The modernization and digitization of Germany’s network infrastructure are key to achieving a climate-neutral and sustainable energy system, as well as strengthening the country’s economic position with prospects for growth. In order to make the necessary billions investments, the involvement of private capital is crucial.
“The Federal Network Agency must take investors’ views into account. This requires a regulatory framework that is attractive and competitive at international level,” says Kerstin Andreae, Chair of the BDEW’s General Management Board.
A BDEW survey of capital market participants shows that two-thirds of them consider the current regulatory framework to be inadequate to cover the enormous capital needs of the energy transition. At the same time, the planned new incentive regulation is generating considerable interest: 85% of those surveyed are actively following the NEST issue. This regulation is key to the modernization of energy networks, determining both the risk profile and the potential return for operators.
A crucial issue is the recognition of interest expenses on borrowed capital. Until now, these have been recognized in full, but in the future they will be paid on a fixed amount basis. 90% of investors consider the adequate recognition of these expenses to be extremely important. The reason is that otherwise there is a risk of insufficient funds to cover the interest on borrowed capital, and network operators will have to make up the difference elsewhere.
“We believe it is important that the interest rate on borrowed capital be adjusted dynamically to reflect actual market developments year after year,” says Kerstin Andreae, Chairwoman of the BDEW’s General Management Board.
70% of capital market participants indicate that creating incentives for efficiency and recognizing rising operating costs are key criteria for the attractiveness of investments in the German energy network. However, it remains unclear to what extent and by what method these rising operating costs will be recognised during the regulatory period. The planned changes in the efficiency benchmark also make it difficult to plan the return on investment.
The Federal Network Agency plans, through NEST, to determine in the future the average return on capital for German network operators based on a fixed rate. International investors generally view this change positively, as the procedure for regulatory capital returns is being standardized and becomes internationally comparable.
The other half of investors consider this change neutral, with the specific design being crucial for them.
“Investors expect a market-based return on equity and full coverage of costs for borrowed capital. The WACC approach is not a panacea for all regulatory challenges. To meet the significant need for modernization of our network infrastructure, we require an attractive and internationally competitive regulatory framework,” says Kerstin Andrea, Chair of the Executive Board of BDEW.
