European Union energy ministers are set to decide on a revenue cap for renewable energy sources.
Although the aim of the EU setting a maximum revenue limit for renewables is to redirect excess profits from cheap electricity generation back to consumers, analysts and industry groups now argue that such measures are risky and ill-timed.
As part of an emergency plan to address the problem of high energy prices, the European Commission proposed a temporary cap of €180 per megawatt-hour (MWh) on the price at which low-carbon electricity companies sell electricity. The situation is complicated by the fact that not all renewable energy plants benefit from rapidly rising prices. This cap would apply to wind, solar, biomass, nuclear power, lignite, and some hydroelectric plants, but it would effectively function as a tax. According to the Commission’s own estimates, EU member states could raise up to €117 billion a year from electricity producers to help vulnerable consumers.
As the European Union is committed to increasing the use of renewable energy (to reduce the reliance on Russian fossil fuels), industry groups have condemned this temporary revenue cap, as it ignores the specificities of the renewable energy market and creates uncertainty for investors.
However, some experts disagree with this
Daniel Gros (Daniel Gros), a German economist at the Centre for European Policy Studies think tank, said that the cap should not negatively affect investment in renewables. “The price cap would only increase the tendency of renewable energy producers to sell their generated electricity forward, thereby protecting themselves both against future price caps and against a sudden drop in prices,” he said.
Uncertainty for investors?
Under EU plans, member states could exceed the €180/MWh cap in their national legislation if they wish to capture a larger share of the windfall profits.
However, industry groups have warned that allowing countries to deviate from an EU-wide cap creates confusion and uncertainty for investors, and threatens the integrity of the energy market.
“A lower revenue cap at the national level creates great uncertainty for investors and threatens the integrity and unity of the EU market,” Naomi Chevillard of SolarPower Europe told EUobserver.
Simon Dekeyrel (Simon Dekeyrel), a climate and energy policy analyst at the European Policy Centre think tank, agreeing with this view, said that different revenue caps in different member states could hinder cross-border trade and fragment the internal energy market.
“A higher revenue tax in one member state could, for example, incentivise electricity producers to sell electricity in neighbouring markets where the revenue tax is lower,” emphasised Simon Dekeyrel.
For its part, the Commission has also acknowledged that differing caps could create “significant distortions between producers in the Union” competing in an integrated EU energy market. However, Commission representatives stress that more ambitious national caps may be allowed, provided they do not interfere with the functioning of electricity markets or undermine investment signals.
Governments are “now” making profits
The situation is further complicated by the fact that not all renewable energy plants benefit from surging prices. According to an analysis by Rystad Energy, only 40% of them are making windfall profits from the current energy crisis. Revenue for most of the renewable capacity installed in the EU comes from fixed-rate contracts signed before the energy crisis – on average lower than current prices.
These long-term contracts (usually awarded through subsidy mechanisms or auctions) account for 60% of installed capacity in the EU, and are primarily in Germany, France, and Spain.
Victor Signes, an Rystad renewables analyst, argues that these producers cannot make windfall profits because they have to redistribute excess revenue with their counterparties. Regarding subsidy mechanisms, such as feed-in tariffs and bilateral contracts, Signes explains that governments and national utilities are the ones buying electricity generated from renewable sources at a set fixed rate and then selling it back into the spot market.
“After 20 years, when governments had to pay renewable energy developers a fixed price exceeding the market price, governments are now the ones making a profit,” the analyst emphasises.
Some institutions have acknowledged that profits are being distributed in this way. For instance, the French Energy Regulatory Commission announced that this system could generate approximately €8.6 billion for the French state in 2022 and 2023.
Wind Europe has called on EU countries to apply the cap only to actually generated revenue, arguing that most wind farms in Europe earn fixed incomes.
According to a leaked document prepared by the Czech EU presidency, electricity producers subject to national measures, such as feed-in tariffs and bilateral contracts, should be excluded from the application of the revenue cap.
EU energy ministers decided on the revenue cap for renewable energy and other emergency measures at an Energy Council meeting on 30 September.