Briefing

13 December 2022

The German Electricity Price Brake Act and the levy of any surplus revenues (Überschusserlöse) regulated therein

On 25 November 2022, the German government presented its draft bill on the Electricity Price Brake Act (Strompreisbremsegesetz - StromPBG-E). According to this draft bill, operators of power plants are to be obliged to pay out 90 percent of their surplus revenues to their connection grid operator.

The surplus revenues that the legislator assumes the plant operators will receive for the electricity quantities fed into the grid in the period from 1 December 2022 to 30 June 2023 will initially be levied. By ordinance, the German Federal Government may extend the levy period until 30 April 2024. The levied revenues are to be used to partially finance the reduction of the effective electricity price within the framework of quotas in favour of final consumers, i.e. the actual electricity price brake.

I. Background

On 1 December 2022, the EU Council Regulation on emergency intervention to address high energy prices ((EU) 2022/1854, Emergency Regulation) will enter into force. The Emergency Regulation provides for a market revenue cap of 180 EUR/MWh for the sale of electricity from plants with low marginal costs and obliges the Member States to ensure that 90 to 100 percent of the market revenues generated above this limit are used to relieve the burden on final consumers. The European legislator gives the Member States leeway for deviations and specifications in the design and implementation of the revenue levy. Member states may, for example, define stricter revenue caps and also make technology-specific distinctions. However, the legislator’s power to make such deviations is subject to conditions, such as the principle of non-discrimination and proportionality, the fact that no investment signals are at risk and that the functioning of the wholesale electricity markets is not distorted.

The StromPBG-E is based on the endeavour to implement the Emergency Regulation.

II. Legal basis and scope of application of the revenue levy

The legal basis for the absorption of surplus revenues is section 14 para. 1 StromPBG-E. This establishes a legal obligation between the plant operators and their connection grid operators. The plant operators are obliged to pay their relevant connection grid operator a monetary amount equalling 90 percent of the surplus revenues generated by the power plant in the relevant billing period. Surplus revenues are always “generated by the power plant” if they can be attributed to quantities of electricity produced in the plant and fed into the public grid. The first billing period begins on 1 December 2022 and ends on 31 March 2023; all further billing periods are on a quarterly basis.

The draft bill provides for exemptions for various types of electricity generation. The scope of application excludes, for example, electricity from plants in which, within a calendar month, electricity is generated exclusively or predominantly on the basis of hard coal, liquefied petroleum gas, natural gas, biomethane or light heating oil; electricity generated in a plant with an installed or electrical capacity of less than 1 MW is also excluded from the levy. Also excluded are quantities of electricity supplied to customers outside the public grid.

III. Calculation of the surplus revenue

The surplus revenues to be levied are determined in three stages. First, it is determined whether the notional spot market surplus revenues are attributable to operators of power plants for electricity quantities generated and fed into the grid in the relevant billing period on the basis of technology-specific revenue caps (see 1.). Plant operators who market their electricity quantities on a plant-specific basis can claim the actual revenue from the plant-specific marketing contract instead of the notional spot market revenue, whereby in this case different safety margins and thus revenue caps apply (see 2.). In the third step, the surplus revenues determined by using this method are adjusted by the result arising from hedging transactions, whereby a differentiation is made between hedging transactions concluded before and after 1 November 2022 (see 3.). The surplus revenues resulting from this calculation method are irrefutably presumed. This also applies if the effectively generated market revenues turn out to be significantly lower.

1. Spot market surplus revenue

The starting point for determining the spot market surplus revenue is the notional spot market revenue of the power plant. This is determined from the product of the electricity fed into the grid and the spot market price applicable for this hour. In the case of wind turbines and solar installations, the notional revenue is not calculated on the basis of the spot market price, but on the basis of the energy source-specific monthly market value according to Annex 1 no. 3.3 of the Renewable Energy Act (Erneuerbare-Energien-Gesetz - EEG), which in turn is linked to the average spot market price of the month.

Furthermore, the technology-specific revenue caps must also be determined. These are governed by section 16 para. 1 to para. 6 Strom-PBG-E and consist of technology-specific reference costs and a safety margin of EUR 30/MWh. Further safety margins are taken into account for renewable energy plants.

