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Gas price brake for entities with high gas consumption

On 25 November 2022, the German Federal Cabinet presented its draft bill for the Natural-Gas Heat Price-Brake Act (Erdgas-Wärme-Preisbremsegesetz – EWPBG). This draft is the result of the “Doppelwumms” (literally: “double bang”) of an electricity and gas price brake announced by Olaf Scholz in September and the subsequent proposal for a gas price brake submitted by the Gas and Heat Expert Commission in October. On the basis of the EWPBG, the German government intends to provide financial relief for entities and consumers in response to the massive price increases experienced since the beginning of Russia’s war of aggression on Ukraine. Therefore, the EWPBG contains guaranteed maximum prices for certain gas purchase quotas. The draft includes different provisions for small consumers, especially private individuals and small and medium-sized enterprises, and for large consumers, especially industrial entities. The relief is financed from the Economic Stabilisation Fund.

A. When will the gas price brake take effect?

The EWPBG is scheduled to be passed by the Bundestag on 15 December and by the Bundesrat on 16 December 2022. Relief for industry is intended to take effect on 1 January 2023 and to remain in place until 31 December 2023. The federal government has the option to extent it until the end of April 2024 by way of a statutory regulation (Rechtsverordnung).

B. What entities does the “industrial gas price brake” cover?

The relief provided for entities with particularly high gas consumption will be granted to entities that

  • buy gas for their own consumption,
  • are supplied in accordance with an interval-metered load profile (registrierende Leistungsmessung – RLM),
  • consume more than 1.5 GWh of gas per year,
  • do not purchase natural gas for the commercial operation of an electricity and heat generation plant if it is not a combined heat and power (CHP) plant pursuant to section 2 nos. 13 and 14 KWKG (Act on Combined Heat and Power Plants), and
  • are not covered by the relief scheme for small consumers as housing companies, social or educational institutions or suchlike.

The annual consumption measured by the metering point operator for the 2021 calendar year at the relevant delivery point is decisive for the 1.5 GWh threshold. In addition, hospitals are included in the scheme regardless of their annual consumption.

A separate relief mechanism applies to “self-procurers”, i.e. entities that feed gas into their own balancing group for their own consumption or consumption within their own corporate group. These entities cannot use the relief mechanism applied by the natural gas supplier to other gas consumers because the supplier does not know the gas volume obtained from the end consumer’s specific delivery points. This special mechanism does not apply to entities that purchase natural gas for commercial electricity and heat generation if they do not operate a CHP plant pursuant to section 2 nos. 13 and 14 KWKG, and do not use the natural gas exclusively for their commercial purposes.

C. What relief does the gas price brake provide for?

The entities covered by the relief scheme for industrial customers are guaranteed a price of 7 ct per kWh (before network charges, metering point charges and state-induced price components, and including VAT) for 70% of their current consumption volume, based on their consumption in 2021. Relief is granted irrespective of actual consumption in 2022 and 2023, thereby maintaining incentives to save energy.

The relief applies to both the material and the energetic use of gas. Only commercial electricity and heat generation plants are to be excluded from the relief scheme to avoid subsidising gas-based electricity generation. Similarly, for operators of a CHP plant, the relief amount is reduced by the gas quantities used to generate condensing electricity, and electricity or heat sold to third parties.

D. How will the relief scheme be implemented?

Under the relief scheme, natural gas suppliers are required to credit the entities they supply with the applicable relief amount for each calendar month covered by the scheme and to reflect it in the next invoice. The relief amount is calculated based on the difference between the kilowatt hour rate agreed at the beginning of the month and the guaranteed price of 7 ct per kWh.

E. What about “self-procurers”?

“Self-procurers” are also guaranteed the above-mentioned price of 7 ct per kWh for 70% of their annual consumption volume in 2021 by deducting the volume for condensing electricity, and electricity and heat sold from CHP plants, as described above. The relief amount for self-procurers is calculated based on the difference between the guaranteed price and their average procurement costs for natural gas consumed in the relevant calendar month. Financial contracts concluded to hedge procurement costs without a delivery obligation must be taken into account in this context. However, reimbursement claims are to be limited for each year to the gross procurement costs incurred for the months in which the party concerned was entitled to relief.

Self-procurers have a direct claim against the federal government for reimbursement of the relief amount, and are also entitled to quarterly advance payments.

F. Can the subsidised gas be resold?

The draft bill does not expressly prohibit the resale of gas volumes that serve as an assessment basis for the relief. However, according to the explanatory memorandum to section 7(1) EWPBG, an entity is not a final consumer if it does not itself consume any gas volumes received, but instead resells them. The same is likely to apply to other forms of retransmission to other parties – including entities within the same group. The memorandum is conclusive because the EWPBG bill refers to the definition of a final consumer set out in section 3 no. 25 of the German Energy Industry Act (Energiewirtschaftsgesetz – EnWG). According to this, final consumers are persons who purchase gas for their own use, with the intention at the time of purchase being decisive, rather than that at the time of contractual conclusion.

