French President Emmanuel Macron has said that he supports a European Union-wide mécanisme de contribution aimed at electricity producers as part of measures against soaring energy prices.
His announcement came after a meeting with German Chancellor Olaf Scholz yesterday (September 5).
Several news outlets have described this mechanism as a ‘windfall tax’ – meaning a tax on the huge profits that electricity producers are currently making. But that is a misunderstanding of the idea.
In the EU, electricity market prices are tied to gas prices, which at the moment are extremely high after Russia’s invasion of Ukraine. On top of this, Russian gas giant Gazprom announced on Friday (September 2) that it would keep the Nord Stream gas pipeline shut – which it closed on the pretext of maintenance.
This pipeline is crucial for Europe, particularly Germany, and the announcement sent gas prices soaring around the bloc while the euro dropped to its weakest level since 2002.
Because of this, market electricity prices are extremely high while production costs remain the same, leading to huge profits for the producers. The prices are essentially based on market speculation.
When Mr Macron spoke of the mécanisme de contribution, he did not mean a tax specifically on these profits, but rather a system to channel the money made from these artificially high electricity prices back to consumers on an EU level, via individual member states’ governments. The amount will vary depending on the country’s energy mix.
He said that if it failed at that level, then France would look at this option on a national level.
This contribution that Mr Macron is talking about could be based on the company’s turnover or other factors, not necessarily just on its profits.
“The contribution is uncorrelated with profitability,” Sophie Blégent-Delapille, a tax lawyer and managing partner at the French Deloitte Tax & Legal Practice, told Franceinfo.
“It is not a tax based on profits. That would be considered too high.”
Avec l'Allemagne, nous serons solidaires en renforçant nos échanges de gaz et d'électricité. Nous défendrons la mise en œuvre d'un mécanisme européen qui mettra à contribution les producteurs d'énergie dont les coûts de production sont bien inférieurs au prix du marché. pic.twitter.com/3C4HwzFsdg— Emmanuel Macron (@EmmanuelMacron) September 5, 2022
This idea is somewhat similar to a mechanism already in place in France aimed at renewable energy producers.
When a renewable energy project is taken on, the government offers the company a fixed ‘target’ electricity price.
When the market price is lower than this rate, the government pays the producers the difference. Inversely, when the market rate is higher than this rate – which it is at the moment due to high energy prices – the producers have to pay the state back using the excess money.
This system could generate around €8.6billion for the French state in 2022 and 2023, the Commission de régulation de l'énergie has reported.
Elsewhere, at an EU-level, the European Commission is also looking into a mechanism to cap gas prices, the Financial Times reported.
EU energy ministers are due to meet on Friday (September 9) to discuss this and the mécanisme de contribution spoken about by Mr Macron.
President of the European Commission Ursula von der Leyen said that Russian President Vladimir Putin is “using energy as a weapon” and that “he will fail”.
She said that the Commission is planning proposals to help vulnerable households and businesses cope with high energy prices.
Putin is using energy as a weapon by cutting supply and manipulating our energy markets.— Ursula von der Leyen (@vonderleyen) September 5, 2022
He will fail.
Europe will prevail.
The @EU_Commission is preparing proposals to help vulnerable households and businesses to cope with high energy prices.
Heating at 19C and electricity cuts a ‘last resort’
Aside from this planned mechanism, Mr Macron also spoke yesterday about energy-saving measures within France and the possibility of energy shortages this coming winter.
In terms of gas, he said that the country’s stocks are already 92-93% full. At an EU-level, the bloc has gone from getting around 50% of its gas from Russia to 9%, Mr Macron said.
French Prime Minister Élisabeth Borne has already said that households will not experience gas cuts this winter despite the possibility of shortages.
“We are not going to cut off gas to French households,” she said in an interview on TMC’s programme Quotidien on Tuesday (August 30).
“It's our companies, the big consumers, that could be cut off. And obviously, this would have economic and social consequences.
Mr Macron, speaking yesterday, also spoke of France’s measures to keep electricity and gas prices down, saying because of the government’s steps, consumers have avoided an increase of around 50 to 70% in energy prices.
He said that as part of energy-saving measures he believed in the country’s ability to reduce consumption by 10%. He said that people should set their heating at a maximum of 19C this winter.
“If we are able to make savings, there will be no cuts. We have to put ourselves in a position to do this now,” he said.
“I believe in collective intelligence. We are going to have regular updates. My objective is to be able to give transparent information.”
He added that electricity cuts to households would be a very “last resort”.