08 February 2023

Solidarity on Solidarity Levies and a Choice of Energy Mix

A sound legal basis for emergency action in the EU’s energy markets

The Council of the European Union has adopted a series of increasingly controversial measures to deal with the energy crisis, including an EU Regulation on filling in gas storage levels; a Council Regulation voluntarily curbing gas consumption over the winter period; and a Council Regulation containing a series of emergency measures (demand reduction, market intervention and windfall levies) to address the problem of very high energy prices across the EU in 2022 and 2023 (see EPRS briefing).

These measures  – based on the little used Art 122(1) TFEU-  are in part linked to the Commission’s REPower EU plan (18 May 2022), which aims to end Europe’s reliance on energy imports from Russia and accelerate Europe’s clean energy transition away from fossil fuels towards renewable energy. With each successive measure the powers of the Commission have expanded to intervene on the supply as well as the demand side of Europe’s electricity and gas markets. As with most crisis measures, urgency of action invariably displaces democratic scrutiny and control, and narrows the window for intensive lobbying of lawmakers. Judicial review may be the only option left open, especially when the measures in question introduce windfall taxes and impose ‘solidarity levies’ on powerful players or leave disgruntled Member States having to accept the will of the majority. But are there are other more noble reasons to explain why the number of challenges to these emergency measures are piling up at the General Court?

When it comes to responding to crises, it has been remarked that it is sometimes painful to observe how the EU pushes aside even the most important constitutional principles when it seems politically opportune to do so. Will the challenges to the EU emergency measures curb this apparent tendency to opportunism? The short answer is probably not, given that most of these temporary measures will have expired before the wheels of justice are in motion. Will these challenges, if eventually successful, act as some sort of deterrent for the future use of emergency powers? The short answer is probably not, given that political opportunism is unlikely to fade as long as consumer energy prices remain high, and those consumers are of course voters.

This post will first look at the rationale for the adoption of crises measures, and briefly explore the scope of the competences to be exercised. It will then turn to the challenges lodged by energy companies and Member States and will hazard a not quite fully informed guess at their chances for success. Given that these challenges have only been lodged recently, little available information on the pleas advanced is available in the public domain.

From Fast-track to Emergency Measures

Three emergency measures based on Art 122(1) TFEU have been adopted in 2022. That article had been used to adopt emergency powers to deal with the oil crises of the late 1970s.  Its text was amended by the TFEU so that it now provides:

Without prejudice to any other procedures provided for in the Treaties, the Council, on a proposal from the Commission, may decide, in a spirit of solidarity between Member States, upon the measures appropriate to the economic situation, in particular if severe difficulties arise in the supply of certain products, notably in the area of energy.

What do these measures set out to achieve?

It is probably easier to understand what these measures do not intend to achieve in order to appraise their scope and likely effect. First, and despite intense political pressure from the European Council, the Commission backed by a number of Member states resisted imposing a wholesale gas price cap on the grounds that this would mean diversion of diminishing gas supplies away from the EU to higher priced global markets. High price signals would reduce demand for gas and renewable substitutes would prosper.

Second, and again despite national pressures, the Commission resisted calls to ‘de-couple’ the EU’s gas and electricity markets. High gas prices meant high electricity prices. Member States were free to impose retail price caps and to subsidize retail consumers but the Commission persisted in its claim that the wholesale energy market was functioning as planned. It was not until late December that a weak form of wholesale gas price was introduced by Council Regulation 20222/2576, again based on Art 122(1) TFEU. Hence the total package of emergency measures provides for various forms of state intervention on the supply and demand side of the market but whether these measures are effective and efficient responses to the crisis is a matter of lively debate. So far, the only clear result is a massive increase in state subsidies for fossil fuels.

Third, and as explained below, the measures are short on solidarity.

The first response to the gas price crisis was to maintain gas supply levels at all costs – and was accomplished through an amendment adopted on 29 June 2022 to an existing EU Regulation on security of gas supply, to mandate a collective target of 85 percent of the capacity of the underground gas storage facilities in the Union which was adopted for 2022. Given extensive diversity in regulatory regimes already in place in many Member States, no specific instrument to meet the filling trajectories or the filling target was imposed. Numerous derogations were included no doubt because few countries actually had available underground storage. There is little by way of binding storage solidarity requirements between neighbours. Notably, this measure was fast-tracked through the EP and no consultation procedures or impact assessments preceded its adoption.

