Explanatory Memorandum to COM(2022)473 - Emergency intervention to address high energy prices - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2022)473 - Emergency intervention to address high energy prices. |
|---|---|
| source | COM(2022)473  |
| date | 14-09-2022 |
1. CONTEXT OF THE PROPOSAL
Gas and electricity prices have reached record levels in 2022 and hit all-time highs following the Russian invasion of Ukraine. Over the past year, electricity prices in Europe have rapidly risen to a level much higher than in recent decades. This dynamic is intrinsically linked to the high price of gas, which increases the price of electricity produced from gas fired power plants, which are often needed to satisfy demand. Prices started rising rapidly last summer when the world economy picked up after COVID-19 restrictions were eased. Subsequently, Russia’s invasion of Ukraine has exacerbated this situation.
Energy prices are expected to remain high due to uncertainty in the market following a series of gas supply disruptions that can only be explained by a deliberate attempt by Russia to use energy as a political weapon. Further disruptions of Russian gas supplies to the EU in the forthcoming weeks or months may result in even higher levels of gas prices with knock-on effects for the price of electricity, the level of inflation and its impact on citizens as well as the overall financial and macroeconomic stability of the EU.
The Commission is acutely aware of the impact that the uncertainty around gas supply is having on the electricity market. Member States across Europe have experienced a surge in electricity prices linked to rising gas prices, leading to gas becoming the marginal price setting fuel ahead of coal. At the same time, the availability of electricity generation in the EU has been below usual levels in the last months due to increased maintenance works of power stations, lower output from hydropower generation, and closures of some older power plants.
In parallel, record-breaking temperatures this summer have pushed up energy demand for cooling and have added pressure on electricity generation. The extreme weather conditions have thus contributed to energy scarcity and high energy prices, constituting a burden for consumers and industry and dampening the economic recovery. Additional supply pressures on energy and food commodity prices are feeding global inflationary pressures, eroding the purchasing power of households and the economy as a whole.
The dramatic increase in electricity prices that we are observing is putting pressure on households, small and medium enterprises and industry and risks causing wider social and economic harm. Vulnerable customers and the energy poor are hardest hit as was already the case last winter, but the high prices are also increasingly affecting middle-income households and businesses. They risk not being able to pay their energy bills and are facing the choice between paying for energy and other essential goods or, for businesses, their very financial viability and investment plans are in question.
This economic context requires a rapid and coordinated EU-wide response to mitigate the difficulties that high prices are causing for consumers and, not only energy poor and vulnerable, but also middle-income households and businesses. Electricity retail prices have increased on average by almost half year-on-year from July 2021 and the extraordinary increases are expected to continue ahead of the next heating season gradually trickling down to most consumer contracts. The EU response needs to be coordinated in a careful and holistic way. Electricity must continue to flow efficiently around Europe so that Member States can export surplus electricity to those who need it most. The role of the internal energy market in helping mitigate the impact of the current energy crisis cannot be overlooked. ACER’s assessment of the EU Wholesale Electricity Market Design 1 showed that cross-border trade delivered EUR 34 billion of benefits to consumers in 2021 while helping to smoothen price volatility, and that it enhances each Member State’s security of supply and resilience to price shocks.
The Union is thus faced with an extraordinary situation. The current unprecedented challenges call for putting in place appropriate, proportionate and temporary measures, to be taken in a spirit of solidarity, in order to address the severe difficulties arising in the area of energy and overcome the energy crisis by acting together.
The Commission therefore proposes an integrated and interdependent package of measures to be introduced immediately. These measures seek, inter alia, to mitigate the impact of high electricity prices and protect consumers, while preserving the benefits of the internal market and a level-playing filed. The measures deliver on these objectives by addressing different aspects of the current situation, thus complementing and reinforcing their effects, and allowing for a single and coordinated EU response to the crisis. At the same time they are fully compatible with the communication of 8 March 2022, entitled ‘REPowerEU: Joint European Action for more affordable, secure and sustainable energy’, and the Commission’s REPowerEU plan of 18 May 2022 with the aim to end the Union's dependence on Russian fossil fuels as soon as possible, and at the latest by 2027.
