Last Wednesday 14 September, the European Commission President Ursula von der Leyen held the annual State of the European Union speech, better known as SOTEU. The SOTEU was a sneak peek of the next steps in EU action on multiple fronts, with the Ukrainian and energy crises in the spotlight. In its style, this year’s SOTEU has introduced a novelty in the energy market. Not only the indication that the current electricity market is going to be subject to review, but also the introduction of specific measures to tackle the current high prices of energy bills. Following the announcement, the Commission published in the afternoon a “proposal for a Regulation on an emergency intervention to address high energy prices”, expanding on the topics introduced in the SOTEU.

The announced measures are thought to be helping reduce the cost of electricity for consumers and redistribute the energy sector's surplus revenues to final customers. The package consists in three main measures to be adopted: tackling prices through demand reduction, temporarily limit revenues on “inframarginal” electricity producers, and a temporary solidarity contribution on excess profits from activities in the oil, gas, coal and refinery sectors.

Acting on demand will require a significant effort from the EU’s Member States. The Commission’s first text will require each Member State to reduce electricity consumption by at least 5% during selected peak price hours. They will need to identify the 10% of hours with the highest expected electricity price and reduce demand during those hours: this mandatory target would result in selecting on average three to four hours per weekday. This is a specific provision, which underlines a general proposal for total demand reduction by 10% until March 2023. The Commission highlights that reducing demand at peak times will save 1.2bcm of gas over a 4-month period.

The cap on market revenues for electricity generation from inframarginal technologies aims to recover excess revenues from sources like renewables, nuclear, and lignite, which do not experience high marginal costs as gas. This measure aims at reducing the impact that the margin-setting technology (e.g., gas) has on the revenues of other generators. The main objective is to keep renewables interesting for investors and, at the same time, preserve the incentive for technologies such as coal and gas-fired power plants to be available when needed. The Commission recognised that the extreme and lasting price increase since February 2022 is markedly different from a normal market situation, stating that a revenue cap should be put around 180 EUR/MWh for the inframarginal resources. This price reflects the average market price expectations of the past decade and would not impair investment in these technologies: doing so would weaken the goals of the European Green Deal itself. The cap should be limited to market revenues rather than total generation revenues, and the surplus revenues resulting from the application of the cap shall be channelled to final electricity customers.

Finally, the Commission recognises the issues that could emerge from sustained high energy prices, including social and economic implications. In this situation, the extra revenues made by the fossil fuel sector represent a possible pool of contribution that can help reduce the stress on consumers and public authorities. This “solidarity contribution” for the fossil industry would be applicable in all Member States, representing an exceptional and temporary measure, taken in a spirit of solidarity to mitigate the direct economic effects of the soaring energy prices. The contribution would be collected by Member States on 2022 profits which are above a 20% increase on the average profits of the previous three years and redirected to energy consumers. In particular, the Commission indicates as main beneficiaries vulnerable households, hard-hit companies, and energy-intensive industries.

The proposed Regulation will now be discussed with the Member States and shall be adopted at the earliest convenience. The provisions should then start to apply as soon as possible, with the Commission intending to avoid the emergence of risks for citizens and business.