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 1  (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 2 ), which is above the ETD minimum rate for business use of electricity of 0.5 EUR/MWh 3 , 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 4 . 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 5 . 

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).

Provisions under the Energy Taxation Directive

Taxation of electricity is governed by the Energy Taxation Directive. In particular, Article 10 and Annex I, Table C of that directive, provide for the relevant minimum levels of taxation, differentiated into business and non-business use, set out respectively at 0.5 EUR/MWh and 1 EUR/MWh.

Article 11 of the Directive contains among others the definition of ‘business use’ and allows Member States to limit the scope of the reduced level of taxation for business use.

Finland has limited the scope of the lower business-use electricity tax rate, the category II rate of 0.63 EUR/MWh, to certain business sectors, namely industry, agriculture, mining and data centres.

Other electricity consumption, such as electricity used by households, belongs to the tax category I, set at 22.53 EUR/MWh.

The proposed reduced tax rate of 0.63 EUR/MWh for electricity would cover 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 would be entitled to the lower electricity tax.

For reasons of consistent and uniform application and of practical implementation, the lower electricity tax rate would apply not only to some business use but also to some specific non-business use, which should be subject to the higher level of taxation under the Finnish category I rate of 22.53 EUR/MWh. In this respect, to further substantiate their request, Finnish authorities highlighted also that Article 15(1)(h) of the Directive allows Member States to apply an exemption in the level of taxation of electricity used by households, while in their country electricity taxation for households would remain very high 6 (category I of the Finnish tax rates is set at 22.53 EUR/MWh, much above the EU minimum level). The requested national tax rate would be however above the ETD minimum level of taxation for business use.

Article 19(1), first subparagraph, of the Directive reads as follows:

In addition to the provisions set out in the previous Articles, in particular in 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 for specific policy considerations.

The possibility to introduce a tax relief (reduced rate of electricity tax) for electricity supplied to heat pumps, electric boilers and recirculating water pumps, that meet certain conditions, can be envisaged under Article 19 of the Energy Taxation Directive, since its purpose is to allow the requesting Member State to introduce a further reduction for specific policy considerations. Supporting the electrification of the heating end-use sector and promoting non-combustion heat production in order to reduce emissions and to save fossil and renewable natural resources can be considered such specific policy considerations. Finland’s goal is to become climate neutral by 2035. The requested measure would foster the achievement of that goal.

Finland requested for the measure to be applicable for six years (starting from 1 January 2022), the maximum period allowed by Article 19(2) of the Directive. In principle, the period of application of the derogation should be long enough to encourage investment in the targeted electrically powered heating solutions. That period will provide the maximum possible legal certainty for the relevant investments.

State aid rules

The envisaged reduced tax rate of EUR 0.63 per MWh is above the EU minimum level of taxation for electricity for business use pursuant to Article 10 and Annex I, Table C, of Directive 2003/96/EC.

The measure may constitute State aid in accordance with Article 107(1) of the TFEU. Since the reduced rate is above the EU minima, the measure would be covered by Article 44 of Regulation 651/2014/EU (the General Block Exemption Regulation) 8 . Upon expiry of the period of validity of the General Block Exemption Regulation on 31 December 2023 the aid remains exempted during an adjustment period of six months (see Article 58(4) of the General Block Exemption Regulation). The decision is without prejudice to the applicable State aid rules during the period covered by the derogation. 

Environment and climate change policy

The requested measure aims at promoting non-combustion heat production in order to reduce emissions and to save fossil and renewable natural resources. In its Article 13, Directive 2008/50/EC on Ambient Air Quality 9 requires Member States to ensure that the levels of several air pollutants are kept below the limit values, target values and other air quality standard established in the Directive.  

Moreover, Finland’s country specific electricity mix consists mostly of renewable (47%) and nuclear electricity (35%) 10 , both of which are zero or low-carbon. Therefore, it is expected that further electrification of large-scale heating applications will result in significant environmental and climate benefits.

Hence, the measure is compatible with EU environment and energy policies, most notably the EU Green Deal, the Fit for 55 package promoting electrification, and the 2050 long-term decarbonisation agenda, in which electrification plays a central role.

Energy policy

The measure would contribute to realising the ambitions of the EU Green Deal, especially in the context of the EU’s Strategy for Energy System Integration 11 .

The EU Strategy for Energy System Integration provides the framework for the green energy transition. The current model where energy consumption in transport, industry, gas and buildings is happening in ‘silos' - each with separate value chains, rules, infrastructure, planning and operations - cannot deliver climate neutrality by 2050 in a cost efficient way. The requested measure would foster the integration of the heating end-use sector with other end-use sectors. In line with the Strategy, the requested measure would also lower the costs of innovative solutions that have to be integrated in the EU’s energy system. The requested measure would directly contribute to two of the three pillars of the EU Strategy for Energy System Integration.