The next wave of legislation could not piggyback on existing measures so a fast-track amendment procedure was probably not an option. By early summer 2022 the impact of high gas prices had spilled over into the EU’s electricity market prompting the adoption of a series of emergency measures adopted late 2022. The Council Regulation (EU) 2022/1369 on coordinated demand-reduction measures for gas was adopted with the aim to increase security of energy supply, by reducing gas demand voluntarily by 15 percent between August 2022 and March 2023. In the case of a severe gas supply disruption, the regulation foresees the possibility for the Council to make the gas demand reduction compulsory by declaring a “Union alert” on the security of supply. Poland has lodged an action for the annulment of this Regulation on 2 November 2022 (Case C-675/22). It submits that the main objective of the contested regulation is to have a significant effect on the conditions for exploiting energy resources, the choice between different energy sources and the general structure of a Member State’s energy supply. Since that regulation significantly affects the freedom to shape the energy mix, it should have been adopted on the basis of Art 192(2)(c) TFEU under which the Council acts unanimously.

A second more detailed Council Regulation (EU) 2022/1854 on an emergency intervention to address high electricity prices was adopted in September. Under the marginal pricing model which underpins the EU’s internal electricity market, expensive gas fired generation sets electricity prices across the EU and into the EEA.

As a result, due to the gas shortage, high gas prices also result in very high electricity prices and thus very high margins for operators of lower-cost generation technologies, such as wind or solar,  the so-called ‘inframarginal producers’. To deal with this, an ‘inframarginal’ cap is imposed to limit the impact of the natural gas prices on the revenues of all inframarginal generators (new and existing) and to generate revenues allowing MS to mitigate the impact of high electricity prices on consumers.  Revenues exceeding the cap will be redirected to finance measures in support of final electricity customers, such as households and small and medium-sized enterprises exposed to high electricity prices. The precise measures to redistribute such revenues will be taken at a national level. The Commission, however, anticipates that up to 117 billion Euros can be collected.

Given the differences between energy mixes, costs and prices in the EU-27 national electricity markets, this cap will allow some Member States to obtain far more revenues than others. The Council Regulation encourages – but does not mandate – solidarity agreements between Member States, to share the proceeds of the revenue cap. The primary aim of these solidarity agreements is to help countries that are highly dependent on electricity imports from their neighbours but there is no experience of how these solidarity agreements will work in practice. Another controversial issue is that the cap applies to revenues (rather than profits), which could cause financial difficulties for some energy companies. Indeed, the efficacy of this cap has been questioned by the International Energy Agency.

Regulation 2022/1854 also introduced a windfall tax but termed it a ‘solidarity contribution’ from companies in the fossil fuel sector amounting to 33 percent of the tax base. The solidarity contribution is justified as an appropriate means to tackle surplus profits in the event of unforeseen circumstances. Obviously, many companies active in the fossil fuel sector have experienced a significant increase in revenues and record profits due to the energy crisis.

The idea of the solidarity contribution is to assess the taxable profits, as determined under national tax rules, in the four fiscal years starting on or after 1 January 2018 and to compare them to the taxable profits of 2022/2023. If this comparison shows that the profits have increased more than 20 percent, the solidarity contribution has to be paid. Only profits made in 2022 and/or 2023 are caught. The solidarity contribution must be used for the objectives specified in the Regulation, to fund financial support measures to final energy customers, and in particular vulnerable households, or to mitigate the effects of high energy prices on energy intensive industries. Member States that have already introduced an equivalent to this solidarity contribution, with a comparable or higher level of revenues, remain free to maintain their national scheme.

One problem with the ‘solidarity ‘contribution is that some Member States will earn far higher revenues than others, simply because they may have more profitable fossil fuel companies resident in their territory. The Regulation does not directly address this issue, however, and shies firmly away from cross border funding requirements. Several Member States objected to the choice of legal basis for this measure during negotiations in the Council, but none filed an action for annulment. Instead, one of the largest oil and gas multinationals, Exxon, has stepped up to the plate. A challenge by an energy trading platform – Enmaac – has also been lodged but no further details are publicly available.

