Key parameters on equity return in the electricity and gas sectors
Klaus Müller: "We especially want to promote investment in new facilities"
Year of issue 2023
Date of issue 2023.06.07
The Bundesnetzagentur has today published key parameters for a higher return on equity for electricity and gas network operators.
"We are looking at current developments in the interest rate environment. We therefore want to increase the return on new investments and thus create significant incentives for network operators' investments. At the same time we do not want to overcompensate the investment portfolio that is long-term funded at low interest rates because the returns of network operators are paid by network users, that is to say, by households, industry and businesses. This additional burden must be kept to a minimum,"
said Klaus Müller, President of the Bundesnetzagentur.
Capex mark-up adjustment
According to the Bundesnetzagentur's key parameters, an increase in return on equity will significantly stimulate investments in network expansion and connection projects. The Bundesnetzagentur therefore proposes adjusting the rate of return on equity for new investments in the capex mark-up.
In the capex mark-up, network operators can apply to have new investments made during the current regulatory period added to the revenue cap. The capex mark-up ensures that investments can be returned immediately instead of only after the five-year regulatory period has ended.
Variable base rate for new investments
In the future, the return on equity in the capex mark-up will result from an annually variable base rate (of the yield on debt securities outstanding) and a fixed and reasonable risk premium, which is currently at around 3%. Up to now, a 10-year annual average of the risk-free rate has been used to determine the base rate. This risk-free rate had been 0.74%. In the first quarter of 2023 it averaged 2.8%, as is the case now, in early June 2023.
Taking into account tax implications, the return on equity in the adjustment of capital expenditure would be around 7.09% (around 8.1% including trade tax) according to current forecasts for 2024.
The Bundesnetzagentur is proposing that the new system uses the first quarter of each year to project a base rate figure for the following year. After the end of the respective year, this projected figure is replaced by the actual base rate. This ensures that the equity employed each year is returned at the actual base rate.
According to the Bundesnetzagentur's proposal, only new investments profit in the capex mark-up from the interest rate adjustment. For the existing investment assets, the return on equity remains at the rate of 5.07% that was set in October 2021. This differentiation protects households, businesses and industry from an unjustifiably heavy burden. In an environment of extremely low interest rates in recent years, network operators were able to finance lower-interest (and accordingly hedged) investments under highly favourable conditions even for the long term.
Similar preparations are also being made for offshore sector investments, which will need to be calculated and agreed upon with the regulatory authority in mid-October 2023.
Publication of the determinations
Interested members of the public can view the key parameters on rates for imputed equity in the capex mark-up at www.bundesnetzagentur.de/bk4aktuell (available in German). The public consultation takes place until 31 August 2023.
The final determination for electricity and gas networks will be made as soon as the European Court of Justice case law regarding the independence of the regulatory authority enters into force; the determination was adopted by the cabinet on 24 May 2023. The Bundesnetzagentur expects a determination to be possible at the end of this year.