On 14 September 2022, the European Commission (“Commission”) published a proposal for a Council Regulation on an emergency intervention to address high energy prices (“Proposal”). This emergency intervention aspires to reduce the cost of electricity for consumers and ensure security of supply for the upcoming winter through 4 key measures: (i) the reduction of demand for electricity, (ii) the introduction of a temporary revenue cap on infra-marginal electricity producers, (iii) a price setting measure for small and medium-sized enterprises (“SMEs”) and (iv) a temporary solidarity contribution on excess profits generated from activities in the oil, gas, coal and refinery sectors.
We have set out here a summary of the proposed measures and reflections on how the temporary revenue cap could affect current or future power purchase agreements.
This is not the first EU initiative to coordinate an EU-wide response to address the volatile energy prices. The new set of measures follows on from the Energy Prices Toolbox adopted on 13 October 2021 (enhanced in May 2022) and the REPowerEU Plan of 18 May 2022 that featured measures EU Member States can adopt to support consumers by attempting to mitigate the effects of high energy prices. It also ties in with the new Gas Storage Regulation (EU) 2022/1032, which was adopted on 29 June 2022 and obliges EU Member States with underground gas storage to fill storage sites to at least 80% of capacity by 1 November this year and 90% before the following winter periods. Against this backdrop, the Commission, recognising the risk of social and economic harm to households and businesses as a result of high energy prices, proposed these new extraordinary instruments to redistribute financial gains made by electricity generators with lower marginal costs and companies in the oil, gas, coal and refinery sectors due to favourable market factors.
The first measure contemplated by the Proposal is a 10% reduction in gross electricity consumption per month and a 5% reduction over identified peak hours. Member States may develop or extent or expand existing demand response schemes which compensate consumers for contributing to these targets by lowering their consumption. The Proposal requires such measures not to be limited to specific customers and the Commission stated in a Q&A about the Proposal that no smart metering systems would be required to enable consumers to participate. According to the Proposal, this measure will run from 1 December 2022 until 31 March 2023.
The second measure the Commission seeks to implement is an ex-post price cap on all market revenues per MWh for inframarginal technologies, namely generators with lower marginal costs such as renewables, nuclear and lignite. The Commission proposed the cap to be set at 180 EUR/MWh considering that the average market price expectations for peak hours of electricity were consistently and significantly below this threshold during the past decade. Revenues exceeding the cap will be collected on or after transaction settlement and be redirected to supporting end-consumers exposed to high electricity prices. The precise measures to redistribute such revenues will be taken at a national level, but the Commission anticipates Member States to collect up to EUR 117 billion from the revenue cap that can be used to provide income support, rebates, investments in renewables, energy efficiency or decarbonisation technologies. This measure is expected to run from 1 December 2022 until 31 March 2023.
Revenue caps impact on PPAs
The market revenues captured by this revenue cap includes revenues from power purchased agreements (“PPAs”) and other hedging operations but excludes any State-granted support (e.g. feed-in premium). For example, this revenue cap might impact corporate fixed-for-floating or virtual PPAs, where the seller pays the buyer the difference between the agreed fixed price and the market/strike price, if the latter is higher than the former. If the market/strike price exceeds the 180 EUR/MWh threshold, the generator would need to seek to exclude the lost revenue surplus above this threshold from the difference payments to be made to the corporate buyer. In existing PPAs this may be done by invoking change in law provisions, while new PPAs will likely have to factor in this revenue cap in the settlement mechanics.
SMEs price setting
The Proposal also includes a retail measure focused on SMEs to allow for certainty in energy purchase prices, including the option of setting electricity prices for SMEs below cost. This measure shall apply for 1 year from the regulation contemplated in the Proposal entering into force.
Fossil fuels solidarity contribution (oil, gas, coal, refinery)
According to the Proposal a temporary solidarity contribution will be applied to skim off “surplus” profits generated from activities in the oil, gas, coal and refinery sectors in order to help fund the proposed support measures. The base for calculating this contribution will the relevant undertakings’ taxable profits on or after 1 January 2022. The profits exceeding the average taxable profits over the three preceding fiscal years by more than 20%, will be subject to the solidarity contribution. Member States will set the rate for calculating the solidarity contribution, which shall at least be 33% of the base according to the Proposal.
Whilst no stakeholder consultation was held ahead of adopting it, the Commission pledged to engage with stakeholders in the context of implementing the subsequent Regulation to be adopted by the European Council. The legal basis for the Proposal is Article 122 of the Treaty on the Functioning of the European Union according to which “the Council, on a proposal from the Commission, may decide, in a spirit of solidarity between Member States, upon the measures appropriate to the economic situation, in particular if severe difficulties arise in the supply of certain products, notably in the area of energy”.
The Council will vote to approve (or not) the Proposal, and as a result, the exact timeline to adopt the Proposal depends on Council’s internal procedures and the measures set out in the Proposal may be adapted to accommodate compromise proposals. It was reported that the presidency of the European Council (currently held by the Czech Republic) is seeking to introduce amendments to the Proposal further to discussions among Member States, including to exempt specific technologies from the revenue cap. EU energy ministers will attempt to reach an agreement on the Proposal during an Extraordinary Transport, Telecommunications and Energy Council to be held on 30 September 2022. The proposed Regulation, if adopted, will be directly effective in EU Member States, although national legislation will also have to be adopted to regulate the matters left at the discretion of the States.
The Proposal envisages that the revenue cap and demand reduction measure will apply as of 1 December 2022, while the fossil fuels solidarity contribution will apply from 31 December 2022 at the latest. All measures except the fossil fuels solidarity contribution are to be reviewed by 28 February 2023 according to the Proposal to assess whether they should be prolonged or whether the level of the revenue cap and its application to producers should be amended. The fossil fuels solidarity contribution is set for review by 15 October 2023.