The difference between the notional spot market revenue and the technology-specific revenue cap constitutes the notional spot market surplus revenue; it is calculated on a monthly basis.

2. Option to assess plant-specific marketing revenue

With a plant-specific marketing of their electricity quantities, plant operators may take the surplus resulting from their actual marketing revenue instead of the notional spot market surplus revenue as a basis. For this purpose, a plant-specific marketing agreement is required, meaning in particular PPAs and direct marketing agreements. The option to base revenues on plant-specific marketing agreements also applies to contracts providing for financial settlement. With respect to plant-specific marketing, the legislator differentiates between agreements entered into before and after 1 November 2022:

• If a plant-specific marketing agreement is concluded before 1 November 2022, the contractual revenue replaces the assumed spot market revenue or the energy source-specific monthly market value. Similarly, the revenue cap will be adjusted in that the safety margin regarding the skimming of spot market revenue will be reduced from EUR 30/MWh to EUR 10/MWh.
• The foregoing shall apply to plant-specific marketing agreements entered into on or after 1 November 2022 only if the power plant was commissioned on or after 1 November 2022. Accordingly, the notional spot market revenue remains decisive, especially for PPAs relating to plants whose subsidy period has ended.
  
  

3. Hedging transactions

In the third stage, the surplus revenue determined under items 1 or 2 is adjusted by the result from hedging transactions. A distinction must be made between hedging transactions entered into prior to 1 November 2022 and those entered into on or after 1 November 2022.

a) Hedging transactions concluded before 1 November 2022

The legislator defines the result from hedging transactions as the “fair value hedging result regarding the feed-in planned for the billing period”.

First of all, the hedging transactions relevant to the correction must be identified. The term “hedging transaction” is not defined in the draft bill; however, transactions providing for financial or physical settlement are covered. It is unclear whether the underlying value of the hedging transaction must be related to the supply of electricity or whether other hedging transactions, such as weather derivatives, are covered as well. The hedging transactions under consideration must be delimited from proprietary trading and must be able to be allocated in concreto to a scheduled feed-in from the power plant. The feed-in volume to which the hedging transactions relate may therefore exceed the actual feed-in volume on the basis of which the surplus revenues are calculated in the first two stages. The draft bill does not provide for any conclusive delimitation and allocation rules; however, the following principles can be derived from the annexes to the draft as to the specific delimitation and allocation methodology:

• Plant-specific marketing agreements are not deemed to be hedging transactions; from this alone it is clear that the nexus between hedging transactions and scheduled plant-specific power generation need not arise from the contract constituting the hedging transaction, but rather from circumstances outside of the contract.
• Furthermore, a plant operator may not claim that certain electricity trading contracts are transactions hedging the feed-in from power plants if such allocation would be inconsistent with principles of risk management, its existing book and portfolio structure, and the allocation rules used by the plant operator up to 31 October 2022. In this respect, the legislator suggests an unambiguousness of which, at best, basic features exist. In numerous detailed aspects, in contrast, there is no recognised understanding of which hedging strategies comply with the principles of proper risk management and which other transactions are suitable for reducing risks inherent in individual book and portfolio structures.
• The draft bill further specifies that the allocation rules must be applied consistently over time across all billing periods and that the volume to be considered must not exceed the anticipated generation in the power plant in question. This requirement, too, raises questions. Companies may, for example adjust their hedging strategy - and thus also their allocation rules - over time to take account of changing market conditions, newly acquired knowledge or changed strategic objectives, which may simply be due to a change in staff. It would not be appropriate for such objectively understandable adjustments to result in allocation being ruled out.
• Furthermore, the legislator specifies that hedging transactions, as distinct from proprietary trading, must “serve in an objectively measurable and delimitable manner” to hedge against and reduce the economic risks of electricity generation in the power plant. This specification does not adequately indicate, either, which criteria are to be decisive for delimitation and allocation.
• Finally, the legislator addresses the situation where certain transactions can be identified as hedging transactions with respect to a specific portfolio comprising several generation technologies, but it remains unclear to which specific generation technology within that portfolio the hedging transaction can be allocated. In this case, allocation shall be based on the typical hours of use of power generation technologies per year in accordance with the table shown in section 4.6 of Annex 4. This seems problematic in that this table does not take account of the seasonal characteristics of wind power and photovoltaic systems.

