Ireland's Department of the Environment, Climate, and Communications has issued a release announcing measures to address windfall gains in the energy sector.
Minister Ryan announces measures to address windfall gains in the energy sector
The Minister for the Environment, Climate and Communications, Eamon Ryan, has today announced measures to address windfall gains in the energy sector through the implementation of Council Regulation (EU) 2022/1854.
Elevated wholesale gas prices have led to potential windfall gains for electricity producers, which have seen an increase in revenues from the wholesale electricity market. The elevated prices also have the potential to generate windfall gains in fossil fuel production and refining.
Minister Ryan stated:
"The Russian invasion of Ukraine has led to unprecedented increases in wholesale natural gas prices, impacting the prices paid by consumers, but also leading to windfall gains in some areas of the energy sector. The agreement of the Council Regulation and the government’s approval on its implementation will ensure that windfall gains will be collected and redistributed to support energy consumers."
The government has decided to place a cap on all market revenues of non-gas electricity generators. Excess revenues will be collected and used to support electricity consumers.
The cap on market revenues will apply to non-gas electricity generators with a capacity of 1 MW or more as follows:
- a cap of €120 per MWh for wind and solar
- a cap of at least €180 per MWh for oil-fired and coal-fired generation
- a cap of €180 per MWh on other non-gas generation
The €120 per MWh cap for wind and solar takes into account the revenues generators would have expected to earn prior to the increase in gas prices, which was less than €100 per MWh, and the limited increase in costs incurred by these generators. It should also be noted that where electricity suppliers can demonstrate that revenues in excess of the cap are being passed on through lower prices to final consumers, those revenues will not be subject to the cap. The cap on market revenues will operate from December 2022 to June 2023 inclusive, as set out in the Council Regulation.
The government has also decided to implement the temporary solidarity contribution, as set out in the Council Regulation, to companies active in fossil fuel production and refining for the years 2022 and 2023.
The temporary solidarity contribution is calculated based on the portion of a company’s taxable profits which are more than 20% higher than a baseline. The baseline will be the average taxable profits for the company for the period 2018 to 2021. Losses from previous years will not be taken into account in the calculation of the taxable profits in temporary solidarity contribution or the baseline.
Taxable profits which are more than 20% above the baseline will be subject to the temporary solidarity contribution at a rate of 75%. This will lead to an effective rate of 0% for windfall gains of up to 20%, an effective rate of 50% for windfall gains of 60%* and an effective rate of 60% for windfall gains of 100% (that is, where profits have doubled).
Given the volatility of gas prices, the level of proceeds from the cap on market revenues and the temporary solidarity contribution cannot be estimated with any certainty. Depending on the price level of natural gas, the proceeds could range from circa €300 million to €1.9 billion. However, the level is expected to be in the lower end of this range and could be even lower if gas prices reduce.
Proceeds from the cap on market revenues are expected to be collected in 2023, with proceeds from the temporary solidarity contribution to be collected in 2023 and 2024.
The Council Regulation sets out that the proceeds can be used to the benefit of electricity consumers. This could include reductions in networks charges or supports provided directly to consumers, similar to those already in place. The government will determine, in due course, how best to distribute these proceeds.
It should be noted that a wide range of supports for all energy consumers have been put in place by the government. Full details are available at: www.gov.ie/ReduceYourUse.
*(60% minus 20% baseline = 40% eligible for contribution at rate of 75%; that is, 30%).