Insights Blog

New mechanisms applicable from 1 December 2022

Regulation (EU) 2022/1854 on an emergency intervention to address high energy prices is now in force, mirroring to a large extent the draft, which we looked at here. The position in the final Regulation is as follows:

  • Demand Reduction: Member States shall endeavour to implement measures to reduce their total monthly gross electricity consumption by 10% compared to the average in the corresponding months of the reference period (1 November to 31 March in the past five consecutive years). Each Member State shall identify peak price hours corresponding to a minimum of 10% of all hours in the period between 1 December 2022 and 31 March 2023, and then reduce gross electricity consumption during the identified peak hours by at least 5% on average per hour.
  • Cap on Revenues: From 1 December 2022 to 30 June 2023, wholesale market revenues are capped at €180MW/h for inframarginal producers (electricity produced from wind, solar, geothermal, hydropower without reservoir, biomass (excluding biomethane, to avoid impacting its take-up as a replacement for natural gas), waste, nuclear, lignite, crude petroleum products, and peat). Member States can decide to apply the cap to only 90% of the revenues above the cap to incentivise security of supply. Applying the cap will be complex and certain features of the Irish energy sector are relevant, as we noted here. Guidance in recitals addresses some of the complexity involved:

The cap on market revenues should be set on market revenues rather than on total generation revenues (including other potential sources of revenues such as feed-in premium), to avoid significantly impacting the initial expected profitability of a project. Regardless of the contractual form in which the trade of electricity may take place, the cap on market revenues should apply to realised market revenues only. This is necessary to avoid harming producers who do not actually benefit from the current high electricity prices due to having hedged their revenues against fluctuations in the wholesale electricity market. Hence, to the extent that existing or future contractual obligations, such as renewable power purchase agreements and other types of power purchase agreements or forward hedges, lead to market revenues from the production of electricity up to the level of the cap on market revenues, such revenues should remain unaffected...”

In line with this, the definition for ‘market revenue’ is “realised income a producer receives in exchange for the sale and delivery of electricity in the Union, regardless of the contractual form in which such exchange takes place, including power purchase agreements and other hedging operations against fluctuations in the wholesale electricity market and excluding any support granted by Member States”.

Producers, intermediaries and other stakeholders are required to provide the CRU (and, where relevant, system operators and NEMOs) with all necessary data for the application of the cap.

  • Distribution of Revenues resulting from the Cap: Member States must ensure that all surplus revenues from the cap are used to finance measures to support final electricity customers to mitigate the impact of high electricity prices in a targeted manner. Measures must be clearly defined, transparent, proportionate, non-discriminatory and verifiable and must not counteract energy demand reduction mechanisms. Example approaches include granting financial compensation to customers for reducing consumption including demand reduction auctions or tender schemes; and promoting customer investment in decarbonisation technologies, renewables and energy efficiency.
  • Retail Measures: as a derogation from normal rules, Member States may apply public interventions in price setting for the supply of electricity to SMEs.
  • Temporary Solidarity Contribution: By 1 December 2022, Member States must adopt and publish measures to implement a temporary solidarity contribution to be paid from surplus profits generated by businesses with activities in the crude petroleum, natural gas, coal and refinery sectors. The contribution is based on taxable profits in 2022 and 2023 above a 20% increase of average taxable profits in the four fiscal years starting on or after 1 January 2018, at a rate of at least 33%. Member States are required to use the proceeds for specific purposes including financial support measures to help reduce consumption and to support companies in energy intensive industries.

Next Steps: The CRU is identified as the competent authority in Ireland responsible for monitoring the implementation of the above measures (except the temporary solidarity contribution). By 31 December 2022, Member States are required to report to the Commission on measures for achieving the demand reduction requirement, and the introduction of the temporary solidarity contribution and corresponding customer support measures, with further information required to follow. By 31 January 2023 and 30 April 2023, Member States must report to the Commission on results. During the European Council meeting of 20-21 October, the Taoiseach indicated that revenue from these measures would begin to flow early in 2023.