21. July 2023 By Wolfgang Weber
Grid fees for gas – quo vadis?
The grid fee system for electricity and gas network operators in Germany
Grid fees, formerly and still occasionally referred to as grid usage fees, are a kind of rent charged by the respective grid operator for the use of its grid through which electricity or gas is transported. This covers the costs needed to construct, operate, maintain and renew the grid.
Since electricity and gas grids are what are known as ‘natural monopolies’, they are regulated in Germany. The German Federal Network Agency (Bundesnetzagentur, BNetzA) in Bonn is responsible for the larger network operators, while the regulatory authority of the respective federal state is usually responsible for the smaller ones. The regulatory authorities’ responsibilities include approving grid costs.
Here is a simplified version of how this works in the incentive-based regulation, which has been in force since 2009:
After the base year (the next one for gas will be 2025, and the next one for electricity will be 2026) of the current five-year regulatory period, the grid operator reports its expenses and investments from the base year (and partly also from the previous years) to the relevant regulatory authority. This authority recognises a part of the figures, but usually not a larger part. Of the recognised part, another part is then assessed in terms of efficiency using a very complex benchmark process. At the end of the review process, the grid operator in question receives a decision on which revenues it may collect in the respective next regulatory period (which is again five years). This multi-year revenue path is called the revenue cap.
From the revenue cap to grid fees
After the grid operator has been informed of its revenue cap following the base year, it forecasts sales volumes in kilowatt hours (kWh) for different customer groups based on historical data and future expectations. In addition, it must allocate its total annual revenues to all the grid levels or pressure levels it operates based on causation.
Dividing the revenue share by the sales volume then results in the grid fees in cents per kWh per customer group (for large consumers there is also a capacity charge, which depends on the peak load). Of course, the grid operator will never succeed in forecasting the future sales volumes for all of its customer groups down to the exact figure; sometimes it will collect more overall than is allowed, sometimes less. To compensate for this, the forecast is then retrospectively compared with the actual values, the difference is balanced through what is known as the regulatory account, and this influences the future grid fees.
Shares of grid fees in the gas price
In the case of gas grids, grid fees made up about one quarter of the end customer price for many years until the end of 2021. The sharp increase in the procurement costs of gas since 2022 has seen the relative share of grid fees fall, even though the absolute amount has actually increased.
In April 2023, the average cost components for EFH were 13.78 cents per kWh for procurement and distribution, 1.99 cents per kWh for grid fees and 2.38 cents per kWh for taxes and levies. This makes a total of 18.15 cents per kWh.
For comparison, in April 2021, the cost components were 2.46 cents per kWh for procurement and distribution, 1.64 cents per kWh for grid fees and 2.01 cents per kWh for taxes and levies. This came to a total of 6.11 cents per kWh.
The impact of declining gas consumption and shorter depreciation periods
In my view, there are two effects acting as the main drivers for the forecast of the further development of gas grid fees:
1) Declining gas consumption
Both specific and absolute gas consumption by end customers has been declining for years now. There are many reasons for this, including:
- New buildings now have very low heating requirements due to the ever-stricter regulations set out in the German Energy Saving Ordinance (Energieeinsparverordnung, EnEV) and the German Building Energy Act (Gebäudeenergiegesetz, GEG).
- Many new construction developments are also no longer fitted with gas at all due to the potentially low sales volumes.
- Existing buildings are increasingly being renovated, which reduces the demand for heating.
- In existing buildings, heating is being switched to other energy sources – such as electricity in the form of heat pumps – due to the high price of gas and the rising CO2 price of gas as a fossil fuel.
The Ariadne research project has developed the following forecasts up to 2045 for its ‘Technology Mix Reference Scenario’.
As I described at the start of this blog post, a simplified way to explain how grid fees are calculated is that the approved revenues are divided by consumption. However, the grid fees remain roughly the same when consumption falls, as there are almost no variable costs in gas grids. Therefore, ceteris paribus (all other things being equal), grid fees must increase at the same rate as consumption decreases.
2) Shorter depreciation periods
The next point sees us coming back to the consideration of costs. The approved revenue cap is made up of two cost blocks:
- OPEX (own and third-party expenses, grid fees of the upstream grid operator and so on)
- CAPEX (investments not yet depreciated)
CAPEX, in turn, consists of imputed depreciation and the return on equity on the imputed residual values.
Both refer to the grid operator’s property, plant and equipment required for operations.
The useful lives relevant for imputed depreciation are defined in Annex 1 of the German Electricity Grid Fees Ordinance and German Gas Grid Fees Ordinance (Stromnetzentgeltverordnung, StromNEV, and Gasnetzentgeltverordnung, GasNEV) and amount to 45 to 55 years for the most important and most valuable assets in gas grids – pipelines made of steel or PE. Grid operators usually use the lower limit, that is, 45 years for these types of pipelines. Therefore, 1/45th of the initial investment is included in the costs in each year of the imputed useful life and thus also in the revenue cap.
Since Germany has set itself the goal of being climate neutral by 2045, and achieving this is difficult to accomplish while also operating natural gas grids, gas grid operators have voiced criticism that depreciation periods of a further 45 years no longer fit in with the plan to decommission parts of the gas grids by 2045 and represent far too high a risk for new investments in business terms (stranded investments).
