European Commission plans revenue cap on non-gas power producers

In her annual ‘state of the Union’ speech, Ursula von der Leyen, president of the European Commission, today announced measures the Commission is planning to take to curb soaring energy prices and boost the EU's energy security.

A corresponding proposal for a EU regulation on an emergency intervention to address high energy prices with a temporary energy crisis framework was published by the Commission today.

One of the key measures in the proposal, to which von der Leyen also referred in her speech, is a market revenue cap for electricity from non-gas power producers. The Commission has proposed a market revenue cap of €180 per MWh. Revenue above the price cap would be redistributed to consumers or invested in energy security measures by EU member states.

The planned market revenue cap would affect all producers generating electricity from renewable sources, nuclear power or lignite, which are referred to in the proposal as ‘inframarginal technologies’. It is designed to apply to both electricity traded on the spot market and electricity traded bilaterally. Oil, gas, coal and refinery companies would also be required to make a "crisis contribution" from exceptional profits, von der Leyen mentioned in her speech.

With its proposal, the Commission wants to counteract the decoupling of the currently high market price for electricity from the relatively low costs of producing the electricity. According to von der Leyen, the problem lies in the existing electricity market design and the "merit order" principle. A "merit order" principle means that the price of electricity is always based on the most expensive energy source used – currently, gas. This means that other energy producers are currently making higher profits than usual "We have to decouple the dominant influence of gas on the price of electricity. This is why we will do a deep and comprehensive reform of the electricity market", von der Leyen said.

However, Valerian von Richthofen, energy law expert at Pinsent Masons, pointed out that the plan as drafted "does not aim for a change in in the merit-order-based market design itself, yet".

"Rather, it defines a certain market revenue - the ‘cap’ - for the production of electricity that is deemed appropriate and then aims for a distribution of the surplus revenues above said cap. This approach raises numerous legal and practical questions, especially with regard to the subsequent distribution mechanism. Large electricity consumers in particular are likely to question whether the mechanism is in line with state aid law and is proportionate," he said.

The proposal also includes requirements for member states to cut their monthly electricity demand. According to the draft new rules, EU member states will be asked to reduce their total monthly gross electricity consumption by up to 5%, and to cut peak power consumption, "covering at least 10% of the hours of each month where prices are expected to be the highest".

Public policy expert Mark Ferguson of Pinsent Masons said: "This is a significant package of measures and will have a massive impact on many businesses. With these measures, the Commission is seeking to address the unprecedented nature of the gas supply crisis. It wants to ensure that power continues to flow around Europe so that a 'high-price crisis' does not become a 'security of supply crisis'."

The temporary measures are planned to be in place by no later than December 2022, and would last no more than one year. Member states will be required to report on progress to the Commission.

Von der Leyen also said the Commission will work on a more representative benchmark for the gas market than the existing TTF hub in the Netherlands, aiming to limit intra-day price volatility and to ensure liquidity for utilities. She said this was required because the EU’s gas market had changed "from pipeline mainly to increasing amounts of LNG. But the benchmark used in the gas market – the TTF – has not adapted."

Also, von der Leyen said the Commission was planning to create a new European ‘bank’ for hydrogen. She said that this would " help guarantee the purchase of hydrogen, notably by using resources from the Innovation Fund" and "be able to invest 3 billion euros to help building the future market for hydrogen."