Netzagentur President Klaus Mueller plans to give companies that operate electricity and gas networks more scope for profit. This will increase the costs for energy consumers (Handelsblatt: 07.06.23).
Network operators benefit: Netzagentur plans higher returns for electricity and gas network operators from 2024
The news for electricity and gas network operators in Germany is positive. Klaus Müller, President of the Federal Network Agency, plans to increase the return on equity for these companies so that they can generate higher returns.
From 2024, the return on equity for new investments will increase from 5.07 to 7.09 percent, which corresponds to an increase of 40 percent. Müller is convinced that this creates a strong incentive for investments. Grid operators have long complained that the planned interest rates from 2024 onwards do not reflect the development of interest rates over the past two years. The authority is now reacting to this with the increase.
Bild: BNetzA, CC BY-SA 4.0, via Wikimedia Commons
The return on equity is set by the network agency and is of great importance for the network operators, as it determines what return the company is allowed to achieve with their invested capital.
State regulation of network operators: Federal Network Agency increases interest on equity for more efficiency and fair competition
Determining the return on equity is an essential part of government regulation of grid operations, since the electricity and gas grids are natural monopolies.
The Federal Network Agency monitors the network operators to ensure that they do not abuse their monopoly position. It limits companies’ returns on equity and creates incentives for greater efficiency.
Klaus Müller plans to only allow the higher interest on equity to apply to new investments and not to existing networks. He emphasizes that all previous investments are properly funded.
New regulation for network operators: Federal Network Agency adjusts interest on equity to changed conditions
The Federal Network Agency considers the return on equity already established for the existing network operation to be sufficient. The head of the authorities, Klaus Müller, has set a higher interest rate for new investments in order to reflect the changed interest and investment conditions.
Network operators must have investments approved by the network agency to ensure that only necessary investments are made.
The return on equity is made up of various components, including the base interest rate, which is based on the average current yield of fixed-income securities over the last ten years. Klaus Müller would now also like to introduce what is known as the “cost of capital surcharge” as a time-variable interest component that is based on the current interest rate level in the first quarter of a calendar year for investments in the following year.
This allows the Federal Network Agency to react more flexibly to changes in interest rates. Klaus Müller plans to no longer set the return on equity for a fixed period of five years, but instead to analyze interest rate developments annually and act accordingly.
More flexibility and higher returns on investments
The Federal Network Agency considers the return on equity that has already been determined to be sufficient for the existing network operation. However, head of the authorities Klaus Müller has set a higher interest rate for new investments in order to better reflect the changed interest and investment conditions.
Network operators must have their investments approved by the network agency to ensure that only necessary investments are made.
The return on equity is made up of various components, including the base rate, which is based on average current yields on fixed-income securities over the last ten years. Klaus Müller plans to introduce an additional interest rate component called the “cost of capital markup”, which is based on the current interest rate level in the first quarter of a calendar year for investments in the following year.
This allows the Federal Network Agency to react more flexibly to changes in interest rates. Instead of setting the return on equity for a fixed period of five years, Klaus Müller intends to analyze the interest rate development every year and act accordingly.
Federal Network Agency plans annual adjustment of interest rates
The network agency has already moved in terms of interest on borrowed capital. Here, too, there should be an annual adjustment option in future, which is based on current interest rate developments. Müller announced that he would now also put his proposal on the return on equity up for consultation.
The consultation procedures give the companies and associations involved the opportunity to submit their proposals. “We will listen carefully to the various arguments over the next few weeks,” said Müller.
However, the authority does not have to heed the suggestions and arguments. Rather, it already has a great deal of autonomy in determining the interest on equity and debt. In addition, the European Court of Justice ruled in September 2021 that the autonomy of the regulatory authorities must be further strengthened.
The federal cabinet has already passed a law that is intended to ensure the implementation of the specifications of the ECJ; it is to be passed by the Bundestag in the autumn.
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