EXPLANATORY MEMORANDUM

1.CONTEXT OF THE PROPOSAL

•Reasons for and objectives of the proposal

Taxation of energy products and electricity in the Union is governed by Council Directive 2003/96/EC of 27 October 2003 restructuring the Community framework for the taxation of energy products and electricity (the ‘Energy Taxation Directive’, the ‘ETD’ or the ‘Directive’).

Pursuant to Article 19(1) of the Directive, in addition to the provisions laid down in particular in its Articles 5, 15 and 17, the Council, acting unanimously on a proposal from the Commission, may authorise any Member State to introduce further exemptions or reductions in the level of taxation for specific policy considerations.

By letter dated 6 August 2021, followed by further correspondence of 4 November 2021, 26 January and 16 February 2022, the Finnish authorities requested authorisation to apply a reduced rate of taxation to electricity used to power certain heat pumps, electric boilers and recirculating water pumps. The requested period of validity is six years, from 1 January 2022 until 31 December 2027, which is within the maximum period allowed by Article 19 of the Energy Taxation Directive. The objective of this proposal is to grant that authorisation by means of a derogation valid for six years, as requested, until 31 December 2027.

Finland is seeking for an authorisation to apply the national rate provided for business use of electricity of 0.63 EUR/MWh (rate labelled “category II” under Finnish law which covers only certain business sectors), which is above the ETD minimum rate for business use of electricity of 0.5 EUR/MWh, to the following: heat pumps and electric boilers that generate heat for the district heating network, heat pumps with a nominal thermal output of at least 0.5 MW not connected to the district heating network, and recirculating water pumps in geothermal heating plants. In that context, according to the information provided by the Finnish authorities, the measure should target both some specific business and non-business use of electricity. The national rate applicable to electricity for non-business use (rate named “category I” under Finnish rules, covering everything else than category II, including households) is set at 22.53 EUR/MWh, well above the corresponding ETD minimum rate of 1 EUR/MWh.

The reduction aims to provide incentives for the deployment and use of electrically powered heating generation that is otherwise heavily reliant on polluting fossil fuels or on biomass and to promote non-combustion heat production (as a heat source, for example heat pumps can use, among others, outdoor temperature, ground-source heat and deeper geothermal energy, sea and lake water and waste water heat; also different waste heat sources from industry, data centres and other cooling systems can be used as heat sources) in order to reduce emissions and to save fossil and renewable natural resources.

The reduced rate would apply to heat pumps and electric boilers in the district heating network, to heat pumps outside of the district heating network that have a nominal thermal output of at least 0.5 MW and to recirculating water pumps in geothermal heating plants. According to the reasoning provided by Finland, taxing all heat pumps and electric boilers at the lower rate would not be justified and well-grounded for several reasons.

Considering for example heat pumps, the ones of a smaller size -not covered by the requested measure- are deemed to be already very competitive. In addition, applying category II electricity tax for those ones would require separate measurement of electricity for the purposes at stake and registration of beneficiaries. There are more than 1.1 million heat pumps in Finland, so the quantity would be very large and the administrative burden significant for different parties.

Conversely, based on the estimations of the Finnish authorities for 2022, the chosen criteria would reduce the number of beneficiaries to less than one hundred.

The measure would apply to those beneficiaries, which would pay 2.19 cent/kWh less than the standard rate, resulting in EUR 10-15 million of tax expenditure, in the form of lower tax revenues (according to the estimations for 2022).