Determination on equity return for new assets in the electricity and gas sectors
Klaus Müller: "Ensuring an appropriate and reasonable equity return"
Year of issue 2024
Date of issue 2024.01.24
The Bundesnetzagentur has today published a determination on a higher equity return for new investments by electricity and gas network operators in the capex mark-up. The publication of the determination follows two rounds of consultations in which the planned rules were discussed with network operators and network users.
"Our rules are sending a strong signal to further speed up network expansion. They are based on the market environment and make sure that the burden on customers is kept to the absolute minimum necessary,"
said Klaus Müller, President of the Bundesnetzagentur. "We are limiting the adjustment of the interest rate to new investments. Existing investments are hardly affected by the general increases in the interest rate environment. They are already protected against the risks of changes in interest rates until 2027/2028 on the basis of our determinations."
Raising the base rate for new investments
The determination largely corresponds to the key elements paper published in June 2023 and the draft determination published in November 2023. The Bundesnetzagentur still considers the rates of equity return set in 2021 to be appropriate. The Bundesnetzagentur is laying down a new calculation method for the equity return for new investments in the capex mark-up in order to support unforeseen network investments that become necessary as a result of the current environment.
In the future, the equity return for new investments in the capex mark-up will result from an annually variable base rate (of the yield on debt securities outstanding) and a fixed risk premium of 3%. Up until now, the 10-year average of the yield on debt securities outstanding has been used to determine the base rate. This rate will be adjusted to the actual yield on debt securities outstanding for the relevant year of acquisition and fixed until the end of the regulatory period. This approach was proposed and assessed in the course of the consultation procedure and was included in the rules with the aim of increasing predictability for investors.
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. The interest rate for 2023 given the average yield on debt securities outstanding of around 2.9% in 2023 would have been around 7.23% (around 8.25% including trade tax). The interest rate given the current yield on debt securities outstanding of about 2.5% would be 6.74% (7.69% including trade tax). It is not possible to determine the actual interest rates applicable until the year of acquisition of a network investment.
The equity return for existing assets is unchanged at 5.07% (5.8% including trade tax) as determined in October 2021.
The determination is restricted to the duration of the fourth regulatory period and does not directly affect any rules that may follow. It therefore does not conflict with the process for developing the rules for cost and incentive regulation, which the Bundesnetzagentur has recently launched.
Corresponding rules for new offshore and interconnector investments have also been consulted on.
Adjustment of equity returns in the capex mark-up
The Bundesnetzagentur is adjusting the calculation method for the equity return for new investments in the capex mark-up. The capex mark-up is particularly suited to creating investment incentives. Network operators can apply to have new investments included in the current regulatory period, which means that the investments can be recouped immediately (instead of only after the regulatory period has ended).
The new determination only applies to the capex mark-up. The Bundesnetzagentur believes there is no need to change the equity return for the investment measure mechanism, for example, because new applications for investment measures have not been possible since 2022. The investment decisions for the projects applied for as investment measures were therefore made on the basis of the equity return determination in 2021 or were made before, and financing for these projects should therefore be secure. However, the Bundesnetzagentur is also enabling operators to apply to switch from the investment measure mechanism to the capex mark-up. In this case, network operators need to weigh up which of the two mechanisms is economically more attractive.
Publication of the determination
The Bundesnetzagentur published the determination on 24 January 2024 in its Official Gazette and on its website at www.bundesnetzagentur.de/bk4aktuell (in German).