Rising Interest Rates: Electricity and gas grid profitability expected to rise by 40 percent

AThey are already one of the biggest items on the electricity bill: grid charges for the use of lines that bring energy from power plants and wind turbines to households. Depending on the region, these fees are often more than a fifth of the bill. Now he can go even higher. The reason is the sharp rise in interest rates, which slows down the urgently needed billions of dollars in investment in network expansion.

Therefore, the Federal Grid Agency, which at regular intervals imposes ceilings on allowable network charges, wants operating companies to earn higher profits. “We take into account the current development of the interest rate. That is why we want to earn higher interest rates on new investments and thus create significant investment incentives for network operators,” said President Klaus Müller.

The leverage for this is the percentage of capital that operators like Eon and Amprion are allowed to use in calculating their commissions. In fact, it should decrease for power grids from 6.91% to 5.07% at the beginning of 2024. That’s what the network agency decided almost two years ago, when interest rates hit record lows.

40 percent increase

Now things are going the other way: for new investments, the market regulator wants to raise the allowable rate to 7.09 percent. The new value also applies to natural gas networks, which were already capped earlier this year. Compared to the old status, this corresponds to an increase in the return on equity for electricity and gas networks by about 40 percent.

However, companies are not allowed to charge higher interest rates in network fees for capital already invested in old shares. There, it remains at the 5.07 percent level set in October 2021. The network agency argues that such differentiation protects consumers from unnecessarily high loads.

This is acceptable to network operators because they could very cheaply finance their investment in the current low interest rate phase in the long term. “Network operators’ revenues are paid by network users, i.e. households, industry and commerce. The additional workload there should be limited to what is absolutely necessary,” Muller said.

Networks as natural monopolies

More than 800 companies operate the electricity grid in Germany, including industrial giants such as Eon, as well as numerous municipal enterprises that take care of the distribution networks. About 700 companies transport fuel to the gas market. Individual networks form “natural monopolies” as customers depend on the respective regional or local network operator. That is why the network agency makes sure that operating companies do not abuse their position by charging inflated prices and making unnecessary investments.

For months, the industry has struggled to improve return on equity. So far, the network agency has only made concessions from outside capital. There, higher interest rates should be allowed to be reflected in network fees more quickly in the future. The network agency is now also planning a change in the system for equity capital: instead of setting the interest rate for five years, it will be adjusted annually in line with current developments in the capital markets through a so-called capital cost premium.