Estimating cost of equity for German gas and electricity networks

Estimating cost of equity for German gas and electricity networks

In July, the German energy regulator, Bundesnetzagentur (BNetzA), opened consultations to determine the allowed cost of equity for electricity and gas networks in Germany for the upcoming price control period.

For the forth price control period starting in 2023 for gas and 2024 for electricity, the regulator proposes an allowed rate of equity of 4.59%. This is lower than the 6.91% used in the third price control period.

In determining the risk premium for equity BNetzA relied on a study by Frontier and Professors Zechner and Randl.

In the first part of our study, we discuss different methodological approaches for estimating the cost of equity. We conclude that the Capital Asset Pricing Model (CAPM) continues to be the best available approach to estimating costs of equity for regulated companies in the given context.

Based on this conclusion, we then estimate a range for the cost of equity and compare the range with decisions on cost of equity from other European regulators. BNetzA has relied on Frontier studies for previous price control rounds (2008, 2011 and 2016).

Frontier regularly advises companies and authorities on cost of capital and other regulatory topics.

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