Bundesnetzagentur publishes drafts on the future rates of return on equity for electricity and gas networks
Jochen Homann: "Rates of return on equity will fall appropriately, investments in networks remain attractive."
Year of issue 2021
Date of issue 2021.07.14
The Bundesnetzagentur has today published its draft determinations on the future rates of return on equity for electricity and gas network operators.
"We are keeping to our proven methods and ensuring a rate of return that is appropriate in the wider environment. The lower rates of return reflect the lower rates on the capital markets. The exact level of the rates has yet to be decided. We will take responses to the consultation into account in our determination,"
said Bundesnetzagentur President Jochen Homann. "We want investing in the networks to remain attractive in the long term, hence our pledge that the rate of return can be adjusted if the rate environment changes during a regulatory period. At the same time, we have to bear in mind that the returns of network operators are paid by network users, that is to say, consumers, industry and businesses. They must not bear an unnecessarily large burden."
Level of risk premium still to be determined
In the draft determinations, the Bundesnetzagentur has set out a rate of return on equity of at least 4.59% before corporate tax for new assets for both electricity and gas network operators. For old assets, a rate of return of at least 3.03% before corporate tax has been determined.
This rate of return on equity results from the ten-year average of the risk-free rate plus an appropriate risk premium.
The capital market is not currently providing any indication that the risk-free rate could rise so much during the next regulatory period that it would no longer be taken into account in the rate of return on equity determined. Nevertheless, the Bundesnetzagentur is both willing and able to adjust the rate of return on equity should rates change unexpectedly in that time.
The Bundesnetzagentur commissioned expert reports on the calculation of the risk premium. A possible distortion caused by duration and liquidity effects in the risk premium as compared to the risk-free rate was identified, which might be a reason to increase the risk premium. The Bundesnetzagentur has therefore decided to obtain further findings in the consultation with which to determine the risk premium.
The current rates are 6.91% before corporate tax for new assets and 5.12% before corporate tax for old assets. The new rates will apply from the beginning of the fourth regulatory period, ie from 2023 for gas network operators and 2024 for electricity network operators.
Consultation on draft determinations
Interested parties are invited to give their views on the draft determinations. The consultation runs until 25 August 2021. A final decision is planned for autumn 2021.
The draft determinations, along with the report from Frontier Economics, Professor Zechner and Professor Randl on the determination of the risk premiums and the report from Professor Stehle and Professor Betzer on the analysis of the central bank approaches to the determination of market risk premiums may be found on the Bundesnetzagentur website at: www.bundesnetzagentur.de/bk4-ekz.