EU sets out windfall tax plans to combat ‘astronomic’ energy bills

EU Commission President, Ursula von der Leyen, has introduced the bloc’s plan to address the rise in energy costs brought forth by the Russian shutdown of the key Nord Stream 1 pipeline and exacerbated by the climate crisis and lingering effects of the Covid pandemic.

The five “immediate” moves proposed to help tame Europe’s energy emergency include: setting a price cap on Russian gas,; mandatory measures to reduce energy use during peak times, funding for ailing utility companies, a windfall tax on fossil fuel companies and a cap on energy companies’ revenues. 

“We are facing an extraordinary situation because Russia is an unreliable supplier and is manipulating our energy markets,” Von der Leyen said while outlining the Commission’s plan. “Our unity and our solidarity will ensure that we will prevail.”

Over the past few months, gas supplies from Russia have declined in what a leaked European Commission draft described as a “deliberate attempt to use energy as a political weapon”. Last month, the Commission announced it was drafting an  “emergency intervention” that would reform the bloc’s energy market to ensure electricity prices reflect cheaper renewable energy.

Currently, Europe’s electricity market is underpinned by a “merit order” system in which the power stations offering the cheapest electricity are tapped first, but prices are determined by the last and most expensive power stations to be tapped. As these are usually gas plants, cheap renewable energy is often sold at the same price as costlier fossil fuel-based power.

“These revenues do not reflect their production costs,” Von der Leyen said. “So it is now time for the consumers to benefit from the low costs of low-carbon sources.”

Low-carbon energy companies, renewable and nuclear suppliers that have reaped “enormous revenues … they never dreamed of” from generating electricity will face a cap on their revenues, she added, explaining the plan to “re-channel these unexpected profits” to help domestic consumers and companies pay “astronomical” bills.

Oil and gas companies that have made “massive profits” would also be subject to a windfall tax, which Von der Leyen called a “solidarity contribution”.

Although the details of the windfall tax have not yet been made public, a leaked document seen by The Guardian shows the commission wants a €200 (£173) per megawatt hour limit on the price of electricity generated by low-carbon technologies. According to those documents, the EU would also pursue a mandatory 5 per cent reduction in electricity use during peak hours.

Von der Leyen also proposed a cap on the price of Russian gas, saying it was necessary to cut revenues that “Putin uses to finance his atrocious war in Ukraine”.

Over recent months, the bloc’s 27 countries have disagreed over the possibility of an intervention in energy markets, as reduced Russian gas deliveries to Europe have pushed up power costs. However, after gas prices reached costs almost 12 times higher than at the start of 2021, countries that have long opposed these emergency measures, such as Germany, expressed their willingness to discuss the matter. 

The Commission’s plan will need to meet the approval of the bloc before being enforced. The most controversial issue is the Russian price cap – aimed mainly at punishing the Kremlin financially for the war in Ukraine – with capitals having “very contradictory views”, one EU diplomat told POLITICO.

“It’s not a constructive proposal,” the Czech Republic’s industry minister, Jozef Síkela, told his country’s Czech senate, adding that it looked like further “sanctions against Russia [rather] than an actual solution to the energy crisis in Europe”.  

Before Russia’s invasion of Ukraine, the nation supplied 27 per cent of the EU’s imported oil and 40 per cent of its gas, with the bloc paying around €400bn (£341bn) a year in return. That is equivalent to around 2.4 million barrels per day, according to data from the International Energy Agency. 

In May this year, the EU announced its intention to effectively cut 90 per cent of oil imports from Russia by the end of the year, in protest to Russia’s invasion of Ukraine. However, the bloc has spent nearly €88bn on Russian fossil fuels since the invasion began on 24 February, according to a tracker from the NGO Europe Beyond Coal.

European Union ministers will meet on Friday to discuss emergency measures to get their nations through the cold months ahead without additional social and economic upheavals.