1. www.bundesnetzagentur.de German Aspects of European Energy Regulation Achim Zerres Bundesnetzagentur Germany

2. 2 Political agenda Energy concept for an environmentally sound, reliable and affordable energy supply Renewable energies as a cornerstone of future energy supply An efficient grid infrastructure for electricity and integration of renewables Currently under review due to the change of priorities after Fukushima Energy strategy 2020 of the European Commission of November 2010 Pan-European integrated energy market with infrastructures Europe's leadership in energy technology and innovation Safe, secure and affordable energy through active consumers (smart grids/ smart meters) Communication from the Commission "Smart Grids: from innovation to deployment", 12 April 2011, COM(2011) 202 final

3. 3 Government energy policy: Share of electricity produced from renewables shall be 35% by 2020 80% by 2050 Renewable Energy Sources Act (EEG) designed to foster this process Renewable energy targets: electricity production Electricity mix Germany 2010 Renewables: 16.4%

4. 4 Development of renewable energy production in Germany Water Biomass

5. 5 Grid expansion in Germany Additional need for electricity lines + = 3600km 2015-2020 (dena 2) 4450km by 2020 the existing transmission grid needs to be expanded by 25 percent! 850km by 2015 (dena 1) Quelle: WDR there are certain doubts, if this length is really needed by 2020 and if this amount of lines can be realised by 2020 (we have lots of delays and very small acceptance for new lines) but: in the long run (= outlook 2030 und 2050) there are even more lines necessary

6. 6 Possible alternatives? Can the need for grid expansion be reduced? by power to gas? promising option through redispatch? not reasonable does the last kWh of wind energy generation need to be transferred? political option using of the traction power network of german railways ? very difficult allocation signals for power plants? useful, but not sufficient storage? no, causes more need for expansion hot wire yes, but additional costs system monitoring (wire monitoring) yes, but additional risks

7. 7 7 The special German challenge Impact of so called nuclear moratorium and the definitive shutdown of 8.400 MW ? Krümmel No indications of concrete risk to system security at present Increased coordination efforts between TSOs and generators, a lot of interventions in the market are necessary Bundesnetzagentur warns against further shutdowns beyond the 7+1 nuclear plants if not sufficiently coordinated in advance with TSOs, power producers and European neighbours Crucial role for Bundesnetzagentur, searching for additional capacitiy to reduce risks for the networks in winter 2011/12 and 2012/13

8. 8 German paradoxon Source: TSOs As a result of the moratorium, an increase in transport capacities is required at a faster pace At the same time network conversion and reinforcement measures cannot be carried out as planned due to the increased network load. The moratorium increases the need to create the additionally planned, new network expansion paths in the German transmission network (in particular the projects under the Energy Line Extension Act (EnLAG)) in a timely manner. Disconnection Disconnection in base scenario Load factor 90 – 100% Load factor 100 – 110% Load factor 110 – 120% Load factor > 120%

9. 9 Delayed projects from the EnLAG 1 Kassø (DK) – Hamburg Nord – Dollern 2 Ganderkesee – Wehrendorf 3 Neuenhagen – Bertikow/Vierraden – Krajnik (PL) 4 Lauchstädt – Redwitz (als Teil der Verbindung Halle/Saale – Schweinfurt) 5 Diele – Niederrhein 6 Wahle – Mecklar 8 Kriftel – Eschborn 9 Hamburg/Krümmel – Schwerin 10 Redwitz – Grafenrheinfeld (als Teil der Verbindung Halle/Saale – Schweinfurt) 11 Neuenhagen – Wustermark 12 Interkonnektor Eisenhüttenstadt – Baczyna (PL) 17 Gütersloh – Bechterdissen

10. 10 Costs EU: European infrastructure package of EU-COM EU-wide: 1 trillion euros needs to be invested in energy infrastructure by 2020 500bn euros in transmission (250bn) and distribution grids (including smart grids) and storage 500bn euros in power generation (including 310-370bn in renewables ) Germany (only electricity grid) and About 30 to 55bn euros by 2020 – completion of EnLAG projects, offshore connection and expansion of the distribution network Cost depends on the degree of underground cable use, implementation of overlay grid projects and use of hot wire and the dimension of roll out of smart meters

11. 11 Consequences and The overall investments of TSOs and DSOs by 2020 will have: Impact on network tariffs household customers: 16-24% business customers: 13-21% industrial customers: 29-55% Impact on electricity prices* household customers: 3-5% business customers: 3-4% industrial customers: 4-6% * calculated on todays price levels Source: www.pixelio.de

12. 12 Distribution networks Challenges for DSOs will be : Replacement of the assets built in the 70s Connecting renewables to the grid and giving full access at all times Making the network fit for a new smart energy market

13. 13 Smart market design Smart Market Design Fotos: pixelio.de

14. 14 Investment in distribution grid Investments in distribution grid A matter of classification Smart measuring devices for end customers (smart meters) Interface between the market participants platforms for data excchange Distinction between grid and sales functionalities Technology to measure, control and balance the network Including necessary IT infrastructure for active controlling of the network Additional or modified "conventional" grid Integration of decentralized renewable energy sources Replacement of depreciated assets Smart market Smart grid "Conventional distribution grid ? ?

