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European Energy Crisis Response: Emergency Intervention to Address High Energy Prices & Upcoming Measures

October 3, 2022
By Dr. Otilia Dhand, Tim Bogaert, Romanos Antonopoulos & Tomasz Krawczyk

On 30 September an Extraordinary Energy Council Meeting was held in Brussels to discuss the previous Commission proposal for an emergency intervention to address high energy prices.

The Council approved the draft compromise text which includes a range of legislative initiatives, such as a revenue cap for inframarginal generators, a solidarity contribution for the fossil industry, coordinated electricity demand-reduction and retail measures for SMEs. A potential gas price cap will be proposed at a later stage, as it has been subject to internal disagreement on the form and scope of such a cap.

 

Context

The European Union has been grappling with record energy prices in 2022, which have risen to all-time highs following the Russian invasion of Ukraine. The EU has moved swiftly to reduce its reliance on Russian fossil fuels, particularly via the REPowerEU and Save Gas for a Safe Winter packages. While these legislative initiatives have managed to strengthen the security of European energy supplies, prices have continued to rise as the EU reduced its dependence on Russian energy imports from 40% to 9%.

The extraordinary Energy Council on 9 September sought to alleviate the pressure of energy prices on households and commercial consumers alike through a range of different legislative initiatives. The initiatives proposed were the following:

  • A revenue cap for inframarginal electricity producers with low costs of production to be used to mitigate high consumer energy prices
  • A solidarity contribution from fossil fuel companies to be used to mitigate high consumer energy prices and boost renewable energy rollout
  • Coordinated electricity demand reduction across the EU, with a particular focus on peak demand
  • An emergency and temporary market intervention, which includes a gas price cap
  • Emergency liquidity instruments that would ensure that market participants have sufficient collateral to meet margin calls through an adapted temporary state aid framework

In response to these requests, the Commission published the Proposal for a Council Regulation on 14 September, containing a marginal revenue cap, a solidarity contribution, electricity demand reduction objectives and retail measures for SME’s. The Commission expects that these initiatives will collect up to €117 billion from the inframarginal revenue cap and around €25 billion from the solidarity contribution.

On 30 September, during the Extraordinary Energy Council Meeting, the Council agreed on a compromise Council Regulation which featured the aforementioned initiatives. Both the gas price cap and the financial markets measures are still under discussion.

Below, you can find both the summary of the Council Regulation, as well as a state of play on the liquidity instruments, price caps and other upcoming legislation.

 

Council Regulation on an Emergency Intervention to Address High Energy Prices

The Council Regulation on an emergency intervention to address high energy prices introduces four measures. These measures include a reduction in demand for electricity, a revenue cap for inframarginal generators, a solidarity contribution for the fossil fuel sector and a temporary extension of retail measures currently applicable to households to also include Small and Medium Enterprises. The council regulation will apply from 1 December 2022 until 31 December 2023.

Reduction in Demand for Electricity

The first measure is to reduce the demand for electricity during peak price hours using a two-pronged approachthereby also reducing price levels:

  • A voluntary target of 10% reduction in overall electricity consumption by all consumers in each Member State, including those not yet equipped with smart metering systems or devices
    • This measure targets households in particular
    • Measures can include targeted consumer information and communication campaigns
  • A mandatory 5% target to reduce gross electricity consumption during selected peak price hours covering at least 10% of peak price hours. Member states will identify 10% of their peak hours between 1 December 2022 and 31 March 2023 during which they will reduce the demand.
    • This target seeks to smooth out hourly consumption profiles in order to reduce 3.8% of gas consumption for power, mostly by targeting consumers who can deliver flexibility through demand reduction or demand shifting offers
    • Measures to achieve this target should:
      • Establish an open competitive process for financial compensation, if that compensation is paid in addition to market revenues
      • Only involve financial compensation when this compensation is paid for additional electricity not consumed compared to expected consumption in the hour concerned without the tender
      • Not unduly distort competition or the proper functioning of the internal market in electricity
      • Not be unduly limited to specific customers or customer groups including aggregators
      • Not unduly prevent the process of replacing fossil fuel technologies with technologies using electricity
    • An example of this measure could be industrial energy-intensive consumers taking part in a tender for demand reduction and receiving compensation for energy saved

