Stand-Alone-Interconnectors: German government presents draft bill for new regulatory framework

With a draft amendment to the Energy Industry Act (EnWG), published on 9th of March 2021, the Federal Government presented, among others, the future regulatory framework for so-called stand-alone interconnectors. These are cross-border electricity cables that are not operated by a transmission system operators (TSO) which are responsible for a so called control areas, but are operated by independent companies, e.g. investment funds. The proposed model shall incentivize private investment into interconnectors by providing a secure payback and return on investment for developers.

Interconnectors are important for the enhanced integration of national energy markets. The new law shall apply to interconnector between Germany and another Member State of the EU but also between Germany and third countries, e.g. United Kingdom. With these electricity cables, electricity could be exported from Germany to other countries and vice versa. In the importing countries, this can ideally decrease the electricity price level. The German government strives to provide clarity for the financing of stand-alone interconnectors by amending the EnWG.

Current legal framework

Interconnectors can be operated by transmission grid operators who also operate the onshore grid and are responsible for a so-called grid area. This traditional form of operation is already reflected by the German regulation. Not only the TSOs, operating a grid area, but also (other) investors are interested in the operation of interconnectors. By now, the German regulatory law has not provided any special framework for such stand-alone interconnectors.


The absence of a specific regulatory framework triggers a regulatory imbalance for stand-alone interconnector operators compared to transmission system operators with control area responsibility. This is in particular true for the financing / income streams of a stand-alone interconnector. TSOs with control area responsibility can finance the grid costs with network charges. In Germany, TSOs are subject to incentive regulation (Anreizregulierungsverordnung) as a regulatory system. This regulations determines the permissible revenue of a grid operator from grid fees and is intended to incentivize transmission system operators to become more efficient and lower their costs.


Stand-alone interconnectors operated by independent companies do not have this opportunity. A characteristic feature of stand-alone interconnectors is the lack of directly connected grid users, that could generate such charges. Income from network charges is therefore impossible. Moreover, European law prohibits to charge fees for cross-bid-zone transactions.


New draft bill in a nutshell

The German government strives to close this gap and to provide an investment incentive. The draft bill contains special provisions for independent operators of electricity interconnectors. The new regulatory regime shall be applicable to interconnectors that are part of a network development plan confirmed by the Federal Network Agency (Bundesnetzagentur). It is planned to introduce a revenue mechanism in order to enable financing of stand-alone interconnectors independent of the amount of congestion revenue accruing and to ensure equal treatment with the other transmission system operators regarding the reimbursement of expenses and the return on equity.


The draft bill enables operators of stand-alone interconnectors to request the confirmation of grid costs by the Federal Network Agency. Unless the Federal Network Agency reaches a different agreement with the responsible regulatory authority of the state connected by the interconnector, the law assumes that the costs will be regulated equally by the relevant states.


The principles which apply to the calculation of charges for network access also apply in this case. The network costs for the construction and operation of stand-alone interconnectors shall correspond to the operational management of an efficient and comparable grid operator. At the same time, cost positions that would not arise in competition shall remain unconsidered. TSOs operating a grid area are already bound by these principles today.


Based on the determined grid costs, which include a risk-adequate return on equity, the operator of a stand-alone interconnector shall have a payment claim in the amount of the grid costs confirmed by the Federal Network Agency against the TSO to which network it is connected. At the same time, the operator of the interconnector is obliged to pass on its revenue to the TSO. In turn, the TSO can include the costs from the fulfilment of the payment claim as part of its revenue cap in the grid fee calculation.

 

Next steps

Infrastructure investors, like investment funds, should closely monitor the ongoing process, in particular the return on equity that will be further stipulated in a regulation to be provided by the Federal Network Agency (Bundesnetzagentur).

 

 

Authored by Alexander Koch and Malte Neumann

Contacts
Alexander Koch
Partner
Hamburg
Malte Neumann
Senior Associate
Hamburg

 

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