While an EU ceiling on revenues from renewables is aimed at redirecting excess profits from low-cost electricity generation back to consumers, analysts and industry groups are now arguing that such measures are both risky — and come at a bad time.
As part of its emergency plan to tackle high energy prices, the European Commission proposed to temporarily cap at €180 per megawatt-hour (MWh) the price at which low-carbon electricity companies sell power.
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What complicates matters is that not all renewable energy plants are actually benefiting from skyrocketing prices (Photo: PressReleaseFinder)
That cap would apply to wind, solar, biomass, nuclear, lignite and some hydroelectric, but it would effectively work as a tax. EU member states could raise up to €117bn from power producers annually to help vulnerable consumers, according to the commission’s own estimates.
As the EU has pledged to increase renewables’ uptake (to reduce its addition of Russian fossil fuels), such a temporary revenue cap has been slammed by industry groups for both ignoring the market specificities of renewables and creating uncertainty for investors.
But some experts disagree.
Daniel Gros, a German economist at the Centre for European Policy Studies think tank, said the cap should not have a negative impact on renewables investment. “A price cap would only increase the tendency for renewable power producers to sell their output forward, thus protecting themselves against both future price caps or a sudden fall in prices,” he said.
Uncertainty for investors?
Under EU plans, member states would be able to go beyond the €180-MWh-cap in national legislation if they wish to capture a larger share of windfall profits.
But industry groups have warned that allowing countries to deviate from the EU-wide cap creates confusion and uncertainty for investors — as well as risks to the integrity of the energy market.
“A lower cap on revenues at the national level creates high uncertainty for investors and endangers the integrity and unity of the EU market,” Naomi Chevillard from SolarPower Europe told EUobserver.
Echoing that, Simon Dekeyrel, climate and energy policy analyst at the European Policy Centre think tank, said different revenue caps across member states could disrupt cross-border trade and fragment the internal energy market.
“A higher revenue tax in one member state may, for instance, incentivise electricity generators to sell their power on neighbouring markets with lower revenue taxes,” he said.
The commission, for its part, has also acknowledged that different caps could lead to “significant distortions between generators in the union”, who are competing in an integrated EU energy market.
Nevertheless, they stress that more ambitious national caps can be allowed, so long as they do not distort the functioning of electricity markets and jeopardise investment signals.
Governments ‘now making a profit’
What complicates matters further is the fact that not all renewable energy plants are actually benefiting from skyrocketing prices. According to an analysis by Rystad Energy, only 40 percent are making windfall profits from the current energy crisis.
Revenues from most renewable-energy capacity installed in the EU come from fixed-rate contracts agreed before the energy crisis — on average, lower than current prices.
These long-term contracts (allocated normally through subsidy mechanisms or auctions) represent 60 percent of installed capacity in the EU, and are mainly found in Germany, France, and Spain.
Victor Signes, renewables analyst at Rystad, argues that these producers cannot make windfall profits — because they need to redistribute additional revenue with the counterparty in the agreement.
When it comes to subsidy mechanisms, such as feed-in-tariffs and two-way contracts, Signes explains that governments and national utility companies are the ones buying the power produced by renewables at the defined fixed rate and then selling it back on the spot market.
“After 20 years of governments having to pay a fixed above-market price to renewable energy developers, governments are now making a profit,” he says.
Some authorities have acknowledged the profits granted this way. For example, the French Energy Regulatory Commission said the system could generate around €8.6bn for the French state in 2022 and 2023.
Wind Europe called on EU countries to apply the cap only to actual revenues earned, arguing that most wind farms in Europe earn a fixed income.
According to a leaked document prepared by the Czech EU presidency, power producers subject to state measures such as feed-in-tariffs and two-way contracts should be excluded from the application of the cap on revenues.
EU energy ministers are expected to decide on the revenues cap on renewables and other emergency measures during their next energy council next week (30 September).
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