German regulator presents first plans for future remuneration of electricity and gas networks

On 18 January, the Federal Network Agency (BNetzA) published a key points paper on the further development of the regulatory framework for German electricity and gas network operators. The paper contains 15 propositions on the possible further development of cost and incentive regulation. The proposals aim to adapt network regulation to the changing requirements: While gas networks are more likely to be decommissioned or converted to hydrogen networks, electricity networks need to be expanded and modernised. The regulation of gas networks and the regulation of electricity networks may therefore diverge to a greater extent in the future.

Background

The background to this is the European Court of Justice’s call for greater independence for the BNetzA in regulating grid access and setting grid fees (C-718/18). As a result, the German legislator amended the German Energy Industry Act (EnWG) and gave the BNetzA far-reaching powers of determination. The previous legislation will continue to apply until the end of the 4th regulatory period (i.e. until the end of 2027 for gas networks and until the end of 2028 for electricity networks) but BNetzA is empowered to set its own regulations before this point in time. 

Who is affected?

The future regulation as covered by the key points paper is to apply to electricity and gas distribution network operators (electricity and gas DSOs) and gas transmission network operators (gas TSOs) starting with the fifth regulatory period (2028 for gas and 2029 for electricity). 

For electricity TSOs BNetzA plans for a separate discussion format, as it believes that there are significant special developments and investment requirements in the electricity transmission sector which, like the growing system responsibilities of electricity TSOs, require separate treatment.

What will be changed?

The proposals relate to the period from the 5th regulatory period onwards and concern the determination of costs and revenues for network operators which is currently being regulated in the Electricity and Gas Network Charges Ordinances (StromNEV and GasNEV) and the Incentive Regulation Ordinance (ARegV). The rules for the calculation of network fees or network access are not addressed by the key point paper but are (will be) dealt with in separate procedures. 

The BNetzA is of the opinion that the basic concept of incentive regulation with a cost review and the subsequent determination of revenue caps on the basis of a comparison of the efficiency of network operators has in principle proved its worth. Stakeholders are still invited to give feedback if and in how far they share BNetzA’s view.

Propositions affecting both electricity and gas network operators

BNetzA proposes various adjustments to the existing framework. While some proposals aim at both gas and electricity network operators, other proposals differentiate between the two types of networks. Propositions affecting both gas and electricity network operators include:

• Shorter regulatory period: To allow for a better and quicker reflection of dynamic cost changes in the network operators’ revenue cap BNetzA proposes to reduce the regulatory period from five to three years. 
• Simplified determination of network costs: BNetzA considers to introduce a number of simplifications compared to the previous system when determining the costs of each network operator. These include
  • reviewing and streamlining the historically grown catalogue of so-called permanently uncontrollable costs which will be fully re-imbursed as they occur; 
  • determining cost of capital using a standardised WACC (weighted average cost of capital) approach, rather than the current individual and regulatory approach; 
  • taking the actual trade tax burden rather than imputed taxes into account as some network operators actually pay little or no trade tax; 
• Uniform equity interest rate: Currently there are different interest rates depending on when assets were first activated (before or after 1 January 2006). In addition, BNetzA just increased the equity interest rate for assets activated after 31 December 2023 for the remaining time of the 4th regulatory period (BK-23-002). However, in the future only one equity interest rate shall apply to all assets for the duration of at least a regulatory period. 
• Uniform rules for depreciation of assets: Similarly, the imputed depreciation of old and new assets shall in future follow the (simpler) rules for new assets only.

Propositions distinguishing between gas and electricity network operators

In other areas BNetzA proposes to distinguish between gas and electricity networks because it anticipates their development to diverge in the future:

• Having to accommodate new and increasingly flexible customers (electric vehicles, smart homes, solar panels etc.) the electricity network is expected to expand in the future with electricity DSOs facing increasingly fluctuating costs for ancillary services. 
• On the other hand, large parts of the gas grid are set to be decommissioned by 2045 or will be partially converted for the transport of hydrogen and biomethane.

While for electricity DSOs BNetzA tends to uphold most of the existing provisions with only minor changes it sees a need for more substantial adjustments in relation to gas network operators:  

• Comparing network operators’ efficiency: BNetzA proposes to review whether an efficiency comparison is still meaningful in the gas sector before the start of each regulatory period. If some gas networks are already being dismantled while others are still providing services, it may no longer be possible to compare their performance.
• Useful lives of assets: Particularly for those parts of a gas infrastructure that cannot be converted or used for the transport of hydrogen or biomethane, BNetzA thinks of adjusting the catalogue of imputed useful lives and introducing a declining balance depreciation method, while the existing depreciation methods could possibly be retained for convertible networks. 
• Provisions for decommissioning: BNetzA is also considering to require gas network operators to form provisions for decommissioning and dismantling costs, which would then also be recognised in the revenue cap. This would allow to spread the dismantling costs over a (still) broad customer base as early as possible.

Regarding electricity DSOs, BNetzA is thinking of rewarding network operators that have shown a particularly high level of expertise in transforming their electricity grids during the energy transition by enhancing the scope of the so-called quality element. Currently the quality element rewards a high network availability. For the future, BNetzA thinks of adding elements that highlight the grid operators' particular “energy transition expertise” and names the speed at which a network connection is realised or the frequency with which generation plants are curtailed as possible examples.

What’s next?

Stakeholders are invited to submit their comments on the key points paper until 16 February 2024. Afterwards, BNetzA will start the formal regulatory process and present draft pieces of regulation which will again be open for stakeholder feedback. 

In parallel, BNetzA is preparing to fulfil further parts of its newly acquired competences. For example, besides the above mentioned regulation for setting network fees and regarding electricity TSOS, the ordinances on network access (GasNZV and StromNZV) are also losing their effect by the end of 2025 and must be replaced by then.

If you have questions on the impact of regulatory development, our energy experts would be very happy to discuss these with you.