Emergency Energy Market Intervention – Draft Irish Measures10 questions answered
The Irish Government recently approved a general scheme for a bill to address windfall gains in the energy sector (the General Scheme)1. As has been widely documented, European energy prices rose to exceptional levels in 2022 and, although they have fallen back somewhat in recent times, they continue to be elevated. In response to this the European Union introduced the regulation on an emergency intervention to address high energy prices on 6 October 2022 (the Regulation).
The Regulation provides for caps on market revenues from generation of electricity to a maximum of EUR180 per MWh of electricity produced. A number of Member States, including Ireland for certain renewables, have set caps at lower levels than this maximum of EUR180/MWh. The Regulation also addresses surplus profits from activities in the crude petroleum, natural gas, coal and refinery sectors. Under the Regulation, the cap on market revenues is effective from 1 December 2022 to 30 June 2023 (i.e. a 7 month period). A number of other Member States including France and Germany took measures in late 2022 to give effect to the Regulation. The General Scheme now provides a framework for similar Irish legislation. However, the proposals advanced by the General Scheme remain subject to change as the drafting and legislative process advances (see: the next steps mentioned at paragraph 10 below).
1) What period does the Market Revenue cap cover?
The General Scheme, similar to the Regulation, provides for the market revenue cap to apply from 1 December 2022 to 30 June 2023 (i.e. a 7 month period). As such, the legislation will have (at least partial) retroactive effect.
2) Over what periods is the Revenue assessed?
The cap on revenues will apply on a monthly basis (and not over the 7-month period from 1 December 2022 to 30 June 2023 taken as a whole). If market revenues fall below the level of the caps in future months, there is no ability for generators to seek a refund of amounts paid as a result of the cap in earlier months.
3) Who will the Market Revenue Cap apply to?
The cap applies to generators with an installed capacity over 1MW, together with intermediaries participating in electricity wholesale markets on their behalf. It also applies to certain other entities who trade electricity on behalf of, or are party to certain bilateral arrangements with, generators and their intermediaries. However, the General Scheme provides that electricity suppliers will not have a liability if they can demonstrate (in the prescribed manner) that excess market revenues have been used to provide a net monetary benefit to final electricity customers.
4) When is payment required?
Entities to which the cap applies will be required to:
- make a formal declaration to the Commission for Regulation of Utilities (the CRU) by 31 July 2023 for each month from December 2022 to June 2023;
- by 30 September 2023 make payment for all months in which the cap applies; and
- within 60 days of the end of July 2024, pay the amounts not already paid due to resettlements in the Single Electricity Market2 (the SEM).
The Single Electricity Market Operator (SEMO) is to be the collection agent and all payments will be made to it.
5) Which Revenues are captured?
The cap is to apply to market revenues obtained from the sale of electricity produced from the following sources:
- wind energy;
- solar energy (solar thermal and solar photovoltaic);
- geothermal energy;
- hydropower (with or without reservoir);
- biomass fuel (solid or gaseous biomass fuels), excluding biomethane;
- nuclear energy;
- crude petroleum products;
- peat; and
- hard coal.
6) How much is the Market Revenue Cap?
The cap on market revenues will be:
- EUR120 per MWh for wind energy and solar energy;
- a level calculated monthly on an ex-post basis (as explained below) for each generating unit for hard coal, crude petroleum products, biomass fuel (solid or gaseous biomass fuels), excluding biomethane, and peat; and
- EUR180 per MWh for all other applicable fuel sources.
The explanatory memorandum that accompanies the General Scheme (the Explanatory Memorandum) states that the variability in the cap afforded to the technologies mentioned at (b) is due to the input costs (i.e. fuel costs) for these generating units varying significantly. The Explanatory Memorandum also states that the cap for these technologies should not be set so low as to limit their operating in the market (which could potentially impact security of electricity supply). As such, a mechanism is proposed to allow the cap to be determined after the amount of these input costs is known.
7) How will Market Revenues be calculated?
The General Scheme provides for SEMO to publish an index of market prices for each half hour of each month. The index is a quantity-weighted average of prices in the SEM Day Ahead Market and the SEM Intra-Day Market (the Index Price). “Market revenue” (for the purposes of the cap) is equal to this Index Price multiplied by the relevant quantity (i.e. the loss adjusted metered quantity, subject to certain other adjustments) of the generating unit in each half hour period.
This one size fits all approach to determining market revenues based on the Index Price ignores the fact that generators, in practice, have a diversity of trading positions. This creates a basis risk for generators who may be missing money relative to the revenue cap if there is divergence between their trading outcomes and the Index Price. This may be a particular difficulty for variable generators (such as wind and solar generators) who must sell excess power into, or buy shortfalls in power from, the SEM Balancing Market (to the extent actual output does not match their Day Ahead/Intra Day positions). As such, a generator’s trading outcome may fall short of the administratively determined Index Price.
8) How is hedging treated?
A significant concern ahead of publication of the General Scheme was the manner in which it would treat hedging transactions. Many market participants have entered into derivatives such as contracts for differences based both on electricity in the SEM and proxies for it, including gas prices. Generators which have hedged (particularly on the basis of proxies) were concerned that if they have payment obligations under their hedges due to high commodity prices, they could be hit with a double payment obligation due to application of the market revenue cap.
The General Scheme provides that market revenues may be adjusted for hedging operations provided that certain conditions are met. These include:
- that the hedge is directly related to hedging the fluctuations in SEM price and is directly associated with the sale and delivery of electricity in the SEM within the relevant timeframe;
- that the hedge is associated with specific quantities of generation in each half hour and that portfolio hedges have been allocated over all units generating in each half hour; and
- that the quantity of energy that the hedge applies to is less than or equal to the generation of the generating unit the hedge is tied to.
As mentioned, it is not unusual for market participants in the SEM to use contracts such as forwards in gas as a proxy hedge for electricity in the SEM. The General Scheme provides that fuel and carbon contracts that are proxies for electricity contracts may be considered in the same way as the hedges based on electricty prices in the SEM (provided that they have been demonstrated to the satisfaction of the CRU to have met all conditions including as described at paragraphs (a) to (c) above). The manner in which such demonstration will take place is an important point (including what the CRU will require to confirm that each condition is satisfied) and further detail regarding this would be welcomed.
9) What other measures are introduced by the General Scheme?
The General Scheme provides that companies in the crude petroleum, natural gas, coal and refinery sectors will be subject to a temporary solidarity contribution based on a rate of 75% of their taxable profits in 2022 and/or 2023, to the extent such profits are over 20% above their average taxable profits over the tax years from 2018 to 2021.
The proceeds from the temporary solidarity contribution will be collected by the Revenue Commissioners and remitted to the Exchequer to be used for financial support measures for customers and companies and to help reduce energy consumption in accordance with the Council Regulation.
10) What are the next steps?
The Government has stated that further consultation with stakeholders and the Joint Oireachtas Committee on Environment and Climate Action is expected as the legislation is developed but that the General Scheme will be the basis of the Energy (Windfall Gains in the Energy Sector) 2023 Bill. This Bill will be brought to Government before being published and introduced in the Oireachtas. It is intended that this legislation will be enacted before the 2023 summer Oireachtas recess.
1General Scheme of the Energy (Windfall Gains in the Energy Sector) 2023 Bill
2The SEM is the wholesale electricity market in operation on the island of Ireland.