With the energy transition meaning a fundamental change for the shape of tomorrow’s energy networks, today’s gas operators need to ask if efficiency benchmarking is still …. feasible.

As part of the NEST process, Germany’s Federal Network Agency (BNetzA) is currently revising the core regulatory framework for energy network operators in preparation for the upcoming fifth regulatory period (RP5).

Frontier were commissioned by BNetzA, alongside Congas and Fraunhofer IEG, to provide analysis that assessed the continued use of efficiency benchmarking for gas network operators. Our paper has shown there could be a role for this established standard with the move toward climate neutrality – but change is needed.

A benchmark for the future

The shift toward climate neutrality will fundamentally change the gas sector and, more specifically, gas network infrastructure. Much of the current natural gas infrastructure may eventually become obsolete. Some parts may be decommissioned, repurposed for hydrogen, or in some cases continue operating using biomethane or synthetic hydrocarbons.

This transformation is expected to lead to both gradual and potentially abrupt changes in supply responsibilities. In the short to medium term, gas network operators will likely follow a common path marked by steady transitions such as declining loads or the phased decommissioning of supply points. In the longer term — especially post-2035 — more abrupt changes such as the shutdown of entire (sub-) networks may occur. Both scenarios will affect the cost base and benchmarking parameters.

Decommissioning will also increase costs significantly. These costs — including pipeline shutdowns and associated infrastructure — are expected to make up a considerable share of remaining network operating costs. Unlike standard supply operations, decommissioning should be treated as a separate process. This supports the case for treating decommissioning costs, and provisions made for them, separately in efficiency benchmarking.

Hanging in the balance  

The aim of efficiency benchmarking is to compare structurally similar network operators. This requires that operators perform comparable tasks, as reflected in chosen benchmarking parameters. While some data variance and heterogeneity has always existed, the transformation may now challenge this structural comparability — potentially undermining the entire benchmarking approach.

A diagnostic framework (referred to as the "assessment grid") can be used before each regulatory period to assess whether the benchmarking process remains valid in light of sector transformation and growing heterogeneity. It also provides direction on how benchmarking might be adapted if necessary. The framework includes both conceptual and empirical considerations.

The criteria to be examined include:
•    Stage 1: Comparability of operators in terms of cost base and supply responsibilities
•    Stage 2: Methodological feasibility regarding methods, sample size, and operational implementation
•    Stage 3: Application in regulation — including consistency of efficiency targets and revenue caps

The last chance for benchmarking…

Conceptually, there are no objections to benchmarking during RP5 — if certain details are clarified.

A full application of the assessment grid for RP5 isn’t currently possible due to limited empirical data. However, based on conceptual analysis alone, it appears that benchmarking in RP5 remains feasible — the effects of transformation on costs and performance are still limited. The focus should instead be on specific implementation questions.

Key issues include:

• Depreciation adjustments (KANU 2.0  ): The use of KANU 2.0 in the 2025 base year will impact depreciation and therefore the non-standardised cost base (TOTEX) used in benchmarking. This could skew efficiency scores due to higher costs. The current “best-of-four” method for calculating efficiency values may buffer these effects, but if this method changes, cost base adjustments may be needed to contain impacts.
• Decommissioning costs and provisions: Provisions for these costs may emerge in RP5. Given their distinct role, separate treatment and possibly separate incentives may be appropriate. If excluding them from the benchmarking cost base isn’t feasible, the exemption clause under clause 15 of the incentive regulation ordinance (Anreizregulierungsverordnung, “ARegV”)  may offer a workaround.
• Clearly defined subgroups of operators: For example, network operators without concession areas (NoKG) may warrant their own category in RP5 due to differing roles.

...or time for a rebirth

Looking ahead to RP6 and beyond, the transformation of gas networks — especially post-2035 — will pose deeper challenges to benchmarking. These include:
•    Reduced comparability of cost bases due to increasing decommissioning and repurposing
•    More frequent and higher decommissioning costs and provisions
•    Sudden shifts in supply responsibilities
•    Emergence of new operator subgroups, such as “winding-down operators”
•    Increased implementation burden due to changes in data collection, frequency (e.g. if RP duration shortens to three years), or use of new benchmarking or incentive models for subgroups

None of these challenges make benchmarking fundamentally unfeasible. But they must be explicitly addressed — using the assessment grid — when evaluating and conducting future benchmarking.

Our Energy team regularly  advises both private-sector clients and public institutions about the ongoing transition to climate neutrality; for example, previously supporting BNetzA in determining appropriate capital costs.

Our team are always happy to talk. Reach out to us at hallo@frontier-economics.com, or call +49 (0) 221 337 130.