In connection with the increase in electricity prices and the sharp increase in profits at individual companies, calls for an excess profit tax for energy producers have become louder.

The understanding of these profits as extraordinary and undeserved is essentially based on the fact that they are not generated through one's own efforts, but are the result of the war-related increase in gas prices.

The demand for electricity is relatively independent of the level of the price, since the basic demand for electricity is high and no substitutes for electricity are available.

The current demand for electricity can only be covered if, in addition to renewable energies, coal and nuclear power, gas power plants are also used in some cases, although the production costs of the latter have risen sharply with the increase in gas prices.

Alternative to excess profit tax

As a result, the electricity price has also risen sharply: in August 2020 the average electricity price was around 35 euros per megawatt hour, in August 2022, the previous peak month, around 455 euros per megawatt hour, i.e. thirteen times as much.

In September, the price of electricity fell again significantly to 350 euros per megawatt hour because the price of gas fell.

Gas-fired power plants thus determine the level of the general electricity price.

The costs remain low for the other electricity providers whose production does not require gas.

They benefit from the high electricity prices and achieve so-called "excess profits".

The high price of gas has led to a redistribution from consumers to these electricity producers.

How should one deal with these excess profits?

On September 14, the European Commission proposed a “temporary EU revenue cap of EUR 180 per megawatt hour for electricity from nuclear energy, lignite and renewable energy sources, among others”.

Sales based on higher prices are to be siphoned off by Member State governments and redistributed to energy end-users to cushion the impact of high energy prices.

The proposed measure is known as "taxing excess profits", which creates conceptual confusion.

The EU proposal is aimed at sales: If electricity is sold for more than 180 euros per megawatt hour, the part of the sales that exceeds the revenue ceiling should be skimmed off.

As an alternative to the EU proposal, gas-fired power plants could be specifically subsidized so that their production costs fall.

This prevents a high gas price from inducing a high electricity price and thus leading to a further increase in inflation and further burdens for the consumer.

The excess profits of the other electricity suppliers would then not arise in the first place or fall sharply.

Due to the lower electricity price, costly relief measures for consumers (commercial and private) are no longer necessary or are only necessary to a lesser extent, since electricity prices are low again.

Cost of the subsidy would be manageable

The fall in the price of electricity would lower inflation in the long term and could immediately curb a price-wage spiral.

Everyone would benefit from the fall in electricity prices without massive market interventions and debates about the fair distribution of excess profits skimmed off.

Administratively, the subsidization can be carried out easily because the number of gas-fired power plants is limited.

Since gas-fired power generation only accounted for 12 percent of total electricity production last year, the costs of the subsidy are manageable.

The total cost of the alternative proposal is lower than the excess profits tax model because the revenue cap set by the EU is relatively high.

The amount of the subsidy for gas-fired power plants should be based on a reference price, the general market price for gas.

If the market price for gas falls, the subsidy is automatically reduced.

It is then not necessary, because the electricity price also falls.

Its amount can be designed in such a way that the electricity price is kept at a level that nevertheless continues to provide an incentive to save electricity.

The idea of ​​keeping energy prices high and only rewarding energy saving makes perfect sense.

However, in view of inflation and persistently high and strongly fluctuating electricity prices, this is the riskier route.

If the electricity prices are decoupled from the gas price, the planning security of investments increases, since the future costs can be calculated more precisely.