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In focus - Grids and Grid Expansion

Competition and Regulation

Introduction

Scales symbolising competition in the energy sector.

© istockphoto.com/DNY59

Effective competition in the energy sector is fundamentally essential to a reliable and affordable energy supply. Therefore, the state must guarantee non-discriminatory access to and competitive fees for the use of electricity and gas grids. However, the power grids and gas pipelines are what is known as natural monopolies. In view of the enormous costs of provision, it is inefficient for potential competitors to build another grid and compete with the original provider of the infrastructure. At the same time, companies operating in the energy sector normally depend on the use of the grid infrastructure. These include energy producers, energy traders on the wholesale markets and those who sell energy to final consumers.

Due to a lack of competition, grid operators are in a position to charge higher prices for the use of their grid infrastructure or to give priority to individual users. This may result in a restriction of competition on the electricity and gas markets and in higher electricity and gas prices for final consumers.

For these reasons, grid access and grid fees are subject to regulation. The Federal Network Agency and the regulatory authorities of the Länder are in charge of the regulation.x

The Incentive Regulation Ordinance exists to create competition in the monopoly sectors of electricity and gas supply, the grids, powerlines and pipelines. The Ordinance ensures that consumers benefit from fair grid fees and that the prices paid by final consumers do not exceed the operators' real costs due to the monopoly.

The grid fees account for about 25 percent of the electricity price to be paid by private households and around 20 percent of the gas price.

Pursuant to the Incentive Regulation Ordinance, there are ceilings for the revenues of grid operators based on a nation-wide comparison of efficiencies. The group of the best companies in the group being compared serves as the benchmark for the efficiency requirements. Grid operators who over-achieve their efficiency target are allowed to keep the difference as profits. This is an incentive for them to work as economically as possible.

Revision of the Incentive Regulation Ordinance

The revised Incentive Regulation Ordinance (in German) entered into force on 14 September 2016 to ensure that the grid expansion – including the integration of renewable energies – can advance rapidly and in a cost-effective manner.

The revision aims to create a balance between stable, investment-friendly rules and appropriate grid fees.

  • The first element of the revision is the creation of a better investment environment by accepting the network operators' actual investment costs. This means that individual investment costs are taken into account instead of flat rates.
  • Efficiency incentives are the second important element. The system of comparing the efficiency of grid operators has been a real success story. In order to improve the practical implementation of this system, the powers of the Federal Network Agency have been expanded. In addition to this, grid operators that are particularly efficient will be rewarded with a financial bonus. This helps spur the use of efficient and innovative solutions and keep grid charges for consumers low.
  • Improving the transparency is the third element. New publication obligations make the decisions taken by the regulatory authorities and the grid operators' costs and profits more visible.

The revision has been based on a report evaluating the Incentive Regulation Ordinance and proposals for its development that were submitted by the Federal Network Agency in January 2015.

Reform of the grid fee structure by revising the Energy Industry Act (Act on the Modernisation of the Grid Fee Structure)

On 30 June 2017, the Bundestag adopted the Act on the Modernisation of the Grid Fee Structure (in German). The Federal Ministry for Economic Affairs and Energy had submitted the draft Act. The Act aims to gradually harmonise the transmission grid fees and to slow down the rise in the 'avoided grid fees'. For this purpose, the calculation basis for the avoided grid fees will be frozen at the 2016 level, and the cost of connecting offshore wind farms and of underground cables for the transmission grid will be deducted. Furthermore, avoided grid fees for volatile electricity generation installations (wind and solar energy) will be reduced gradually in three stages from 2018 to 2020 and paid for controllable electricity generation installations only if they are connected to the power grid by 31 December 2022. This will help to reduce regional disparities in grid fees and thus in electricity prices for final customers.

'Avoided grid fees' are payments for distributed feed-in that are funded by the grid costs. Avoided grid fees had been introduced assuming that locally generated electricity is consumed at the local level – without having to use a higher-voltage structure and thus reducing the overall grid costs. But this assumption is increasingly proving to be false: rather, wind and solar power has to be transported from the north to the centres of consumption in the south and west, and this requires the use of grids. As a nation-wide average, around 10 percent of the grid fees, and in individual areas even more than 20 percent, are accounted for by avoided grid fees.

Press releases

  • 07/07/2017 - Press release - Grids and Grid Expansion

    Press release: Minister Zypries: “Reform of grid fees reduces regional disparities and distributes the costs more fairly”

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  • 03/08/2016 - Press release - Grids and Grid Expansion

    Press release: Cabinet approves Incentive Regulation Ordinance

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Access by the energy suppliers to the consumer markets is essential to diversity of choice on the energy markets. For this reason, the rights of access and connection to the networks in the power and gas sector are guaranteed by law and can be enforced by rulings of the Federal Network Agency or the Länder regulatory agencies and through the courts.

The Power Station Grid Connection Ordinance not only guarantees but also accelerates and facilitates non-discriminatory connection of new power plants to the power grid. In the event of bottlenecks in the grid, the electricity produced in new power plants even enjoys guaranteed transmission rights.

The grid system connection links energy producers and consumers with the grid so that energy can be taken out of the grid or fed into the grid. While there is a general right to be connected to the grid, there is a priority right for installations generating electricity from renewables and for CHP installations.

To ensure non-discriminatory operation of the major energy networks, energy companies that both control the grids in the monopolistic sector and also operate in the competitive sectors of generation or distribution, known as vertical integrated utilities, are required to keep these activities apart (unbundling). Grid operations must be carried out by a separate company in which decision-making on the grid business, financial reporting, grid and grid-user information and accounting are independent of the competitive lines of business (legal, operational, accounting and informational unbundling). Up to now, however, the grid operator may still belong to the same corporate group as the generation and distribution sectors.

