Asset or uncertainty? Renewables groups break down details of EU revenue cap

Wind turbines in Denmark. The EU is proposing to cap the revenues of some electricity producers to ease the pressure on consumers’ energy bills.
Source: Vestas Wind Systems A/S

A proposal to cap European renewable energy revenues could be difficult to implement and create uncertainty if member states adopt it in an uncoordinated way, according to analysts and industry groups.

The European Commission presented a series of proposed measures on September 14 to tackle soaring energy prices in the bloc since Russia’s invasion of Ukraine, including a temporary cap of €180/MWh on revenues from inframarginal generators, or generators expected to produce electricity well below. market rate. This now includes renewables, nuclear and lignite assets that make money by selling electricity on the wholesale market.

These generators have benefited from unexpected bargains due to soaring gas prices, which, as the most expensive technology, sets the price of electricity in the EU. One-year electricity contracts in Germany were at €517/MWh on September 14, according to exchange data, around 10 times higher than usual levels.

The EU intervention aims to redirect funds to consumers to help them cope with rapidly rising energy bills. However, industry groups have criticized its design, particularly that the commission would allow member states to deviate from the regulations and introduce tougher revenue clawbacks. WindEurope, a trade group, said this would result in a “patchwork of different price caps” and lead to investment uncertainty.

The committee called on member states to only adopt regulations that are “proportionate, which do not distort the functioning of wholesale electricity markets, do not undermine investment signals and… are in line with [EU law].”

“Extraordinary” profits of war

The proposed revenue cap is part of a series of EU market interventions aimed at reducing energy costs for consumers. The committee said the cap would increase to €117 billion on an annual basis and wants member states to adopt the proposal no later than December 1, 2022, until at least March 31, 2023. EU energy ministers are expected to meet. September 30 to decide whether or not to approve the cap.

“In our social market economy, profits are good, that’s good. But in these times, it’s wrong to receive extraordinary record profits profiting from war and on the backs of consumers”, European Commission President Ursula von der Leyen said in her State of the Union address on September 14 in Strasbourg, France.

The scope of the measure in the Member States will vary according to the level of exposure to the wholesale market of their generation parks.

The proposal will cover renewable energy projects that are contracted under power purchase agreements, or PPAs, but not those that benefit from government support programs, according to WindEurope. Companies that forward hedge their electricity sales will also be subject to the cap. However, neither coverage nor PPPs are likely to be affected, as these prices are usually already below the cap level, WindEurope added.

In the meantime, all European lignite and nuclear capacities will be covered, with the exception of certain French nuclear volumes sold by Electricité de France SA at a fixed price, according to Coralie Laurencin, senior director at S&P Global Commodity Insights.

“All capacity in Germany [and] most renewable capacity in Scandinavia would fall under this regulation, and for most other markets it will be somewhere between nothing and everything,” Laurencin said in a September 15 webinar.

Implementation could be problematic, however, given that generators are only required to disclose the price, quantity and duration of their electricity when selling to the wholesale market, not the name or technology of their electricity. active, according to Laurencin.

“It really depends on self-disclosure,” Laurencin said. “The information necessary for this to happen at this time is not publicly available.”

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Benefit for renewable energies

Reaction to the Renewable Energy Industry Committee’s proposal was generally mixed.

Sweden’s state-owned Vattenfall AB, which operates wind farms in several European countries, said it “risks hampering investment in new fossil-free power generation”, adding that the temporary nature of the measure is important.

Meanwhile, Louis-Mathieu Perrin, financial director of The French renewable energy group Neoen SA, said the mechanism “provide clarity on what renewable energy producers can expect in the future.”

Like many players, Neoen derives most of its revenues from PPAs with public counterparties, utilities or corporate buyers, but it is also partially exposed to wholesale electricity prices in Finland, France and Ireland. . In the first half of 2022, 13% of its wind and solar revenues came from the spot market.

Renewables developers typically have “lower market price assumptions built into their financial models” at €180/MWh, Perrin said in an email. “This cap would thus represent an advantage compared to the initial business plans and would in any case make it possible to absorb the recent increases in the cost of inputs and in particular [capital expenditure] and financing costs.

Detailing their revenue cap proposal, commission officials pointed out that €180/MWh is a bargain for inframarginal producers. EU simulations based on observed prices from January to August showed that a cap of €180/MWh would have resulted in average revenues of around €150/MWh —”consistently higher” than the cost of generating power from renewables or nuclear, officials said.

Morgan Stanley analysts said Sept. 14 that the level will continue to encourage investment in renewable energy and price-driven demand destruction, and “encourage asset owners to sell forward volumes of renewables on multi-year contracts now that merchant exposure benefits are capped.” Jefferies analysts on September 13 highlighted the potential benefits for power producers such as RWE AG, Drax Group PLC and SSE PLC.

“The EU is very clear that they have set the price at such a level that no one feels ripped off,” Laurencin said.

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Sallie R. Loera