Amager Bakke. Waste energy plant in Copenhagen, Denmark.
Photo: Hofton&Crow
Photo: Hofton&Crow
2. Implementation of emergency measures in the Nordic countries
The CR required EU member states to implement emergency measures in response to high electricity prices. In short, the main measures outlined in the CR were:
- Reduction in electricity demand that involved two targets:
- A mandatory 5% reduction in peak-hour electricity consumption
in the period of 1 December 2022–31 March 2023. - A voluntary 10% reduction target of total electricity consumption
in the period of 1 November 2022–31 March 2023.Countries could decide on appropriate measures to meet these targets.
- Cap on market revenues for inframarginal technologies in electricity generation: the revenues of some electricity generators were capped at 180 EUR/MWh. This applied to the inframarginal technologies, i.e., those with marginal costs lower than the market price. The cap applied until 30 June 2023.
- Solidarity levy from the fossil fuel sector: companies active in the petroleum, gas, coal and refinery sectors had to make a mandatory solidarity contribution of at least 33% of their taxable profits that exceed the previous four fiscal years’ average profits by 20%.
Although these measures were outlined in the CR, the specific implementation was left to the member states, and there was some flexibility regarding the practical implementation of the measures.
Sections 2.1–2.3 provide more detail about the requirements of the CR and their implementation in each country. Table 2.1 summarizes the requirements of the CR and the implementation of the measures in the Nordic countries.
We also present a short overview of the reactions from the market agents in each country based on responses to public consultations on the law and interviews with market agents and authorities.
Table 2.1. Overview of the implementation of the emergency measures in the Nordic countries
The Council Regulation | Sweden | Denmark | Finland | |
Reduction in electricity demand | Mandatory 5% reduction in electricity consumption during peak load hours between 1 December 2022–31 March 2023. Voluntary 10% reduction of total electricity consumption between 1 November 2022–31 March 2023. Flexible implementation and somewhat flexible definition of peak hours. |
|
|
|
Cap on market revenues | 180 EUR/MWh cap on market revenues obtained from the sale of electricity produced from specific sources between 1 December 2022–30 June 2023. | 180 EUR/MWh cap on market revenues obtained from the sale of electricity produced from specific sources between 1 March 2023–30 June 2023. Tax applied to 90% of hourly realized revenues exceeding the cap. | 180 EUR/MWh cap on market revenues obtained from the sale of electricity produced from specific sources between 1 December 2022–30 June 2023. Tax applied to 90% of monthly realized revenues exceeding the cap. | Additional 30% tax on electricity companies’ profits in 2023, above “ordinary” return on equity. The tax is levied on electricity producers and, under certain conditions, retailers. |
Solidarity contribution from fossil fuel sector | The fossil fuel sector is levied a tax of 33% on taxable profits that exceed the average profits in the four preceding years by 20%. Applies to fiscal year 2022 and/or 2023. | The fossil fuel sector is levied a tax of 33% on taxable profits that exceed the average profits in the four preceding years by 20%. | The fossil fuel sector is levied a tax of 33% on taxable profits that exceed the average profits in the four preceding years by 20%. | The fossil fuel sector is levied a tax of 33% on taxable profits that exceed the average profits in the four preceding years by 20%. |
Source: Vista Analyse
2.1. Measure 1: Reduction in electricity consumption
We start by describing how the CR stipulated the demand reduction measures (Section 2.1.1) before explaining how Sweden, Finland and Denmark implemented the measures (Sections 2.1.2 to 2.1.4).
2.1.1. The Council Regulation: Electricity consumption reduction
The Council Regulation stipulated two demand reduction measures:
- A mandatory 5% reduction in electricity consumption during peak load hours.
- A voluntary 10% reduction target in total electricity consumption.
2.1.1.1. A mandatory 5% reduction in electricity consumption during peak hours
The Council explained the motivation to introduce a peak hour demand reduction as follows:
To preserve fuel stocks for electricity generation and to specifically target the hours with highest price or consumption of electricity, when gas-fired power generation has a particularly significant impact on the marginal price, each Member State should reduce its gross electricity consumption during identified peak hours.
Recital 17, the CR
Recital 17, the CR
In addition, according to Article 4 of the CR, each member state was to identify the expected peak hours for 1 December 2022–31 March 2023 and reduce electricity consumption by an average of at least 5% per hour during these hours. The peak hour demand reduction was calculated as follows:
… the difference between the actual gross electricity consumption for the identified peak hours and the gross electricity consumption forecasted by the transmission system operators […] without taking into account the effect of the measures put in place to reach the target set in this Article.
Article 4.1, the CR
Article 4.1, the CR
Member states had some flexibility in defining peak hours, as long as the energy saved was at least equal to the amount implied by the parameters in the CR; however, at least 10% of the hours needed to be covered.
The CR outlined three ways to define peak load hours (Article 2.4):
The CR outlined three ways to define peak load hours (Article 2.4):
- Hours with the highest expected prices according to forecasts.
