Network Levy Fearing a Price Shock

Regulators plans to slash the prices utilities such as RWE and E.ON are allowed charge for distributing gas and electricity. The companies warn the cuts would weigh heavily on their bottom line and could deter investments.
Utilities are earning money on delivery electricity across Germany, including Berlin.

Germany's utilities aren't going to take it lying down. They've made that more than clear in an unusually direct letter protesting a move by regulators to slash deep into their rates of return.

The Federal Network Agency, which regulates Germany's energy grid and sets distribution prices, has moved to slash the returns utilities make on new electricity and gas infrastructure investments by 24 percent and on old infrastructure by 28 percent. This would lower the network charge consumers and companies pay to get electricity and gas delivered at home and in the office.

In a letter obtained by Handelsblatt, the German Association of Energy and Water Industries, the German Association of Municipal Enterprises and the trade union Verdi warn that the cuts would have a "massive effect on the returns" of both large companies, such as E.ON and RWE, and small municipal utilities.

Why should investors come to Germany when they can make more money in a neighboring country? Source in Utility Sector

The network agency caps rates of return to prevent utilities from exploiting their monopoly status to price gouge consumers. Currently, utilities are allowed a return on equity of 9.05 percent for new infrastructure and a return of 7.14 percent for maintaining and updating old infrastructure. Currently, the regulated distribution price of electricity, or network charge, currently adds up to €16.3 billion annually.

Under the proposed schedule, the return for new infrastructure investments would drop to 6.95 percent and the return for maintaining old infrastructure would decline to 5.12 percent. In the letter, the utilities lobby called on regulators to raise the caps on returns by "at least one percent."

E.ON chief executive Johannes Teyssen claims Germany's largest utility would lose €100 million to €200 million if the cuts go through. In 2015, half of E.ON's earnings came from its electricity network.

"We are participating in the current discussions and hope that our arguments for a higher return will lead to improvements," said Mr. Teyssen.

But the utility's loss is not necessarily the consumer's gain. The cuts would save private households that use 3,500 kilowatts of electricity annually just €5.30 on a €1,000 energy bill, according to the Association of Energy and Water Industries.

 

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RWE relies even more on its electricity network than E.ON. Chief Executive Peter Terium estimates RWE's new spin-off Innogy will derive 60 percent of its earnings from its electricity network. Mr. Terium emphasized the importance of "a predictable regulatory framework...for secure and stable earnings."

German utilities are already under tremendous financial pressure as the country's transition to renewable energy makes old fossil fuel and nuclear plants unprofitable. Subsidies for solar and wind energy have created an electricity glut that has led to steep a decline in wholesale electricity prices.

RWE, for example, received €27, or $29, for a megawatt hour of electricity on the European Energy Exchange in Leipzig in July. Four years ago, the utility received twice as much.

In the first quarter of 2016, RWE saw its earnings before tax and interest collapse by 20 percent. The utility’s coal, gas and nuclear plants brought in €354 million compared to €441 million the year before.

In this period of turmoil, the returns from operating electricity networks – though capped – became a much needed source of stable income for the utilities. But the network agency's proposed cuts now threaten that stability.

The president of the network agency, Jochen Homann, claims the cuts simply reflect the overall drop in returns on the market due to low interest rates. But a manager in the utility sector, who asked to remain anonymous, warned that the rates were lower than the European average and could hamper future investments in Germany's energy transition.

"Why should investors come to Germany when they can make more money in a neighboring country?" the manager asked.

 

Jürgen Flauger covers the energy market for Handelsblatt, including electricity and gas providers, international market developments and energy policy. Klaus Stratmann is the deputy bureau chief of Handelsblatt in Berlin and covers the energy market. To contact the author: [email protected] and [email protected]