The EU proposes a plan of 140 billion euros to stem rising energy prices

The European Commission has proposed an unprecedented intervention in the energy market in an attempt to curb skyrocketing prices on the continent due to Russia’s war on Ukraine and the weaponization of its energy resources.

The European Union executive plans to raise more than 140 billion euros to protect consumers from high prices by pushing revenue from low-cost electricity producers and fossil fuel companies that make windfall profits. It will also require countries to reduce electricity consumption by at least 5 percent during peak hours and asks them to reduce their overall electricity demand by at least 10 percent until the end of March.

Member states will be able to use their share of the €140 billion to provide income support or consumer rebates or invest in renewable energy or energy efficiency.

Retail electricity prices in the EU have risen by almost 50 percent year-on-year from July 2021, largely due to high prices for the natural gas that powers much of the bloc’s electricity generation. Earlier this month, Russia said it would not reopen its main Nord Stream 1 pipeline to supply Europe – the latest in a series of supply cuts that Moscow blames on Western sanctions for 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 European Parliament in Strasbourg on Wednesday that the bloc must be resolute in its response to Russian aggression and manipulation affecting global and European energy markets.

Electric companies that produce electricity at a low cost “are creating revenues they never faced, they never even dreamed of,” she said.

“In these times it is wrong to receive extraordinary record profits profiting from war and on the backs of consumers. In these times the profits must be shared and channeled to those who need it most.”

Calling the proposals “unprecedented,” European Commission Vice President Frans Timmermans said the measures are “a necessary response to energy shortages and high energy prices affecting Europe.”

In the EU system, it is often natural gas plants that determine the price of electricity. Electricity producers who do not use gas sell their electricity at the resulting prices, although they do not have to pay large bills for gas or coal, whose price has also increased. The Commission’s proposal would limit the revenue that wind, solar, nuclear and lignite plants receive for producing electricity to €180 per megawatt-hour until March.

Ms von der Leyen said the fossil fuel industry should also step in during the current energy crisis.

“Major oil, gas and coal companies also make huge profits. So they have to pay a fair share – they have to make a crisis contribution,” she said.

Under the proposals presented on Wednesday, this 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 percent of companies’ taxable profits from 2022 (with profits defined as the 20 percent above a company’s average taxable profit in the past three years).

The EU country where the surplus is generated would collect the cash and redirect it to energy consumers, including vulnerable households, hard-hit businesses and energy-intensive industries. It could also be used to promote investment in renewable energy, energy efficiency or other decarbonisation technologies.

Mr. Timmermans said the revenue cap would pass abnormally high profits on to customers struggling with their bills.

“This crisis highlights that the era of cheap fossil fuels is over and that we need to accelerate the transition to home-grown, renewable energy,” Mr Timmermans said.

According to the commission, the fossil fuel tax will raise around 25 billion euros – bringing the expected total from the EU’s two measures to just over 140 billion euros.

Quarterly profits have recently risen for major European oil and gas companies. TotalEnergies SE of France had an adjusted second-quarter profit of $9.8 billion, while London-based Shell PLC had an adjusted profit of $11.5 billion. London-based BP PLC reported a second-quarter profit of $9.3 billion.

Peter Tertzakian, the ARC Energy Research Institute’s deputy director, said in an interview that taxing utilities and producers — and redistributing the wealth — may be little more than a Band-Aid solution for the winter.

“Taxing energy producers is a negative signal for investors,” he said.

“We want investors to invest more in energy supply, including much more renewable energy, to get a long-term solution.”

Britain announced an unexpected tax on oil and gas producers in May. In June, Alberta Energy Minister Sonya Savage told the Global Energy Show in Calgary that her province’s oil and gas sector fears Ottawa will try to follow suit, warning that such an “act of aggression” would cause backlash across the Prairies .

She said in an email Wednesday that it would be “deeply irresponsible” to create “arbitrary new taxes targeting the energy industry” while promoting energy security for Canada’s allies and relying on the sector to make massive investments in carbon capture technologies.

Lisa Baiton, the president and CEO of the Canadian Association of Petroleum Producers, said in an email 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 incorporates higher commodity prices — in other words, royalty rates increase with higher oil and gas prices,” she said. “Higher commodity prices translate into higher government spending across the country.”

Neither Natural Resources Canada nor the Treasury Department returned a request for comment Wednesday about whether Ottawa is considering such a tax.

The EU’s emergency proposal must be approved by a majority vote among members, although the commission said many intend to adopt the plan quickly.

With a report from Reuters