The very high energy prices currently faced by consumers generate exceedingly large financial gains not only for electricity generators with lower marginal costs, but also for companies in the oil, gas, coal and refinery sectors. These gains are primarily due to favourable external market factors caused by the Russian war and not by companies’ own additional efforts or investments. These high energy prices create hardship for EU households and businesses, drive up inflation and necessary support measures raise public expenditure. Therefore, it is opportune to lower electricity demand across the EU to reduce the need for gas-fired electricity production and also redistribute some of the revenues garnered by companies in the different energy sectors, as a result of these exceptional circumstances, to alleviate difficulties for energy consumers and society in general. Such redistribution can be achieved by different instruments, depending on the circumstances of the sector, with the purpose of making these funds available to consumers or projects to strengthen the Union’s energy autonomy including the possibility for Member States to channel parts of the contribution to Union funds in the spirit of solidarity or use them on the basis of agreements between Member States.
Several Member States have already adopted or are currently considering the adoption of redistribution measures. However, measures adopted solely at national level risk creating uneven conditions for companies operating in the EU energy market. In order to create a level playing field, the Commission proposes two complementary instruments so as to cover the full energy sector: (a) a measure that temporarily targets and reduces the revenues of electricity producers and (b) a measure that temporarily establishes a solidarity contribution on surplus profits in the fossil sector falling within the scope of this Regulation. By reducing the revenues of electricity producers, the measure proposed in the Regulation aims to mimic the market outcome that producers could have expected if global supply chains would function normally, in the absence of the gas supply disruptions that have taken place since the invasion of Ukraine in February 2022. Furthermore, the Commission proposes a temporary solidarity contribution applying to the profits of businesses active in the oil, gas, coal and refinery sectors, which has significantly increased compared to prior years.
The Member States will use proceeds from the solidarity contribution to provide support to households and companies and to mitigate the effects of high energy prices. They should also use the proceeds from this short-term measure to finance measures for the reduction of energy consumption and support industries, thereby further strengthening the Union’s energy autonomy in the longer term.
These temporary measures, which redistribute surplus revenues and profits to support consumers, deliver the benefit of lower cost energy generation to consumers. As such, they are without prejudice and complementary to the ongoing work of the European Commission concerning the liquidity in financial markets for energy, the EU State aid Temporary Crisis Framework, the gas price reduction as well as the long-term market design as announced in the Communication on Short-Term Energy Market Interventions and Long-Term Improvements to the Electricity Market Design that was issued alongside the Repower EU Plan of 18 May 2022. The proposed Regulation preserves the benefits of the internal electricity market in terms of dispatch efficiency and security of supply while, at the same time, lowering electricity demand and the impact of high gas prices on consumers’ electricity bills.
2. Electricity Emergency Tool
Contents
- Reduction in demand for electricity
- Cap on market revenues for the generation of electricity from inframarginal technologies
- The level of the cap on market revenues
- Scope of the cap
- Definition of relevant inframarginal technologies
- Redistribution to final customers
- Legal basis
- Subsidiarity (for non-exclusive competence)
- Stakeholder consultations
- Fundamental rights
In response to the heightened risk for the coming winter and the need to lower overall electricity demand, to preserve fuel stocks for electricity generation and take targeted action to reduce electricity prices in the most expensive hours, in a spirit of solidarity, the proposed Regulation sets out two electricity demand reduction targets.
The first requires Member States to put measures in place to lower overall electricity consumption from all consumers, including those who are not yet equipped with smart metering systems or devices enabling them to adjust their consumption during the day. The measures should be sufficiently ambitious and could include, for example, targeted consumer information and communication campaigns. In this respect, a Union-wide application for targeted information towards consumers could be envisaged. In addition, to specifically target the most expensive hours of electricity consumption when gas generally sets the marginal price, the Commission proposes a mandatory target of at least a 5% reduction in gross electricity consumption during selected peak price hours covering at least 10% of the hours of each month where prices are expected to be the highest. This mandatory target would result in selecting on average 3 to 4 hours per weekday, which would normally correspond to peak load hours, but can also include hours where electricity generation from renewables is expected to be low and the generation from marginal plants is necessary to cover the demand. To account for this, Member States have a certain margin of discretion when identifying these hours. The binding target specifically addresses consumers who can deliver flexibility through demand reduction or demand shifting offers on an hourly basis. Member States should be free to choose the appropriate measures to achieve the demand reduction targets and should, in particular, consider economically efficient and market-based measures such as auctions or tender schemes for demand side response or electricity not consumed. This may include expanding existing schemes or national incentives to develop demand response. This may also include financial incentives or compensation to participating market parties in cases when this is paid for additional electricity not consumed compared to the expected normal consumption in the hour without the tender. The introduction and implementation of such measures should be without prejudice to the application of State aid rules.
