Renewables investors face uncertainty due to EU profit cap

As a European cap on renewable energy revenues aims to redirect excess profits from low-cost power generation to consumers, analysts and industry groups now say such moves are both risky and coming. at the wrong time.

As part of its emergency plan to tackle high energy prices, the European Commission has proposed a temporary cap of €180 per megawatt hour (MWh) on the price at which low-carbon electricity companies sell electricity. electricity.

  • What complicates matters is that not all renewable energy plants actually benefit from soaring prices (Picture: PressReleaseFinder)

This cap would apply to wind, solar, biomass, nuclear, lignite and some hydroelectric plants, but it would effectively operate as a tax. EU member states could raise up to €117 billion a year from power producers to help vulnerable consumers, according to the commission’s own estimates.

While the EU has pledged to increase adoption of renewables (to reduce its addition of Russian fossil fuels), such a temporary revenue cap has been criticized by industry groups for ignoring the specifics of the renewables market. and create uncertainty for investors.

But some experts disagree.

Daniel Gros, a German economist at the Center for European Policy Studies think tank, said the cap should not have a negative impact on investments in renewable energy. “A price cap would only increase the tendency of renewable energy producers to sell their production forward, thus protecting themselves both against future price caps or against a sudden drop in prices,” he said. he declares.

Uncertainty for investors?

Under EU projects, member states could go beyond the 180 MWh cap in national legislation if they want to capture a larger share of windfall profits.

But industry groups have warned that allowing countries to deviate from the EU cap creates confusion and uncertainty for investors, as well as risks to the integrity of the energy market.

“A lower cap on revenues at the national level creates great uncertainty for investors and puts the integrity and unity of the EU market at risk,” Naomi Chevillard of SolarPower Europe told EUobserver.

Echoing this, Simon Dekeyrel, climate and energy policy analyst at the European Policy Center think tank, said different revenue caps between member states could disrupt cross-border trade and fragment the internal energy market.

“A higher income tax in one member state can, for example, incentivize electricity generators to sell their electricity in neighboring markets with lower income taxes,” he said.

The Commission, for its part, has also acknowledged that different caps could lead to “significant distortions between EU producers”, who compete in an integrated European energy market.

Nevertheless, they point out that more ambitious national caps can be allowed, as long as they do not distort the functioning of electricity markets and do not undermine investment signals.

Governments are now “making a profit”

Complicating matters further is the fact that not all renewable energy plants actually benefit from the price spike. According to an analysis by Rystad Energy, only 40% are making windfall profits from the current energy crisis.

Revenues from most renewable energy capacity installed in the EU come from fixed rate contracts entered into before the energy crisis, on average below current prices.

These long-term contracts (normally awarded through subsidy or auction mechanisms) represent 60% of the installed capacity in the EU and are mainly located in Germany, France and Spain.

Victor Signes, renewable energy analyst at Rystad, argues that these producers cannot make windfall profits because they have to redistribute additional revenue with the quid pro quo to the deal.

With regard to subsidy mechanisms, such as feed-in tariffs and bilateral contracts, Signes explains that governments and national utility companies are the ones who purchase the electricity produced by renewables at the defined fixed rate, and then sell it on the spot. market.

“After 20 years of governments having to pay a fixed above-market price to renewable energy developers, governments are now making a profit,” he says.

Some authorities have recognized the benefits thus granted. For example, the French Energy Regulatory Commission said the system could generate around €8.6 billion for the French state in 2022 and 2023.

Wind Europe called on EU countries to only apply the cap to actual earned income, arguing that most wind farms in Europe earn a fixed income.

According to a leaked document prepared by the Czech EU Presidency, power producers subject to state measures such as feed-in tariffs and bilateral contracts should be excluded from the application of the revenue cap.

EU energy ministers are expected to decide on the revenue cap for renewables and other emergency measures at their next energy council next week (September 30).

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