According to International Energy Agency (IEA) website publication on Renewables 2022 Analysis and forecast to 2027 report, several European countries have introduced regulatory measures to tax energy companies’ extraordinary profits or revenues, with the aim of limiting inflation increases and protecting society’s most vulnerable consumers. For the electricity sector, governments expect to collect additional taxation income on the profits or revenues of generation units that have low marginal costs, including renewable energy producers and energy trading companies that have been selling/trading generation in the wholesale market.
Five European countries (Greece, Hungary, Italy, Spain, and Romania) already began implementing new taxation and fiscal measures in 2022 to claw back windfall profits covering periods of six months to three years, while discussion on this topic is ongoing in nine other EU countries. In addition, Germany has announced that it expects to raise about EUR 10 billion by imposing windfall taxes on electricity generators, and Belgium anticipates EUR 3 billion. While remuneration policies may enable renewable energy generators to tap into the wholesale market to receive higher revenues, hedging mechanisms and long-term bilateral contracts make the actual amount governments could eventually collect less certain.
Implications for the energy transition in Europe
Accelerating renewable energy expansion is crucial to reduce EU reliance on imported fossil fuels from Russia. Large utilities and independent power producers continue to be the main investors in renewables in Europe and thus have a pivotal role in increasing the pace of wind and solar PV expansion. Following the European Council’s October 2022 regulation of price caps for electricity generators, more EU countries are expected to introduce new regulatory measures.
The current regulation enables member countries to define their own price caps as well as clawback mechanisms for profits or revenues, depending on national circumstances. However, inconsistencies among regulatory regimes could create uncertainty for investors, especially if they make the business case for renewables less appealing. Thus, it is important for regulations to tax profits from energy sales in the wholesale market and not revenues.
