Lines are blurring and network regulation needs to react

The energy turnaround is an enormous effort. The energy industry itself must succeed in phasing out CO2-emitting electricity generation and substituting it with CO2-neutral alternatives such as wind energy and PV plants. In the heating and transport sectors, an enormous demand for heat pumps and electric vehicles is expected. A clear distinction between energy production and consumption is no longer possible. In future households and companies will not only buy electricity, but also supply their own power to the public grid.

In a previous study on the economic value of power distribution networks we have shown how important energy networks are to enable the energy transition. This requires coherent legal requirements and regulatory decisions. One regulatory parameter within these framework conditions is the "sectoral productivity factor" (Xgen), i.e. the lump-sum annual deduction from the network operators’ revenue cap. The German regulator (Bundesnetzagentur, BNetzA) has started the process for setting the level of the Xgen applicable in the 4th regulatory period for electricity (start: 2024) and gas distribution networks (start: 2023).

XGen as an enabler of energy transition

Against this background, E.ON asked Frontier to analyse the sectoral productivity factor and to make recommendations for and beyond the 4th regulatory period. The fact that the Düsseldorf Higher Regional Court (Oberlandesgericht Düsseldorf: Teilerfolg für Stromnetzbetreiber: Xgen muss neu festgelegt werden (nrw.de) has lifted the Xgen for power network operators for the current regulatory period adds to the relevance of our study. E.ON is investing around €22 billion in network infrastructure in Europe by 2026. Under incentive regulation, Xgen plays a decisive role as it determines the available financial funds and the profitability of investments into energy networks in the future.

A rapidly changing environment

For regulators, determining the Xgen is a big challenge: They have to make a forecast about future productivity gains, based on historical data. Their forecasts bear a large responsibility as they have a significant influence on the network operators’ future economic success.

The main question is: To what extent do historical data provide an appropriate view of the future when determining productivity gains? The energy industry environment in which energy network operators work has already been subject to several changes in the past and will also change significantly in future, especially in view of the ambitious energy and climate targets. Numerous investments in new facilities, the need for innovations and the new tasks being taken on are evidence of the new requirements. Electricity grids are being digitalised and gas grids face the challenge of integrating biogas and hydrogen. All this has to be taken into account when finally determining the Xgen.

More insights and options for action from our study can be found here.

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