Alert: Regulation on an Emergency Intervention to Address High Energy Prices
On 6 October 2022, the Council of the European Union (the “Council”) adopted a Proposal for a Council Regulation on an Emergency Intervention to Address High Energy Prices (the “Regulation”). The goal of the Regulation is to mitigate the effects of high energy prices by adopting temporary emergency measures such as revenue caps, price setting, demand reduction and solidarity contributions. Although the Regulation is binding and directly applicable in the Member States, its language indicates that the details of how to introduce specific measures will have to be established via domestic legislation. Below follows a brief summary of key provisions of the Regulation.
1. Revenue Caps
1.1. The Regulation introduces a mandatory cap on the market revenues of electricity producers in the amount of EUR 180 per MWh of electricity produced. The cap applies to energy generated from renewable and nuclear sources, waste, lignite, crude petroleum products and peat.
1.2. The revenue cap should not be understood as a price cap: the idea behind the Regulation is not to eliminate the electricity revenue surplus but to redistribute it among end-consumers.
1.3. The Regulation does not address how Member States should introduce the revenue cap. Instead, it explicitly allows Member States to choose their own approach in certain aspects. For instance, Member States may decide:
1.3.1. whether the cap should be applied on market revenues at the settlement of the exchange of energy or at a later stage;
1.3.2. that the cap does not apply to producers of electricity deriving from plants with a capacity of no more than 1 MW if the application of the cap would lead to a significant administrative burden;
1.3.3. that the cap applies only to 90% of the revenues exceeding the cap.
1.4. Although the cap is likely to cover also revenues generated under power purchase agreements, the Regulation does not specify how this solution will be applied in practice.
1.5. The Polish government has not yet introduced or proposed specific regulations setting the revenue cap mechanism. However, the government is working on introducing energy price caps in the near future.
2. Price Setting
2.1. Member States may intervene and set the price for the supply of electricity to small and medium-sized enterprises. In addition, it will also be possible to set electricity prices below cost.
2.2. In addition, as per a press release, the Polish government aims to introduce a fixed energy price for households, small and medium-sized enterprises as well as local governments. According to a recent press release, the energy prices will be fixed at levels of approx. EUR 140 per MWh for households and EUR 160 per MWh for companies and vulnerable recipients. The rate for local governments will be subject to further negotiation. At the moment, it is not clear whether and how prices set under power purchase agreements will be covered by the price-setting mechanism.
2.3. In addition, the lower chamber of the Polish parliament (the Sejm) has recently adopted a law to fix the electricity price for households. If the law enters into force (subject to the president’s approval), households will pay energy prices fixed at 2022 levels in 2023, up to a specified consumption limit. The draft law provides for a compensation mechanism for energy trading and distribution companies.
2.4. At the beginning of October, a new Polish regulation setting the maximum bid price in the balancing market came into force. In this case, the maximum price will not be expressed as a fixed sum, but will be calculated at every instance on the basis of the price of enforced supply of energy (i.e., when a producer is compelled by the Polish transmission system operator to generate energy to balance the grid). The balancing market is not a trading market, but rather a technical one, as it allows the Polish transmission system operator to ensure the balancing of the national grid.
3. Demand Reduction
3.1. The Regulation imposes upon Member States the obligation to reduce its gross electricity consumption during peak hours by at least 5% on average per hour. However, Member States shall endeavour to reduce electricity consumption by 10%.
3.2. The Polish government has not yet introduced or proposed specific measures to reduce demand in line with the Regulation.
4. Solidarity Contribution
4.1. The Council intends to provide support to end-consumers of energy also by means of mandatory temporary solidarity contributions, which will be used to support households and companies affected by high energy prices. Surplus profits generated from activities in the fossil fuels sectors will be subject to solidarity contributions, collected in addition to any applicable taxes and levies.
4.2. The rate of the contribution will be at least 33% of the portion of taxable profits that are above a 20% increase of the average of taxable profits in the four fiscal years starting on or after January 2018.
4.3. The solidarity contribution will only be collected in a given Member State if that Member State has not already enacted equivalent national measures. In the case of Poland, the government is already working on a comprehensive windfall tax act, which is expected to cover the majority of companies, not only those active in the energy sector. At this stage it is too early to assess whether the new windfall tax will be considered an equivalent to the solidarity contribution.
The Regulation will enter into force on the day following its publication in the Official Journal of the European Union, which is expected to happen soon. Subject to additional review and potential prolongation by the European Commission, key provisions of the Regulation will apply from 1 December 2022 until the end of 2023, except for the demand reduction measures (applicable only until 31 March 2023) and revenue caps (applicable until 30 June 2023).
