Netherlands: status of implementation of market revenue cap for electricity generators

Introduction

On 30 November 2022, the Dutch government announced through a letter to Dutch parliament that it was working on a legislative act to implement rules on the skimming of surplus revenues from operators of electricity generating technologies into Dutch law (see the announcement in Dutch here).

One of the responses by the European Union to soaring electricity prices over the course of 2022 was the new Council Regulation (EU) 2022/1854 on emergency intervention to address high energy prices (the “Regulation”) which entered into force on 8 October 2022. Amongst others, the Regulation aims to skim what are conceived to be "surplus" revenues from those operators of electricity generating technologies who are currently realising higher prices when selling their electricity than one would expect in a "normal" market environment (see our recent blogpost on the Regulation here).

The Regulation grants EU Member States substantial discretion when implementing the market revenue cap. In this post, we discuss the Dutch implementation process. Furthermore, we provide an overview of the key considerations that may be of interest to the operators of electricity generating technologies in relation to the market revenue cap.

It is envisaged that the income derived from the proposed market revenue cap amounts to €1.8 billion and that around 1,500 production installations will be affected by these rules.

Please get in touch if you would like more detail on the legislative and regulatory regime and how your business might be affected by it.

At a glance

It is anticipated that a draft bill will be submitted to Dutch parliament during Q1 2023. Following approval by each of the Dutch House of Representatives and the Dutch Senate, the bill will include at least the following features:

• Which technologies of power generation are caught?: wind, solar, biomass (except biomethane), waste and nuclear energy, and coal generation technologies in the Netherlands. Mostly, this covers the so called "Inframarginal" technologies, i.e., those electricity generators which are currently profiting from the high strike prices set at the electricity exchanges by technologies with higher marginals costs (such as natural gas or hard coal fired power plants).
• Applicable revenues and size of levy: 90% levy on inframarginal generators’ market revenues above €130/MWh, which number is to be calculated on the basis of monthly average prices for all qualifying generation technologies. Market revenues from electricity generated from biomass fuels (other than biomethane) will be subject to a higher cap of €240/MWh. Finally, a specific cap will apply to market revenues regarding electricity generated from coal.
• Intercorrelation with incentive schemes: Operators of electricity generating technologies benefiting from a subsidy scheme (i.e., SDE, SDE+ or SDE++) are subject to a market revenue cap equal to the strike price (basisbedrag) under such subsidy scheme, provided such base amount is higher than the applicable market revenue cap.
• Levy period: 1 December 2022 up to 30 June 2023.
• Group basis: Corporate groups and joint ventures will be assessed as a whole. Further clarity is needed on the exact principles for the delineation and determination of market revenues.
• Exemptions: The market revenue cap shall not apply to (i) operators of power-generating facilities with an installed capacity of up to 1 MW and (ii) revenues obtained from the sale of electricity in the balancing energy market and compensation made from re-dispatching services.

In more detail

Effective period

The Dutch Tax and Customs Administration (Belastingdienst) will be the relevant authority levying the market revenue cap. The cap shall be levied on the relevant generators once and in arrears over the period from 1 December 2022 up to 30 June 2023. The intended taxation method is a payment on return.

Though the skimming of surplus revenues was announced as a temporary measure, the European Commission may propose to extend the market revenue cap’s application period by 30 April 2023.

What qualifies as market revenues?

There are multiple ways to sell electricity to the market (i.e, (virtual) PPAs, (no) subsidy regime, hedging mechanisms or not in place etcetera). Hence, the Dutch government proposes to impose a levy in respect of market revenues instead of generation revenues.

With regard to "market revenues" the Dutch government will tie in with the "market revenues" definition provided in the Regulation, which reads as follows:

“realised income a producer receives in exchange for the sale and delivery of electricity in the European 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”

The market revenue cap will only apply to market revenues having been realised. That way, generators that have entered into virtual power price hedging arrangements need not pay the levy on any market revenues surrendered to the hedging provider in excess of the relevant cap.

Where relevant, intermediaries participating in electricity wholesale markets on behalf of parties generating electricity from production installations subject to the cap, are subject to the cap as well. The Dutch government indicated the market revenue cap will as much as possible be levied on objective transactions with third parties, which are not part of a vertically integrated group or have ownership in the producer.

Market revenues obtained from the sale of electricity in the balancing energy market and derived from re-dispatching services to solve grid transmission issues are in principle exempted. The Dutch government may reconsider such exemption if the rise of the volume of electricity targeted at the balancing and redispatch market as a result of the introduction of the cap gives sufficient reason thereto.

To which generation technologies does it apply?

