Restrictions / Redistribution of Extraordinary Profits on EU Energy Companies Arising From the Energy Disruption

The CG EU Energy Disruption Resource Center-Section Breaks-Sun-1200x150

On October 6, 2022, the Council adopted Regulation (EU) 2022/1854 as emergency intervention to address high energy prices in the European Union.

Rise in prices is addressed acting on multiple fronts at once. The Regulation provides for (i) a reduction of monthly and peak price hours gross electricity consumption, (ii) mandatory cap of €180/MWh on revenues of inframarginal electricity producers, (iii) the possibility for Member States to support end-customers through public interventions and lowering of retail prices and (iv) an extraordinary solidarity contribution by fossil fuel companies. 

CLEARY ALERT MEMO: European Council Regulation to Address High Energy Prices

CLEARY ALERT MEMO: The Regulation was adopted under Article 122 TFEU.

The Impact of the Bundesverfassungsgericht NextGenerationEU’s Judgment on Emergency Energy Regulations

In its judgment of December 6, 2022, the German Federal Constitutional Court (Bundesverfassungsgericht, hereinafter “FCC”) dismissed two constitutional complaints against the German Act Ratifying the EU Own Resources Decision, with a majority of 6 to 1.[1]  This case allowed the FCC to consider the legality of common EU borrowing on the basis of its ultra vires and constitutional identity reviews.  The judgment also touches upon the use of Article 122 TFEU as a legal basis for emergency measures. This post summarizes the key positions taken by the FCC in the judgment as regards the use of Article 122 TFEU for the EU’s energy regulations.  

Facts of the case

The constitutional complaints brought before the FCC were directed against the German Act Ratifying the EU Own Resources Decision (“Act”).  National ratification laws were required to give legal force to the Own Resources Decision (“ORD”), which is part of the package of regulations that composed the EU’s temporary recovery instrument, Next Generation EU (“NGEU”).[2]  The ORD formally authorizes the European Commission to borrow up to 750 billion euros on the capital markets until 2026.[3]

The Council of the EU voted in favor of the ORD on December 14, 2020.  On March 25, 2021 the Act was adopted by the German Bundestag, and the Bundesrat gave its consent to it on March 26, 2021.  The Act was referred to the Second Senate of the FCC on March 26, 2021.  Following the complainants’ request for a preliminary injunction, the FCC issued an order prohibiting Germany’s Federal President from certifying the Act before the FCC had judged upon the application for preliminary injunction.  The FCC rejected the request for preliminary injunction on April 15, 2021 and the Act was signed into law, thereby allowing the ORD to enter into force  on June 1, 2021, with retroactive application from January 1, 2021.  

In dismissing the claims of the complainants, the FCC concluded that the ORD does not violate the complainants’ right to democratic self-determination, does not exceed the competences conferred to the EU, and does not encroach on the budgetary responsibilities of the Bundestag.

The complainants also contended that the ORD was ultra vires as it lacked, among other things, an appropriate legal basis (Article 122 TFEU).  In addition, they argued that the ORD did not respect the EU’s rules on its own resources (Article 311 TFEU) and the non-bailout clause (Article 125 TFEU).

Article 122 in focus

The EU Own Resources Decision is based on Article 311 TFEU in conjunction with Articles 122(1) and 122(2) TFEU.  As explained in our previous post,

  • Article 122(1) TFEU is designed for general economic policy decisions taken in a “spirit of solidarity”. It notes that a Council measure may be warranted where severe difficulties arise in the supply of energy products but does not set out an exhaustive list of situations;
  • Article 122(2) TFEU provides for more specific measures, as it only mentions Union financial assistance, provided either a “natural disaster” or “exceptional occurrences beyond the control” of the Member State arise.

On the use of Article 122 as a legal basis, the FCC examined:

  • Whether assistance to Member States “as a collective group” is included in the scope of Article 122—as opposed to assistance to specific Member States;
  • Whether the connections between the consequences of the pandemic and the measures financed—i.e., achieving climate targets (37%), digitization (20%), and ongoing programmes of the EU (10%)—were sufficient;  and
  • Whether borrowing until 2026 can still be considered an “exceptional measure” in relation to the EU budget.

While it criticizes the “tenuous connections” between the effects of the pandemic and the abovementioned targets of the recovery funds, the FCC ruled out that the Council acted ultra vires as regards Article 122 TFEU. The FCC concluded that the Council did not “manifestly exceeded the competence conferred in Art. 122(1) and (2) TFEU, provided that the EURI Regulation remains strictly tied to the historically exceptional case of “support[ing] the recovery in the aftermath of the COVID-19 crisis” (Art. 1(1) of the Regulation) and “tackl[ing] the adverse economic consequences of the COVID-19 crisis” (Art. 1(2) of the Regulation).”

What does it mean for energy regulations

While it stresses that Article 122 “must generally be understood narrowly”, the FCC reaffirmed that the list of events triggering Article 122(1)  is not meant to be exhaustive.  According to the FCC, the reference to difficulties “in the supply of certain products, notably in the area of energy” made in Article 122(1) should be “understood as merely illustrating one example of a case falling within the scope of this competence”. 

Following the FCC’s reasoning, the recent energy regulations adopted to tackle the ongoing energy crisis could equally be considered to fall within the scope of Article 122 TFEU.[4]  While the list of events set out in Article 122(1) TFEU is not exhaustive, severe supply shocks “notably in the area of energy” are mentioned expressis verbis in that list.  Moreover, the energy regulations adopted under Article 122 are expressly intended to be exceptional and temporary, and have a clear deadline.

The FCC adopted its judgment without referring the case to the Court of Justice for a preliminary ruling. It can therefore not be excluded that the ECJ could take a different position on the scope of Article 122, in particular in the context of the recent appeal lodged by Exxon-Mobil against Regulation (EU) No 2022/1854.  But the FCC’s judgment and reasoning could provide additional arguments in defense of the EU’s emergency energy regulations.

[1] Judgment of 6 December 2022, 2 BvR 547/21, 2 BvR 798/21, Act Ratifying the EU Own Resources Decision - Next Generation EU

[2] Council Regulation (EU) 2020/2094 of 14 December 2020 (EURI Regulation);  Regulation (EU) 2021/241 of the European Parliament and of the Council of 12 February 2021 establishing the Recovery and Resilience Facility (RRF Regulation)

[3] Article 5(1), Council Decision (EU, Euratom) 2020/2053 of 14 December 2020 on the system of own resources of the European Union and repealing Decision 2014/335/EU, Euratom

[4] Council Regulation (EU) 2022/1369 on coordinated demand-reduction measures for gas; Council Regulation (EU) 2022/1854 on an emergency intervention to address high energy prices; Council Regulation (EU) 2022/2577 of 2