Guidance paper published by the Federal Network Agency (Bundesnetzagentur) in early March 2025 on establishing a new regulatory framework for transmission system operators signals extensive changes.
Particular role of transmission system operators and need for reform
The paper starts by emphasising the particular role of transmission system operators (“TSOs”) in the German and European electricity system. According to the Bundesnetzagentur, TSOs bear the main burden of guaranteeing energy supply security, making accelerated grid expansion a critical regulatory issue and of major economic significance. The energy transition is now also raising substantial challenges for TSOs, with public-law stipulations under the Federal Requirements Plan Act (Bundesbedarfsplangesetz) and the Energy Industry Act (Energiewirtschaftsgesetz) obliging them to invest approximately EUR 320 billion in on- and offshore networks by 2045. Against this background, the Bundesnetzagentur considers changes to be needed to the current system of cost regulation. The guidance paper now published sets out the Bundesnetzagentur’s proposed principles for adjusting TSOs’ cost and revenue calculations.
Improved efficiency and harmonisation by moving away from the budget model
To improve efficiency and encourage grid expansion, the budget principle previously applied to onshore transmission systems is to be replaced by a regulatory framework similar to the model currently applied to offshore networks. By this, the Bundesnetzagentur hopes to align the regulatory approaches for on- and offshore networks, which are progressively converging in economic terms.
- Principle of annuality
The planned change to the regulatory model means that the principle of annual review or “annuality” will also apply to onshore transmission networks in future. To accommodate the financial requirements placed on TSOs, the paper envisages an annual cost-plus regulation based on forecasted costs with efficiency incentives and a subsequent comparison with actual costs. This would eliminate the need to split costs into controllable and permanently non-controllable costs.
- Cost forecast and comparison between forecasted and actual costs
To determine forecasted costs, TSOs will be required to carefully forecast their network costs before the start of each year. The forecast must take best possible account of various factors, such as the forecasted change in operating costs, capital costs and the situation in the energy sector. At the end of the year, TSOs will produce a comparison between forecasted and actual costs and submit it to the Bundesnetzagentur. Each TSO will also be subject to a full audit at least once every four years. The new system is intended to enable investments to be recouped quickly, leading to annual refinancing of the necessary costs at TSO level. Differences between forecasted and actual costs would be taken into account in subsequent years. The Bundesnetzagentur also hopes to stabilise differences between forecasted and actual costs in onshore network tariff calculations so as to prevent extreme fluctuations in network tariffs.
Changes to return on equity
Changes are also proposed to return on equity, which in future is to be calculated using weighted average cost of capital (WACC). This method is already used in most European countries and is widely accepted by investors. The Bundesnetzagentur believes that aligning with international standards in this area will improve transparency for investors and network users while ensuring a globally comparable return on equity. The rate of return on equity – which is particularly important for financing grid expansion – will continue to be determined in advance for the whole of the general regulatory period, providing better long-term planning predictability. The new provisions are intended to guarantee a reasonable, competitive and risk-adjusted return on capital employed and create incentives for efficient service provision.
Distribution system operators not taken into consideration
Alongside TSOs, there are approx. 900 distribution system operators (“DSOs”) that will also play a key role in the electricity networks of the future. While the Bundesnetzagentur paper acknowledges that DSOs – just like TSOs – will have to make significant investments as part of the energy transition, they are not included in the alignment proposals. According to the Bundesnetzagentur, the challenges faced by DSOs are already being addressed in the parallel NEST (“Networks. Efficient. Secure. Transforming.”) process. It remains uncertain whether this process will take sufficient account of DSOs’ role in the networks of the future, however. Here, too, a return on equity more closely aligned with the international capital market would be more appropriate.
Outlook
The guidance paper is part of one of a series of announced determination processes aimed at managing the energy transition and is simply a first step towards potential regulatory adjustments. Interested industry stakeholders now have until mid-April to comment. A formal consultation process will be conducted at a later stage prior to a final draft determination.
Should the proposed changes be implemented, they would remain in effect until at least the end of 2037. An evaluation of the new regulatory framework for TSOs is scheduled for 2034 to allow for any necessary adjustments from 2038 onwards.
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