EU weighs 33% tax on fossil fuel profits and price cap on non-gas power generation

The European Commission plans an EU-wide windfall levy to recoup one-third of the “surplus” profits of fossil fuel firms from this financial year.

It will also propose a cap at €180 per megawatt hour on the price at which non-gas fuelled generators can sell their power, according to a draft proposal seen by Reuters.

The measure would skim off revenue above that price and use the cash to help consumers and businesses facing soaring energy bills. It would apply to wind, solar, biomass, nuclear, lignite and some hydropower plants, according to the draft proposal, details of which are due to be unveiled by Brussels on Wednesday.

Alongside these measures on producers, the Commission is targeting a cut in overall power consumption by 10 per cent, as well as a mandatory goal lowering of demand during selected peak hours by 5 per cent, as it steps closer to energy rationing in a bid to tame the crisis.

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Commission president Ursula von der Leyen’s plans still need to be finalised and ultimately signed off by member states and there are deep divisions as to how to address the crisis. Already the most controversial idea — to cap the price of imported Russian gas — has been shelved for more talks. But gas prices are already falling, at least in part because of European action.

The windfall levy, described as a “solidarity contribution” would apply to profits that are more than 20 per cent higher than the average of the three years starting in 2019. It would be temporary and up to member states to apply.

In the leaked paper, the commission estimates that there will be a fivefold increase in oil, gas and coal companies’ profits in 2022. These “surplus” and “unexpected” profits, do not result from any economic or investment choices, states the commission, but “unpredictable developments in the energy markets following the ongoing illegal war in Ukraine”, it says.

The bloc is also trying to create tools to ease volatility in energy markets as surging prices have made for ballooning margin calls. Several national governments have taken steps already — boosting market confidence and helping to ease prices. The Commission is working with European banking regulators, “assessing issues related to the eligibility of collateral and margins, and possible ways to limit excessive intraday volatility, according to a draft document.

The challenge will be to find an EU-wide solution that would fit each of the member states with their varying sources of energy, wealth and industrial strength. Ms von der Leyen will set out her plans on Wednesday, and the Czech rotating presidency has called another emergency meeting for September 30th.

The final text could still change, but the draft reveals the Commission’s doubts over gaining enough support from EU member states for its preferred option of putting a cap on Russian gas in response to what it has called the Kremlin’s weaponisation of supply.

EU member states that import large amounts of gas from Russia, including Hungary, Slovakia and Austria, have spoken out against a cap on Russian gas because they fear the Kremlin would halt all gas flows, plunging their countries into recession. The Russian president, Vladimir Putin, has already threatened to halt energy exports to Europe if such a plan is agreed.

About a dozen countries, including France and Poland, would like to impose a price cap on all imported gas, which they see as a better way to curb surging prices. The Commission is unenthusiastic about this idea, because it fears the EU would lose out to countries prepared to pay more in the highly competitive market for liquefied natural gas.

The Netherlands and Denmark are wary of any price cap, while Germany fears a price cap on Russian gas would be divisive. — Reuters/Bloomberg/Guardian