The result of the hedging transactions identified in this way is their fair value, according to the draft bill. Fair value is defined by the legislator as “the price that would, or will, be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

The hedging result determined in this way is intended to correct the surplus revenue determined in the first two stages. The draft bill leaves it at that and does not specify how to implement the correction. What is probably meant is that the (possibly negative) hedging result is added to the notional spot market revenue or to the plant-specific marketing revenue (i.e., if the hedging result is negative, this would lead to a corresponding deduction). This is likely to be the case even if the planned feed-in, and hence the volume of the hedging transactions, is higher than the actual feed-in on the basis of which surplus revenues are calculated in accordance with the first two stages.

b) Hedging transactions concluded on or after 1 November 2022

The correction mechanism is different for hedging transactions entered into on or after 1 November 2022:

Hedging transactions concluded after that date must be reported to the Federal Network Agency (BNetzA) in the form of what is referred to as a price hedging report. Reporting is possible at any time with respect to the future and also with retrospective effect until the end of the relevant trading day. The combination of the trading product and the quantity of electricity to be purchased or sold for which hedging is to be performed must be reported on a plant-by-plant basis in each case. Only the hedging transactions for electrical energy tradeable on EEX (EEX German Power Base and Peak Futures) on the relevant trading day with a maturity of one month, quarter or year are deemed to be trading products. EU law considerations support the view that similar products traded on other power exchanges may also be considered; otherwise, the Act would distort competition between power exchanges.

Also, the result from hedging transactions for which a price hedge report has been submitted must be reported, per billing period and plant, in euros. “Result” means the sum of the (pro-rated) financial value of all price hedging reports with a fulfilment period that, in whole or in part, overlaps with the billing period. The financial value of a price hedging report is calculated by multiplying the reported quantity of electricity and the difference between the daily settlement price of the relevant trading product on the trade date and the close-out price. In the case of electric power, the latter is the average price of the value underlying the EEX German Power Futures in the hours of the relevant trading product’s fulfilment period.

Price hedging reports are each limited to plus/minus 1% of the nominal output of a power plant per hour. The draft bill thus aims to prevent undertakings from reporting the entire quantity generated by them if the settlement price falls below the skimming  threshold for even one day only, which would allow them to escape the levy completely. In addition, price hedging reports are limited to the actual total market volume of the hedging transactions carried out in the relevant trading product on EEX on that day. This is to prevent undertakings from influencing the settlement price in the case of less liquid markets and then reporting large volumes.

IV. The electricity price brake properly speaking

The draft bill provides that the skimming proceeds and, if necessary, additional funds from the Economic Stabilisation Fund (Wirtschaftsstabilisierungsfonds) will be used to relieve the burden on final consumers by means of guaranteed electricity prices. This “electricity price brake” is initially limited to 2023 but can be extended by ordinance until April 2024.

The relief is implemented first and foremost by granting utility companies that supply their final consumers via a network exit point a reduction in their electricity costs in a defined monthly relief amount.

Smaller consumers are guaranteed a price of 40ct/kWh including network charges, metering point charges and state-induced price components as part of this relief. Smaller consumers are those that draw up to 30,000 kWh per year, as measured by either the 2021 annual consumption established using the interval-metered load profile (registrierende Leistungsmessung, RLM) method or the 2022 annual consumption forecast established using the standard load profile (SLP) method. The guarantee applies on a monthly basis to a quota of only 80% of the current annual consumption forecast divided by twelve (SLP method) or the correspondingly divided annual consumption in 2021 (RLM method). For large consumers drawing more than 30,000 kWh per year, the guaranteed price is 13ct/kWh for a monthly quota of 70% of the pro-rated annual consumption in 2021 (RLM method) or of the current annual consumption forecast (SLP method). The quota for track railways is regulated separately.

