Third in series: Windfall tax for fossil fuel companies to reduce energy costs

In our series?'Consequences of measurements taken by the European Commission to tackle the energy crisis,'?we reflect on the 4 most important measurements Europe will/will not take. We will review and analyze the impact this will have on energy sourcing for businesses.

The four measures are:

1. ?An introduction of the market price gap on gas
2. ?A cap on the revenues of ‘inframarginal’ electricity producers (i.e. those with low costs of production, such as wind, solar and nuclear)
3. ?A ‘solidarity contribution’ from fossil fuel companies to be used to mitigate the impact of high energy prices on customers
4. ?A mechanism for coordinated electricity demand reduction across the EU

Today, we look at the (positive) consequences of the solidarity contribution (windfall tax) imposed on fossil fuel companies, and the impact on our energy bills.

Good news from the EU: first measures approved and could raise up to €142 billion

Last week, ministers agreed on the following measures:

• imposing a windfall levy on profits of fossil fuel companies' surplus profits made in 2022 or 2023
• imposing a temporary levy on excess revenues that low-cost power producers make from soaring electricity costs (see post last week)
• and a mandatory 5% cut in electricity use during peak price period were approved

The emergency measures could help raise $140 billion (€142 billion) that would be available to EU member states to help finance relief packages for consumers.

Not only gas and oil companies will be imposed by this solidarity tax

The Commission is also looking at companies from non-gas fuelled power plants that gain from selling electricity at sky-high costs, but which do not have to pay huge bills for fuel, to help consumers cope with surging power bills. In addition, the EU is also targetting other companies but not yet clear what types of companies will be imposed.

In a recent study on excess profits, it was mentioned that 1.000 of the world’s biggest companies have recorded excess profits of 1.15 trillion dollars in 2020 and 2021 compared to the pre-pandemic period – an increase of 68.5 percent.?

How to determine how big the tax will be

At this stage, the commission intends to recoup one-third (33 percent) of excess profits made in?2022 and/or 2023. Excess profit is defined as profit exceeding the average of the last four years (2018 – 2021) by 20 percent. This is a threshold rate and EU countries can apply a higher rate.

Individual countries are imposing additional windfall profit taxes

• Italy has already introduced a windfall profit tax on excess profits made by electricity firms during the crisis. They were one of the first ones.
• Countries like Hungary and the Czech Republic decide this month on their own windfall tax. Greece is leading here the way with a rate of 90 percent. Spain is even planning on capturing which is planning to capture excess profits made by banks.
• Germany is also considering introducing a windfall tax. They intend to reap around 10 billion euros ($10 billion) by skimming off windfall profits from energy companies benefiting from market disruption.

Impact of this tax on energy bills for Belgian companies

• Unfortunately, Belgium is lacking a little in its decisions on imposing a windfall tax and is waiting for the measures taken by the EU. This has an immediate - and negative - consequence on our competitive position within Europe. We already see substantial differences among countries on the price of energy because of the above-mentioned (non)-measures. Belgium should take action on this more quickly!

Although the EU is taken appropriate actions on this windfall tax, some individual countries going much further. This can lead towards competitive (dis)advantages. Unfortunately Belgian companies are already feeling this disadvantage...

• At this stage, most of the money is flowing toward solutions for the residential sector only a limited volume goes to the companies.

Xavier De Moor?is a senior energy expert with over 20 years of experience in energy hedging and trading strategies. His role at?Condugo?is helping customers with?energy procurement, energy sourcing, and energy budgeting.