Germany mulls windfall tax on power generation

Germany's economy and climate action ministry is mulling a tax on power generators' "windfall profits", partly applicable retroactively from March 2022, which would finance a cap on power prices for retail and industry customers.

The ministry, in a paper of "conceptual thoughts" on how to implement the EU emergency energy regulation passed on 30 September, suggests introducing a tax on generators' windfall profits. This could apply retroactively to sales on the spot market from 1 March 2022, and from 1 December 2022 additionally to power generation sold on the futures market.

The windfall tax would skim off 90pc of the extra profits of nuclear, lignite, renewables, oil, mine gas and waste power plant operators. No windfall tax would be implemented on hard coal, natural gas and biomethane power generation, or on power storage.

The "permitted proceeds" for every power generator would consist of a "reference costs" element and of a "safety margin" of €30/MWh, along with an additional minimum of €10/MWh for power sold on the futures market. The reference costs would vary by technology — for lignite suggested at its legally defined costs, while for offshore wind and nuclear it could be set at €100/MWh and €40/MWh, respectively.

Setting the tax at 90pc for profits above the permitted level will guarantee that market signals will remain intact, according to the paper.

The ministry hopes to pass both its gas and electricity price brakes at a cabinet meeting on 18 November.

The paper concedes that implementing the windfall tax in the futures market is complex. The ministry is mulling using companies' hedging announcements — which would be certified — as the basis for this. To encourage companies to fully disclose their hedging strategies in advance, they could be penalised for not doing so by having 100pc of their extra profits skimmed off based on spot prices, the paper suggests. Inaccuracies will be unavoidable but can be limited, the ministry says.

The reclaimed profits would be passed on to power suppliers, which would offer their customers a basic lower-price allocation, based on historic consumption. Remaining consumption would be unsubsidised — similar to the proposals on the gas price brake made by Germany's gas and heat commission earlier this month. The basic allocation would be set in such a way as to provide incentives to save electricity.

Part of the tax revenues would be used to stabilise the power transmission system charges.

Germany's renewable energy federation BEE slammed the suggestions, and warned that this kind of intervention in existing market mechanisms will "destroy" confidence in Germany as an investment location.

BEE said introducing the tax retroactively would be "unconstitutional". And it would come at a time when renewable power tenders remain undersubscribed, BEE said.

By Chloe Jardine