- Hours with the highest expected consumption.
- Hours with the highest expected non-renewable consumption.
The CR did not specify which measures should be used to achieve consumption reduction. However, the CR asked member states to consider market-based measures, such as auctions and tender schemes, in particular.
2.1.1.2. A voluntary 10% reduction in total monthly gross electricity consumption
According to Article 3.1 of the CR, member states were to endeavour to implement measures that would reduce total electricity consumption by 10%. The comparison period was the average consumption in the corresponding month (November–March) of the reference period. The reference period was defined as the same months in the five years before the 2022–2023 winter, beginning with the winter of 2017–2018.
2.1.1.3. Flexibility in the implementation of demand reduction measures
The CR suggested that demand reduction measures include national awareness-raising campaigns, publishing targeted information about the forecasted electricity system situation, regulatory measures limiting non-essential energy consumption, and targeted incentives to reduce electricity consumption (see Recital 19 of the CR). Member states were free to choose how to reach the demand reduction targets set by the Council and could extend existing national measures. However, the implemented measures stipulated the following conditions (Article 5):
- Where financial compensation is paid in addition to market revenues, the amount of that compensation shall be established through an open competitive process.
- Only involve financial compensation when such compensation is paid for additional electricity not consumed compared to the expected consumption in the hour concerned without the tender.
- Not unduly distort competition or the proper functioning of the internal market in electricity.
- Not be unduly limited to specific customers or customer groups, including independent aggregators, in accordance with Article 17 of Directive (EU) 2019/944.
- Not unduly prevent the process of replacing fossil fuel technologies with technologies using electricity.
2.1.2. Sweden: Consumption reduction implementation and reactions
Key features of the implementation of demand reduction measures in Sweden
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Some initiatives to reduce power consumption were enacted before the CR was adopted. For instance, public institutions were required to implement energy-saving measures, and an information campaign aiming to inform the public about possible measures to reduce consumption and shift consumption away from peak load hours was launched. In addition, in September 2022 the Swedish government asked the Swedish TSO Svenska kraftnät to consider measures to reduce demand and increase demand flexibility.
2.1.2.1. Definition of peak hours
In Sweden, peak hours were defined as three hours in the morning (8:00–10:59) and three hours in the afternoon (16:00–18:59) every weekday.
Svk report 2022/3283, 30 November 2022
2.1.2.2. Svenska kraftnät considered several models for procuring flexibility
In September 2022, the Swedish government tasked Svenska kraftnät with preparing further procurement of consumption and production flexibility in Southern Sweden.
Uppdrag att förbereda ytterligare upphandling av förbrukningsflexibilitet och planerbar elproduktion i södra Sverige (I2022/01721, 8 September 2022)
Svenska kraftnät considered several consumption procurement models and production procurement models (see Text Frame 2.1). In the end, a consumption flexibility procurement model was chosen that compensated consumers who shifted consumption away from peak hours.
Agents could pre-qualify beginning in November 2022, and the procurement documents were published before Christmas 2022, with tenders being continuously evaluated thereafter. The procurement was conditional on the EU Commission’s approval, as the compensation for the consumption reduction constituted state aid; Sweden received this approval on 6 February 2023. The first procurement agreement entered into force a few days after the European Commission’s approval. The total flexibility procured under the scheme was 75 MW per peak load hour.
However, the high prices in December 2022 and January 2023, together with the information campaign and other measures, led to a sufficient reduction of electricity consumption, making the procurement scheme redundant. For instance, consumption was reduced by almost 2,000 MW in peak hours on average in December, January and February (see Section 4.2). The weakness of the scheme was that the selected consumers had to reduce their electricity consumption regardless of prices or whether there was a risk of power shortage. On 28 February 2023, Svenska kraftnät announced the closure of the flexibility procure
ment scheme.
ment scheme.
2.1.2.3. Other consumption reduction measures
Other measures implemented in Sweden to reduce power demand include the following:
- Energy-saving measures in public institutions.
- The public information campaign “Every kilowatt-hour counts” (Varje kilowattimme (kWh) räknas), which aims to inform the public about possible measures to reduce consumption and shift consumption away from peak hours.
Text Frame 2.1. Procurement schemes considered by Svenska kraftnät
Svenska kraftnät identified three models for consumption procurement and two models for flexible production capacity procurement, all of which were suggested to be financed by surplus congestion rents. According to Svenska kraftnät, the alternative models would benefit different agents and could therefore be used in combination for maximum effect.
The three consumption flexibility procurement models considered were:
- Alternative 1: Increase the use of price-dependent bids (hourly bids, block bids and flexible block bids with a price cap) in the spot market. The authorities would compensate consumers when they refrained from consumption, either per MW made price-dependent or based on the cost of lost output (due to reduced electricity consumption).
