According to International Energy Agency (IEA) website publication on Renewables 2022 Analysis and forecast to 2027 report, Russia’s invasion of Ukraine triggered a global energy crisis, leading to sharp increases in oil, natural gas and coal prices. As a result, electricity prices in Europe have risen drastically because natural gas-fuelled plants remain the price-setter in the wholesale market. Furthermore, high fossil fuel prices have resulted in windfall profits for some energy companies. In fact, the profits of major oil, gas, coal and refinery companies in the first half of 2022 more than doubled from the same period last year, and discussion on windfall profits in the European Union has extended to electricity generators (including renewables-based ones) that can produce electricity at lower marginal costs than natural gas-fuelled power plants.
In October 2022, the European Council passed a regulation on an emergency intervention to address high energy prices. The regulation proposes windfall-profit levies on fossil fuel producers through a temporary solidarity contribution, and on electricity generators (or inframarginal electricity producers) that have lower marginal costs than the price-setting gas units.
The Council also introduced plans to cap the wholesale electricity price at EUR 180/MWh or lower, and expects that member countries would raise EUR 117 billion annually. This market intervention aims to reduce electricity prices to protect and support vulnerable energy consumers. As the proposal’s interpretation and implementation by each member state remains an uncertainty, its implications at the country and EU level are difficult to estimate. In addition, several European countries have already introduced national-level windfall taxes for electricity generation and trading companies.
The direct answer to whether renewable power plant owners are making windfall profits is highly complex. While renewable energy policies can provide insights on whether developers are allowed to receive higher revenues from the market, they can only partially answer the question on windfall profits because data are limited concerning non-policy factors, including long-term bilateral power purchase contracts, developers’ hedging strategies and exposure in the wholesale electricity market. To understand these non-policy factors, we examined the balance sheets of the European utilities with large operational renewable and fossil fuel capacities.
