After the gas levy was abandoned, the German government announced the introduction of a gas price and electricity price cap on 3 November 2022.
Then, on 29.11.2022, the draft laws for introducing price caps for grid-bound natural gas and heat as well as an electricity price cap were ready.
It is intended to provide relief for private households as well as businesses from 1 March 2023 to no later than 30 April 2024. The draft legislation provides for a retroactive application for the months of January and February 2023.
Essentially, the gas and heat price cap is based on the following pillars:
- For private households and companies with a gas consumption of less than 1.5 million kWh per year, along with care facilities, research and educational institutions, the gas price is to be capped at 12 ct/kWh (including all taxes, levies, surcharges and network fees). Applies to 80% of the previous year's consumption
- For industrial customers, the gas price is to be capped at 7 ct/kWh (excluding all taxes, levies, surcharges and network charges) and for heat at 7.5 ct/kWh. Applies to 70% of the previous year's consumption
The resulting budget spending is estimated at around EUR 56 billion for 2023 and 2024.
On the other hand, the electricity price cap is based on the following pillars:
- The electricity price for private consumers as well as companies (with an electricity consumption not exceeding 30,000 kWh per year) will be capped at 40 ct/kWh (including all taxes, levies, surcharges and network fees). This applies to the baseline requirement of 80% of historical consumption
- For consumers with a historical annual consumption of more than 30,000 kWh (mainly medium-sized and large companies), the cap is 13 ct/kWh (excl. taxes, levies and surcharges) for 70 percent of historical consumption
The electricity price cap will be funded primarily by skimming off so-called surplus revenues, although the assumption is that interim financing of around EUR 43 billion will be required from the federal budget.
The term "surplus revenues" is generally understood to mean "windfall profits". These "windfall profits" are mainly generated by producers with low generation costs as a result of the merit order. The draft law provides for the levy of 90% of the surplus revenues from power generation by wind power, photovoltaics, hydropower plants, waste incineration plants, nuclear power plants, mineral oil and lignite-fired power plants. Determining the precise amount of the levy for each generation technology is complex and permits generators to take into account the effects of forward market transactions when determining surplus revenues. The purpose of this consideration is to avoid unilaterally disadvantaging generators for early hedging of their marketing of the energy to be generated. By contrast, forward market transactions entered into for the purpose of proprietary trading cannot be included in the surplus revenue calculation.
Special attention should be paid to the installed capacity of a generation plant above which the levy is to apply. For renewable energy plants, the levy already applies to an installed capacity of 1 megawatt. A similar requirement also applies to combined heat and power plants. The only generators exempt from the levy are those that consume the electricity themselves without using a grid. According to current estimates, this provision will mean that companies with their own generating capacity – for example, from a photovoltaic system on the production halls and an installed capacity of more than 1 megawatt – may be subject to the surplus revenue levy. This is due to the fact that, as a rule, the grid is used since it is not possible to store the energy completely in the company's own battery storage facilities.
Given that the levy is intended to be retroactive from 01.12.2022 and the first levy period was defined from 01.12.2022 to 31.03.2023, this could entail an obligation for companies to form provisions in the financial statements as of 31.12.2022.
In conclusion, both the gas and the heat price cap as well as the electricity price cap drafts provide for numerous audit obligations of the companies, energy producers, energy suppliers and the network operators, for which an external auditor (e.g., an auditing company) must be appointed. While some of these audits do not have to be carried out until 2024, the draft laws also stipulate audits that must be completed by 31.07.2023, indicating a high level of auditing effort.
With respect to the electricity price cap, from an energy economics perspective, it is worth noting that certain generation technologies may be prevented from generating energy and feeding it into the electricity grid, as the cap mechanism has a strong disadvantageous effect in these specific situations. This is not helpful for Germany's security of supply. In addition, the levy mechanism may result in an asymmetrical payment profile for individual electricity marketing activities and make them unattractive for generators in the future.
Your Finance and Treasury Management team emphatically recommends studying the provisions of both draft laws at an early stage and preparing an impact analysis for the respective company.
Source: KPMG Corporate Treasury News, Edition 128, December 2022
Authors:
Ralph Schilling, CFA, Partner, Head of Finance and Treasury Management, Treasury Accounting & Commodity Trading, KPMG AG
Moritz zu Putlitz, Manager, Finance and Treasury Management, Treasury Accounting & Commodity Trading, KPMG AG
