Germany: Skimming of surplus revenues in the electricity sector

On 16 December 2022, the Act on a price-break for electricity (Price Break Act) passed the German parliamentary procedure which inter alia includes regulations on the skimming of surplus revenues from electricity generators. 

The Act implements the European Council Regulation (EU) 2022/1854 on an emergency intervention to address high energy prices which obliges the EU Member States to limit the market revenues of electricity generators using "inframarginal" technologies (read more here), i.e. those electricity generators which are currently profiting from the high strike prices set at the electricity exchanges by technologies with higher marginal costs (as are natural gas or hard coal fired power plants)

Generators affected

Under the German Price Break Act, in principle all surplus revenues from electricity generating technologies are subject to skimming, excluding generators using hard coal, natural gas, biomethane and certain petroleum products and other gases. 

Irrespective of the technology, no cap shall apply for:

• generators with an installed capacity (in case of biogas: rated output) of up to 1 MW;
• electricity which is passed to the consumer without the use of a grid; or
• electricity from electricity storages which only use electricity from the grid.

Surplus revenues = market revenues − allowed revenues (± hedging)

The German government decided to skim 90% of the surplus revenues. The operators have to calculate their surplus revenues on a monthly basis by:

1. determining the electricity produced and fed into the grid;
2. multiplying the electricity produced in kWh
   • with the applicable price (following either the Standard Model or the Contract Model, see below) to calculate the market revenues, as well as
   • with the technology specific price/kWh foreseen in the act to calculate the allowed revenues; and
3. deducting the allowed revenues from the market revenues; and where applicable; 
4. adjusting the surplus revenues by the outcome of hedging transactions.

Generators of renewable electricity have the additional option to declare that their surplus revenues shall be limited to the spot market price of a given hour (minus 0.4 ct/kWh). Otherwise, it could be economically prudent for an operator to curtail its installations in hours of low spot market prices.

Market revenues: Spot market prices by default

The German Legislator decided to use a notional approach as a default to determine the market revenues of electricity generators (Standard Model) but in some cases allows contractually agreed prices to be taken into account (Contract Model).

Standard Model: 

Irrespective of the actual marketing model, under the Standard Model, the market revenues of a generator are calculated in a simplified manner: 

• as the revenues that would have resulted from selling the electricity produced with hourly day-ahead spot market prices on the German electricity exchange or; 
• in the case of solar, onshore and offshore wind, as the revenues that would have resulted by selling the electricity for the averaged monthly market price specific for each technology (as it is used to determine the level of support under the German Renewable Energies Act, “EEG”). 

To cover for market swings a safety margin of 3 ct./kWh (biogas: 9 ct./kWh) is deducted – except for fully refinanced post-subsidies renewables. For wind and solar, the safety margin is engrossed by another 6 % of the specific averaged monthly market value.

Contract Model: 

Alternatively, actual revenues may be taken into account instead of the notional prices from the Standard Model, for installations with so-called "asset related" marketing agreements:

• concluded before 1 November 2022, as long as such agreement is in force and has not been amended, or
• if concluded after 31 October 2022, only if relating to new installations.

An agreement can be considered to be “asset related” if it relates to electricity generated from one or more specific electricity generating installations. According to the government, the definition intends to cover a large part of PPAs and direct marketing agreements. If an operator decides to apply the Contract Model, the safety margin is lowered to 1 ct./kWh.

Allowed revenues: depends on the technology...

Where the EU regulation proposed a uniform 18 ct./kWh to calculate the allowed revenues the Price Break Act makes use of the possibility offered by the EU regulation to set technology specific revenue caps. These range from 4 ct./kWh (initially for nuclear) to 25 ct./kWh (for mineral oil), partly with further adjustments.

For renewable electricity, the Act provides for a comparably complicated way to calculate the allowed revenues:

• Where feasible, allowed revenues are to be calculated based on the so-called applicable value in the respective calendar month in accordance with the EEG. This method is to be used both for installations actually receiving subsidies (e.g. through the market premium model) and those which could receive EEG support but opted out and use other forms of marketing (sonstige Direktvermarktung), such as PPAs.
  • For offshore wind, allowed revenues may not fall below 10 ct./kWh. This provision especially takes into account that the last tenders for support of offshore wind saw bids for support as low as 0 ct./kWh.
  • For installations that have chosen the Contract Model the allowed price may, however, never fall under 8 ct./kWh. 
• The allowed revenues of installations that are no longer entitled to EEG support (ausgeförderte Anlagen) or for which an applicable value cannot be determined are also to be calculated on the basis of 10 ct./kWh. 

How is hedging taken into account?

In addition, the operator may adjust its surplus revenues by the result of hedging transactions for the electricity produced. Here again, timing decides on the regime: 

• In the case of hedging transactions concluded before 1 November 2022, the result of hedging transactions corresponds to the sum of all hedging transactions concluded for a specific generation plant to financially hedge the electricity production in a settlement period. The system operator must submit an auditor's report on compliance with further requirements.
• After 31 October 2022 hedging transactions available to electricity generators are limited to power base and peak futures traded at the German EEX with a maturity of one month, quarter or year. (Lignite plants may also hedge CO2-emission allowances). Generators may declare (and amend) hedging transactions for future trading days or within the same trading day as long as the fulfilment period has not yet begun. Here, a safety margin of 1 ct./kWh is to be added to the hedging result. 

Payments and sanctions

The skimming shall be applied from 1 December 2022 and is initially limited to 30 June 2023 but can be extended by statutory order at most until 30 April 2024. 

Operators must calculate and pay the skimming amount directly to the responsible grid operator 4.5 months after the end of a billing period. The first billing period runs from 1 December 2022 to 31 March 2023, so the first payment is due on 15 August 2023. Thereafter, the billing period is always the quarter.

If the operator does not pay or does not pay on time or properly:

• 100% instead of 90% of the surplus revenues are to skimmed. In addition, no safety margin may be taken into account. If the operator does not pay the assessed amount within four weeks of the assessment becoming effective, the grid operator is obliged enforce the amount in court.
• In addition, non-payment qualifies as an administrative offence that can be sanctioned with a fine of up to 4% of the worldwide turnover achieved in the preceding business year. Since the operator's shareholders and their affiliated companies are also liable for the payment obligation, such a fine can also be imposed on them.

The skimming mechanism is intended to contribute to the financing of an electricity price cap contained in the same Act.

Entry into force

The Price Break Act passed the legislative procedure on 16 December 2022 and entered into force on 24 December 2022.