EU Member States Adopt Energy Windfall Tax   

EU member states adopted a Council Regulation (2022/1854) of 6 October 2022 on an emergency intervention to address high energy.

The Regulation establishes an emergency intervention to mitigate the effects of high energy prices through exceptional, targeted and time-limited measures.

1. Objectives of the Regulation

The objectives of these measures are:

(i) Reduction of electricity consumption;

(ii) Establishment of cap on market revenues that certain producers receive from the generation of electricity;

(iii) redistribution to final electricity customers in a targeted manner;

(iv) empowerment of Member States to apply measures of public intervention in the price setting for the supply of electricity for household customers and SMEs;

(v) establishment of rules for a mandatory temporary solidarity contribution from Union companies and permanent establishments with activities in the crude petroleum, natural gas, coal and refinery sectors to contribute to the affordability of energy for households and companies.

2. Measures aimed at demand reduction:

On the basis of the recently adopted instrument, Member States shall endeavour to implement measures to reduce the total monthly gross electricity consumption by 10% compared to the average gross electricity consumption in the corresponding months of the reference period.

Moreover, peak hours shall be identified corresponding in total to a minimum of 10% of all hours of the period between 1 December 2022 and 31 March 2023. Each Member State shall reduce its gross electricity consumption during the identified peak hours. The reduction achieved over the identified peak hours shall reach at least 5 % on average per hour, calculated as the difference between the actual gross electricity consumption for the identified peak hours and the gross electricity consumption forecasted by the transmission system operators in cooperation with the regulatory authority.

The Regulation provides with a set of criteria that Member States shall comply with when adopting measures aimed at demand reduction.

3. Mandatory cap on market revenues and distribution of surplus revenues and surplus congestion income revenues to final electricity customers

The Regulation establishes a mandatory cap on market revenues obtained from the sale of electricity produced from the following sources:

(a) wind energy

(b) solar energy (solar thermal and solar photovoltaic);

(c) geothermal energy;

(d) hydropower without reservoir;

(e) biomass fuel (solid or gaseous biomass fuels), excluding biomethane;

(f) waste;

(g) nuclear energy;

(h) lignite;

(i) crude petroleum products;

(j) peat.

Market revenues of producers obtained from the generation of electricity from the sources referred to above shall be capped to a maximum of 180 EUR per MWh of electricity produced(1). Consequently, Member States shall ensure that the cap on market revenues targets all the market revenues of producers and, where relevant, intermediaries participating in electricity wholesale markets on behalf of producers, regardless of the market timeframe in which the transaction takes place and of whether the electricity is traded bilaterally or in a centralised marketplace.

4. Distribution of the surplus revenues

Member States shall ensure that all surplus revenues resulting from the application of the cap on market revenues are used to finance measures in support of final electricity customers that mitigate the impact of high electricity prices on those customers, in a targeted manner. Such measures may include, inter alia, the following examples:

a) granting financial compensation to final electricity customers for reducing their electricity consumption, including through demand reduction auctions or tender schemes;

b) direct transfers to final electricity customers, including through proportional reductions in the network tariffs;

c) compensation to suppliers who have to deliver electricity to customers below costs following a State or public intervention in price setting pursuant to the mechanism provided in the Regulation;

d) lowering the electricity purchase costs of final electricity customers, including for a limited volume of the electricity consumed;

e) promoting investments by final electricity customers into decarbonisation technologies, renewables and energy efficiency investments.

5. Measure concerning the crude petroleum, natural gas, coal and refinery sectors (Windfall tax)

Surplus profits generated by Union companies and permanent establishments with activities in the crude petroleum, natural gas, coal and refinery sectors shall be subject to a mandatory temporary solidarity contribution. The deadline for adopting these measures is 31 December 2022.

I. Base for calculating the temporary solidarity contribution:

The temporary solidarity contribution for Union companies and permanent establishments with activities in the crude petroleum, natural gas, coal and refinery sectors, including those that are part of a consolidated group merely for tax purposes, shall be calculated on the taxable profits, as determined under national tax rules, in the fiscal year 2022 and/or the fiscal year 2023 and for their full duration, which are above a 20 % increase of the average of the taxable profits, as determined under national tax rules, in the four fiscal years starting on or after 1 January 2018. If the average of the taxable profits in those four fiscal years is negative, the average taxable profits shall be zero for the purpose of calculating the temporary solidarity contribution.

II. Rate for calculating the temporary solidarity contribution

The rate applicable for calculating the temporary solidarity contribution shall be at least 33 % and shall apply in addition to the regular taxes and levies applicable according to the national law of each EU Member State.

6. Use of the proceeds from the Windfall tax

Member States shall use the proceeds from the temporary solidarity contribution with sufficiently timely impact for any of the following purposes:

(a) financial support measures for final energy customers, and vulnerable households, in particular, to mitigate the effects of high energy prices, in a targeted manner;

(b) financial support measures to help reduce energy consumption such as through demand reduction auctions or tender schemes, lowering the energy purchase costs of final energy customers for certain volumes of consumption, promoting investments by final energy customers into renewables, structural energy efficiency investments or other decarbonisation technologies;

(c) financial support measures to support companies in energy-intensive industries provided that they are made conditional upon investments into renewable energies, energy efficiency or other decarbonisation technologies;

(d) financial support measures to develop energy autonomy, in particular, investments in line with the REPowerEU objectives set in the REPowerEU Plan and in the REPowerEU Joint European Action such as projects with a cross-border dimension;

(e) in a spirit of solidarity between Member States, Member States may assign a share of the proceeds of the temporary solidarity contribution to the common financing of measures to reduce the harmful effects of the energy crisis, including support for protecting the employment and the reskilling and upskilling of the workforce, or to promote investments in energy efficiency and renewable energy, including in cross-border projects, and in the Union renewable energy financing mechanism provided for in Article 33 of Regulation (EU) 2018/1999 of the European Parliament and of the Council.

It should be emphasised that the solidarity contribution applied by Member States in accordance with the Regulation shall be of a temporary nature and only applies to surplus profits generated as of 2018.

(1) This cap on market revenues shall not apply to demonstration projects or to producers whose revenues per MWh of electricity produced are already capped as a result of State or public measures.