Based on observed hourly generation during the period between January and August 2022, a reduction of 5% during the 10% hours displaying the highest level of demand for electricity would bring the average demand during these hours to the level of the first non-selected peak hours. This would therefore result in a smoothening of the hourly consumption profile. Moreover, since gas is generally the marginal technology during the hours with the highest demand, this targeted 5% reduction can lead to a reduction of gas consumption estimated around 1.2bcm over a 4-month period. This represents around 3.8 % of gas consumption for power over the same period. Recent studies 2 show that the current potential of demand response could fulfil the mandatory target, having a positive impact on electricity prices and on volumes of gas savings.
Secondly, the proposed Regulation sets out an approach to recover excess revenues from generators with lower marginal costs such as renewables, nuclear, and lignite (“inframarginal technologies”) by setting an ex-post cap on revenues per MWh of electricity produced.
In the day-ahead market, electricity prices are determined by the variable cost of the marginal technology, i.e. the last and most expensive plant that is needed to meet demand (marginal pricing). In view of the role that the electricity prices in the day-ahead market have as a reference for the pricing of electricity across all the other market timeframes, this measure reduces the impact that the margin-setting technology (typically coal, today often gas-fired power plants) has on the revenues of other generators with lower marginal costs such as most renewables, nuclear, and lignite. It mimics the market outcomes for these technologies that could be expected were global supply chains functioning normally and not subject to the weaponisation of energy through gas supply disruptions.
Through this Union-wide approach, based on the principle of solidarity, the electricity wholesale markets would function and clear as they do today, thereby ensuring that the cheapest and most efficient power plants around the EU are dispatched always first, and that Member States can rely on imports when needed. This preserves the incentive for technologies such as coal and gas-fired power plants, storage facilities and demand response to be available to run when needed, ensuring the stable operation of the electricity system throughout the winter season 2022-23.
The revenue cap prescribed in this Regulation should be set at a level that encompasses the majority of inframarginal generators in the EU and avoids jeopardising the availability and profitability of existing plants and future investment decisions for new inframarginal generation.
While occasional and short-term peaks on prices can be considered a normal feature in an electricity market and may be useful for some investors to recover their generation investment, the extreme and lasting price increase since February 2022 is markedly different from a normal market situation of occasional peak prices or longer-term price swings linked to economic cycles.
This applies in particular to investment decisions for generation from renewable sources, which are crucial to achieve the Union’s decarbonisation targets. To avoid undermining the assessment of profitability when investment decisions were made, the cap should therefore not be set below the expectations of market participants as to the average level of electricity prices in the hours during which the demand for electricity was at its highest, before the invasion of Ukraine by Russia. The average market price expectations for peak hours were consistently and significantly below 180 EUR/MWh during the past decades, despite price differences across regions in the Union. Moreover, simulations based on observed prices over January through August 2022 show that a cap set at 180 EUR/MWh would have resulted in stabilising the average revenue around 150 EUR/MWh. This average revenue level is consistently higher than the current levelised cost of energy (LCOE) for the inframarginal technologies targeted by the application of the cap on revenues 3 , allowing producers to which it applies to cover their investments and operating costs. The cap should therefore not impair the investment in new inframarginal capacities. Therefore, the Commission proposes to set the revenue cap at 180 EUR/MWh, which incorporates the necessary security margin.
Such a cap should be limited to market revenues rather than encompassing total generation revenues (including for instance those stemming from support schemes), to avoid significantly impacting the initial expected profitability of a project.
Having a uniform cap on revenues across the Union is necessary to preserve the functioning of the internal electricity market as it would maintain price-based competition between electricity producers based on different technologies, in particular for renewables. As the cap will apply on the revenues per MWh of electricity produced, price formation in electricity wholesale markets will not be affected. The dispatch of power plants will continue to take place based on their level of efficiency, with those with lower marginal costs being dispatched first, and the cross-border trade of electricity will not be affected.
Member States will need to put appropriate procedures in place to recover the surplus revenues from generators, as the revenue cap may be applied at the moment when transactions are settled or, if not possible, thereafter. This depends on differences in the way wholesale electricity markets function in different timeframes and how they are organised in Member States.
The market revenue cap would apply to revenues from the sale of electricity for all inframarginal generators as defined in the Regulation and cover all market timeframes, regardless of whether the trading of electricity takes place bilaterally (over-the-counter) or in centralised marketplaces. If the cap was to apply only to certain timeframes or only to exchanges and other organised marketplaces, inframarginal generators could have an incentive to trade electricity in the timeframes and marketplaces not covered by the measure. On the other hand, the proposed wide application of the revenue cap would preserve incentives to conclude long-term power purchase agreements, which are crucial for consumers to hedge against price volatility and important tool to stimulate investments in inframarginal technologies, especially renewables. Given that the revenue cap does not interfere with the formation of prices, consumers would have an interest to conclude long-term power purchase agreements which allow them to benefit directly from prices lower than those observed in the market.
