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Temporary EU measures addressing rising energy prices

October 13, 2022

The EU has adopted a new Regulation setting out various temporary measures to lower prices on the energy market. The aim of the temporary measures is to reduce Russia’s impact on the European energy market. The Regulation provides, among other things, that the Member States are obliged to reduce the electricity consumption by at least 5 % during certain peak hours and that the crude oil, natural gas, coal, and refinery sectors are required to pay a solidarity contribution.

The situation on the energy market has worsened significantly through rising electricity prices since the Russian invasion of Ukraine. Russia’s limited gas deliveries to the EU has further tightened the situation on the energy market which has already been heavily affected by the Covid-19 pandemic.

The European Commission has suggested a series of measures in the Energy Pricing Toolbox, adopted in October 2021, which was extended in spring 2022 by the adoption of Short-Term Energy Market Interventions and Long Term Improvements to the Electricity Market Design, and has also put forward the REPowerEU Plan. The EU has now agreed on even more robust measures to stabilize the severe imbalance between supply and demand for energy. The new measures are laid out in a new Regulation (2022/1854) on an emergency intervention to address high energy prices, which is directly applicable in all Member States. These temporary and extensive crisis interventions, based on the emergency provision in Article 122(1) of the Treaty on the Functioning of the European Union (TFEU), are expected to generate €117 billion in revenue which is to be collected by Member States and redistributed to electricity consumers.

Member States are obliged to reduce electricity consumption

The Regulation obligates Member States to take measures to reduce electricity consumption by at least 5% during certain peak hours. These peak hours are to be determined by the Member States themselves and must, in total, correspond to at least 10% of all hours in the period between 1 December 2022 and 31 March 2023.

In addition, Member States should aim to reduce overall electricity demand by at least 10%.

Member States are to choose the most appropriate measures to achieve the reduction in electricity consumption. These measures must be clearly defined, transparent, non-discriminatory and verifiable.

Surplus from revenue cap for inframarginal power producers will lower electricity bills

The Regulation also introduces a revenue cap for inframarginal electricity producers, i.e. electricity producers using technologies that generate lower costs and high revenues (such as renewables, nuclear and lignite). The revenue cap will be set at €180/MWh. The surplus from the revenue cap will be redistributed to consumers in order to lower their electricity bills. Some flexibility is given to Member States in regulating the revenue cap. For example, Member States can set a higher revenue cap and differentiate between different technologies, where wind, hydro and nuclear energy is likely to be in the spotlight. According to the Council, the revenue cap is designed to preserve the profitability of operators and not to hinder investment in renewable energy.

A proposed revenue cap on gas was ultimately not included in the Regulation, as Member States were unsuccessful in reaching an agreement on how such a revenue cap would be composed. However, the Commission has now put forward a proposal on how to deal with the gas prices.

Solidarity levy for fossil fuel sector

The Regulation imposes an obligation on activities in the crude oil, natural gas, coal, and refinery sectors to contribute to the alleviation of the energy crisis through so-called solidarity contribution Member States will therefore be able to levy a solidarity contribution on those activities that have a taxable profit in the tax year 2022 and/or 2023 exceeding 20% of the average profit of the four tax years starting in 2018. The solidarity levy shall amount to at least 33% of the tax base thus calculated. The solidarity contribution shall be applied in addition to regular national taxes and contributions. The contribution shall be paid to the Member State and then be redistributed to households and businesses to mitigate the effects of high electricity prices on the final customers.

Determination of price below cost

Member States will, under certain conditions, be able to determine a temporary price for electricity supply that is below costs.

National authorities will monitor the implementation of the rules

It will be the responsibility of the Member States to designate competent governmental and regulatory authorities at the national level to monitor the implementation of the new rules. Member States should, as soon as possible after the entry into force of the Regulation, but no later than 1 December 2022, inform the European Commission of the national measures that have been, and will be, taken to reduce electricity consumption. Member States shall also inform the European Commission of the use of the solidarity contribution one month after the contribution has been collected.

Entry into force and application of the Regulation

The Regulation entered into force on 8 October 2022 and shall apply until 31 December 2023. However, the provisions on measures to reduce overall electricity demand, as well as those on the sharing of surplus revenues, shall apply from 1 December 2022. The reduction targets for electricity consumption during peak hours shall be applicable from 1 December 2022 until 31 March 2023, and the mandatory revenue cap for market revenues is to be applied until 30 June 2023.

Reactions

There is a strong consensus among Member States that exceptional measures are necessary to tackle the energy crisis, while strong criticism has been directed at the European Commission's choice of Article 122 TFEU as the legal basis for the revenue cap and the solidarity contribution. Critics argue that, by choosing Article 122 TFEU as the legal basis for the revenue cap and the solidarity contribution, the European Commission has circumvented the unanimity requirement for tax proposals in order to allow the Council to decide by qualified majority. Concerns have thus been expressed that this could have major implications for Member States' sovereignty in tax matters for future proposals, and that the revenue cap and the solidarity contribution could become permanent in nature.

Organisations in various energy sectors argue that the revenue cap and the solidarity contribution are to be regarded as a form of 'punitive taxation' of electricity producers and that this is not the way forward in an industry with low margins. Other proposals that have been put forward as possible solutions to the energy crisis include to instead use State VAT revenues from electricity trade or large bottleneck revenues that have been generated between different electricity areas. The design of the revenue cap also explicitly targets producers of fossil-free power, which risks undermining the transition to green energy.

The targets of 5% and 10% reductions in energy consumption are tough and it is not yet clear how the new rules will work in practice. There is not much time to ensure that the necessary rules implementing the Regulation are to enter into force before the winter, when electricity bills are expected to soar further.

Link to the Regulation

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