- Alternative 2: Compensation for shifting consumption from peak hours. Consumers move a certain volume of power purchases from expected peak load hours to other periods and receive compensation, for example, for higher production costs resulting from the shift. All else equal, the shift would decrease peak prices and increase other prices, levelling the price curve.
- Alternative 3: Compensation for the net reduction of power consumption. Consumers refrain from purchasing a certain volume of power without increasing consumption in other hours.
Alternative 2 was chosen, as it was considered to have a larger price-reducing effect than Alternative 1, especially during peak-load hours, while Alternative 3 would have a continuous price-reducing effect during the contract period.
The two flexible production procurement models entailed that Svenska kraftnät compensated producers who submitted additional bids to the spot market during peak load hours. The main difference was the compensation scheme. However, the schemes may have distorted competition because some agents received compensation from the procurement scheme and others did not.
The report also mentions the possibility of procuring larger production facilities with the aim of using these for remedial measures (countertrade and redirection) and the potential for using power reserves in the spot market to reduce prices.
Source: Uppdrag att förbereda ytterligare upphandling av förbrukningsflexibilitet och planerbar elproduktion i södra Sverige (svk.se)
2.1.3. Denmark: Consumption reduction implementation and reactions
Key features of the implementation of demand reduction measures in Denmark
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Denmark did not implement any new consumption reduction measures after the CR entered into force. A large-scale national energy-saving campaign targeting households, public authorities and private companies was established in June 2022 with the aim of reducing energy consumption, including gas, specifically, and electricity consumption in general, along with moving energy consumption away from peak hours.
Source: Answer to fulfilling monitoring obligations according to Article 19 of the Council Regulation (EU) 2022/1854, Danish Energy Agency, 23 January 2023.
In addition, there are four pre-existing subsidy schemes with a primary focus of phasing out fossil fuels in the heating of private buildings:
Source: Description of heating subsidy schemes, Energistyrelsen, 21 April 2023.
- The Building Pool (Bygningspuljen)
- The Scrapping Scheme (Skrotningsordningen)
- The District Heating Pool (Fjernvarmepuljen)
- The Phasing-Out Scheme (Afkoblingsordningen)
2.1.3.1. Energy-saving measures in the public sector
The government issued instructions to all ministries, departments and public agencies (including agencies, councils and boards) to implement (mandatory) measures to save energy by 1 October 2022.
The four recommendations include the following:
- Decreasing the indoor temperature to 19° C
- Reducing the operating time of ventilation and heating systems in buildings
- Turning off unnecessary outdoor lighting
- Distributing information material to employees
Furthermore, local authorities promote the (voluntary) adoption of initiatives similar to those implemented by the ministries. Some municipalities have decided to go even further, for example, by reducing the water temperature of public indoor pools, closing saunas, reducing the use of public lighting and/or promoting working from home.
The Danish Energy Agency (DEA) also launched an information campaign to encourage civil servants to take local initiatives for energy conservation, such as turning off lights and computer screens in unused meeting rooms (see Chapter 2.1.3.3).
2.1.3.2. Energy-saving campaign for households
In June 2022, the DEA launched a national campaign with the objective of reducing energy use in Danish households. In particular, the campaign emphasizes reducing electricity consumption during peak hours and shifting consumption to cheaper (and greener) hours of the day.
The campaign includes information on energy consumption, advice on energy saving possibilities and encouragement to save energy via several different channels, such as outdoor posters, campaign videos on national TV, social media and the website SparEnergi.dk.
Furthermore, a number of information meetings for Danish gas customers and households in general have been held both online and locally around the country, and a hotline where Danish households can receive advice on energy consumption and energy-efficient solutions was established.
2.1.3.3. Energy-saving campaign for private companies
The DEA introduced a national energy-saving campaign targeting businesses with the goal of reducing energy consumption (both electricity and natural gas use).
The campaign website, SparEnergi.dk, features information and campaign material. Furthermore, the DEA has issued a catalogue with advice, guidance and calculations on energy savings in workplaces aimed at employees and operational managers in office buildings, etc.
The DEA has also engaged the public in general through outdoor posters, campaign videos on national TV and social media to encourage local energy-efficient behaviours, such as turning off lights, screens, computers and other electronic devices when leaving a room or workspace, as well as switching to LED lights.
2.1.3.4. The Building Pool (Bygningspuljen)
The Building Pool is an application-based subsidy scheme where individuals and households can apply for grants subsidising the installation of an electric heat pump when converting from gas, oil or pellet broilers or electrical heating. The scheme also offers grants for general energy-efficiency measures, such as insulation, ventilation and energy-efficient windows.
The subsidy is variable, based on a fixed percentage of the estimated market cost of the measure. The subsidy is 15% for most measures and is paid out after the measure has been documented as completed within the requirements established in the legal framework. The demand for the subsidy has exceeded the allotted funds every year since its introduction in late 2020.
Beginning in 2023, the Building Pool was divided into two separate schemes: one focusing on heat pumps and the other on energy efficiency measures.