15. 15 Total Volume Smart Meter Smart Grid conventional distribution grid No comprehensive analysis from BNetzAs point of view as yet; numbers tend to be rather rough estmitates Ca 30bn by 2030? ca 15bn by 2020? Ca 20bn by 2020 ca 7.5bn increase of the revenue cap, if 50 % (?) can be financed through the revenue cap Bundesnetzagentur has not carried out calculations of investment cost in distribution grid Calculations of industry associations : VKU (by 2030) ? bn. 5bn. 25bn. BDEW (by 2020) ? bn. ? bn. 10-27bn.

16. 16 Questions to be answered 1. Total volume? How much investment is needed in distribution grids, distinguished between a) conventional grid b) smart market c) smart grid 2. Replacement investments? Which part of the smart grid can be financed through the revenue cap and shouldn't therefore have any effect on tariffs? 3. Increase in the revenue caps? Are there any remaining additional costs that should increase tariffs? If so, what amount? 4. Provision for additional costs in German incentive regulation? How are these (efficient) additional costs dealt with in German incentive regulation?

17. 17 Instruments of German incentive regulation Smart Meter and expansion of conventional grid efficient costs are covered by general mechanisms of German incentive regulation if the network benefits, the costs will be accepted and the investment can be refinanced by network tarifs if the supplier (or anyone else) benefits, he has to pay Smart Grid General mechanisms can also be applied: expansion factor, cost approval in base year there is no tailor-made instrument for smart grid – but: it has still to be proved, that this is really necessary Smart Meter "conventional Distribution Grid Smart Grid In the Base Year to determine the Revenue Cap … … approval in the process of cost review outside the Base Year to determine the Revenue Cap by … … expansion factor … investment budgets (for DSOs) … regulatory account -- Taken into account in the regulatory framework

18. 18 Higher returns? TSOs and DSOs ask for higher ("appropriate") returns The proposition of TSOs and DSOs: "Some countries grant higher returns. Therefore, the return on equity in Germany is too low". But: Does one indicator fit all? Some countries grant lower returns. So: Which is the right rate of return? A statement on sufficient return on equity needs to take an evaluation of entrepreneurial risk into account. Rate of return is calculated with CAPM in Germany BNetzA will not accept cherry picking Considering the low risk profile, the achievable return on equity is sufficient and suitable to attract capital for the investments needed!

19. 19 European overview Land ElectrictyGas TSODSOTSODSO Germany7,82% UK9,17%8,89%9,17%9,42% France7,15% 8,73%7,95% Italy6,75%6,85%6,70%7,25% Netherlands7,64%7,96%k.A.7,96% Nominal rate of return for equity

20. 20 Sufficient returns Any specific risks demonstrated will be reflected in suitable measures. Consistency and transparency of the regulatory regime are essential! Investors need to be able to rely on a stable regulatory regime, as yield expectations depend on risk. A short track record of a regulatory regime is expensive for a network operator (lower rating because of higher risk premiums) Therefore, moderate, carefully considered changes in the framework can be expected, but no short term manoeuvres or changes in the system!!

21. 21 The investments needed by 2020 are huge In general, network operators will be able to make the investments The achievable Return on Equity (ROE) is adequate and will attract sufficient capital for the investments needed If network operators can document any additional specific risks, these will be met by adequate risk instruments More important than "window-dressing" ROE changes is a stable, transparent and reliable regulatory framework Conclusion

22. 22 Thank you for your attention ! Achim Zerres

23. 23 Back-Up

24. 24 Financing issue highly relevant,but not the main challenge for energy infrastructure investment ! Protracted and very complex permission procedures with uncertain outcome Lack of social acceptance Challenges for the European grid

25. 25 NDP: Include the public Goal of net development plan: Increase local acceptance Prerequisite is improved transparency Consultation of net development plan on several stages: Include the public (especially the actual and potential user)

26. 26 What needs to be done? Planning authorities, BNetzA and TSOs need to seek transparent procedures and open dialogue New forms of dialogue could increase acceptance In specific cases, assess underground use and DC links Financial compensation for municipalities Enable citizens to participate in investment ("people shares") BNetzA federal planning authority?! Prevention of duplicated work Trimming of examination and provisions Acceleration of course of the procedure BNetzA can use synergy effects

27. 27 Challenges for the European grid Further obstacle: Worldwide lack of manufacturing capacity for cables and pipelines (in the short run) may not allow implementation of projects to be speeded up Would higher returns on investment change the situation ? 27

28. 28 Grid expansion To achieve the successful integration of renewable energy grid expansion is a major challenge Grid expansion is also necessary for cross-border electricity trade Energy infrastructure package by the European Commission