www.bundesnetzagentur.de

German Aspects of European Energy Regulation

Achim ZerresBundesnetzagentur Germany

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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

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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%

Mineral Oil; 1,2%

Other; 3,9%

Nuclear; 22,6%

Black Coal; 18,7%

Natural Gas; 13,6%

Wind; 5,9%

Biomass; 5,4%

Water; 3,2%

Photovoltaics; 1,9%

Brown Coal; 23,67%

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Development of renewable energy production in Germany

Entwicklung der installierten Leistung der nach EEG vergüteten Anlagen

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2002 2003 2004 2005 2006 2007 2008 2009

GW

Solar

Biomasse

Wasser

Gas

Wind

Water

Biomass

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Grid expansion in Germany

Additional need for electricity lines

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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

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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

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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

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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%

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Delayed projects from the „EnLAG“ 1 Kassø (DK) – Hamburg Nord – Dollern2 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

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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) About 30 to 55bn euros by 2020 – completion of EnLAG projects,

offshore connection andand expansion of the distribution network Cost depends on the degree of underground cable use,

implementation of overlay grid projects and use of hot wireand the dimension of roll out of smart meters

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Consequences

The overall investments of TSOs andand 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

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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

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Smart market design

Smart metering

Smart consumptionSmart storage

Smart generation

Smart Market Design

Fotos: pixelio.de

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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 balancethe 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 marketSmart grid

"Conventional“ distribution grid? ?

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Total Volume

Smart Meter Smart Grid “conventional“ distribution

grid

No comprehensive analysis from BNetzA‘s 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.

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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?

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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 GridSmart 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

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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!

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European overview

LandElectricty Gas

TSO DSO TSO DSO

Germany 7,82% 7,82% 7,82% 7,82%

UK 9,17% 8,89% 9,17% 9,42%

France 7,15% 7,15% 8,73% 7,95%

Italy 6,75% 6,85% 6,70% 7,25%

Netherlands 7,64% 7,96% k.A. 7,96%

Nominal rate of return for equity

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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!!

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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 changesis a stable, transparent and reliable regulatory framework

Conclusion

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Thank you for your attention !

Achim Zerres

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Back-Up

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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

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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)

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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

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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 ?

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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