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    EU approves intervention in the electricity market with limits on companies' extra profits and reduction in consumption

    September 30, 2022 - CE Noticias Financieras


      The EU has already approved this Friday to intervene in the electricity market. And what does that mean? Limits on extraordinary corporate profits and mandatory reduction of electricity consumption at peak hours. Thus, in line with what was proposed on September 13 by the European Commission, the 27 EU energy ministers have agreed on three measures: the obligation to consume 10% less electricity -5% at peak hours-; a minimum levy of 33% for the super-profits of fossil fuel companies and a maximum ceiling of 180 euros megawatt/hour for infra-marginal energies.

      The text approved by the ministers on Friday in Brussels will be formally adopted by written procedure next week. It will then be published in the Official Journal and will enter into force the day after publication.

      According to what has been approved by the ministers, considerable flexibility is left to the Member States. This means, according to the sources consulted, that the energy tax that is being processed in Spain does not present problems of incompatibility with what was agreed on Friday, in the same way that the Spanish system for infra-marginal taxes would also be compatible, insofar as the 180 euros would be a maximum ceiling, not a minimum. And the mechanism that has been applied in Spain for the last year provides for a 90% reduction in the price from 67 euros megawatt/hour.

      Brussels has put at 142,000 million euros what the States can collect with the caps on the super-profits of the infra-marginal industries -nuclear, lignite and renewables- and of the fossil fuel industries.

      "The proposed measures are of an extraordinary nature and should therefore be of limited duration," says the European Commission: "The electricity emergency tool should be implemented at the latest by December 1, 2022 and until March 31, 2023. The European Commission has committed to carry out a review of the electricity emergency tool by 28 February 2023, taking into account the electricity supply situation and electricity prices across the EU , and to submit a report on the main conclusions of that review to the Council."

      The so-called solidarity contributions from the fossil sector, i.e. the windfall profits levy, "shall apply for one year from their entry into force. The Commission shall carry out a review by 15 October 2023, in view of the overall situation of the fossil fuel sector and the excess profits generated, and submit a report on the main findings of that review to the Council."

      The European Commission has estimated that Member States could raise up to E117 billion per year from the proposed temporary cap on revenues for infra-marginal electricity producers - such as renewables.

      The extra revenue raised is to be channeled by member states to electricity end-consumers, whether private or commercial, who are exposed to high prices. "These revenues can be used to provide income support, rebates, investments in renewables, energy efficiency or decarbonization technologies," says Brussels: "The support provided should maintain an incentive for demand reduction. Decisions on the precise distribution shall be taken at national level in accordance with the principles set out in the regulation."

      The so-called temporary solidarity contribution based on taxable capital gains - at a rate of 33% - earned in the 2022 tax year by energy companies in the oil, gas, coal and refineries sectors in the Union could bring in an estimated E25 billion of public revenue, "to be redistributed among Member States subject to compliance with Union law."

      "The proposals state that these benefits should be targeted at households and businesses, including energy-intensive industries, to mitigate the effects of sustained high energy prices, reduce energy consumption and boost EU energy autonomy," says the European Commission. "In addition to the revenue generated for Member States, reducing demand in the electricity sector can also help reduce prices by reducing the need for costly gas-fired power plants to meet demand."

      How to reduce demand?

      According to the proposal, "Member States should aim to implement measures to reduce total electricity consumption by at least 10% by 31 March 2023. All consumers can contribute, also those who are not yet equipped with smart metering systems or devices that allow them to adjust their consumption during the day."

      In addition, to specifically target the most expensive hours of electricity consumption when gas generally sets the marginal price, Brussels "proposes an obligation of at least a 5% reduction in gross electricity consumption during selected peak hours, covering at least 10% of the hours of each month where prices are expected to be the highest."

      This obligation would result in the selection of an average of 3 to 4 hours per working day, which would normally correspond to peak load hours, but may also include hours where electricity generation from renewables is expected to be low and generation from marginal plants is needed to meet demand.

      "Overall," estimates the European Commission, "this specific reduction may lead to a reduction in gas consumption estimated at around 1.2 bcm over 4 months. This represents a reduction of gas use for power by around 4% during the winter season across the EU."

      It will be up to Member States to identify peak demand hours in their market. Member States are also free to choose the appropriate measures to meet the expected reduction in demand, as long as they comply with the relevant EU electricity market and competition rules.

      Spanish "disappointment" over gas

      Disappointment. This is what the Vice President for Energy Transition, Teresa Ribera, has shown on her arrival in Brussels this Friday for the extraordinary meeting of energy ministers. "We are disappointed with the proposal, with the non-proposal made by the European Commission," said Ribera: "The Commission knows that it is a sensitive issue and has not just found what is the space in which all Member States can respond positively. Therefore, it is good that a debate is raised that allows us to guide what to do in this regard. What does this mean? It means that we do not come out today with a definitive conclusion in a text that can be implemented immediately. But I do hope that we can come out with a very clear orientation on what we do with respect to that price, that price corridor, that index that is taken as a reference in Europe that no longer responds to reality. The TF index is no longer responding to what are the operations and the cost behind the gas purchase operations, and yet it is generating huge distortions in our prices in Europe".

      Ribera added: "It is also unreasonable for us to look the other way when there are many intermediaries and many operations that are being closed at prices that have nothing to do either with production costs or with the prices paid to the supplier, which is what we are seeing. Unfortunately we think that the terms in which the Commission is making the proposals today fall short of what Europe needs".

      European Commissioner for Energy, Kadri Simson, has tried to defend her proposals: "The Commission has proposed measures to reduce energy demand and also to generate revenues that can be used to support people and businesses in this crisis. Last time we discussed measures that we can use to address gas prices. Since then, several member states have presented their position papers, their proposals and ideas. And today we will discuss them and we will also discuss the Commission's ideas on that. As you know, I think we cannot approach this problem in the same way towards Russia and towards our trusted partners [such as Norway]."

      "The answer is clear," Simson says: "We have to offer maximum prices for all Russian gas, not only for pipelines, but also for liquefied natural gas (LNG). And for our partners, with whom we can negotiate, we have to agree on price corridors. And then, the Commission is also ready to develop a European-wide price cap for natural gas used for power generation. But we have to keep in mind that the consequences cannot be increased demand for gas, because we still face supply problems."


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