2.1.3.5. The Scrapping Scheme (Skrotningsordningen)
The Scrapping Scheme is an application-based subsidy scheme targeting private companies that sell heat pumps with an accompanying service agreement subscription, including installation of the heat pump. The scheme provides grants for converting away from gas, oil and pellet broilers to an electric heat pump. The grant covers a maximum of 45% of the eligible costs for conversion from gas- and oil-fired boilers and 30% for conversion from a pellet boiler. The maximum amount of the subsidy is 25,000 DKK. The scheme has not achieved full disbursement of the allocated funds since its implementation in late 2020.
2.1.3.6. The District Heating Pool (Fjernvarmepuljen)
The District Heating Pool is an application-based subsidy scheme targeted at district heating companies that roll out district heating in new areas. The scheme provides subsidies for conversions from gas- or oil-fired boilers to district heating. The district heating companies can receive a subsidy of up to 20,000 DKK per converted gas- or oil-fired boiler. The demand for funding through the District Heating Pool has been high and steadily increasing over the last year.
2.1.3.7. The Phasing-Out Scheme (Afkoblingsordningen)
The Phasing-Out Scheme is a fee-waiver scheme targeted at individual gas consumers who use gas for heating. When an individual gas consumer sends a decoupling request from the gas grid to the distribution system operator (Evida), they normally have to pay a decoupling fee; however, this scheme covers the cost of the decoupling for individual gas consumers. The scheme has a limited budget for each year. The amount covered by the scheme is between 7,000–8,200 DKK, depending on the area in which the gas consumer lives. The fee is disbursed by the DEA to Evida. The scheme was so popular among individual gas consumers that it received additional funding in 2022 and 2023.
2.1.4. Finland: Consumption reduction implementation and reactions
Key features of the implementation of demand reduction measures in Finland
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2.1.4.1. Definition of peak hours
Peak hours in Finland were defined only for December 2022–February 2023: every weekday from 8:00–10:00 and 17:00–20:00, excluding holidays.
2.1.4.2. Voluntary power system support procedure
At the beginning of December 2022, the TSO Fingrid introduced a new scheme to avoid electricity outages. The aim of the scheme is to engage companies and public entities who can reduce demand or increase electricity production (for example, by starting back-up power generators) but do not participate in the day-ahead or balancing markets.
Fingrid has entered into agreements with about 50 companies and public entities (e.g., the Helsinki-region water supplier, Yara, SSAB and Metsä). The minimum contribution from an agent is 1 MW. At the time of this writing, the total capacity acquired through the scheme is over 500 MW.
The companies are not compensated for this other than through price effects on the market.
In April 2022, the scheme was extended to spring 2024.
2.1.4.3. Energy-saving campaign “Down a Degree”
The Finnish energy saving campaign “Down a Degree” (Astetta Alemmas) began on 10 October 2022 and has the following goals:
- All Finns take specific energy-saving measures with the aim of producing quick results.
- Everyone voluntarily limits their electricity consumption during the hours of the day when consumption is highest – on weekdays from 8:00–10:00 and 16:00–18:00 – by moving the use and charging of electrical devices to other times.The peak hours defined by this campaign are different from the peak hours defined by the TSO when calculating peak hour consumption reduction.
- Energy consumption is reduced throughout society, including in homes and housing companies, businesses, municipalities, organizations and educational institutions.
In addition, the campaign’s web page in English lists the following goals:
- Short-term goal: “To get over 95% of Finnish households to save energy and cut down on their consumption by 5% during peak hours.”
- Long-term goal: “To permanently lower energy consumption and reduce electricity consumption peaks.”
The campaign encourages everyone to limit their electricity consumption during peak hours. Consumers are also provided energy-saving advice and help with energy issues related to housing. The campaign is organized by the Energy Authority, Motiva, the Ministry of Economic Affairs and Employment of Finland, the Ministry of the Environment, the Prime Minister’s Office and the Finnish Innovation Fund Sitra, and it is financed by the Energy Agency (Energiavirasto).
2.1.4.4. Information and education
Energy experts and representatives of the authorities have been active in the media, informing the public about the situation and possible measures to reduce energy and electricity consumption. This has contributed to increased awareness among the general public.
2.2. Measure 2: Cap on market revenues
2.2.1. The Council Regulation: Market revenue cap on the sale of electricity
The Council explained the motivation to introduce a market revenue cap as follows:
The recent surge in the price of gas and hard coal has translated into an exceptional and lasting increase of the prices at which the gas and coal-fired power generation facilities bid in the day-ahead wholesale market. That in turn has led to exceptionally high prices in the day-ahead market […] In a situation where consumers are exposed to extremely high prices which also harm the Union’s economy, it is necessary to limit, on a temporary basis, the extraordinary market revenues of producers with lower marginal costs by way of application of the cap on market revenues achieved through the sale of electricity. […] The cap on market revenues should apply to technologies with marginal costs lower than the cap on market revenues, such as for instance wind, solar, nuclear energy or lignite.