A further change in the organisation of grid operations was initiated by the Third EU Internal Energy Market Package. To strengthen the confidence of the market players and thus the basis for genuine competition, the new European requirements prescribe stricter rules for the unbundling of the power transmission grids and long-distance gas pipeline networks. These requirements were transposed into German national law by an Amendment to the Energy Industry Act adopted in August 2011.

Structural measures such as the Power Station Grid Connection Ordinance take time to become fully effective. Until such time as competition itself exercises the desired checks and balances to ensure properly functioning markets and competitive prices, stricter antitrust monitoring for abusive pricing will be needed as a collateral measure in the medium term. For that reason, new provisions to combat abusive pricing were introduced in Section 29 of the Act against Restraints of Competition (GWB) and came into effect at the end of 2007. These supplement and add detail to the general anti-abuse regulations and make it easier for the antitrust authorities to prove when energy companies with a dominant market position are charging abusively excessive prices for electricity and gas. The provisions of Section 29 GWB are temporary and expire at the end of 2017.

The new regulation prohibits charges that are higher than those of other energy companies or other comparable companies without this being objectively justified. This gives the antitrust authorities more leeway in choosing potentially comparable companies. Another important change is the reversal of the burden of proof to justify the price difference which, in proceedings brought by the antitrust authorities, now rests with the energy company. Furthermore, and irrespective of any comparable prices, charges that unreasonably exceed the actual cost are also forbidden. On the basis of these special provisions for the energy industry, the antitrust authorities have already instituted and successfully concluded abuse proceedings against a number of energy companies, especially in the gas sector but also in the context of electrical heating prices, on the grounds of suspected abusively excessive prices charged to residential customers and small businesses. On the basis of commitments made by the companies concerned, gas and electricity customers have already received refunds or credits to the tune of around 444 and 27.2 million EUR, respectively.

At the European level, too, action is needed to stimulate cross-border trade in power and gas. The intention is that the integration of the national energy markets and the completion of the European internal energy market should create a level playing field to promote EU-wide competition. The 2009 Third EU Internal Energy Market Package goes a long way toward achieving this. In addition to the new unbundling rules, another focus of this package is on evolving the grids. The aim is to improve the regulatory framework for expanding the grids and cross-border interconnectors. Regulation (EU) No. 347/2013 of 17 April 2013 on guidelines for trans-European energy infrastructure (TEN-E Reg) establishes guidelines for the timely development and interoperability of priority corridors and areas of trans-European energy infrastructure. It sets out how grid expansion projects of common interest should be identified and their implementation facilitated, accelerated and, if expedient, financially assisted. Expanding the grids is essential not only to incorporating new power generating units into the grids but also to facilitating cross-border power and gas trading. In this way both the reliability of supplies and competition can be enhanced in the interests of German consumers.

Alongside the measures at the EU level there are a number of further initiatives aimed at intensifying cooperation between the member states and integrating their national energy supply networks. One example of these is the Pentalateral Energy Forum for Northwest Europe, founded in 2005, in which the governments of Germany, France, Belgium, the Netherlands, Luxembourg and Austria work together with regulators, grid operators, power trading exchanges and market players with the aim of linking up markets across borders. The electric power markets of these member states have been linked since 9 November 2010, significantly simplifying cross-border trading. Going forward, the member states of the Pentalateral Energy Forum also intend to cooperate in the gas sector.

In the Central/Eastern Europe region, the Central Eastern European Electricity Forum (CEEE Forum) was founded in 2009 at the initiative of Germany and Poland together with the Czech Republic, Slovakia, Slovenia, Austria and Hungary. The Forum's purpose is to coordinate the expansion of the cross-border grid infrastructure and to work more closely together on ensuring a reliable power supply. It also aims to enhance market transparency and to improve power trading between the region's member states.

There are also other intergovernmental schemes in progress, for example the Baltic Energy Market Interconnection Plan (BEMIP) and the North Seas Countries' Offshore Grid Initiative, which aspire to facilitate cross-border power and gas trade at the regional level. In all these initiatives, priority is attached to harmonizing the regulatory framework.

Further information

Section 46 of the Energy Industry Act contains rules on the granting of concessions to use municipal rights of way for electricity and gas infrastructure. It states that 'concession contracts' on the operation of lines and pipelines for electricity and gas may only be concluded for a maximum period of 20 years. The aim here is that the concessions and thus the grid operation should be able to move from one energy company to another in a competitive process.

In order to create greater legal certainty in this process, the Bundestag adopted the Act Amending the Requirements for the Award of Concessions for Networked Energy Supply on 1 December 2016.

The transformation of the electricity and gas markets, which were virtual monopolies until the late 1990s, into competitive structures has been making progress. However, it cannot be ruled out that further adjustments may be necessary to enable competition on the power and gas markets to achieve the desired dynamism. Competition in grid-bound sectors such as the power and gas industry will only be possible in future e. g. if adequate transmission and distribution capacities are available. For that reason, not only the construction of new, environmentally compatible power generating installations but also and especially extending and expanding the grid are going to be vital considerations of energy policy in the years to come. The increasing importance of cross-border power and gas trading is also going to make its mark on competition in the energy sector going forward. The amended Energy Industry Act transposing the Third EU Internal Energy Market Package into German law has paved the way for maintaining and improving competitive conditions on the energy markets.