The cap on revenues will apply per MWh of electricity produced. Regardless of the contractual form in which the trade of electricity may take place, the cap should apply to realised market revenues only. This is necessary to avoid targeting producers who do not actually benefit from the current high electricity prices due to having hedged their revenues against fluctuations in the wholesale electricity market at a price below the cap level. Hence, to the extent that existing or future contractual obligations, such as renewable power purchase agreements and other types of power purchase agreements or forward hedges, lead to market revenues from the production of electricity below the cap, they would not be caught by its application.
The revenue cap is applicable to market revenues from the sale of electricity produced from technologies whose marginal costs are lower than the cap, such as wind, solar, geothermal, nuclear energy, biomass, oil and oil-related products, hydropower installations without reservoir, etc.
The cap on market revenues should however not apply to the technologies with input fuel costs leading to break-even level above the cap level, as this would jeopardise these activities and, ultimately, security of supply. This is for instance the case of gas-fired and coal-fired power plants. Since the invasion of Ukraine, the prices of natural gas and hard coal have increased sharply 4 , leading to break-even generation price above the cap level. If gas-fired and coal-fired power plants were subject to the revenue cap, they would not be able to cover their operating costs and would be pushed out of activity.
In line with the objectives of the REPowerEU Communication, the application of the cap should not hamper incentives in investments in flexible generation technologies (e.g. demand-response and all types of storages), and the production of electricity from sources that directly compete with natural gas and gas-fired power plants. Accordingly, the cap should not apply to power plants using biomethane.
This is necessary in order to preserve the incentives for these technologies and generation types to decrease gas consumption, as highlighted in RePowerEU Communication.
In order to preserve the incentives for the development of innovative technologies, the revenue cap should not apply to demonstration projects. In practice, this is already usually the case, as the remuneration of demonstration projects is typically set out of the market (e.g., fixed revenues through feed-in-tariffs).
In some Member States, the revenues obtained by some generators are already capped by way of State measures. As such these generators do not benefit from increased revenues resulting from the recent spike of electricity prices. Therefore, existing producers subject to this type of State measures should be excluded from the application of the cap.
With a view to avoiding an excessive administrative burden and ensuring an efficient application of the proposed measure, Member States should be allowed to exclude producers generating electricity from installation facilities with a capacity below 20 kW from the application of the cap on revenues.
The surplus revenues resulting from the application of the cap shall be channelled to final electricity customers. This includes all purchasers of electricity for their own consumption. In selecting the beneficiaries of the redistribution, Member States should target as much as possible the final customers, be it private or commercial ones, who are most strongly exposed to high electricity prices. The distribution the surplus revenues as set out in this instrument is without prejudice to the application of Article 107 and Article 108 TFEU.
Addressing difficulties faced by consumers
Finally, this proposal contains key provisions to address the difficulties being faced by consumers as a result of very high energy prices. The current crisis represents the challenge of ensuring adequate support so that household consumers continue to have access to necessary energy, while not undermining the incentive to save energy. The starting point for action is full recognition of the hardship risk that households are facing, including middle income households and need for support measures at national level.
A wide range of support measures have already been put in place by Member States, including measures based on the Toolbox. These have included direct income support, reductions in taxes, and levies and rebates on consumers energy bills, as well as measures to support energy efficiency and on-site renewable production. Member States have also intervened in price setting in the supply of electricity – that is establishing regulated prices for end-consumers.
All of these tools will remain important. Member States should be able to choose those which best suit their national circumstances. As far as possible, support to consumers will also need to support demand reduction. However, it is also important to recognise that some consumers may already be close to the minimum essential level of consumption necessary to safeguard their well-being.
The Commission provided Guidance on the application of State intervention into price setting in the Communication REPowerEU: Joint European Action for more affordable, secure and sustainable energy 5 in the design of public interventions in price setting for the supply of electricity, ensuring they benefit consumers during this current crisis and enhance competition to the benefit of consumers over the longer term. However, under Directive (EU) 2019/944 such interventions in price setting may not cover small and medium enterprises and must not be below cost.
