Energy companies have come into unexpected profits - some five times their usual - because of the effects of Russia’s invasion of Ukraine and climate change.
The EU plan could raise £120 billion to help people pay soaring energy bills, but it’s unclear whether it will be approved by all 27 EU countries.
A windfall tax is what Labour has been calling for in the UK, but Prime Minister Liz Truss ruled out the option, claiming it would deter energy companies from investing in the UK.
Instead, she announced - just moments before the Queen’s death - that the typical UK household will pay no more than £2,500 a year for energy for the next two years from October.
The windfall tax is one of several proposals being rolled out across Europe, including slashing energy use and reforming the electricity market, which all need approval by the 27 EU countries.
As the bloc supports Ukraine, Russia has reduced or cut off natural gas to 13 member nations, surging gas and electricity prices that are expected to go higher as demand peaks during the cold months.
Europe also has been hit by a drought that experts say is the worst in 500 years. Prices for natural gas — which is used to power industry, heat homes and generate electricity — are now 10 times higher in the EU than before Covid-19 took hold in 2020.
“Russia keeps actively manipulating our energy market,” European Commission President Ursula von der Leyen told EU lawmakers in France.
“So, this market is not functioning anymore.”
Individual countries have passed subsidies, tax cuts and other relief for households and businesses, but with economies still recovering from the pandemic, money must be found outside of national budgets.
That’s why the commission wants to tap the profits of power producers using oil, gas and coal as well as renewables and nuclear power.
“These companies are making revenues they never accounted for, they never even dreamt of,” Ms von der Leyen said.
“In these times, it is wrong to receive extraordinary record revenues and profits benefiting from war and on the back of consumers.”
During her State of the European Union address to the EU assembly, attended by Olena Zelenska, wife of Ukrainian President Volodymyr Zelenskyy, Ms von der Leyen said company “profits must be shared and channeled to those who need it the most”.
“Our proposal will raise more than 140 billion euros for member states to cushion the blow directly,” she said.
Most of the money would come by setting a price cap on electricity produced through renewable energy sources and nuclear power of 180 euros per megawatt hour, less than half the current price.
EU countries would also collect a “solidarity contribution” from oil, gas and coal refineries earning 20 per cent more profit than they averaged over the last three years.
With Russia tightening the natural gas taps, demand for gas and electricity also must be reduced, even if reserves of the fuel are on average 84 per cent full across the EU.
Capping prices will not draw down use, so the European Commission also wants people to consume less, particularly during peak hours.
The commission’s goal is to reduce electricity consumption in the bloc by at least five per cent during peak use hours.
EU countries are divided over what approach to take, and it remains unclear whether they will approve the commission’s proposals.