Members of the European Parliament take part in a voting session on the deployment of renewable energies and the reduction of energy consumption by 2030 during a plenary session at the European Parliament in Strasbourg, France, on Sept. 14.FREDERICK FLORIN/AFP/Getty Images
The European Commission has proposed an unprecedented intervention in the energy market in an attempt to slow rocketing prices on the continent due to Russia’s war on Ukraine and the weaponization of its energy resources.
The European Union’s executive plans to raise more than €140-billion to shield consumers from high prices by skimming off revenues from low-cost electricity generators and fossil fuel companies, which are making windfall profits. It will also require countries to cut electricity consumption by at least 5 per cent during peak hours, and ask them to reduce their overall electricity demand by at least 10 per cent until the end of March.
Member countries will be able to use their share of the €140-billion to provide income supports or consumer rebates, or invest in renewables or energy efficiency.
Retail electricity prices in the EU have increased by almost 50 per cent year-on-year from July, 2021, largely due to high prices for the natural gas that fuels much of the power production in the bloc. At the start of this month, Russia said it would not reopen its main Nord Stream 1 pipeline to supply Europe – the latest in a string of supply cuts, for which Moscow blames Western sanctions imposed over its invasion of Ukraine.
And energy prices are expected to remain high spurred by the risk of further disruptions of Russian natural gas supplies to the EU.
Commission president Ursula von der Leyen told the EU Parliament in Strasbourg on Wednesday that the bloc must be resolute in its response to the Russian aggression and manipulation that is affecting global and European energy markets.
Electricity companies producing electricity at a low cost are “making revenues they never accounted for, they never even dreamt of,” she said.
“In these times, it is wrong to receive extraordinary record profits benefitting from war and on the back of consumers. In these times, profits must be shared and channelled to those who need it the most.”
Calling the proposals “unprecedented,” executive vice-president of the European Commission Frans Timmermans said the measures are “a necessary response to the energy supply shortages and high energy prices affecting Europe.”
In the EU system, natural gas plants often set the price of electricity. Power producers that don’t use gas sell their electricity at the resulting prices even though they do not have to pay huge bills for gas or coal, the price of which has also jumped. The commission’s proposal would cap the revenue that wind, solar, nuclear and lignite coal plants receive for generating electricity at €180 per megawatt hour until March.
Ms. von der Leyen said the fossil fuel industry should also pitch in during the current energy crisis.
“Major oil, gas and coal companies are also making huge profits. So they have to pay a fair share – they have to give a crisis contribution,” she said.
Under the proposals tabled on Wednesday, that contribution would come in the form of a temporary windfall tax on the profits of fossil fuel companies, including the oil, gas, coal and refinery sectors. It would apply to 33 per cent of companies’ taxable surplus profits from 2022 (with surplus profits defined as those 20 per cent above a company’s average taxable profits in the past three years).
The EU country where the profits are generated would collect the cash and redirect it to energy consumers, including vulnerable households, hard-hit companies, and energy-intensive industries. It could also be used to promote investments in renewables, energy efficiency or other decarbonization technologies.
Mr. Timmermans said the cap on revenues would pass abnormally high profits to customers struggling with their bills.
“This crisis underlines that the era of cheap fossil fuels is over and that we need to accelerate the switch towards homegrown, renewable energy,” Mr. Timmermans said.
The fossil fuel levy would raise about €25-billion, according to the commission – bringing to just over €140-billion the anticipated total from the EU’s two measures.
Quarterly profits have recently jumped at major European oil and gas companies. TotalEnergies SE of France posted an adjusted profit in the second quarter of US$9.8-billion, while London-based Shell PLC had an adjusted profit of US$11.5-billion. London-based BP PLC reported a second-quarter profit of US$9.3-billion.
Peter Tertzakian, ARC Energy Research Institute’s deputy director, said in an interview that taxing utilities and producers – and redistributing the wealth – might not be much more than a Band-Aid solution for the winter.
“Taxing producers of energy is a negative signal for investors,” he said.
“We want investors to invest more in energy supply, including a lot more renewables, for a long-term solution.”
Britain announced a windfall tax on oil and gas producers in May. In June, Alberta Energy Minister Sonya Savage told the Global Energy Show in Calgary her province’s oil and gas sector fears Ottawa might try to follow suit, warning that such an “act of aggression” would cause a backlash across the Prairies.
She said in an e-mail on Wednesday that it would be “deeply irresponsible” to create “arbitrary new taxes targeting the energy industry” while also promoting energy security to Canada’s allies and relying on the sector to make massive investments in carbon capture technologies.
Lisa Baiton, the president and chief executive of the Canadian Association of Petroleum Producers, said in an e-mail that windfall taxes are unnecessary in Canada, because – unlike many other jurisdictions – they are built into royalty and tax frameworks.
“All provincial royalty regimes in Canada have a sliding scale approach to royalties that incorporate higher commodity prices – in other words, royalty rates increase with higher oil and gas prices,” she said. “Higher commodity prices are translating into a higher government take across the country.”
Neither Natural Resources Canada nor the finance ministry returned a request for comment on Wednesday about whether Ottawa is considering such a tax.
The EU emergency proposals will have to be approved in a majority vote of members, although the commission said many intend to adopt the plan swiftly.
With a report from Reuters