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European Commission Publishes Further Details Of Energy Market Interventions – Renewables

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The Commission has published the Proposal for a Regulation on an emergency intervention to address
high energy prices
following the request from energy Ministers
which we looked at here along with considerations applying in

Caps on Revenues & Tax: The Commission
proposes two instruments: (a) a temporary cap on revenues of
inframarginal electricity producers (to be channelled to support
customers), and (b) a temporary solidarity contribution from
profits in the fossil fuel sector (specifically profits in 2022
above a 20% increase of average taxable profits in the three fiscal
years starting on or after 1 January 2019). Potential uses of the
solidarity fund include financial support measures
to reduce energy consumption and to help companies in energy
intensive industries.

The Commission states the cap on revenues of inframarginal
producers is intended to mimic the market outcome producers could
have expected if global supply chains were functioning normally. It
is proposed that the cap is set at ?180/MWh and is applied ex-post
to market revenues from the sale of electricity produced by
technologies whose marginal costs are lower than the cap. It would
not apply to technologies with input fuel costs leading to
break-even level above the cap (gas and coal-fired plant), nor to
plant using biomethane, nor should it hamper incentives to invest
in flexible generation such as demand-response or storage.

Regardless of the contractual form in which the trade of
electricity takes place, the cap would apply to realised market
revenues only, and not encompass total generation revenues (such as
those stemming from support schemes), in order to avoid impacting
the initial expected profitability of a project. Further: “In
some Member States, the revenues obtained by some generators are
already capped by way of State measures such as feed-in-tariffs and
two-way contracts for difference. These generators do not benefit
from increased revenues resulting from the recent spike of
electricity prices. [They] .. should be excluded
from the application of the cap on revenues.” It is also noted
that the cap is designed not to interfere with price formation and
should preserve incentives to conclude long terms
PPAs – and Member States would be required to
swiftly remove any unjustified administrative or market barriers to
renewables PPAs.

It will be for Member States to put appropriate procedures in
place to recover revenues above the cap. Certain features of the
Irish energy sector will be relevant, as we noted here.

Demand Reduction: The Commission proposes that:
(1) Member States would put measures in place to reduce their total
monthly gross electricity consumption by 10% compared to the
average in the corresponding months of the reference period (which
is 1 November to 31 March in the past five consecutive years). (2)
Each month, Member States would identify peak price hours
corresponding to a minimum of 10% of all hours in the month and
reduce gross electricity consumption during these hours. For every
month, the reduction achieved over the identified hours should
reach at least 5% on average per hour. Member States can choose the
appropriate measures to achieve this, but the measures have to be
clearly defined, transparent, proportionate, non-discriminatory and
verifiable. In particular, they have to meet several conditions
including being “market-based, with
compensation, where applicable established through an open
competitive process, including tenders in which successful bidders
receive compensation”. These requirements are notable in the
context of current proposals for demand reduction in Ireland, which
we discussed here.

This article contains a general summary of developments and
is not a complete or definitive statement of the law. Specific
legal advice should be obtained where appropriate.

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