A Cap on Market Revenue for the Generation of Electricity from Inframarginal Technologies

The second measure would implement a cap on revenue from electricity generation by inframarginal technologies. This cap would take the form of an ex-post cap on revenue per MWh of electricity produced by generators with lower marginal costs, the so-called inframarginal technologies. The inframarginal revenue cap will be set at 180 €/MWh. Revenue above this cap is to be recovered by Member States and then redistributed to final consumers. This revenue cap will apply until 30 June 2023.

The inframarginal revenue cap will:

  • Apply when transactions are settled or thereafter
  • Cover all market timeframes, including both bilateral over-the-counter sales, as well as deals in the centralised marketplaces
  • Only cover market revenue, not total generation revenue (i.e., exclude subsidies or other national support schemes)
  • Serve as a minimum standard, with Member States being allowed to maintain or introduce measures that further limit the market revenue of producers, based on a number of factors

The inframarginal technologies covered by the cap are:

  • Wind energy
  • Solar energy (thermal and PV)
  • Geothermal energy
  • Hydropower without reservoir
  • Biomass fuel (solid or gaseous) excluding bio-methane
  • Waste
  • Nuclear energy
  • Lignite
  • Crude petroleum products
  • Peat

However, Member States may differentiate between technologies, set a higher cap on market revenues, maintain existing national measures and set a specific cap for market revenue obtained from sale of electricity produced from hard coal. Member States are also only able to collect 90% of the market revenue above the cap.

This surplus revenue will then be channeled into both private and commercial final electricity consumers who are exposed to high electricity prices. Member States will determine how to channel these additional resources to consumers.

Measures include:

  • Financial compensation to final consumers for reducing electricity consumption
  • Direct transfers to final consumers
  • Compensation to suppliers who deliver electricity below costs following state intervention in price setting
  • Lower electricity purchase costs of final electricity consumers for limited volumes of electricity consumed
  • Promoting investment by final electricity customers into renewable and energy efficiency investments as well as decarbonisation technologies

Added to this particular instrument is an additional derogation from EU rules on congestion income, where Member States are allowed to use surplus congestion income revenue derived from cross-zonal capacity to support final electricity consumers.

Addressing Difficulties Faced by Consumers

The third measure of this Council Regulation seeks to extend a wide range of support measures that were previously introduced for households to Small and Medium Enterprises (SMEs).

While an incentive should be maintained to reduce consumption, these SMEs can now also benefit from measures including:

  • Direct income support
  • Reduction in taxes
  • Levies and rebates on consumer energy bills
  • Measures to support energy efficiency and on-site renewable production

Member States are also able to set electricity prices for SMEs below cost, if the following conditions are fulfilled:

  • The measure covers a limited amount of consumption and retains an incentive for demand reduction
  • There is no discrimination between suppliers
  • Suppliers are compensated for supplying below cost
  • All suppliers are eligible to provide below-cost offers at the price of electricity on the same basis

Solidarity Contribution

The Solidarity Contribution of the fossil industry can best be interpreted as a form of a windfall tax. Member States will establish a coordinated, one-off temporary solidarity contribution based on taxable surplus profits made in the fiscal year 2022 and/or 2023 on energy undertakings in the crude petroleum, natural gas, coal and refinery sectors in the Union. This levy will only apply in the two fiscal years mentioned.

The Solidarity Contribution will cover taxable profits in 2022 and/or 2023 which exceed 20% of the average taxable profits generated in the four fiscal years starting on or after 1 January 2018. If the four fiscal years have a negative average annual result, the average taxable profit will be set to 0 in order to calculate the total solidarity contribution. The percentage for this solidarity contribution, based on the taxable base set out above, will be set at the level of at least 33%.

