The European Commission has released plans to address soaring energy costs. The most eye-catching proposal is to siphon extraordinary profits and revenue levels away from energy companies, and redirect them to help vulnerable households and businesses.
There is some potentially bitter medicine too: the mandatory reduction of electricity use at peak times.
Where is the money coming from?
Any money above €180 per megawatt hour that is paid on energy markets for inframarginal sources (think nuclear and renewables) would be collected by the state.
In addition, national governments would impose a one-off “solidarity contribution” on fossil fuel energy producers.
This is a levy of at least 33 per cent on any profits above 20 per cent higher than average profits over the past three years. It applies to the taxable profits of “companies and permanent establishments tax resident in the EU in oil, gas, coal and refinery sectors”. (It sounds like a tax but there are political reasons for calling it other names.)
Several European Union countries were already working on similar national measures, and the proposal of an EU-wide plan is an attempt to prevent countries diverging.
How much would it raise?
The commission suggested the fossil fuel levy would raise €25 billion and the price cap €117 billion. The latter figure is calculated based on energy prices so far this year, then extrapolated as though such a price cap were in place for 12 months.
Prices may be lower, and it is expected to only be in place for six months, so revenues will almost certainly be less.
How much will be raised per member state will vary widely. Major energy-producing countries have the greatest potential to raise cash. Ireland was 67 per cent reliant on energy imports in 2018, according to the Sustainable Energy Authority of Ireland.
Any energy imports from companies registered in non-EU countries, such as Britain, will not be affected by the EU’s cap and levy. Where energy is imported from companies based in other EU countries, Ireland can ask those governments to share the revenues raised on sales to Ireland.
How will it be doled out?
The Irish Government will largely decide. The commission stipulates that the money can go towards vulnerable households, energy-intensive industries, measures to reduce energy consumption and the development of home-grown energy production.
How quickly will it be in force?
It depends when, or if, member states agree on it, but the proposed legislation states December at the latest.
Is there energy rationing?
The bill proposes mandatory cuts of 5 per cent in energy use in the three to four hours each weekday when electricity demand peaks.
The rationale is that this prevents the use of gas plants, which are switched on to cope with surges. Therefore, it stops the high gas price from setting expensive rates for all electricity under the marginal price system.
Aware of the political sensitivities, the commission is largely leaving the question of how to achieve this to national governments — but is emphasising information campaigns, the “smart” use of electricity such as factories switching to different shifts, and incentives to reward those who reduce.
“We’re not asking people to sit in a freezing home or to share the bathwater,” commission vice-president Frans Timmermans said.
Will energy markets be fundamentally changed?
Ireland’s commissioner Mairead McGuinness as financial services chief is working on some quick fixes. One is the development of a new gas benchmark to replace the Dutch TTF, to better reflect Europe’s increased use of liquefied natural gas instead of pipeline gas (EU imports of Russian pipeline gas have fallen to represent just 9 per cent of the bloc’s total use from 40 per cent).
Big price swings on the gas markets have forced energy companies to hold huge cash reserves as collateral to make trades, forcing some to exit the market. To address this, there are plans to amend the rules on how much collateral companies must hold, and also introduce measures to limit intraday price volatility.
Amid fears that the turbulence may cause bankruptcies in the energy sector, the commission is also set to change its state aid rules to allow governments to guarantee energy companies.
“We absolutely want to avoid a Lehman Brothers scenario in the energy field,” Mr Timmermans said.
Longer-term reform of the energy markets, such as examining how to stop gas setting the price for all electricity, will require further study. Proposals are due early next year and, unlike these emergency measures, they will need to go through the full EU’s legislative process, requiring approval by the European Parliament.