The EU's blueprint for a revenue cap on renewable electricity

As one reaction to soaring electricity prices the new Council Regulation (EU) 2022/1854 on an emergency intervention to address high energy prices was introduced. Besides other measures (read more here), Art. 6 et. seq. of the regulation aims to skim what is conceived to be "surplus" revenues from those electricity generators who are currently realising higher prices when selling their electricity than one would expect in a "normal" market environment.

A temporary cap for producers of "inframarginal" electricity 

The regulation obliges the EU Member States (MS) to limit the market revenues of "inframarginal" technologies, i.e. electricity generators producing electricity on the basis of wind, solar, geothermal, hydropower without reservoir, biomass (except biomethane), waste, nuclear, lignite, crude petroleum products or peat.

These technologies are conceived to be "non-marginal" as they are currently profiting from the high strike prices which electricity generators with higher marginal costs (i.e. power plants using natural gas or hard coal) set at the electricity exchanges (so-called merit order effect). The regulation demands that the market revenues of these generators are limited to a maximum of EUR 180 EUR/MWh at least between 1 December 2022 and 30 June 2023.  

No cap, however, is to be applied to market revenues of demonstration projects and those of producers whose revenues per MWh of electricity generated are already capped as a result of government/public measures, such as feed-in tariffs or two-way contracts for difference.

The skimmed surplus revenues are to be used specifically to mitigate the effects of high electricity prices on electricity consumers.

What are market revenues?

As there are many ways to sell electricity to the market (via (virtual) PPAs, under a/no subsidy regime, with(out) hedging mechanisms in place etc.) the regulation asks the MS to look at market revenues instead of generation revenues. In this context the regulation defines "market revenues" as:

• realised income,
• a producer receives,
• for the sale and delivery of electricity,
• in the Union,
• regardless the contractual form in which this exchange takes place,
  • including power purchase agreements
  • other hedging operations against fluctuations in the wholesale electricity market, and
  • excluding any support granted by MS.

It is apparent that the regulation tries to embrace the various ways of selling electricity with this definition. If it will succeed in "only" skimming surplus revenues but not having a wider impact on the behavior of contractual counterparties or the market in general remains to be seen - judging from what we see, market participants seem to be very concerned as to how to best structure their transactions or evaluate their business. 

How can Member States amend the European blueprint?

In addition, the Regulation grants the MS substantial discretion when implementing the market revenue cap. It especially allows the MS:

1. to decide whether the cap is applied at the time of the settlement of the energy exchange or thereafter,
2. to apply the cap only to 90% of the market revenues exceeding the cap,
3. not to introduce a cap for market revenues from
   • plants with an installed capacity of up to 1 MW;
   • hybrid plants which also use conventional energy sources;
   • the sale of electricity in the balancing energy market and from financial compensation for redispatch and countertrading,
4. to set a higher market revenue cap for generators whose investment and operating costs are above 180 EUR/MWh,
5. to maintain or introduce measures to limit the market revenue cap also below 180 EUR/MWh, also differentiating between technologies, and further limiting the market revenues of other market participants, including market participants active in electricity trading, 
6. to impose a cap on other generation technologies; specifically mentioned are hard coal plants and hydropower plants with reservoir.

What's next?

As the surplus revenues are to be skimmed as of 1 December 2022, MS are under pressure to swiftly implement the regulation into domestic law. Given the very short timeframe they are given (the regulation entered into force on 8 October 2022) it may well be that a number of them will need to enact their laws retrospectively - especially as the Commission has not yet published a guidance paper as stipulated by the regulation.  

For now, the skimming is set to end on 30 June 2023. The Commission may however propose to prolong (and amend) the skimming provisions in a report it is to publish by the end of next April in which it will take into account the general situation of electricity supply and electricity prices.

What does this mean for business?

Given the ambiguities of the regulation's wording and the leeway the MS are offered when implementing the revenue cap companies, investors and traders alike are currently caught in limbo as long as the MS have not passed implementing legislation. 

Given the wide range of discretion the regulation grants to the MS we expect that market participants will have to deal with skimming procedures that differ from MS to MS. We will of course monitor the implementation process across our Linklaters network. Our energy lawyers are happy to explore the impact the regulation and its (upcoming) implementing domestic legislation is having on your project with you.