The cap will apply to producers generating electricity from wind, solar, hydropower without reservoir, waste and nuclear energy in the Netherlands. Such producers will have to pay a 90% levy on any realised market revenues that exceed €130/MWh.

The cap for biomass fuels (solid and gaseous) other than biomethane is set at €240/MWh. Main reason for this is recently increased prices for biomass. In respect of market revenues generated from the sale of electricity from coal, a specific cap (which shall not be less than €130/MWh) shall be calculated at the end of each calendar month based on a pre-determined formula. The formula accounts for the costs (both marginal and fixed) of electricity generation from coal in the relevant calendar month.

Currently, about 100 production installations benefit from a subsidy decision with a strike price (basisbedrag) of at least €130/MWh. The owners of these production installations will only be subject to the market cap insofar any realised income on a monthly basis exceeds the base amount under the relevant subsidy scheme.

The market revenue cap shall not apply to generators operating production installations with an installed capacity of less than 1 MW. Currently, the Dutch government expects that around 1,500 production installations will be subject to the proposed market revenue cap.

How does the levy work? 

Operators of qualifying electricity generating technologies will be subject to a 90% levy on realised market revenues. Market revenues in a given month (expressed in EUR (€)) are aggregated for each power generation technology subject to the cap. These market revenues are then divided by the relevant number of MWh for each power generation technology subject to the cap. This yields the realised market revenue(s) per MWh for that month. To the extent that for any qualifying power generation technology the average market revenue in any given calendar month falls below the relevant market revenue cap, no levy is due.

The levy to be paid for each qualifying power generation technology subject to the cap is equal to 90% of the product of (i) the production in MWh by that power generation technology for the specific calendar month and (ii) the average market revenue per MWh for such month minus the relevant market revenue cap (i.e., €130/MWh for non-marginal technologies in general, €240/MWh for biomass and the  specific monthly cap for coal).

The Dutch government’s publicly announced communication includes the following example. If the market revenue in a calendar month resulting from the production of electricity from wind and solar technologies was on balance €2,300 for a production of 10 MWh. This would mean an average market revenue per MWh of €230/MWh (€2,300 / 10 MWh = €230/MWh) for that month. The levy is 90% of €230-€130 = €90/MWh, resulting in a levy of €90/MWh*10 MWh = €900 for the given calendar month.

It could be that an owner of a production installation is of the view that not all production should be part of the levy because, for example, it produces some power from natural gas. The calculation example above would then be as follows: if, in the relevant calendar month, 7 MWh is generated through wind and solar technologies and 3 MWh from a gas plant, the levy for that month is €90/MWh*7 MWh = €630.

Next steps

The Dutch government confirmed that it will apply the levy in respect of any realised market revenues from 1 December 2022 onwards with retrospective effect.  The relevant legislative process will need to be run and each of the Dutch House of Representatives and the Dutch Senate will need to adopt the proposed legislation. We understand that a draft bill will be submitted to Dutch parliament during Q1 2023. In the meantime, the Dutch government will actively interact and consult with relevant market parties on a number of items.

Implications and points to consider

The imposition of the market revenue cap may have an impact on existing business and ongoing (M&A) transactions:

• Equity documents: if an operator of an electricity generating technology is subject of any M&A transaction, the sponsors may wish to review the terms of the sale and purchase document(s) following the announcement of the market revenue cap. For example, depending on the terms of the sale and purchase document(s), in certain circumstances there may be potential recourse to the vendor (e.g. by way of adjusting the sale and purchase price) as a result of the introduction of the market revenue cap. 
• Contracts: the introduction of the market revenue cap could be considered a “change in law” and/or a “material adverse change” (or similar) in corporate, finance or project documents involving electricity generators. This will need to be considered on a case-by-case basis to assess whether, under the terms of the relevant document, introductions of the market revenue cap may have implications. For example, any potential termination of a power purchase agreement due to the change in law would likely trigger a financing default.
• Joint ventures: the levy could affect revenue sharing arrangements and/or warranties contained within some operations contracts. As the levy is being introduced with the aim of targeting “returns”, this consideration requires a review of project documents for any such arrangements and warranties; and
• Coverage ratios: as a result of the increased payments caused by the levy, electricity generators should assess how their coverage ratios may be affected by the market revenue cap. It should also be considered whether the ratios can be retested and if so, how these might affect any financing arrangements. Electricity generators may also want to review their financial model(s) to re-assess assumptions made in relation to the anticipated power price for the electricity generated.

We continue to closely monitor developments in relation to the Dutch implementation of the market revenue cap and keep you informed hereof.