Consumers’ right to choose the energy supplier who offers them the best price and service lies at the heart of the internal electricity market. The resulting competition has put downward pressure on prices and increased choice, as consumers no longer had to rely on incumbent monopolists. Competition and choice of suppliers and offers will also be a key part of realising the European Green Deal, as they allow consumers to benefit from the internal market for electricity and to contribute to attaining the Union's energy efficiency and renewable energy targets.
As set out in the Communication on Short-Term Market Interventions and Long-Term Improvements to the Electricity Market Design, the Commission considers that it could be acceptable in the current context to extend price regulation to small and medium-sized enterprises (SMEs). Given that the EU energy legislation does not envisage any specific framework for these consumers, allowing Member States to extend interventions in price setting in the form of regulated prices to small and medium enterprises during this crisis would give them another tool to manage its impact. This approach reflects the fact that the current energy market situation with high and volatile wholesale gas and electricity prices may be restricting competition and harming customers in the SME segment. However, such a possibility should maintain the incentive to reduce consumption and thus be limited to 80% of their historical consumption.
Public interventions in price setting for electricity which is below cost could be a way for some Member States to directly alleviate the impact of the crisis on consumers. Nonetheless, such measures also have significant impacts on the functioning of competition in the retail market, on innovation, and on the incentive to reduce demand. This is why, even as an emergency measure, they need to be accompanied by safeguards to ensure non-discriminatory treatment of suppliers and an incentive for demand reduction.
Ensuring that the internal electricity market gives Member States the tools and flexibility needed to respond to the crisis is a critical part of the solidarity needed. However, whether to use these possibilities should remain the choice of Member States who are best placed to determine the efficacy of such measures, particularly compared to other tools, and to match them to the need to target support to where it most needed.
3. Solidarity Contribution
Not only electricity generating companies, but also the fossil fuel sector is benefiting from extreme price increases due to the current market situation, generating profits that go beyond the result of usual business activities. Soaring energy and electricity prices are putting a significant burden on public authorities, consumers, and businesses alike, and action is needed to avoid the risk that prices reach unsustainable levels, with far greater and potentially detrimental social and economic implications. These developments call for a collective response at Union level. EU leaders and the Commission have therefore identified an urgent need for additional measures to mitigate the impact of these events on EU citizens and economic operators, and to stave off an even more acute crisis.
In order to financially support the measures that are necessary to react to current crisis situations for households and businesses, those that generate excess profits need to contribute a portion of them in the spirit of solidarity.
This Regulation introduces a solidarity contribution for the fossil industry applicable in all Member States. This solidarity contribution is an exceptional and temporary measure appropriate to the current situation that Member States would take in a spirit of solidarity to mitigate the direct economic effects of the soaring energy prices for public authorities’ budgets, consumers and businesses across the Union.
Introducing a temporary solidarity contribution will ensure that these sectors also contribute in proportion to the profits generated by the crisis situation. At the same, time the design of the contribution will ensure that there are sufficient funds available to finance the investments necessary to invest in the energy transition and new technologies including at EU level.
To that end, this proposal establishes a measure that consists of a temporary solidarity contribution based on taxable surplus profits made in the fiscal year 2022 from companies and permanent establishments active only in the oil, gas, coal and refinery sectors that is commensurate and appropriate to the current socio-economic situation. The contribution will finance measures that help mitigate the current crisis, in a spirit of solidarity between Member States. The measure will enable a redistribution of resources and financial support to households and businesses to mitigate the effects of sustained high energy prices, reduce energy consumption, support energy intensive industries targeting renewable energies or energy efficiency and develop the Union’s energy autonomy, to the benefit of all Member States. Moreover, the current disruption to gas supplies and resulting impacts on gas and electricity prices, higher demand for energy resulting from record-breaking summer temperatures, combined with reduced availability of certain power generators constitutes a severe difficulty in the supply of a specific – in this case energy – product. The measure will help preserve the smooth functioning of the internal market and ensure the necessary solidarity between Member States. The distribution of the surplus profits as set out in this instrument is without prejudice to the application of Article 107 and 108 TFEU.
4. Consistency with existing policy provisions in the policy area
The proposed instrument sets out temporary, proportionate and extraordinary measures. It complements existing relevant EU initiatives and legislation and is complementary to the initiatives already taken by the Commission to respond to the current crisis in energy markets. It flows logically from existing initiatives, such as the Energy Prices Toolbox 6 7 adopted on 13 October 2021 and the “REPowerEU” Plan of 18 May 2022, which contains a list of measures that Member States can use to support consumers and complementary to the “Save Gas for a Safe Winter” initiative.
