Energy grid symbolizing Incentive Regulation Ordinance; Source: BMWi/Holger Vonderlind

© BMWi/Holger Vonderlind

On 3 August, the German Cabinet adopted the Incentive Regulation Ordinance in accordance with the amendments proposed by the Bundesrat. The Incentive Regulation Ordinance is an ordinance that requires express approval from the Bundesrat. On 8 July 2016, the Bundesrat adopted several amendments. These have now been approved by the Federal Government as part of its decision of 3 August 2016.

State Secretary Baake said: "This ordinance helps create a regulatory framework for the expansion of distribution grids that is conducive to investment without losing sight of efficiency. This is an important prerequisite for quickly driving forward the energy transition in distribution grids in a way that is cost-efficient. As the regulatory body will also be required to publish more information on the work it is undertaking, this revised ordinance will also be more transparent."

The Federal Government's revised Incentive Regulation Ordinance thoroughly modernises the framework for investment for distribution grid operators. Rising shares of renewable energy are creating a need for further upgrading and modernisation of the distribution grids in the coming years. At the same time, the costs for the energy consumers need to be kept as low as possible. In order to create a more attractive environment for investment, it is to be possible to include rising capital costs from investments in the grid costs without any delay. In return, the annual cost adjustment will mean that energy consumers will benefit more quickly from lower capital costs. In addition to this, grid operators that are particularly efficient will be rewarded with a financial bonus.

The ordinance will likely enter into force before the end of this summer, after its promulgation in the Federal Law Gazette.

Details on the key points set out in the revised ordinance

Germany's distribution grids are currently the most reliable in the world. We want this to remain the case in future. The revised ordinance will therefore strengthen incentives for investment in the distribution grids.

The revised Incentive Regulation Ordinance contains three key points:

  1. The introduction of a capital cost adjustment: In order to improve investment conditions, investment costs are to be recognised in full without delay, replacing the system of offering a fixed-sum budget. In this way, investments can be refinanced straight away using grid charges. The system of providing fixed-sum budgets - which is based upon the notions of 'base effect', 'expansion factor' and 'investment measure' - is to be abolished. The costs are no longer to be compensated periodically, but will now be adjusted yearly.
  2. Effective, technology-neutral efficiency incentives: 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.
  3. Procedural rules and transparency requirements: Grid regulation procedures are complex and are often difficult to understand for both consumers and investors. Increasing transparency is to fill any gaps in information. For transmission system operators, the system of incentive regulation in place up until now will in principle continue to apply. However, some of the amendments made - including in particular the implementation of more simplified procedures and new rules on transparency - will apply to all grid operators.

Apart from the revised Incentive Regulation Ordinance, the Federal Cabinet has approved a wide number of additional decisions in the field of energy and mining law.

For example, the Cabinet has adopted a bill on the stockholding of crude oil, on the collection of data on mineral oil, and on changing to high calorific value gas. This bill means that three laws will need to be revised.

  • The revised Energy Industry Act is to include provisions that are to ensure that the necessary change from low calorific value gas to high calorific value gas can be made (change from L to H gas). This change has become necessary as, in the future, there will be less low calorific value gas available from the Netherlands and Germany. This gap will have to be covered over the coming years by changing to high calorific value gas. Around one third of gas customers are affected by this change. In order to make sure that these gas customers, who are based in the west of Germany, will be able to continue to use gas in the future, they will have to adapt their installations (such as gas boilers and gas stoves) accordingly. As a general rule, these adaptation costs will be covered by the relevant grid operator. The Federal Network Agency has been accompanying this process for many years. Further information (in German) can be found here.
  • The revision of the Oil Data Act is to ensure that governments will be able to pass their oil supply data on to the statistical offices of the German Länder.

In addition to this, the Cabinet has also approved two ordinances in the area of mining. The Bundesrat has adopted amendments for both of these ordinances, which the Cabinet approved in its decision of 3 August. These apply to the Amending Ordinance on Mining Regulations in the Area of Coastal Waters and the Continental Shelf. The ordinance implements the EU Offshore Directive.
Secondly, amendments adopted by the Bundesrat on the Ordinance on the Introduction of Environmental Impact Assessments and Requirements for Using Fracking Technology and Deep Drilling in Mining have been approved by the German Cabinet. This ordinance is part of the 'fracking package'. The Bundesrat's deliberations on the relevant bills were concluded on 8 July 2016.