The “very high prices in electricity markets … observed since September 2021” prompted the Council of the European Union, in October 2022, to make Regulation (EU 2022/1854). This Regulation required each EU Member State to impose a number of energy-related measures including:
- The imposition of a “cap on market revenues” earned by electricity producers from certain types of generation, to be set at €180/MWh, and
- The imposition of a “temporary solidarity contribution” on entities active in the crude petroleum, natural gas, coal and refinery sectors
The proceeds of the solidarity contribution, and any surplus revenues confiscated via the cap, are to be used to finance measures that support final electricity customers.
The Irish Government has seen fit to implement these measures by way of primary legislation, and published the Energy (Windfall Gains in the Energy Sector) Bill in March 2023 for this purpose.
Cap in hand
As per the heads of Bill, the revenue cap will apply to electricity generators, and their trading agents, with market revenues obtained from the generation of electricity produced from sources other than natural gas. This is due to the fact that generators using natural gas are already paying the high natural gas prices that triggered the problems.
Notably, the cap is to operate at three separate price levels:
- €120/MWh for wind energy and solar energy
- €180/MWh for geothermal, waste-to-energy, nuclear energy or lignite, and
- A variable price level, based on production costs plus a margin, for coal, petroleum, biomass and peat generators
Each generator will be required to calculate the relevant quantity of its electrical output for each half hour. Deriving this quantity involves the making numerous adjustments, using variables from the Single Electricity Market’s pricing and bidding algebra.
SEMO, the operator of the Single Electricity Market, will be responsible for publishing an index of electricity market prices for the relevant period, December 2022 to June 2023 inclusive. Due to the relatively complex structure of the Irish wholesale electricity market, the calculation of these prices requires the weighting by trade quantity of prices across a number of separate temporal markets.
Each generator’s relevant quantity is:
- Multiplied by the applicable cap, to yield the amount of revenue that it is permitted to retain, and
- Multiplied by the index price, to yield the amount of revenue that it is deemed to have earned from the electricity market
in each case as aggregated across the month.
Where monthly market revenue exceeds the monthly capped revenue, this difference is the “surplus revenue”, which must then be adjusted to take account of:
- Costs and revenues resulting from hedging transactions and out-of-market electricity sales, and
- Evidence that the benefit of this surplus revenue has been passed to electricity consumers.
Each affected generator will be required to make a “formal declaration” of the relevant calculations by 31 July 2023. They will then be required to pay any resulting surplus revenue amounts by 30 September 2023, with further payment arising out of market resettlements then required by the end of September 2024.
This obligation to make the solidarity contribution will apply to profits accrued from activities carried out at the level of “[European] Union companies and permanent establishments with activities in the crude petroleum, natural gas, coal and refinery sectors”, and will be imposed by way of a charge collected by the Revenue Commissioners.
For any company that is subject to the obligation, “surplus profits” will be calculated as taxable profits accrued in the fiscal years 2022 and 2023, which are “above a 20% increase of the average of the taxable profits in the four fiscal years starting on or after 1 January 2018”.
The temporary solidarity contribution shall be 75% of these surplus profits.
Regarding the legislation process, the General Scheme is still in an early stage as consultation with stakeholders and the Joint Oireachtas Committee on Environment and Climate Action is still going on.
These proposed clawbacks of the earnings of electricity generators and fossil fuel companies are quite remarkable in their scale and ambition.
In particular, by targeting renewable generators for special treatment (the proposed €120/MWh cap is lower than the €180/MWh cap set out in the EU measure), the electricity market revenue cap seems to run counter to the incentivisation that is a pillar of existing wholesale electricity market design.
Much of the historical investment in Irish renewable generation has to date been based on an expectation that these generators, or their contractual counterparties, can retain the proceeds of market trading, even if the market prices are higher than trend levels.
Irish electricity market participants and fossil fuel companies will need to track the progress of this legislative proposal, and in the meantime may find it useful to review their existing trading contracts in case opportunities exist to reopen these arrangements using “change of law” provisions.
For more information, contact a member of our Energy Sector team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.