In addition, the demand reduction elements of the proposed Regulation will support the recently adopted Storage Regulation (EU) 2022/1032 8 by reducing the need for electricity production from gas, thereby helping Member States to preserve gas stocks obtained through the storage filling obligations and safeguard supply for the winter of 2022–2023.
Extending the scope of State interventions in line with the measures proposed in the Regulation is justified by the gravity of the current situation on electricity markets.
The proposed initiative responds to the increased retail price burden being felt by all electricity consumers and the need to reduce demand and save gas this winter as a result of Russia’s war against Ukraine.
Given the design of the proposed initiative, notably the level and temporary nature of the proposed cap on market revenues for the generation of electricity from inframarginal technologies, the Commission considers that the proposal is consistent with the objectives of the European Climate Law.
5. Consistency with other Union policies
The proposal is an extraordinary measure, to be applied for a limited time, that is consistent with a broader set of initiatives to enhance the Union’s energy resilience and to mitigate the risk or impact of possible emergency situations. The proposal preserves the functioning of the internal market and does not compromise its integrity, as functioning cross-border energy markets are key to ensure security of supply in a situation of supply shortages. Providing for more coordinated electricity demand reductions, it is also in line with the Commission’s Green Deal ambition and it follows the same principles and objectives as outlined in the “Save Gas for a Safe Winter” initiative. Finally, the proposal is in line with the consumer protection principles, aiming to ensure affordable energy prices for consumers across the EU.
6. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
The legal basis for this instrument is Article 122(1) of the Treaty on the Functioning of the European Union (‘TFEU’).
The current disruption to gas supplies and resulting impacts on gas and electricity prices, and higher demand for energy resulting from record-breaking temperatures this summer combined with reduced availability of certain power generators constitute a severe difficulty in the supply of energy products – in this case energy – pursuant to Article 122 TFEU. Soaring electricity prices are putting a significant burden on consumers and businesses, and if no action is taken, they risk reaching unsustainable levels, which could have significant wider social and economic implications. EU leaders and the Commission have identified the urgent need for additional measures to mitigate the impact on EU citizens and be better prepared for the coming winter.
The temporary measures under the proposed Regulation embody the principle of solidarity in the area of energy and allow Member States to have a coordinated approach to protecting consumers without compromising the functioning of the internal electricity market.
With a view to avoiding the significant distortions of the internal market and supply chains, potentially accentuating the security of supply risk for this winter, it is crucial that all Member States act jointly and in a spirit of solidarity as soon as possible. All Member States have been negatively affected by the current crisis, but not all are equally financially able to support consumers. This may lead to a situation in which some Member States provide support to consumers while others may not be able to afford to do so or might hesitate to intervene with measures that may negatively affect the internal electricity market.
A coordinated effort to reduce demand and redistribute excess revenues to struggling consumers is the best way to navigate the challenges ahead of this winter. By coordinating demand reduction, preserving the ability to import electricity when needed and using excess revenues to support consumers, Member States will be able to cater for better support to consumers and businesses, thereby mitigating the impact of inflation in the whole economy and strengthening the resilience of the EU internal market. Coordinated action is also necessary to contribute to better solvency for citizens and businesses, thereby mitigating the impact of inflation on the whole Union economy. All Member States should share the burden and contribute to the joint effort of supporting customers to avoid undermining the principles of the single market.
While Member States are affected differently by the impact of the gas supply shortages on electricity prices, all Member States need to commit to this measure to reduce their electricity consumption at the same level. Coordinated efforts at EU level to reduce electricity demand EU-wide will lower overall consumption of electricity in the entire Union, leading to lower wholesale electricity prices and subsequent lower prices for consumers. The reduction of electricity demand during peak hours will also result in a reduced need for gas-fired power plants as there will be less overall demand for electricity. Such a coordinated response will tap the potential of electricity savings in the EU, which would not be possible to the same extent absent coordinated action of all Member States at EU level. All Member States will contribute to the joint effort of bringing prices down and preventing security of supply risks. Since in the internal electricity market the Member States’ electricity systems are highly integrated, the measure could be effective only if all Member States play their part in reducing demand.
In the same vein, the solidarity between Member States, through a uniform cap on the revenues of inframarginal generation technologies will generate revenues for Member States to finance measures in support of electricity final customers, while at the same time preserving the price signals on the markets across Europe, and preserving cross-border trade. Therefore, it will ensure that electricity in Europe continues to flow to where it is most needed and that cheaply produced electricity is exported to Member States where the electricity production is more expensive. Such a coordinated effort by Member States therefore enshrines the principle of energy solidarity between Member States and citizens of the Union.