This percentage has been chosen to ensure that a certain part of the profits is not subject to the contribution in order to allow for reinvestment and to constitute reserves to ensure financial stability. Member States would also be able to set a higher rate or maintain a levy or tax that has already been established at a higher rate.

The funds from this Solidarity Contribution are to be used for:

  • Financial support measures to households and companies to mitigate the effects of high energy prices
  • Financial support measures to help reduce the energy consumption
  • Financial support measures to support companies in energy-intensive industries such as fertiliser production, provided conditions for transformation are fulfilled
  • Financial support measures to develop energy autonomy of the union
  • Common financing of measures to reduce the harmful effects of the energy crisis between Member States, including protecting employment, reskilling and upskilling of the workforce or promoting investment in energy efficiency and renewable energy including in cross-border projects

 

Energy Crisis Work Streams Related to the Financial System: State of Play

While the European Commission did not publish its response to the current liquidity issues faced by energy market actors, it did present a document highlighting actions taken in order to promote transparency. Given the wide range of actions to be assessed, the rollout of this proposal may happen gradually based on the completion of actions.

  • The document focuses on three main issues:
  • Addressing liquidity stress
  • Pricing of gas imports
  • Circuit breakers on trading venues

Addressing Liquidity Stress

As the European Commission indicates, the increased gas and electricity prices over the past months have forced energy firms to post increasing amounts of cash collateral to CCPs, as margin calls have risen in line with prices. This caused liquidity problems for energy companies and requires possible amendments to the rules applicable to collateral for margin calls.  In this regards the Commission has taken/plans the following actions:

Pricing of Gas Imports

As there is no comprehensive database reflecting the price and volumes of gas imports into the EU, the European Commission plans to introduce a complementary transactions-based price benchmark that more accurately reflects the market for gas imports.

The European Commission presented its three-step approach:

Circuit Breakers on Trading Venues

None of the European energy exchanges have applied at a national level to use a safeguard mechanism that allows energy exchanges to interrupt trading in case of significant price movements (circuit breaks) in order to mitigate the negative consequences of volatility in gas and electricity prices. As these rules are not harmonised, the European Commission has taken the following actions:

Gas Price Cap: State of Play

The gas price cap was not included in the package of measures the Energy Council approved. The cap has been subject to intense debate, both between the Council & the Commission, as well as internally at the Energy Council.

On the one hand, the European Commission has been hesitant to put forward a proposal for a gas price cap, managing Member State expectation and engaging in dialogue. The main risks according to the Commission are:

  • Threats to energy security
  • Poor European competitiveness on global LNG markets
  • Legal challenges following targeted price caps (particularly on Russian imports)
  • Severe distortion of the internal energy market

Nonetheless, a number of different applications of a gas price cap have been mooted, including:

  • Wholesale gas imports price cap
  • Russian gas imports price cap
  • A price cap on gas used for power generation

However, finding a suitable compromise will be challenging as not only are the institutions divided on the topic, so are Member States. Fifteen Member States have signed a letter asking for a wholesale gas imports price cap, while Germany and Hungary, for example, have outright opposed any form of gas price cap. France, on the other hand, only supports a price cap on gas used for power generation.

This means that, even if a proposal on the gas cap is forthcoming in the following weeks, landing on a balanced council compromise may be difficult, with a number of permutations possible for the suggested gas price cap applications.

 

Next Steps

These current measures will be adopted in early October following the written procedure.

A communication will be presented by the Commission next week on the measures in the financial markets in order to address liquidity issues and potentially alter collateral requirements on the financial markets related to energy.

A proposal on the state aid framework is expected on 14 October 2022.

A deeper electricity market reform proposal is expected in Q1 – Q2 2023.

The views and opinions in these articles are solely of the authors and do not necessarily reflect those of Teneo. They are offered to stimulate thought and discussion and not as legal, financial, accounting, tax or other professional advice or counsel.

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