From recitals 23, 25 and 32, the CR
According to Article 7.1, the cap applied to the market revenues obtained from the sale of electricity produced between 1 December 2022–30 June 2023 from the following sources:
- Wind and solar (thermal and PV)
- Geothermal
- Hydropower without storage
- Biofuels, except for biomethane
- Waste
- Nuclear
- Lignite and crude petroleum products
- Peat
The market revenues from electricity generation from these sources were capped at a maximum of 180 EUR/MWh of electricity produced.
According to Article 6.2, the cap on market revenues targeted all the market revenues of producers, regardless of the market in which a transaction took place. In the Nordic region, there were three relevant wholesale power markets with different time frames: the day-ahead market, the intraday market and the balancing market. Nord Pool is the main power exchange for electricity in the Nordic countries. In addition to Nord Pool, physical electricity is traded bilaterally through power purchasing agreements (PPAs).
There are also markets for trading financial derivatives used for hedging and/or speculation, such as the financial power futures markets on Nasdaq OMX.
Table 2.2 summarizes the main features of the CR as it was implemented in the Nordic countries. Sections 2.2.1 to 2.2.4 below provide more details.
Table 2.2. Cap on market revenues: Summary of implementation in the Nordic countries
Option | Sweden | Denmark | Finland |
Type | Revenue cap | Revenue cap | Profit tax 30% on profits over 10% annualized ROE |
Generation technologies included | Same as in the CR - Hydropower with storage < 24 hours included - Crude oil included, but fuel oil exempt | Same as in the CR | Tax applies to all producers |
The cap level | 1957 SEK/MWh (Equivalent to 180 EUR/MWh) | 180 EUR/MWh | Intended to be equivalent to an average power price of 280 EUR/MWh |
Cap applied to 90% of excess revenues? | Yes | Yes | Intended to be equivalent |
Special cap for high-cost producers? | Yes 1.3 times variable costs | Yes Fixed amount on top of costs | No Tax applies to all producers |
All wholesale markets covered (day-ahead, intraday and balancing market)? | Yes | Yes | Yes |
Reference prices? | Yes Day-ahead price used as a reference for all wholesale markets | No Actual price for all wholesale markets | N/A |
Hedging agreements and PPAs taken into account? | Yes | Yes | Yes |
Settlement (hourly, monthly, yearly) | Hourly, with monthly corrections for hedging positions | Monthly | Yearly (tax year 2023) |
Duration | 1 March 2023 – 30 June 2023 | 1 December 2022 – 30 June 2023 | The tax year 2023 |
Source: Vista Analyse
2.2.2. Sweden: Revenue cap implementation and reactions
Key features of the implementation of the revenue cap in Sweden
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The Swedish government issued a memorandum on 12 December 2022, with supplementary provisions to the CR on the market revenue cap.
Tillfällig skatt på vissa elproducenters överintäkter Fi2022/03328 (12 December 2022).
The main difference between the Swedish implementation and the CR is that the legislation took effect on 1 March 2023 and not 1 December 2022. The government explained the postponement as the need to politically process the bill through both the Council on Legislation and the Riksdag.
Other than the implementation date, the provisions of the bill were similar to those of the CR. The tax applied to 90% of revenues obtained from the sale of electricity that exceeded the price cap produced by the technologies listed in the CR.
Electricity generated from crude petroleum products were taxed, but fuel oil generators were exempt.
The day-ahead market price was used as a reference price for all market revenues. Revenues from all wholesale markets were included in the tax base, but price differences between the markets were not taken into account.
The tax base was adjusted for hedging positions and long-term contracts (such as power purchasing agreements).
A special revenue cap applied to production technologies with high operating costs. For those producers, the cap was 1.3 times the operating costs.
2.2.2.1. Reactions from market agents and the general public in Sweden
The government invited private and public organizations to give feedback on the proposal. The final bill included relevant feedback from the public consultation and the government’s explanations for each provision.
Most responses endorsed (or at least did not object to) the general intentions of the proposed implementation of the CR. Many of the responses requested clarification on how certain terms should be understood or the practical implementation of certain provisions. There were also some warnings about excessive administrative burdens of practical implementation. It was mostly energy producers who argued against the proposal.
The feedback about impacts on wholesale markets can be summarized as follows:
- There were no objections to limiting the revenue cap to 90% of excess income (instead of 100%).
- Some consumer organizations (e.g., Villaägarnas Riksförbund) believed that the tax should be applied retroactively from 1 December 2022. Producers endorsed the planned application for 1 March 2023.
- Some agents (Svenska kraftnät, Nord Pool AB and Finansinspektionen) indicated that using the day-ahead market price as a reference for all markets could influence incentives towards supplying intraday and balancing markets, which often have higher prices. This could increase prices on day-ahead and derivatives markets. However, Svenska kraftnät assessed this risk to be less critical than the risk of decreased liquidity in balancing markets.
