EU proposes windfall levies on energy firms

In her State of the Union address, Von der Leyen made a passionate case for a stronger and closer union emerging from the overlapping crises

European Commission President Ursula von der Leyen
European Commission President Ursula von der Leyen

The European Union has revealed plans to raise more than 140 billion euros to soften the blow to consumers from soaring energy prices by skimming off revenues from low-cost electricity generators and making fossil fuel firms share windfall profits.

The European Commission published the proposals on Wednesday as the 27-member European Union grapples with an energy crisis fuelled by Russia’s invasion of Ukraine.

Governments across Europe have already ploughed hundreds of billions of euros into tax cuts, handouts and subsidies to tackle a crisis that is driving up inflation, forcing industries to shut production and hiking bills ahead of winter.

“In these times, profits must be shared and channelled to those who need it most,” European Commission President Ursula von der Leyen told the EU Parliament in Strasbourg, adding that the plans should raise more than €140 billion for member states to rechannel into helping businesses and retail consumers.

EU countries will have to negotiate the Commission’s proposals and agree on final laws.

The plan did not include an earlier idea to cap Russian gas prices. EU countries are divided over whether broader gas price caps would help or harm efforts to secure winter supplies.

With gas price caps off the table, at least for now, some diplomats were optimistic that deals could be struck at a meeting of EU energy ministers on 30 September.

Von der Leyen said the Commission was “discussing” price caps and had launched talks with Norway on lowering gas prices.

The Commission proposals would skim off excess revenues from wind and solar farms and nuclear plants, by imposing a cap of €180 per megawatt hour (MWh) on the revenue they receive for generating electricity.

That would cap generators’ revenues at less than half of current market prices. Germany’s front-year electricity price was trading at just below €500/MWh on Wednesday.

Investor confidence

Some energy firms have questioned how much cash the EU plan would raise, since generators like wind farms sell their power under fixed-price contracts, and are therefore not reaping windfall profits from high market power prices.

“The measures proposed to cap revenues for renewable and low-carbon electricity producers risk damaging investor confidence,” said Kristian Ruby, Secretary General of Europe’s electricity industry body Eurelectric.

Fossil fuel firms would also face a windfall levy under the EU plans, to claw back profit from soaring prices stoked by Russia slashing gas deliveries since its invasion of Ukraine.

Oil, gas, coal and refining firms would be required to contribute 33% of their taxable surplus profit from fiscal year 2022, the EU proposals said, confirming details previously reported by Reuters.

Von der Leyen said the bloc was working to establish a “more representative benchmark” price for gas than the Dutch Title Transfer Facility (TTF), where prices have rocketed higher.

Brussels is looking into amending collateral requirements in energy markets to help companies facing a liquidity squeeze, she said.

The EU also proposed a mandatory target for countries to cut electricity by 5% use during peak hours, in a bid to save fuel.

EU countries’ gas storage caverns are now 84% full - a healthy pre-winter level - but analysts say Europe will still need deep cuts in fuel use over winter to avoid shortages.

Separately, von der Leyen said the EU was planning a deeper overhaul of its electricity market to decouple power prices from the soaring cost of gas.

Six takeaways from this year’s State of the European Union address

Ursula von der Leyen delivered on Wednesday her annual State of the Union speech, unveiling the main political priorities for the next working year.

Russia’s war in Ukraine and the worsening energy crisis were recurring themes in the address, giving the special occasion a markedly sombre undertone.

“As we look around at the state of the world today, it can often feel like there is a fading away of what once seemed so permanent,” she said.

However, von der Leyen also injected doses of optimism and made a passionate case for a stronger and closer union emerging from the overlapping crises.

“We will succeed – and that success will belong to every one of us,” she noted, quoting the late Queen Elizabeth II.

1. ‘Sanctions are here to stay’

Von der Leyen began her speech by praising Ukraine’s resistance against Russia’s invasion, describing the country as a “nation of heroes” and vowing the EU’s solidarity will “remain unshakable.”

Ukraine’s first lady, Olena Zelenska, was her guest of honour and received a standing ovation from MEPs.

“Today, courage has a name, and that name is Ukraine,” von der Leyen said, adding she will travel to Kyiv later in the day. “Putin will fail and Europe will prevail.”

The Commission chief also unveiled several proposals to align Ukraine with the single market, including by extending the European free-of-charge roaming area, and support its reconstruction, with €100 million to rebuild damaged schools.

2. ‘We have to decouple’

As expected, the energy crisis featured high on von der Leyen’s to-do list.

“Russia keeps actively manipulating our energy market. I mean, they prefer to flare the gas instead of sending it to Europe according to the contracts,” she said.

The Commission chief officially presented three key proposals to curb electricity bills: an EU-wide plan to introduce mandatory electricity savings, a uniform price cap on the excess revenues made by inframarginal power plants (that is, those who don’t use gas, such as renewables, nuclear, hydropower and lignite), and a windfall tax to partially capture the huge profits reaped by fossil fuel companies.

3. ‘We must make nature our first ally’

Von der Leyen’s diagnosis of the energy crisis has one root cause: the EU’s heavy dependency on fossil fuels.

The bloc, she said, should now strive to speed up the transition away from all imported fuels and develop homegrown and self-reliant systems of green technology, like Denmark did when it bet hard on wind power in the aftermath of the 1970s oil crisis.

“The good news is: this necessary transformation has already started,” she said.

The president talked of hydrogen as a “game changer” for the continent and said her executive will propose to create a new European Hydrogen Bank to secure around €3 billion in investments for the sector.

4. ‘A new reality of higher public debt’

Closely linked to the green transition, von der Leyen spoke about the EU’s fiscal rules, a highly sensitive topic that has for years sparked tensions between Northern and Southern countries.

The disciplinary rules, known as the Stability and Growth Pact (SGP), require members states to implement financial policies that keep their deficit under 3% and debt under 60% of GDP, limits that many governments currently exceed by a considerable margin.

“The future of our children needs both that we invest in sustainability but also that we invest sustainably,” von der Leyen said, noting high debt was a “new reality.”

5. ‘We must also eradicate corruption at home’

One of the most compelling segments of von der Leyen’s speech came in its second half, when the president spoke about the threats faced by democracies in the 21st century.

First, she warned about the “foreign autocrats” funding entities inside the EU to spread “disinformation” and “toxic lies,” such as a Chinese centre in Amsterdam that dismissed the mass internment of Uyghurs as “rumours.”

Von der Leyen promised to combat these threats with a Defence of Democracy package, which, she said, would expose covert foreign influence and shed light on “shady funding.”

“We will not allow any autocracy’s Trojan horses to attack our democracies from within,” she told MEPs.

6. ‘A rethink of our foreign policy agenda’

In her speech, von der Leyen sounded the alarm about the precarious state of the rules-based international system of peace and security, which she described as being “the very target of Russian missiles.”

“This watershed moment in global politics calls for a rethink of our foreign policy agenda,” she said. “This is the time to invest in the power of our democracies.”

The Commission chief urged the EU to work more closely with “like-minded partners” and promote democracy around the world.

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