Germany’s windfall tax proposal

An analysis of the German government’s plans to introduce a mechanism to absorb ’windfall profits’ that power producers are making in the current energy crisis.

High energy prices have led European policymakers to introduce measures to help relieve customers. Germany is introducing a “gas price brake” and an “electricity price brake” to limit energy cost for both residential and business energy consumers. To finance this, the government has proposed a “windfall profit absorption mechanism”, which would absorb 90 % of all profits beyond a certain technology-specific price threshold.

Together with Thilo Richter, partner at German law firm LEITFELD Rechtsanwälte, we have undertaken a high-level assessment of Germany’s policy proposal, from both an economic and legal perspective.

Key insights are:

  • In light of the current economic situation, the EU and the German government intend, understandably, to absorb extraordinary revenues that electricity producers make due to high energy prices.
  • The German approach, however, goes substantially beyond the EU default: While the EU demands member states absorb profits above a technology-neutral level of EUR 180/MWh, Germany aims to absorb profits much below this level. So, the government has tried to use the opportunity to limit not only those extraordinary and unexpected “windfall profits” induced by the current crisis, but also other revenues, largely unrelated to the current energy crisis.
  • This is a deep market intervention, which threatens to undermine investors’ trust in Germany policy around the globe. This is bad timing, given the urgent need for substantial investment in renewable energy to achieve climate neutrality and reduce dependence on fossil fuel imports.
  • Moreover, this approach is moving in the direction of micro-managing electricity production on a government level, which comes with significant risks if things go wrong.

Read our full analysis below (German; English convenience translation on request).

Frontier regularly advises clients on policy measures in the energy market and beyond.

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