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28th Feb 2024

EU agrees windfall energy firm tax — but split on gas-price cap

  • 'We are in an energy war with Russia. The winter is coming. We need to act now,' said Czech Republic's industry minister Jozef Síkela (Photo: European Union)
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EU energy ministers on Friday (30 September) approved a package of measures to intervene in the electricity markets and reduce high energy prices, during a council meeting in Brussels.

But the main topic of the day was how to deal with the gas price itself — and there are differing views on what is the best way to proceed.

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"We are in an energy war with Russia. The winter is coming. We need to act now," Czech Republic's industry minister Jozef Síkela, whose country holds the EU council presidency, implored colleagues ahead of the meeting.

The greenlighted proposal, which was negotiated in less than a month, includes mandatory power savings, a cap on excess revenues from low-cost electricity producers such as renewables and nuclear power plants and a so-called "solidarity-contribution mechanism" for fossil-fuel extractors.

"It is now crucial that these steps are implemented quickly so that they can start having the intended effect," said energy commissioner Kadri Simson.

Under the new rules, EU countries would be obliged to reduce electricity consumption by five percent during peak hours — i.e. when power demand is at its highest.

Energy ministers also agreed to temporarily cap at €180 per megawatt-hour (MWh) the price at which low-carbon electricity companies sell power.

They argued that renewables and nuclear power plants have made "unexpectedly large financial gains over the past months" because of the role of gas as a price-setting mechanism for the final price of electricity.

Despite criticism of the risk of creating a patchwork of measures that could hinder investment in renewables, ministers introduced some flexibilities for individual member states. These include the possibility to set different and higher caps for different types of electricity generation.

Finally, the agreement also includes a levy on fossil fuel companies, covering 33 percent of taxable surplus profits made in 2022 and/or 2023. This means that fossil fuel extractors' windfall profits from 2022 can be exempted from the market revenues cap.

The original EU commission proposal says the solidarity contribution should be calculated over a three-year baseline ( 2019-2021), but governments have extended this to also cover 2018.

This is seen by green groups as a "loophole" and a missed opportunity to support Europe's most vulnerable households and businesses struggling to pay their soaring energy bills.

"The EU and governments must tax all of these windfall profits now, not next year. This money is urgently needed to protect the most vulnerable people this winter," said Thomas Gelin, a campaigner from Greenpeace.

'All eyes on Germany'

Limiting gas prices is seen by many as the missing piece of the puzzle.

"All these temporary measures are very good, but in order to find the solution to help our citizens in this energy crisis, we need to cap the gas price," said Croatian economy minister Davor Filipovic before the meeting.

A growing chorus of member states is calling on the commission to come forward with a proposal to limit the price of gas directly — covering all imported gas, plus gas traded within the union. Supporters include Belgium, France, Poland, Portugal, Romania, Slovakia, Slovenia, Greece, Italy and Spain.

"All eyes are on Germany," said Belgian energy minister Tinne Van der Straeten ahead of the meeting, hoping Berlin may support the proposal. "Germany is being constructive," she also said.

The commission has argued that a price cap covering both liquefied natural gas (LNG) and pipeline supplies would be difficult to implement and could pose risks to energy security.

Germany, Denmark and the Netherlands have voiced similar concerns.

The commission is expected to present an action plan on price caps for gas in mid-October.

Three ideas

In an informal document, the EU executive has put forward three ideas: setting a price cap on Russian gas imports, negotiating a lower gas price with other suppliers like those located in Norway, and establishing a ceiling on the price of gas used to generate electricity in the EU market.

"Russia is a special case. I believe we could impose a price cap on all of Russia's imported gas including LNG. However, some member states see this as a sanction, and we don't yet have a consensus on this step," said Simson.

Nevertheless, some countries are not convinced by the proposal.

Van der Straeten said that a cap on Russian gas will not have a major impact on consumers' bills, pointing out that a majority of countries are asking for an intervention on the price to have a direct solution for soaring bills.

The cap should be set at a level that is "high" and "flexible enough" to allow Europe to attract the required supplies, Belgium, Greece, Poland and Italy argue in a note explaining their approach, seen by Reuters.

"A wholesale gas price gap is a legitimate option, but it requires a radical intervention in the market, which means that several non-negotiable conditions have to be met before," said commissioner Simson. One of these conditions would require EU countries to commit to saving gas demand beyond the current voluntary 15-percent-reduction plan, she added.

Analysis

Investors in renewables face uncertainty due to EU profits cap

While a cap on revenues from renewables is aimed at redirecting excess profits from low-cost electricity generation back to consumers, analysts and industry groups argue such measures come with risks — and at a bad time.

EU leaders discuss gas price cap — amid rationing fear

The European Commission will present its roadmap to reduce gas prices to member states during an informal summit in Prague. The plan includes a price cap on gas used to generate electricity, but experts point out a variety of risks.

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