Draft determination on equity return in the electricity and gas sectors

Draft determination on equity return in the electricity and gas sectors

The Bundesnetzagenturhas today put out for consultation a draft determination on a higher equity return for new investments by electricity and gas network operators.

"We are taking account of the changed interest rate environment and creating incentives for network operators to invest in the necessary network expansion. With this adequate interest rate, we will ensure that investments can access the capital markets. We have based our determination on the actual, current interest rates so as not to place too much of a burden on consumers. That is why we are limiting the raising of the interest rate to new investments," said Klaus Müller, President of the Bundesnetzagentur. "On the one hand we are sending a strong signal to speed up the network expansion, while on the other we are keeping the additional burden on households, industry and business low."

Raising the base rate for new investments

The draft determination largely corresponds to the key parameters paper published in June. However, at the suggestion of the sector, the annual adjustment of the base rate is to be fixed in the relevant year of acquisition and continued until the end of the regulatory period. This will increase planning certainty and incentivise faster expansion.

In the future, the equity return for new investments will result from an annually variable base rate (of the yield on debt securities outstanding) and a fixed risk premium, which is currently at around 3%. Up to now, the 10-year average of the yield on debt securities outstanding has been used to determine the base rate. Taking into account the tax implications, the equity return in the adjustment of capital expenditure would be around 7.09% (around 8.1% including trade tax) based on the forecast in summer. There could be changes if the yield on debt securities outstanding deviates from this in the coming year.

This equity return in the capex mark-up only applies to new investments. The equity return for existing assets is unchanged at 5.07% (5.8% including trade tax), as determined in October 2021. The financing conditions for existing investments were already secured until 2027/2028 on the basis of the relevant determination on interest conditions, so the higher interest rates have barely any effect on them.

To calculate this interest rate in the year of acquisition, a target figure is first derived. Once the final value to be applied is definite, any differences are balanced out. This ensures that the equity employed is returned at the actual base rate.

It is planned to make equivalent rules for new offshore and interconnector investments as well.

Adjustment of equity returns in the capex mark-up

The Bundesnetzagenturenvisages adjusting the equity return for new investments in the capex mark-up. The capex mark-up is particularly suited to creating investment incentives because network operators can apply to have new investments included in the revenue cap in the current regulatory period. That means investments can be returned immediately instead of only after the five-year regulatory period has ended.

Publication of the draft determinations

The Bundesnetzagentur has published its draft determination (in German) at www.bundesnetzagentur.de/bk4aktuell. Comments may be submitted until 6 December 2023.

The final determination is planned to be issued immediately after the new Energy Industry Act (EnWG) has entered into force, which is likely to be around the end of this year.

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