- Producers advocated that the tax should be based on a monthly average price, not an hourly price.
- There were no objections to a special revenue cap for producers with high operating costs. However, there were several requests for clarification.
A more complete overview, including government clarifications, is available in the bill text.
2.2.3. Denmark: Revenue cap implementation and reactions
Key features of the implementation of the revenue cap in Denmark
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Denmark had a general election in late 2022, which delayed the political treatment of the national supplementary provisions to the Council Regulation. To ensure security of supply while awaiting the government’s implementation proposal, the Danish Energy Agency informed the relevant stakeholders about the possible implementation and that the Danish implementation was likely to be similar to the provisions stipulated by the EU.
The Danish government sent a proposal of the bill for public consultation on 27 January 2023.
The purpose of the bill was to supplement and implement the provisions on a mandatory cap on market revenue of 180 EUR/MWh. Those liable were electricity producers with income from the production and sale of electricity from 1 December 2022–30 June 2023. Those liable for the tax had to pay 90% of their realized market income above the income cap. Hedging agreements and long-term contracts (PPAs) were taken into account when calculating market income.
Power plants producing electricity from crude oil products and solid biomass fuels had a higher revenue cap to account for operating costs above the revenue cap. Furthermore, a number of production facilities were exempt for other reasons, such as security of supply, effects on heating prices for consumers and administrative burdens for smaller producers.
The final bill was passed by the Folketinget on 27 April 2023. The law was effective retroactively from December 2022.
Explanation for using a monthly average price rather than hourly prices
The government assessed that a calculation of the actual income on a shorter term (daily or hourly basis) would entail significant administrative costs for producers, as many only received a monthly settlement from their balance responsible parties. Therefore, it was proposed to use a calculation method that was based on actual monthly production and income.
The government believed that in order to ensure security of supply, it was important that producers continued to have incentives to participate in all markets, including intraday and balancing markets. The Danish government explained in the bill that the preservation of these incentives required that prices on intraday and balancing markets were able to exceed the day-ahead price, which could have been at risk if the cap was binding. By calculating realized income on a monthly basis, producers had the opportunity to offset any high income from times of high intraday prices by balancing market prices with periods when their income was lower. Therefore, the proposed calculation method was considered to reduce disturbances in market incentives.
2.2.3.1. Reaction to the revenue cap in Denmark
The Danish government published public consultation statements on 22 March 2023. We present the most relevant feedback:
For a complete list of statements, see here.
- Some argued that the revenue cap would reduce green investments and thus should not be prolonged (Dansk Erhverv, Eurowind, Green Power Denmark).
- European Energy noted that the regulation created challenges for producers of renewable energy, as it taxed green electricity instead of harmonizing taxation between all forms of energy. European Energy noted that Finland taxes all energy companies’ excessive profits, which the Danish government should recognize.
- Several statements criticized that power brokers were exempt (Dansk Metal, FH, Forbrukerrådet Tænk). Dansk Erhverv supported the exemption. The government pointed out that independent brokers were not taxed per the CR but that “connected brokers” (e.g., through a group) were taxed to avoid within-group adaptations.There has also been an ongoing debate in Danish media about power brokers’ extraordinary profits. See, for example https://ekstrabladet.dk/nyheder/samfund/12-milliarder-til-danskerne-men-de-slipper/9607582.
- Eurowind noted that prices had fallen since the adoption of the regulation and that the current price level could no longer justify the introduction of the revenue cap. Eurowind and Landbrug & Fødevarer noted that the proceeds of the proposal were not proportional to the administrative costs for electricity producers. European Energy and Green Power Denmark also pointed out the administrative burden.
- FH noted that the proposal resulted in limited proceeds and considered it unreasonable that only the minimum cap level was implemented.
- Dansk Erhverv, European Energy, Eurowind, Green Power Denmark and Landbrug & Fødevarer found it problematic that the legislation had a retroactive effect and pointed to Sweden, where the cap was effective beginning 1 March 2023. FH, however, recognized the need to implement the cap retroactively.
2.2.4. Finland: Tax on profits
Key features of the implementation of the profit tax in Finland
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The Finnish government submitted a bill to Eduskunta (the Parliament of Finland) on 29 December 2022, with supplementary provisions to the CR on the market revenue cap.
The law includes provisions for a new temporary tax that applies to electricity companies’ profits for the 2023 tax year. This profit tax is in addition to the ordinary corporate income tax. Profits exceeding a 10% annualized return on adjusted equity in taxpayers’ electricity business activities are taxed at 30%. The purpose of the 10% threshold is to enable a tax-free income that corresponds to the capital cost of productive investments and thus avoid negative incentives in terms of investments in electricity production.
The tax is levied on companies that operate in the wholesale markets and produce electricity or supply electricity for consumption or resale if the company has revenues from such activities that exceed 500,000 EUR or is not already covered by the mandatory solidarity contribution on the fossil fuel sector.