Challenging the Emergency Measures – Chances of Success?

As non-privileged applicants, unlike a Member State, private parties face an almost unsurmountable obstacles to establish standing to challenge EU legislation. One can imagine that the CJEU is unlikely to soften its ‘tough love’ approach given the political controversy surrounding the EU’s response to the energy crisis. Although the Court has recently confirmed in NS 2 v Commission that a private party could challenge a general legislative measure if it can establish direct and individual effect, the ruling is a cautious one. It certainly cannot be seen as opening up the proverbial floodgates for future litigation. The condition of direct concern is likely to be met on rare occasions and the requirement of individual concern is all the more exceptional. While a private party subject to a windfall tax may well be able to meet the first limb of the test, the question of establishing that it is individually impacted by a general measure will not just depend on the scale of its profits.  Substantive arguments – if admitted – are likely to focus on potential breaches of the principles of legal certainty, retroactivity and proportionality.  It will be for the applicants to establish that the objectives of the measure fail to correspond to those of Article 122(1) TFEU, namely, to address in a spirit of solidarity, an exceptional situation.

Undoubtedly arguments will be made that these solidarity contributions are just a form of tax by any other name. This raises – and just as the Polish government has contended in respect of Council Regulation 2022/ 1369 – the key issue of whether Article 122(1) TFEU is the correct legal basis for the disputed measures.  Fiscal measures should be adopted on the basis of unanimity.  Measures impacting the national energy mix should at least in ‘normal times’ also be adopted on that basis.

The CJEU will likely continue to recognize – as it did in its earlier case law on Article 103 EEC (C-5/73 Balkan Oil Imports) – that the Council has a wide margin of discretion when acting on the basis of Article 122(1) TFEU. That degree of discretion is not unlimited. Recourse to Article 122(1) TFEU presupposes the existence of a situation of urgency or of exceptionality leading to severe difficulties in the economic situation of the Member States which cannot be addressed by means of the ordinary Union measures. The “appropriate” measures to which Article 122(1) TFEU refers must be commensurate to the gravity of the situation.  The question of their actual efficacy in dealing with that situation is another matter – and it is highly unlikely that the Court will be tempted to evaluate such a tricky subject.

Case law confirms that the measures must be temporary. – but can this justify setting other Treaty articles – albeit briefly -aside? The Council Legal Service (CLS) takes the view that the introductory words “without prejudice to any other procedures provided for in the Treaties” underscore the exceptional and temporary nature of measures under Article 122(1) TFEU.  The measures should not undermine or circumvent the use of other legal bases laid down in the Treaties once “normal times” are re-established.  Interestingly, and in the context of the Covid ‘Recovery Instrument’ the CLS has also opined that ‘in principle, Article 122(1) TFEU provides for “reactive”actions in the sense that it allows to respond to existing difficulties but does not support preventive action to avoid future hypothetical crisis, for which other legal bases (and ordinary form of financing) are available.

Solidarity – that’s the spirit?

Finally, are any of the contested measures adopted ‘in the spirit of solidarity’, whatever that term might mean? It is perhaps ironic that it was the Polish government who not only succeeded in having reference to this principle included in the TFEU but was also the initiator of an action that promoted the CJEU to rule that this was a binding legal principle. Poland now seeks to rely on its ‘right to go it alone’ and decide on its own energy mix. With the benefit of hindsight, we know that one large Member State’s decision to choose its own energy mix and source large imports of gas has been at the root of the exceptional difficulties the rest of the EU is now facing.  Solidarity is nice to have but not so nice to have deliver on. One can rest assured that the CJEU will keep its head well below the parapets.

In the meantime, the Swedish Presidency of the Council has expressed its intention to avoid emergency measures: ‘temporary crisis measures cannot become the new normal’. If the previous Czech Presidency was able to steer Council discussions on emergency legislation, it was unable to secure agreement on the compulsory nature of energy consumption reduction measures. A lack of ambition in the revision of important directives ‘for normal times’ on both Renewable Energy and Energy Efficiency were sadly, missed opportunities for real and urgent progress on the clean energy transition and independence from fossil fuel imports.

Irrespective of the outcome of the challenges now before the CJEU it is sincerely hoped that the present crisis driven approach does not become ‘the new normal’.