Revision of Incentive Regulation Ordinance

After the Federal Ministry for Economic Affairs and Energy launched its consultation on the proposed revision of the Incentive Regulation Ordinance (ARegV), it is now looking at the comments. For the most part, the revision shall bring changes for distributions system operators, encouraging modernisation of the distribution grid to make it better suited to deal with increasing amounts of renewable energy.

1. Background

The ARegV is the major regulatory element for electricity and gas distribution system operators (DSOs). It stipulates the operation and expansion costs of the networks that grid operators may pass on to grid users via the grid fees for a period of 5 years. Furthermore, it contains efficiency improvement targets for each network operator. The targets are determined on the basis of efficiency benchmarking between the network operators. Below the revenue cap, network operators are free to decide based on business considerations how they want to meet these efficiency targets. If they exceed the efficiency target, they may retain the additional revenues throughout the remainder of that regulatory period. The Federal Network Agency (BNetzA) has an excellent English summary of the main tools of German in­cen­tive reg­u­la­tion on its website.

The original ARegV is from 2007, and has been applied since 2009. The draft revision is reacting on the changing requirements due to the integration of electricity from renewable energy sources into the network. 90% of renewable energy generation capacity is connected to the grid at the distribution system level, triggering substantial investment need. Consequently, investment requirements for DSOs have also changed. A new and modern regulatory framework shall enable and encourage new investments. The aim is to combine investment incentives with a cost-efficient optimisation of the network operation.

2. Key Points of the Draft

The draft consists of the following key points:

a) Comparison of Capital Costs (Kapitalkostenabgleich)

A comparison of capital costs shall be implemented. It shall allow to adjust the revenue cap due to investments made during the regulatory period. This shall incentivize new investments.

According to Sec. 10a para. 1 ARegV-E (Incentive Regulation Ordinance Draft) the regulatory authority approves a capital costs surcharge (Kapitalkostenaufschlag) on the revenue cap for capital costs that arise due to investments made into assets necessary for network operation (betriebsnotwendige Anlagengüter) after the base year. Capital costs due to investments made after the base year are not considered within the setting of the revenue cap for the next regulatory period. These capital costs shall be taken into account within the current revenue cap without time delay.

According to Sec. 10a para. 5 ARegV-E the capital cost surcharge shall only be available for DSOs. It shall replace the existing investment budgets: expansion factor (Erweiterungsfaktor, Sec. 10 ARegV), and the so called base amount (Sockelbetrag) for DSOs.

  • The expansion factor (Erweiterungsfaktor): serves as an adjustment mechanism for the revenue caps in cases where the respective DSO’s supply tasks have substantially and permanently changed during the regulatory period. It allows to adjust the revenue cap in the course of the regulatory period.
  • The base amount (Sockelbetrag): the network operator depreciates capital assets, using this to finance necessary investments. If a network operator has a stable network structure and still has positive depreciation for equipment, replacement investments within the regulatory period can be financed from what is known as the base amount without the revenue cap being directly adjusted and without the operator having any disadvantages on its return on equity.

b) Shortening of Regulatory Period and Period for Reduction of Inefficiencies

As from the third regulatory period on, the regulatory period shall be shortened form 5 to 4 years (Sec. 3 para. 2 sent. 2 ARegV-E). The aim is to allow quicker efficiency benchmarking with regard to the capital costs that lead to a capital cost surcharge on the revenue cap in the course of a regulatory period. Changes on operating costs shall also be taken into account quicker.

The period to reduce individual inefficiencies shall be shortened to 3 years (Sec. 16 para. 1 ARegV-E). So far, network operators have been able to reduce their identified inefficiencies within 10 years (first regulatory period) or 5 years (second regulatory period).

c) Efficiency Bonus

Particularly efficient network operators shall receive an efficiency bonus (Sec. 12a ARegV-E). It shall be designed as a surcharge on the revenue cap on the basis of a super efficiency analysis (Supereffizienzanalyse). Currently, occurring efficiency profits are skimmed off within the efficiency benchmarking before each new regulatory period. With the efficiency bonus it shall be possible to reward investments that have a long-term effect beyond one regulatory period. Network operators who invest in smart and innovative technologies shall therefor be rewarded.

The efficiency bonus shall not apply to transmission system operators.

d) Quicker Compensation of the Regulatory Account

So far, revenues divergent to the revenue cap have been credited on a regulatory account and compensated within the next regulatory period through increases and reductions (Zu- und Abschläge) on the revenue cap. This has led to noticeable jumps for network charges. To even the development, the compensation of the regulatory account shall take place annually over 3 years (Sec. 5 para. 3 ARegV-E).

e) No Reduction of Threshold Values within the Simplified Procedure

Electricity distribution system operators with fewer than 30,000 customers and gas distribution system operators with fewer than 15,000 customers may choose to participate in what is known as the simplified procedure. They are then not subject to efficiency benchmarking. The new ARegV draft does not reduce this threshold values as discussed in the run-up to the reform.

Within the simplified procedure, the simplified approach to costs that a network operator cannot control in the long term shall be reduced from 45% to 5% included costs for the upstream network and avoided grid fees (vermiedene Netzentgelte), Sec. 24 para. 2 sent. 3 ARegV-E.

f) Publication Requirements

The new Sec. 31 ARegV-E shall extend the publication competences of the regulatory authority. This shall increase transparency within the incentive regulation. In future, the regulatory authority will publish the essential data of the network operators in a non-anonymised form as codified in Sec. 31 para. 1 ARegV-E.

3. Next Steps

Comments on the draft were due by 3 May 2016. The Federal Ministry for Economic Affairs and Energy  will now review the received statements.

Source: BMWi, BDEW

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