G. What are the caps on relief?

The relief is only granted to entities up to certain caps, which are based on state aid law. Relief in excess of the caps is only provided for on application and following individual notification to the European Commission under state aid law, with the Commission’s approval.

Special caps apply to entities where an audit authority has determined they are “particularly affected by high energy prices”. The relief payment must not cause such an entity’s EBITDA in 2023 to exceed 70% of its EBITDA for 2021. In addition, they are generally subject to an absolute cap of EUR 100 million and a relative cap of up to 40% of the additional energy costs caused by the crisis. Energy-intensive entities are deemed to be “particularly affected by high energy prices” if their EBITDA decreases by 40% between the end of January 2022 and the end of 2023 compared to 2021. Other entities are deemed to be particularly affected if their EBITDA decreases by 30% in the same period compared with 2021.

If the audit authority has also determined that the entity is “energy-intensive”, an absolute cap of EUR 50 million and a relative cap of no more than 65% of the crisis-related additional energy costs apply. Entities are deemed to be “energy-intensive” if their energy procurement costs accounted for at least 3% of their sales or production value in 2021 or at least 6% in the first half of 2022.

The caps increase to EUR 150 million (absolute) and up to 80% of the crisis-related additional energy costs (relative) if the entity is particularly affected by the high energy prices and is energy-intensive and belongs to one of the sectors listed in Annex 2 to the EWPBG.

For all other entities – except those in agriculture and aquaculture, which are regulated separately – a cap of 2 million euros and up to 100% of the crisis-related additional energy costs, or 4 million euros and a maximum of 50% of the crisis-related additional energy costs, applies.

The relative caps always relate solely to the individual entity. The absolute caps, by contrast, apply across the group. Within a group, each individual entity in the group must comply with the highest relevant absolute cap on a pro rata basis according to the following key: If various group entities themselves meet the criteria for a higher absolute cap, this cap is divided among them on a pro rata basis. For group entities where a lower cap applies, this lower cap is deducted from the highest relevant cap in the group. The wording of this apportionment mechanism allows for different interpretations, which lead to divergent results for the relevant group entities. There is still scope for greater specificity in the application of the provision.

According to the draft explanatory memorandum, however, entities falling under several categories of caps are free to choose the category whose absolute and relative caps suit them best. For example, an entity which is energy-intensive and particularly affected by the high energy prices may decide not to take advantage of the combined caps specifically tailored to such entities, namely EUR 50 million and 65% of the crisis-related additional energy costs, and instead to switch to the category for entities “only” particularly affected by the high energy prices, with caps of EUR 100 million and 40% of the crisis-related additional energy costs.

H. What obligations are associated with the relief?

Use of the relief measures is associated most notably with a job retention obligation, after a site retention obligation had initially been discussed. It applies to entities which receive relief totaling over 2 million euros. They must either have a collective bargaining agreement or works agreement to safeguard employment up to and including April 2025, or maintain 90% of the full-time equivalents in place at the beginning of January 2023 until the end of April 2025. Otherwise, there is a risk that the relief granted in excess of EUR 2 million will be reclaimed.

I. Ban on bonuses and dividends

For entities receiving recapitalisation measures under section 29(1) EnSiG, the draft EWPBG provides for a ban on bonuses and an extensive ban on dividends, which is restricted to the management and supervisory bodies. The current draft does not contain a ban on bonuses and dividends for all recipients of the gas price brake relief measures, as had also been discussed initially.

J. Waiver option

Currently, the bill does not provide for a waiver option for entities that do not wish to take advantage of the included relief. Natural gas suppliers are required to credit the relief amount without a request from the entity concerned. However, the EWPBG grants entities that are “self-procurers” the aforementioned direct reimbursement and advance payment claim against the federal government. This means they will likely be able to not claim the relief by not asserting their relief claims.

Waiving relief may be opportune, especially for larger natural gas consumers. In some cases, their monthly gas costs are already well above the maximum annual relief. The obligations associated with relief may then weigh heavily when compared to the benefits received. In addition to the job retention obligation, entities are required under section 22 of the draft to make a self-declaration to their suppliers regarding the cap likely to apply to them. This requires a reliable EBITDA forecast, which may trigger notification requirements under capital market law. In addition, if a different cap is subsequently found to be relevant due to a difference between actual and forecasted EBITDA, then the relief granted must be partially repaid. This may therefore require reserves in the amount of the support paid – up to 150 million euros.

If large consumers do not take advantage of the gas price brake, this could have an impact on the general price level. Industrial gas consumers are often at the beginning of supply chains because they produce raw materials. If they, in particular, do not benefit from the relief, the result of gas prices remaining high could be a sustained increase in the price of basic products, which will be passed on along the supply chain.