The relief amount is in each case calculated based on the difference between the average kilowatt hour rate agreed at the beginning of the month and the relevant guaranteed price. The relief amounts shall either be set off by the utility company against the agreed advance payments or payments on account on a monthly basis or - if no such payments have been agreed - shall be taken into account in the next invoice. However, in order to give the utility companies lead time for organisation, the relief need not be granted before March 2023; it must then be granted retroactively for January and February. The total relief for 2023 is limited to the actual electricity costs the final consumer will incur in that year.

In the case of final consumers who do not procure their electricity from a utility company as defined in the draft bill but, for example, import electricity or procure it on the stock exchange (known as “self-procurers”), the relief is implemented directly in their relationship with the transmission system operators. In this respect, the basis for calculating the relief amount is not the difference between the guaranteed price and the agreed kilowatt hour rate but the difference between the guaranteed price and the average procurement costs at the relevant network exit point incurred in the previous month. Self-procurers have a claim against the responsible transmission system operator to their electricity costs being reduced by the relevant relief amount.

With regard to caps for relief and the associated job retention obligation where relief exceeds the amount of EUR 2 million, the provisions of the StromPBG-E draft bill run in parallel to the draft gas price brake.¹

The financing of the relief amounts is ensured by a pass-on mechanism, which is mainly managed by the transmission system operators and is similar to a (reversed) pass-on mechanism under EEG law. The utility companies and the final consumers not supplied by a utility company have a claim for reimbursement against the transmission system operator responsible for the relevant delivery point that is equivalent to the relief amounts granted. The transmission system operators, in turn, are entitled to compensation from each other in the event the burden due to the relief claims as compared to the surplus revenues collected is disproportionate. In addition, the transmission system operators have compensation claims against their downstream distribution system operators in the amount of the surplus revenues collected. After the validity period of the levy and the electricity price brake has ended, the transmission system operators may demand reimbursement from the federal government for their relief expenses that exceed the skimmed amounts. On the other hand, any resulting additional revenue must be used to reduce transmission system costs in the next calendar year.

V. Evaluation & outlook

The draft bill provides only the broad outlines of the rules under which hedging transactions entered into prior to 1 November 2022 may be delimited and allocated to scheduled electricity generation at a power plant. This vagueness is in tension with the constitutional requirement of clarity and definition of statutory provisions; this applies in particular to downstream criminal and administrative offences. However, it is precisely this vagueness that gives companies leeway to consider futures contracts in an appropriate and viable manner when calculating their surplus revenues.

The legal situation is clearer as regards agreements concluded on or after 1 November 2022; however, the effects of the law are also more drastic. Thus, proceeds from PPAs relating to existing plants are not taken into account when calculating surplus revenues; the same applies to other hedging transactions concluded OTC. This very restrictive approach limits plant operators’ scope for optimisation and thus reduces the potential for abuse, which is inherent in skimming market revenues. However, this is accompanied by a significant intervention in the futures market, as plant operators that offer PPAs with respect to existing plants or otherwise market the power they generate OTC from 1 November 2022 onwards now bear the risk of being obligated to pay out notional surplus revenues that they have not even realised. OTC markets could consequently lose significant liquidity, since asset operators flee into futures and spot markets that are organised in the form of exchanges. Incentivising such structural changes could be contrary to the requirement that the functioning of the wholesale electricity market must not be distorted and thus could violate the Emergency Regulation.

It remains to be seen whether the legislator will address the above aspects in the current legislative procedure. The draft bill will be introduced directly into the legislative process via the Bundestag parliamentary groups. This means that the Bundestag can deal with the planned Act in plenary session and in the committees as early as the beginning of December 2022. Such a speedy procedure is necessary because, similar to other emergency measures, the timetable imposed by Union law is tight. The Bundestag is scheduled to finally deal with the draft bill on 15 December 2022, as the Bundesrat will meet on 16 December for the last time in 2022. Then it should adopt the (objection) law (which does not require the Bundesrat’s consent) so that it can timely be promulgated and enter into force.

¹ See our briefing on the gas price brake.