See § 3 of the law.
The Finnish profit tax is different from the provisions in the CR because it is on profits and not on (gross) revenues. The government explained the motivation for taxing profits as follows:
For a thorough discussion of the relationship of the tax to the CR, see Report FiUB 44/2022 from the Finance Committee.
The basic idea of the proposed taxes is that they should apply to the agents’ net income, that is, the difference between income and expenditure. The tax to be paid by the companies on the electricity market then takes into account the differences in production costs for different forms of production better than the revenue ceiling according to the EU regulation. Since the tax is to be imposed on the basis of the net income of the agents in the electricity market, it can be applied in a more natural way than a revenue cap to all forms of electricity production and all electricity marketplaces. The tax thus treats different agents in a more equal way than a revenue cap, which to a greater extent covers the forms of production whose production costs are higher.
2.2.4.1. Reactions from market agents and the general public in Finland
The bill includes a summary of the 60 responses from the public consultation of the bill draft. The relevant feedback from the public consultation to the bill draft can be summarized as follows:
For the summary in its entirety, see the bill. For the individual consultation statements, see the Finnish Ministry of Finance’s web page: https://vm.fi/sv/projekt?tunnus=VM160:00/2022.
- Some statements supported the profit tax (instead of a revenue cap), while others disagreed, arguing that the tax should be implemented as described in the CR.
- Several statements warned that the tax could cause a reduction in investment in renewables. However, other statements pointed out that the previous investment decisions were based on lower expected prices than the actual current prices, that the tax applies only for one year and that the consequences for investments would therefore be small.
- Attention was drawn to Finland’s international competitiveness in a situation where Sweden, for example, intended to introduce a revenue cap for a shorter period (1 March–30 June 2023) than required by the EU regulation.
- Regarding the details of the tax base calculation, the consultation responses highlighted in particular that the 5% cap is too low
After receiving the bill, the Finance Committee conducted an additional hearing with power sector stakeholders and experts
- According to the Finance Committee, experts were critical of the proposed regulatory approach and its relationship to the underlying EU regulation. The Finance Committee pointed out that the implementation of the regulation via the proposed profit tax could lead to a significantly higher revenue calculation than the EU regulation required in terms of the part exceeding the upper limit for market revenue. Experts also criticized the fact that the profit tax proposed in the bill was significantly harsher than measures in neighbouring countries. In particular, it was criticized that the tax was stricter than the revenue-cap model in Sweden.
- The ongoing energy transition and the current energy crisis highlight the importance of a well-functioning and stable investment environment in the energy sector. The proposed regulation was seen as reducing the predictability of the tax system and thereby lessening companies’ investment incentives. From this point of view, it is important to compare the chosen model with regulations in other countries. The Finance Committee emphasized that, in view of the acceptability of the regulation, it was essential that the proposed model be temporary so that it would not delay or hinder investments in the energy sector.
- Given the predictability of the investment and business environment, it was deemed important that the chosen regulatory solutions supported a level playing field for businesses. The Finance Committee proposed that they further assess whether the model proposed in the bill sufficiently considered the different structures for electricity production so that the system would not unjustifiably discriminate against certain types of company structures.
The tax delegation of the Finance Committee also conducted a hearing with experts on taxation, finance and law, as well as power sector stakeholders:
- Many believed that it was justified to collect extra profits from companies in the electricity industry and that the proposed model was a reasonable solution given the exceptional situation.
- The business community and in particular the electricity industry did not support the proposed temporary tax on the profits of electricity companies for the 2023 tax year and thought that Finnish stakeholders received worse competitive conditions than agents in other countries. Here, it was pointed out that the proposed model deviated in many parts from the model for a market revenue cap established in the CR, and that the proposed model was extensive and stricter than the model specified in the CR. At the hearing, it was also considered a problem that the tax would not only apply to excess income. The proposed tax-free share of 10% of the return on equity was considered too low. Furthermore, criticism was directed at the fact that foreign capital was not considered. However, others considered the annual tax-free return of 5% on equity (in the original draft bill) sufficient and thought it was not necessary to increase the rate to 10%. The reduction of the tax rate from 33% to 30%, according to the draft, was criticized. In addition, it was pointed out that a tax rate of 30% should ensure that excess profits were used for investments in renewable energy and the green transition and not for increased return on capital or rewards for company management.
- Many stressed that the proposed tax should be of a one-time nature. This was considered important to avoid negative investment effects. In a situation where the tax would be permanent or there was a prospect of it being reintroduced, the tax was considered to have negative consequences for investment.
- It was argued that the tax would treat companies differently depending on their capital structure.
