Proximo Weekly: Will France get the energy price cap balance right?
With Europe's winter energy bill set to spiral, European governments must introduce measures to shield consumers and businesses against the astronomical cost increases. Many are looking to energy price caps as a solution. But while caps are appealing – they are not without risks, as uncertainty over the details of France's proposed inframarginal cap is demonstrating.
Since the beginning of the energy crisis, price caps have appeared in various guises across Europe. Earlier this year, Spain and Portugal launched a cap on wholesale gas prices. Since then, Greece, France, Malta, Estonia, Romania, and Slovenia, have all implemented energy price caps in some form. Poland and the Netherlands have also announced that they plan to cap electricity prices in 2023 and Germany is currently considering introducing a cap.
Published on 7 October, the draft legislative amendment tabled by France’s government before the French parliament will implement EU Council Regulation 2022/1854 (of 6 October 2022), which outlines emergency intervention to address high energy prices. Within this amendment is a cap on energy prices which will effectively take the form of a tax applicable to market revenues of most inframarginal generators (solar, wind, nuclear and hydro power) exceeding €180/MWh wholesale price cap from 1 December 2022 until 31 December 2023. This will be at a rate equal to 90%, which may be lowered up to 60% after 1 July 2023. The excess revenues gained in tax will be allocated to finance measures to assist final users in lowering their bills. At the EU level this scheme is expected to generate up to €140 billion to aid consumers.
Under EU plans, member states can go beyond the €180/MWh cap in national legislation if they wish to capture a larger share of windfall profits – France has taken the bait. The cap is in principle set at €180/MWh, but the legislation tabled by the French government outlines that this level can be increased or decreased by a maximum of €80/MWh according to technology costs. So, the cap could be set as low as €100/MWh and as high as €260/MWh. Logic demands that the cap will be lowered for renewable technologies as their costs are, in most cases, less than €180/MWh.
The proposed cap of €180/MWh is sufficient to cover most solar and wind projects without subsidies and even covers some projects with battery storage attached. But the cap does not cover the full and unsubsidised costs of new nuclear and hydro projects. These projects tend to be capital intensive and have a history of large budget overruns. This could pose a problem for the ‘nuclear renaissance’ that French President Macron recently called for – France derives around 70% of its electricity from nuclear energy but power supplies are currently tight as 50% of France’s Nuclear Reactors are now offline for maintenance.
Market prices are expected to drop as operators will try as much as possible to escape this tax, lowering their prices below the cap during this temporary measure with a view to catching up later on. Most challenging for utilities is that unhelpfully the amendment does not specify the adjustment of the cap per technology. Francois April, partner in Linklaters Paris office, says," the legislation will mean operators need to adapt to review financial models". But not only this, utilities will have to plan ahead on the basis of a worst-case scenario e.g., a €100/MWh cap.
The still undefined parameters of this proposed price cap, as it refers to differing technologies, exacerbates existing concerns for utilities and the effect of price caps on their profitability. Price caps are intended to minimise windfall profits of utilities and provide governments with a revenue stream to compensate consumers on high energy bills but reducing the profitability of utilities could limit investments in the energy transition at a time when the need for increased investment is at an all-time high. There is also concern that different revenue caps across member states of the EU could disrupt cross-border trade and fragment the internal energy market.
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