Bun­desnet­za­gen­tur pub­lish­es de­ter­mi­na­tions on cost reg­u­la­tion for electricity and gas net­work op­er­a­tors

Year of issue 2025
Date of issue 2025.12.10

The Bundesnetzagentur has today published its determinations in the NEST process. The determinations relate to incentive regulation as a framework concept, the calculation of operationally necessary costs, the return on capital, the productivity factor and efficiency benchmarking.

“We are making cost regulation more effective, simpler and above all less bureaucratic. At the same time the framework conditions are to remain reliable. Regulation will be more conducive to investment – that is a key requirement. Investments in Germany’s electricity networks will be more attractive. At the same time, we are making sure that network operators work more efficiently and only costs that are unavoidable are factored into the network tariffs. Efficiency is key to implementing the energy transition at the lowest possible cost. We are keeping an eye on the interests of households, businesses and industry, who are ultimately billed the costs,” said Klaus Müller, President of the Bundesnetzagentur. “A transparent and open-minded culture of discussion has paid off. Sound and constructive discussions were held with the network operators and representatives of the other stakeholder groups. Input in these discussions was important, as a lot is at stake for both sides.”

Incentive regulation will remain

The Bundesnetzagentur has essentially decided to continue the system of incentive regulation that has proven its worth in Germany for all gas network operators and for electricity distribution system operators beyond 2027.

The established instruments will remain in place. Network operators’ costs will be examined periodically for a base year and then applied over several years of a regulatory period as a revenue cap. The shorter regulatory period means that changes in costs due to the transformation can be reflected more swiftly. The revenue cap determines the maximum amount that can be billed to consumers through the network tariffs. It includes a return on equity that will be re-set for each regulatory period and based on the development of interest rates in the international capital markets. The approved revenue cap for new investments will continue to be adjusted each year.

These elements will be supplemented by efficiency benchmarking, in which the authority will conduct a comparison of the network operators. This will result in individual efficiency requirements applicable to each network operator for the regulatory period.

Utilisation risks will continue to be balanced out through a regulatory account.

Investment-friendly framework conditions and strong efficiency incentives

In its final decisions, the Bundesnetzagentur found the arguments put forward by the network operators and by the federal state regulatory authorities convincing in many instances. Now, for example, the length of the regulatory period will not be shortened until the next period but one. Before that, an assessment will have to be made of whether the envisaged simplifications will be sufficient to implement a shorter examination cycle in practice.

One significant substantive change is the introduction of an instrument to adjust the operating costs for all electricity distribution system operators in the forthcoming five-year regulatory period. This will now apply to all network operators – both large and small. If an operator’s supply task grows, the costs for personnel or maintenance (operating costs) can also be adjusted.

Special mention should be given to the adjustments to the methodology for calculating the rate of return on equity. The return on equity will increase due to a new averaging method. The cost of debt used to calculate the costs for the base year will be weighted using the investment volume, provided that there is pronounced investment behaviour in certain years.

Another core element is the imputed return on capital, which in future will be calculated using the internationally established weighted average cost of capital (WACC) method. The many municipal and group companies considered it particularly important for the trade tax to still be based on calculations – as under the present system – and not on the actual taxes paid.

Compared with the current system, the Bundesnetzagentur assumes that the electricity distribution system operators’ revenue will increase by 1.4%. This will be a significant aid to the restructuring of the electricity networks. That is the pure “NEST effect”. It still does not take into account effects on revenue from larger investment volumes or higher international interest rates.

The Bundesnetzagentur is flanking the improvement in the network operators’ revenue with strong efficiency incentives. Efficiency is key to implementing the energy transition at the lowest possible cost. Efficiency benchmarking is the heart of the system of incentive regulation. All of Germany’s 900 or so network operators will be subject to efficiency benchmarking either directly or indirectly. Inefficiencies will have to be reduced over a period of three instead of five years, the values from the stochastic frontier analysis (SFA) method will no longer be scaled, and the efficiency score will be the “best of” two averages calculated using two different costing methods instead of the previous “best of four” calculated scores.

Next steps

The Bundesnetzagentur intends to highlight networks operators that perform particularly well and can serve as an example for others. It is currently working on a further development of the system of quality regulation as the last part in the NEST process. A draft determination is set to be published before Christmas, with a consultation period until the end of January 2026. It includes deliberations about energy transition competence and the specific design of a digitalisation index as well as the current system of quality regulation. The Bundesnetzagentur is looking thoroughly into alternative proposals from sector stakeholders.

The electricity transmission system operators were excluded from the general NEST process from the beginning. This is due to the operators’ structurally different investment requirements and to the large changes in the operators’ system tasks and the extremely high share of the total costs accounted for by these tasks. The Bundesnetzagentur has today published a draft determination on regulation for the electricity transmission system operators. In contrast to the rules for the other network operators, the determination sets out a system with an annual comparison between forecast and actual costs that is interwoven with strong efficiency instruments.

Background to the NEST process

The Bundesnetzagentur launched the process for laying down new rules for calculating costs and revenues, known as the NEST process (Networks – Efficiency – Security – Transforming), in February 2024. Network operators, network users and all other stakeholders had the opportunity to present their views and follow online discussions in a series of comprehensive consultations. The last step was to present the draft determinations to the federal states.

The new system of rules was necessary following a judgment issued in 2021 by the Court of Justice of the European Union (CJEU), according to which rules as are currently in place under the Incentive Regulation Ordinance (ARegV) and the tariff ordinances have to be laid down directly by the independent regulatory authority. The current rules need to be replaced with determinations issued by the Bundesnetzagentur. The Bundesnetzagentur therefore established the Grand Ruling Chamber for Energy to decide on the content of these determinations.

The determinations in the NEST process have been published online at www.bundesnetzagentur.de/1085382 (in German). The draft determination on the regulation of the electricity transmission system operators has been published at www.bundesnetzagentur.de/1052180 (in German).