1. Department of Accounting and Managment Control 34th IAEE International Conference The interdependency of incentive-based regulation and environmental policy in the German electricity industry Sören Agne and Hendrik Finger Stockholm, 20 June, 2011

2. 2 Department of Accounting and Management Control Sören Agne / Hendrik Finger Introduction Methods Expert Interviews Results Simulation Results Conclusions Agenda

3. 3 Department of Accounting and Management Control Sören Agne / Hendrik Finger Introduction Environmental policy goals in Germany Reduce greenhouse gas emissions Increase the use of renewables Shut down nuclear power plants Consequences South-to-north shift of power generation Need of major electricity grid investments Re-evaluating the conditions of capital-intensive investments

4. 4 Department of Accounting and Management Control Sören Agne / Hendrik Finger Introduction Regulation of electricity grids Indispensable due to the natural-monopolistic character of electricity grids Incentive-based regulation replaced cost regulation in 2009 Aims at a sustainable and reasonable priced security of supply Current investment conditions Time lag in refinancing grid investments Incomplete recognition of capital costs Few cost pass-through elements within the incentive-based regulation

5. 5 Department of Accounting and Management Control Sören Agne / Hendrik Finger Introduction Methods Expert Interviews Results Simulation Results Conclusions Agenda

6. 6 Department of Accounting and Management Control Sören Agne / Hendrik Finger Methods Two-step approach Qualitative analysis of the condition of transmission grid investments -Eight individual expert interviews -Semi-structured and guideline-based Business simulation model -Financial simulation model based on the methodology of System Dynamics -Assessment is based on the forecast of key performance indicators for single and multiple investment decisions in the regulatory environment Exploration of the research question the model should focus on

7. 7 Department of Accounting and Management Control Sören Agne / Hendrik Finger Introduction Methods Expert Interviews Results Simulation Results Conclusions Agenda

8. 8 Department of Accounting and Management Control Sören Agne / Hendrik Finger Expert Interviews Results Sample selection and survey period Survey period January-March 2010 Interviewees represent the regulatory key actors IntervieweeCompany or InstitutionCurrent Position INT_1 Regulatory Authority Speaker INT_2 Grid Operator Head of Accounting INT_3 Grid Operator Head of Accounting INT_4 Grid Operator Head of Regulatory Affairs INT_5 Grid Operator Academic Advisor INT_6 Electricity Producer Academic Advisor INT_7 Consulting Firm Manager INT_8 Law Firm Partner

9. 9 Department of Accounting and Management Control Sören Agne / Hendrik Finger Expert Interviews Results General The need of transmission grid extension is mainly induced by political goals whereas the investment conditions are determined by the regulator Demands for sufficient investment incentives Enlarge reliability and credibility between regulatory actors Investment refinancing without time lags Increase of the achievable rate of return on grid investment Unlimited authorisation of investment budgets

10. 10 Department of Accounting and Management Control Sören Agne / Hendrik Finger Introduction Methods Expert Interviews Results Simulation Results Conclusions Agenda

11. 11 Department of Accounting and Management Control Sören Agne / Hendrik Finger Simulation Results Time lag for investment budgets in accordance with § 23 ARegV Development of the allowed revenue under different systems: MU Year (T-2) Time lag with correction factor (actual costs) (T-0) No time lag (planned costs) (T-2) Time lag (actual costs) T+2 Reference Scenario

12. 12 Department of Accounting and Management Control Sören Agne / Hendrik Finger K dnb = investment budget revenue / non-influenceable costs Transition into regular revenue path at the beginning of next regulation period Variation of the investment year between 2007 and 2011 Investment year has an impact on: Duration of authorisation as non-influenceable costs with additional correction factor Residual value within regular revenue path K b / K vnb = Inefficient and efficient costs MU T=2007 T=2008 T=2009 T=2010 T=2011 MU K dnb =5 Years K dnb =4 Years K dnb =3 Years K dnb =2 Years K dnb =1 Year Year Simulation Results Transition of investment budgets from non-influenceable to influenceable costs

13. 13 Department of Accounting and Management Control Sören Agne / Hendrik Finger Transition of investment budgets from non-influenceable to influenceable costs Simulation Parameters / Impact factors on the revenue: Investment year (T) Relative inefficiency (X ind ) General X-factor (PF t ) Consumer Price Index relationship (VPI t /VPI 0 ) Further assumptions on the development of the regulatory regime required Simulation Results

14. 14 Department of Accounting and Management Control Sören Agne / Hendrik Finger Total revenue in comparison to the reference scenario Investment year Relative efficiency MU Reference value 255.26 MU Total revenue in comparison to the reference scenario Simulation Results Assumptions: PF t = RP2 - 1.5%/yr RP3+ - 0%/yr ΔVPI t = 2.0%/yr

15. 15 Department of Accounting and Management Control Sören Agne / Hendrik Finger Rate of return in comparison to the reference scenario Investment year Relative efficiency % Rate of return in comparison to the reference scenario Reference value 6.78% Simulation Results * after-tax *

16. 16 Department of Accounting and Management Control Sören Agne / Hendrik Finger Introduction Methods Expert Interviews Results Simulation Results Conclusions Agenda

