The Federal Network Agency wants to provide greater profit opportunities for operators of electricity and gas networks. This should incentivize investment. Consumers bear the cost.
Klaus Müller, head of the Federal Network Office, promised higher returns for operators of electricity and gas networks. The return on equity for state-sanctioned investments in new network infrastructure could be around 7.09 percent, according to a new calculation, the Federal Network Agency has announced. Müller cited “developments in the current interest rate environment” to justify the rise in interest rates: “That’s why we want to pay higher interest on new investments, thus creating a clear incentive for investment among network operators.”
Most recently, the Federal Network Agency reduced the equity interest to 5.07% in October 2021. If the authority’s proposals were implemented now, the equity interest in the new system would rise by more than two percentage points. For old investments, the old interest rate should remain the same even after the change. However, it is now up to Parliament whether and when the ROE enhancement will be implemented. Because the Bundestag still has to decide on the legal basis for the change – the new law has already been approved by the Federal Cabinet.
New regulations on January 1, 2024?
The reason for the new law is the ruling of the European Court of Justice from September 2021, according to which Germany is currently in breach of EU guidelines. Thus, for example, the Federal Network Agency does not have sufficient leeway in setting network tariffs. To date, many issues have been regulated mainly in individual regulations of the federal government.
It is currently planned to pass the new law by the Bundestag in autumn. It can then be implemented by the Federal Network Agency. As such, it is unclear exactly when the new ROE will take effect. The planned date is January 1, 2024.
The authorities have now presented their proposals for discussion. Network operators or associations have until the end of August to comment on this. Network operators such as E.ON, EnBW and numerous municipal utilities have long demanded higher returns, pointing to rising interest rates and high inflation.
What is the network operator’s return on equity?
Return on equity shows the return a company is generating on its capital. Therefore, it is a parameter to measure the profitability of a company. In the state-regulated energy market, the permissible rates for network expansion are determined by the Federal Network Agency.
A network operator’s return on equity consists of a base rate and a risk premium. The benchmark rate is based on the average current yield of fixed income securities over the past ten years. Risk surcharges reflect the risks of online business — and tax surcharges.
If the new law is passed by the Bundestag, the method by which the Federal Network Agency sets stake interest could change fundamentally. Until now, rates were set every five years and then applied to new investments and existing legacy systems. In the future, the interest rate on new investments would simply need to be fixed each year to increase the incentive to invest in network expansion – allowing a rapid response even if interest rates rise or fall sharply.
The average household pays more
The higher return on equity is paid for by consumers. However, Netzagentur boss Müller emphasizes that the additional costs for the end customer should be as low as possible: “The additional burden must be limited to what is absolutely necessary.”
Consumers also pay equity interest to network operators through network charges. The following applies: the higher the ROE, the higher the network fee. However, the additional burden from the changes proposed by the Federal Network Agency should remain low, since only new investments earn interest at higher rates. Experts assume that an average household with an annual electricity consumption of 3,500 kWh will pay around 10 to 12 euros more per year.
Message from Lilli-Marie Hiltscher, ARD Finance