Furthermore, this measure is compatible with the current way of trading and pricing electricity around Europe, thereby ensuring that energy trading and sharing remains intact, that Member States can continue to rely on their neighbours for imports and that those Member States with less domestic generation and limited natural resources are more protected from the risks of supply disruptions. It is therefore justified to base the proposed instrument on Article 122(1) TFEU.
The extreme price increase has led to a situation where not only many households face a significant challenge to pay their bills, but which also constitutes a serious risk for the economy. As the extent of the current problems has not been anticipated in the current regulatory framework, it is therefore appropriate to allow State interventions into retail prices also for small and medium-sized enterprises and, subject to certain conditions, interventions which lead to price levels below the costs of energy suppliers both for households and SMEs.
However, the impact of the gas supply shortages on electricity prices, as well as the possibilities to finance support measures from State budget differ between Member States. As a result, there are disproportionate effects of the crisis in some parts of the Union, where customers are not able to access the energy they need as suppliers withdraw from the market. Absent the proposed measures, there is a risk that only Member States with fiscal space could have the resources to protect these customers and suppliers, leading to severe distortions of the internal market. The uniform obligation created by the proposed Regulation to pass on the excess revenues to final consumers will ensure that, in principle, all Member States will be able to protect their customers and to use these additional resources for the same purpose. The positive effect on energy prices will have a positive impact on the interconnected EU market and will also help dampening the inflation rate. Therefore, national measures will, in the interconnected Union economy, also have a positive effect in other Member States.
The collective establishment, by Member States, of a coordinated, temporary solidarity contribution based on taxable surplus profits made in the fiscal year 2022 on EU companies and permanent establishments in the oil, gas, coal and refinery sectors in the Union governed by common framework is needed to help protect consumers and businesses against soaring energy prices across the whole Union while preserving the smooth functioning of the internal market and ensuring the necessary solidarity between Member States. It is therefore justified to base the proposed instrument on Article 122(1) TFEU. The establishment of a solidarity contribution adds an element of fairness to the package of measures to be launched in the context of the emergency intervention on energy.
This proposal therefore ensures that all Member State coordinate their efforts. It reflects the principle of energy solidarity, which has recently been confirmed by the Court of Justice as a fundamental principle of EU law 9 .
The planned measures of the present initiative are fully in line with the subsidiarity principle. Because of the significant uncertainty in the Union electricity market and the resulting extraordinary high prices caused by the weaponisation of gas supply by Russia, there is a need for action at Union level. A coordinated approach through Union-wide electricity demand reduction, in the spirit of solidarity, is necessary to minimise the risk of potential major disruptions during the winter months when electricity consumption and electricity production from gas will be higher.
Given the unprecedented nature of the gas supply crisis and the role of gas as a key technology to meet electricity demand, action at Union level regarding electricity markets is also warranted. Member States must be able to rely on imports if and when needed this winter, underlining the importance of the internal electricity market. Power must continue to flow around Europe to avoid a high-price crisis becoming a security of supply crisis. However, this must be affordable and the disproportionate effects on consumers’ electricity bills should be tackled. To preserve the functioning of the electricity system and cross-border trade and investments, a common approach to cap the revenues for inframarginal technologies is both reasonable, appropriate and proportionate.
Concerning electricity, this proposal sets the final result to be achieved by the measures, in the form of setting out demand reduction measures and legally binding obligations on energy reduction when electricity prices are at their highest and the limitation of the revenues of inframarginal technologies. At the same time, it gives Member States full autonomy in choosing the most effective means to meet these obligations according to their national specificities and widens the possibility for Member States to intervene in price regulation. More specifically:
·Regarding demand reduction for electricity, the proposed Regulation sets binding targets to be achieved while leaving Member States the choice of the means to achieve those targets.
·Regarding the cap on revenues to fund support to consumers, the proposed Regulation sets a uniform cap applicable in the Union. However, Member States retain the right to introduce further limitations, as long as they are proportionate, do not distort the functioning of electricity wholesale markets, ensure that the investment costs are covered, do not jeopardise investment signals, and that they are in line with Union Law. The surplus revenues will be used to support consumers, but Member States will have full autonomy regarding the means of ensuring that the surplus revenues reach consumers.
·Regarding measures of public intervention in retail prices, the proposed Regulation actually enlarges Member States’ scope to take such measures compared to the current legislative framework at Union level, which is in line with the principle of subsidiarity.