Firstly, a more ‘circular' energy system, with energy efficiency at its core. The strategy identifies concrete actions to apply the ‘energy efficiency first’ principle in practice and to use local energy sources more effectively in buildings or communities. There is significant potential in the reuse of waste heat from industrial sites, data centres, or other sources, and energy produced from bio-waste or in wastewater treatment plants. The measure requested by Finland aims to support, among others, the use of waste heat from sources explicitly listed by the Strategy.

Secondly, a greater direct electrification of end-use sectors. As the power sector has the highest share of renewables, electricity should be increasingly used where possible, for example, for heat pumps in buildings. The measure requested by Finland aims to support electrically powered application, in line with the Strategy.

That measure would foster energy system integration since district heating networks offer more flexibility and ability to store electric energy in the form of heat as compared to separate building heating solutions. Finland already has a well-developed district heating infrastructure, which can serve that purpose.

The requested derogation to use a lower tax rate would also apply among others to certain electric boilers. Such reduction can also contribute to energy system integration and to system integration of renewable electricity. Electric boilers can be used for producing heat into district heating networks especially in the times when there is surplus of electricity and the electricity price is low. That allows, for example, the use of wind power for district heat production. The small investment costs of the electric boilers enable profitability with only few operating hours and heat production can take place only when there is oversupply of electricity. That can contribute to maintaining the stability of the electricity system. The impact of the electricity taxation to the heat production cost is currently significant and, as said before, it could be a good moment to use those appliances. Electric boilers can be combined with heat storage capacity, which allows storage of excess power as heat.

The measure requested by Finland is also in line with the EU’s Strategy on Heating and Cooling 12 which recalls the benefits of replacing fossil fuel based heating solutions by heat pumps and waste heat use. The Strategy states that heat pumps can turn one unit of electricity into three or more units of heating or cooling.

The above mentioned benefits are also highlighted in the context of the EU’s Energy Efficiency Directive and specifically by the Commission Recommendation on the content of the comprehensive assessment of the potential for efficient heating and cooling under Article 14 of Directive 2012/27/EU 13 (the Energy Efficiency Directive).

Internal market and fair competition

The measure would be open to all EU operators without discrimination. The reduced rate would apply to all heat producers using 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 used outside the district heating network and recirculating water pumps in geothermal heating plants.

Article 19 of Council Directive 2003/96/EC.

The field of indirect taxation covered by Article 113 of TFEU is not in itself within the exclusive competence of the European Union within the meaning of Article 3 of TFEU.

However, pursuant to Article 19 of Directive 2003/96/EC, the Council has been granted an exclusive competence, as a matter of secondary law, to authorise a Member State to introduce further exemptions or reductions within the meaning of that provision. Member States cannot therefore substitute themselves for the Council. As a result, the principle of subsidiarity is not applicable to the present implementing decision. In any event, since this act is not a draft legislative act, it should not be transmitted to national Parliaments pursuant to Protocol No 2 to the Treaties for review of compliance with the subsidiarity principle.

The proposal respects the principle of proportionality. The tax reduction does not exceed what is necessary to attain the objective in question.

The instrument proposed is a Council implementing decision. Article 19 of Directive 2003/96/EC makes provision for this type of measure only.

The measure does not require the evaluation of existing legislation.

This proposal is based on a request made by Finland and concerns only this Member State.

There was no need for external expertise.

The measure does not provide for a simplification. It is the result of the request made by Finland and concerns only this Member State.

The measure has no bearing on fundamental rights.

The measure does not impose any financial or administrative burden on the Union. The proposal therefore has no impact on the budget of the Union.

An implementation plan is not necessary. This proposal concerns an authorisation for a tax reduction for an individual Member State upon its own request. It is provided for a limited period. The applicable tax rate would be above the minimum level of taxation for electricity for business use set by the Energy Taxation Directive. Therefore, it would respect the minimum set by the Directive for business use. The measure can be evaluated in case of a request for a renewal after the expiration of the initially granted validity period.

The proposal does not require explanatory documents on the transposition.

Article 1 stipulates that Finland will be allowed to apply a reduced taxation rate to electricity supplied to the following applications: 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 outside of the district heating network, and recirculating water pumps in geothermal heating plants. The tax rate must not be less than EUR 0.50 per MWh, i.e. the minimum level of taxation for electricity for business use set by the Directive.

Article 2 stipulates that the authorisation requested is granted with effect from 1 January 2022, until 31 December 2027, which is the maximum period allowed by the Directive.