2.3. Measure 3: Solidarity contribution from the fossil fuel sector
2.3.1. The Council Regulation: Solidarity contribution from the fossil fuel sector
The Council’s motivation to introduce mandatory solidarity consumption from the fossil fuel sector was explained as follows:
[Companies in] the crude petroleum, natural gas, coal and refinery sectors, have seen their profits spike due to the sudden and unpredictable circumstances of Russia’s war of aggression against Ukraine, reduced supply of energy and increasing demand due to record high temperatures. […] The temporary solidarity contribution should act as a redistributing measure to ensure that the companies concerned which have earned surplus profits as a result of the unexpected circumstances, contribute in proportion to the improvement of the energy crisis in the internal market.
From recitals 50 and 51, the CR
Companies with activities in the crude petroleum, natural gas, coal and refinery sectors are levied a mandatory temporary solidarity contribution. The contribution shall be at least 33% of the taxable profits in fiscal years 2022 and/or 2023 that are more than a 20% increase over the average profits of the four preceding fiscal years.
2.3.2. Sweden: Fossil fuel solidarity contribution implementation and reactions
Key features of the implementation of the mandatory solidarity contribution in Sweden
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The Swedish government sent a bill to the Riksdagen on 17 November 2022 proposing a new temporary tax on extraordinary profits for certain companies in 2023.
The temporary tax applies to companies whose net revenues during the 2023 tax year are at least 75% attributable to operations in the fossil fuel sector. The tax is levied on the part of the companies’ taxable profits in 2023 that exceeds 120% of the average taxable profit for 2018–2021. The temporary tax amounts to 33% and is levied in addition to the ordinary 20.6% corporate tax.
2.3.2.1. Reactions from market agents and the general public in Sweden
The government invited 10 private and public organizations to give feedback on the proposal.
A majority of the responses endorsed (or did not object to) the general intentions of the proposed implementation of the CR. Those who argued against it were energy producers in the fossil fuel industry.
A summary of the feedback, focusing on the impacts on investments and prices, is as follows:
- Drivkraft Sverige argued that such sudden and unexpected taxes may harm the green transition.Drivkraft Sverige argued that the tax may increase investment costs, resulting in price increases.
- Drivkraft Sverige argued that instead of the tax, companies that carry out a green transition could earmark an equivalent amount for sustainable investments.
- Some public institutions pointed out that companies may be able to use Swedish tax rules to neutralize the tax.
For a more complete overview, including the government’s clarifications, see the bill text.
2.3.3. Denmark: Fossil fuel solidarity contribution implementation and reactions
Key features of the implementation of the mandatory solidarity contribution in Denmark
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Denmark had a general election in late 2022, which delayed the political treatment of national supplementary provisions to the CR. The Danish government sent a bill proposal for public consultation on 27 January 2023.
The purpose of the bill is to supplement and implement the provisions on a mandatory temporary solidarity contribution from companies in the crude oil, natural gas, coal and refinery sectors. Those liable are companies where at least 75% of the taxable revenue in the 2023 income year derives from economic activities within the crude oil, natural gas, coal and refinery sectors. The liable profit is only the part of the company’s taxable profit that is 20% higher than the average taxable profit before tax in the first four income years starting on 1 January 2018 or later.
The solidarity contribution rate is set at 33%.
2.3.3.1. Reactions from the public consultation in Denmark
A short summary of the public consultation responses (ignoring responses that opposed the CR itself or the provisions stated in the CR) is as follows:
- Some criticized that the minimum tax level was chosen and that only 2023 (and not 2022) would be covered (Oxfam, FH, 92-gruppen). Others, such as Drivkraft Danmark, supported the minimum implementation. The government replied that more than 33% would trigger compensation for the DUC partners following the compensation agreement entered into in connection with the North Sea Agreement of 2003.
- Some argued that the tax would have negative effects on green investments, particularly those aimed at reducing emissions in fossil fuel operations and CCS/CCU (Kalundborg Refinery, Drivkraft Danmark).
2.3.4. Finland: Fossil fuel solidarity contribution implementation and reactions
Key features of the implementation of the mandatory solidarity contribution in Finland
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The Finnish government sent a bill to the Eduskunta on 29 December 2022 proposing a temporary tax on profits in the fossil fuel industry.
The temporary tax on profits in the fossil fuel sector includes companies covered by the scope of the solidarity grant according to the CR; more than 75% of the turnover consists of the extraction of crude oil and natural gas, the production of refined oil products from crude oil and the manufacture of coal products.
The result of the business activity must, in accordance with the solidarity contribution according to the CR, be compared with the average result of the business activity for the tax years 2018–2021, and the result of the business activity during the tax year must be taxable to the extent that it is higher than 120% of the average result of the business activity during the comparison period. According to the CR, the taxable profit for 2023 determined in this way is subject to a tax rate of 33%.
2.3.4.1. Reactions from market agents and the general public in Finland
According to the Finance Committee, no companies in Finland were identified that would be liable for the proposed temporary tax for companies in the fossil fuel sector. The government did not include any public consultation responses to this tax in the proposition’s summary. Furthermore, the Finance Committee of the Finnish Parliament had no objections to the proposed temporary tax for companies in the fossil fuel sector,