As concerns the measure in the fossil sector, the temporary solidarity contribution tackles the challenge faced by all Member States which is currently being addressed in disparate ways with a framework governing a solidarity contribution at the European level. The common initiative at Union level, consisting of the mandatory introduction of a solidarity contribution in each Member State for certain companies and permanent establishments predominantly active in oil, gas, coal and refinery sectors. This problem cannot be appropriately addressed by Member States alone.
A solidarity contribution introduced by this Regulation will increase revenues for the State budget and enable them to finance measures aimed at alleviating the burden of high energy costs for consumers, in particular vulnerable persons and companies. However, not every Member State has introduced such measures, and the content of the already adopted measures varies from Member State to Member State.
Hence, a mandatory solidarity contribution on surplus profits governed by a common Union framework will ensure a sufficient level playing field across the Union and a situation where all Member States’ authorities can reap the proceeds from such surplus profits that would enable them to better tackle the exceptional event of soaring energy prices, which requires urgent action in all Member States. Therefore, an EU initiative would add value, as compared to individual actions taken at national level.
Therefore, by reason of its scale and effects, the measure can be better achieved at Union level, hence the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union.
Proportionality
The initiative complies with the proportionality principle. Within the scope of Article 122(1) TFEU, the policy intervention is appropriate to the economic situation and proportional to the dimension and nature of the problems defined and the achievement of the set objectives.
In view of the unprecedented geopolitical situation and the significant threat for citizens’ livelihood and the EU economy, there is a clear need for coordinated action. Coordinated efforts at reducing overall electricity consumption as well as electricity consumption at peak hours, capping the revenues achieved by inframarginal electricity producers and giving Member States more scope for public intervention in retail price-setting are suitable means to reduce the existing upward pressure on electricity prices to the detriment of consumers. At the same time, no other, less intrusive measures can be envisaged that would as effectively achieve that objective.
The proposed solidarity contribution respects the proportionality principle in that it does not go beyond what is necessary to achieve the objectives. It is based on a calculation base and rate, which ensure that profits are partly subject to such a contribution without unnecessarily impeding the energy companies in the oil, gas, coal and refinery sectors to use such surplus profits for future investment or for ensuring their viability. That is why the rate proposed in the regulation is limited to one third of the surplus taxable profits, after a buffer is applied to the tax base. However, and to ensure that Member States’ specific circumstances are safeguarded, the proposed rate is a minimum rate and Member States may apply a higher rate in case they deem it is necessary.
The solidarity contribution is also of a temporary nature and limited to those surplus profits made in the fiscal year 2022, and is applied only to surplus profits of the oil, gas, coal and refinery sectors, taking into consideration the unexpected profits earned as a result of unpredictable circumstances. Those Member States that have a domestic levy or tax already in place exceeding the proposed rate of the solidarity contribution, may continue to apply the existing higher rate to cater for the national specificities that led them to adopt such rate.
Hence, the proposal does not go beyond what is necessary to achieve the objectives laid down in the current instrument. The proposed measures are considered proportionate and build to the extent possible on existing initiatives, which have been welcomed by Member States.
Choice of instrument
Taking into account the scale of the energy crisis, the potential of its social, economic and financial impacts and the urgency to mitigate them, the Commission deems it suitable to act by way of a regulation which is of general scope and directly and immediately applicable. This would result in a swift, uniform and Union-wide cooperation mechanism.
7. STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
Due to the politically sensitive nature of the proposal and urgency to prepare the proposal so that it can be adopted on time by the Council, a dedicated stakeholder consultation could not be carried out.
However, the Commission plans to engage with stakeholders, and notably energy intensive industries, for ensuring a successful implementation of this Regulation.
Given the temporary and urgent nature of the measures that respond to an emergency situation, an impact assessment could not be carried out.
No negative impact has been identified on fundamental rights. The measures under this instrument will not affect the rights of customers who are categorised as protected under Regulation (EU) 2017/1938, including all household customers. Furthermore, the cap on revenues and the introduction of a temporary solidarity contribution in the proposed Regulation fully take into account the need to protect legitimate expectations and existing investments, and therefore will not jeopardise the right to own and use lawfully acquired possessions. The instrument will enable Member States to reduce the risks associated with the gas shortage and the resulting surge of energy prices that would otherwise have major implications on the economy and society. By ensuring that suppliers who are required to sell electricity below cost are compensated it is ensured that such persons are not deprived of their fundamental rights, albeit without prejudice to the application of State aid rules.
8. BUDGETARY IMPLICATIONS
This proposal does not require additional resources from the EU budget.
9. OTHER ELEMENTS
Not relevant.