Finance ministry may tax RES producers who earned ‘windfall profits’

The finance ministry said on Thursday it may tax RES producers found to have earned windfall profits as a result of the high tariffs paid to them.

In a statement, the ministry said that it was currently studying the findings of a working group set up for this very purpose – to establish whether businesses engaging in electricity production from renewables generated windfall profits, due to the particularly high energy prices.

The ministry said it has identified certain companies who “may have had unexpectedly high revenues due to the increased price of energy from renewables. From a further economic analysis of the data, the working group will devise a methodology for possible taxation or imposition of a levy on windfall profits…”

The working group comprises technocrats from the finance and energy ministries, and the Cyprus Energy Regulatory Authority.

According to the statement, those RES producers found to have made possible windfall profits fall into the category of commercial operations – as opposed to subsidy schemes for electricity generation for own consumption, such as households.

The state power corporation pays RES producers a tariff called the ‘avoidance cost’ – the cost which the power corporation avoids by not producing that amount of electricity. Essentially the avoidance cost represents the Electricity Authority of Cyprus’ (EAC) cost of production.

“As the working group’s findings indicate,” the statement went on, “given that the EAC’s avoidance cost is directly intertwined with the market purchase price of electrical energy from renewables by the EAC, its unexpected rise, due to exogenous factors, inevitably led to the increase in the purchase price of renewables.”

Earlier this month, the EAC told the Cyprus Mail that in July last year they bought fuel – mazut and diesel – for €520 a metric tonne on average. By comparison, their more recent purchase this July cost them €1061 per metric tonne.

Due to the absence of several officials on holiday, it was not possible on Thursday to find out how the government defines ‘windfall profits’ or whether legislation exists permitting the state to tax such earnings.

But an industry source, preferring to remain anonymous, told the Cyprus Mail that when RES producers apply for production permits, among other things they submit a business plan to the government. The business plan cites what the applicant considers as their ‘viable earnings’ – which includes the profit.

By way of example, the source said, an applicant may state they anticipate to make ‘viable earnings’ from selling their electricity for 8 cents per kilowatt-hour.

“Well, right now, we’ve got RES producers selling for as high as 18 cents per kilowatt-hour, and even higher than that.”

Those companies earning such profits are solar parks, not wind parks, the source added.

It’s understood that the period under scrutiny, vis a vis the alleged windfall profits, goes back approximately a year.

Similar policies have been adopted by other countries. For instance, the Greek government will impose a 90 per cent tax on large power producers’ windfall profits generated in October 2021 to March 2022. The government will use the revenue generated by the tax to further support consumers.