17. 17 Department of Accounting and Management Control Sören Agne / Hendrik Finger Conclusions Incentive-based regulation and environmental policy The realisation of the German environmental policy goals require a fast extension of the electricity grid and major investments but The present regulatory framework is not expected to be suitable for ensuring grid investments in the needed extent, since -The timing of investment is of great importance -Time lags reduce the investment incentives -Limited authorisation of investment budgets increases regulatory uncertainty Currently the regulatory framework does not supplement the environmental policy, their implications are divergent

18. 18 Department of Accounting and Management Control Sören Agne / Hendrik Finger Sören Agne Technische Universität Dortmund Department of Accounting and Management Control Otto-Hahn-Straße 6a 44227 Dortmund Germany Telefon: +49 231 – 755 4652 Email: soeren.agne@tu-dortmund.de Questions and Comments Hendrik Finger Technische Universität Dortmund Department of Accounting and Management Control Otto-Hahn-Straße 6a 44227 Dortmund Germany Telefon: +49 231 – 755 5289 Email: hendrik.finger@tu-dortmund.de

19. 19 Department of Accounting and Management Control Sören Agne / Hendrik Finger References Ballwieser, Wolfgang (2008): Investitionsrechnungen fu ̈ r Netze im Rahmen der Anreizregulierung, Kalkulationsgrundlagen in der Energieversorgung - Bd. 9., VWEW-Energieverlag. Bremer Energie Institut (2010): Anreiz- oder Hemmniswirkung des regulatorischen Rahmens für Erweiterungsinvestitionen der Stromübertragungsnetze, http://www.amprion.net/sites/default/files/pdf/BEI-Studie.pdf.http://www.amprion.net/sites/default/files/pdf/BEI-Studie.pdf Bundesnetzagentur (2006): Bericht der Bundesnetzagentur nach § 112a EnWG zur Einführung der Anreizregulierung nach § 21a EnWG, http://www.bundesnetzagentur.de/cae/servlet/contentblob/32084/publicationFile/1974/BerichtzumDownloadId6715pdf.pdf.http://www.bundesnetzagentur.de/cae/servlet/contentblob/32084/publicationFile/1974/BerichtzumDownloadId6715pdf.pdf Bundesnetzagentur (2008): Pressemitteilung, 07.07.2008: Anreizregulierung startet fristgerecht zum 1. Januar 2009. Bundesnetzagentur (2010): Pressemitteilung, 08.06.2010: Investitionsbudgets für Sammelanbindungen von Off-Shore-Windparks genehmigt. Burns, Phil and Riechmann, Christoph (2004): Regulatory instruments and investment behaviour, Utilities Policy, Vol. 12, pp. 211-219. Deutsche Energie-Agentur GmbH (2010): dena-Netzstudie II - Integration erneuerbarer Energien in die deutsche Stromversorgung im Zeitraum 2015 - 2020 mit Ausblick 2025, http://www.dena.de/fileadmin/user_upload/Download/Dokumente/Studien___Umfragen/Endbericht_dena-Netzstudie_II.PDF. http://www.dena.de/fileadmin/user_upload/Download/Dokumente/Studien___Umfragen/Endbericht_dena-Netzstudie_II.PDF Estache, Antonio; Rodriguez Pardina, Martin A.; Sember, German; Rodríguez, José María (2003): An Introduction to Financial and Economic Modeling for Utility Regulators, World Bank Policy Research Working Paper No. 3001. Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (2010): Energy Concept for an Environmentally Sound, Reliable and Affordable Energy Supply, http://www.bmu.de/files/english/pdf/application/pdf/energiekonzept_bundesregierung_en.pdf.http://www.bmu.de/files/english/pdf/application/pdf/energiekonzept_bundesregierung_en.pdf Forrester, J. W. (1962): Industrial Dynamics, Cambridge. Joskow, Paul L. (2006): Incentive Regulation in Theory and Practice: Electricity Distribution and Transmission Networks, CWPE 0607, Working Paper, MIT. Kurth, Matthias (2009): Was ist eine erfolgreiche Regulierung der Strom- und Gasnetze? - Rolle der Regulierungsbehörde sowie Ansätze zur Bewertung, Zeitschrift für betriebswirtschaftliche Forschung (zfbf), Vol. 61, pp. 679-697. Morecroft, John D. W. (2007): Strategic modelling and business dynamics: a feedback systems approach, Wiley. Sterman, John (2000): Business dynamics: systems thinking and modeling for a complex world, McGraw-Hill. Vogelsang, Ingo (2010): Incentive Regulation, Investments and Technological Change, CESifo Working Paper No. 2964. Von Hirschhausen, Christian and Hess, Borge (2007): Das volkswirtschaftliche Profil einer effizienten Anreizregulierung, in: Säcker, Franz J. and Busse von Colbe, Walther. (eds.): Wettbewerbsfördernde Anreizregulierung, S. 1 – 9.

20. 20 Department of Accounting and Management Control Sören Agne / Hendrik Finger Backup

21. 21 Department of Accounting and Management Control Sören Agne / Hendrik Finger Impact of the relative inefficiency on the allowed revenue Sensitivity analysis - Variation of X ind : X ind =60% X ind =100% Potential subvariants MU Year Investment year: T=2011 2013 2019 2014 2024 202920342039 2044 2049 Simulation Results * after-tax * Assumptions: PF t = 1.5%/yr ΔVPI t = 2.0%/yr