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Europe’s crisis measures to tackle energy price spike: An Explainer 

Countries including Italy have already introduced a windfall profit tax on energy firms. The draft said Brussels would put in place a minimum rate for all EU countries, but governments could choose to go higher.

Europe’s crisis measures to tackle energy price spike: An Explainer 
The European Commission proposals would claw back revenue from electricity generators with low running costs to raise cash for governments to spend on cushioning consumers and industry from soaring energy bills.

The European Union’s executive proposed emergency measures on Wednesday aimed at pulling down surging gas and power prices that are stoking inflation, hampering industrial activity and inflicting sky-high bills upon citizens ahead of winter.

At the start of this month, Russia said it would not reopen its main Nord Stream 1 pipeline to supply Europe – the latest in a string of supply cuts, which Moscow blames on Western sanctions imposed over its invasion of Ukraine.

EU country governments will now negotiate the details of the proposals, possibly approving the final laws at a Sept. 30 meeting of energy ministers.

Here’s what the EU’s energy crisis package contains.

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WINDFALL LEVY ON NON-GAS POWER PLANTS

The European Commission proposals would claw back revenue from electricity generators with low running costs to raise cash for governments to spend on cushioning consumers and industry from soaring energy bills.

In the EU system, gas plants often set the price of electricity. Non-gas fuelled power plants sell their electricity at the resulting high prices – even though they do not have to pay huge bills for gas.

Brussels wants to skim off any excess revenue that wind, solar, nuclear, lignite, oil, biomass and some hydropower plants make under this system. Hard coal plants would be excluded because their fuel costs have also jumped this year, the Commission said.

The measure would apply a price limit of 180 euros per megawatt hour (MWh) on the revenue these generators get for their power in the market. The limit would be applied after power transactions are settled, so it would not directly affect prices in Europe’s exchange-traded electricity market.

It would exclude revenues made from government subsidy schemes, and would not apply to generators whose revenues are already capped by national policies.

The move would cap generators’ revenues at less than half of current market prices – but far above the running costs of most generators affected, the Commission said. Germany’s front-year electricity price was close to 500 euros/MWh on Wednesday.

National governments would be responsible for recouping the cash and spending it on mitigating soaring energy prices – which could include giving consumers financial incentives to use less power, lowering consumers’ electricity bills, or helping them invest in energy saving measures like home insulation.

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The Commission said the proposal would raise 117 billion euros ($117 billion). Industry groups say most of Europe’s wind farms are not reaping windfall profits from high energy prices because they sell their power under fixed-price contracts – suggesting some generators would be less affected than others.

PROFIT SHARING FOR FOSSIL FUEL FIRMS

The EU also wants companies that have made bumper profits from selling fossil fuels at record prices to make a financial contribution to help citizens and industries.

EU countries would introduce a temporary windfall profit levy for oil, gas, coal and refining companies. It would apply to 33% of firms’ taxable surplus profits from 2022 – with surplus profits defined as those 20% above a company’s average taxable profits in the last three years.

Countries including Italy have already introduced a windfall profit tax on energy firms. The draft said Brussels would put in place a minimum rate for all EU countries, but governments could choose to go higher.

The levy would be collected by the EU country where the company’s windfall profits are generated.

The fossil fuel levy would raise around 25 billion euros, the Commission said – bringing to just over 140 billion euros the anticipated total from the EU’s two proposed measures to claw back revenues from energy firms.

ELECTRICITY DEMAND CUT

The draft EU proposal would impose a mandatory target for countries to cut electricity consumption this winter, to ensure Europe has enough fuel to last the colder months.

EU countries would be required to curb their power use by 5% during the 10% of hours with the highest electricity demand each month, the draft said – a move it said could curb gas use in the power sector by around 4% over a four-month period.

EU gas storage is now 84% full, exceeding the EU’s pre-winter filling target. But analysts say Europe will still need to slash gas use over winter, to avoid storage facilities running dry.

National governments would be responsible for designing measures to lower electricity demand.

EMERGENCY LIQUIDITY FOR POWER FIRMS

The Commission said it was also working on plans to help energy companies facing soaring collateral needs.

Utilities sell some power in advance to secure a certain price but must post a cash deposit with exchanges in case they default before the power is produced. Soaring power prices have meant firms must post bigger margin deposits, leaving some struggling to find the extra cash.

“We will work with the market regulators to ease these problems by amending the rules on collaterals and by taking measures to limit the intra-day price volatility,” Commision President Ursula von der Leyen said.

NO GAS PRICE CAP

The draft EU proposal did not include a gas price cap – an idea that has divided the bloc’s member states, and which von der Leyen said the Commission was still discussing.

EU countries have asked Brussels to propose a cap but disagree on whether this should apply to all imported gas, pipeline flows or wholesale gas trading.

Germany, the Netherlands and Denmark oppose a general gas price cap, warning it could leave countries struggling to attract supplies in price-competitive global markets, and endanger Europe’s winter energy security.

Italy and Poland are among the supporters that say capping gas prices would pull down bills for citizens and industries.

The Commission said it was still looking into an earlier plan to impose a price cap on Russian gas. It shelved the idea from Wednesday’s proposals after opposition from countries including Hungary and Austria, which feared Moscow would retaliate by cutting off the dwindling supplies it still sends to the EU.

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