The German Federal Network Agency reacted to this criticism: at the end of 2022, Ruling Chamber 9 (Beschlusskammer 9, BK9), which is responsible for gas grid fees, adopted a determination on the adjustment of imputed useful lives of natural gas pipeline infrastructure and published it. Unlike Annex 1 of the German Gas Grid Fees Ordinance mentioned earlier, there is an option to shorten the useful life for new investments in the gas grid that are capitalised from 1 January 2023 onwards, which ensures full imputed depreciation by 2045. This means that from 2023, investments can be fully refinanced via the revenue cap until the planned gas phase-out in 2045.
Let us take the example of a steel pipeline that costs €1 million to build, and look at what the figures would be if it were built and capitalised in 2022, 2023 and 2030.
- Built in 2022: imputed annual depreciation included in the revenue cap until 2066: €1 million / 45 = €22,222.22
- Built in 2023: imputed annual depreciation included in the revenue cap until 2045: €1 million / 23 = €43,478.26 (imputed useful life = 23 years)
- Built in 2030: imputed annual depreciation included in the revenue cap until 2045: €1 million / 16 = €62,500 (imputed useful life = 16 years)
Every investment from 2023 onwards for which the option of shortened useful lives is exercised will thus have a significantly greater impact on the cost and revenue side than with the previous depreciation calculation – and, as can be seen above, the problem gets worse for new investments each year.
The Ruling Chamber itself comes to the (paraphrased) conclusion on the matter that it is unfavourable for the consumers, but still the best option in the current system.
The two effects explained above – declining gas consumption and shorter depreciation periods – therefore lead to successively increasing gas grid fees. The amount by which they increase will also continue to grow as we get closer to 2045.
Two other effects will also increase the price of gas. The first of these is that, at least for the next few years, rising interest rates will increase equity interest rates in the medium term, which will also increase grid fees. The second effect is the CO2 price of natural gas, which is set to increase in both Germany and the EU:
|€/t CO2||2021||2022||2023||2024||2025||2026||ab 2027|
|EU||-||-||-||-||-||-||Amount still unknown|
Natural gas with an energy content of 1 kWh releases approximately 200 grams of CO2 during combustion; an average household consumption of 20,000 kWh per year emits around four tonnes of CO2 per year.
The Ariadne project has also examined how high the CO2 price in the building sector would have to be in order to achieve the climate targets for 2030 and calculated this to be €275 per tonne. This alone would make gas about 5.5 cents more expensive per kWh.
Ceteris paribus, the gas price will thus continue to rise. As long as rival competitors in the heating market (such as heat pumps) do not become just as expensive, the incentive for consumers to move away from gas as (the intended political consequence) will steadily increase. As a result, gas consumption will continue to decline and grid fees will continue to rise, which has created a vicious circle from the consumer’s point of view that is accelerating natural gas’ transformation into a disadvantage.
Possible ways to stop or at least slow down the vicious circle
As it stands, I see two main ways to stop or at least slow down this vicious circle:
1) External grants, such as subsidies – from the federal government, for instance
I think this is a fairly unlikely option. The current system of grid fees would have to be changed significantly for this to happen, not to mention the fact it would require billions to implement. But having said that, the current system would make things absurdly expensive for the final few users of the gas grid, as the low consumption volumes would probably still be offset by incredibly high grid costs and the grid fees would rise astronomically as a result. A solution has not been found for this yet. In all likelihood, the state and/or the grid owners will have to step into the breach and provide relief.
2) Repurpose parts of the gas grids as hydrogen grids
If the gas grids were to continue to be used in full or to a large extent, then shorter depreciation periods would become unnecessary, and the effect described above would thus be eliminated or at least significantly reduced. The latest studies and forecasts, however, indicate that far too little green hydrogen will be available until at least 2035, and it will be too expensive to use it for heating in private households and small businesses, or for mobility on a larger scale.
There is also a sword of Damocles hanging over the head of any potential repurposing: the EU Commission and the EU Council of Energy Ministers plan to separate ownership of the hydrogen and gas grids at distribution grid level. Nothing has been decided yet, but it would mean that distribution grid operators would not be allowed to own and operate gas and hydrogen grids within one company. This would make it almost impossible for distribution grid operators to acquire cross-subsidisation to develop the hydrogen grid or dismantle the gas grid, and operating two companies in parallel would also become more expensive and ineffective.
As it stand, it seems likely that at least large parts of today’s transmission networks will be converted to hydrogen. However, this would presumably only affect about 10,000 of the approximately 500,000 km of Germany’s current total natural gas grid, meaning it would have minimal impact on slowing down the effect of rising grid fees.
Furthermore, it is also conceivable that parts of the grid currently operated with fossil natural gas will be run on pure biogas in the future. But even that will only affect small power supply units at most – the decline in volume would still be a problem.
The analysis shows that gas grid fees in Germany will continue to rise sharply due to declining consumption, shorter depreciation periods for new pipelines and rising interest rates. Add to this the rising CO2 price, all of which will drive up the price of gas. This increase is the intended political consequence, so as to advance the energy and climate change through falling CO2 emissions.
Gas consumers should therefore prepare themselves for further increases in gas prices and look for ways to minimise their own consumption and also look for alternatives to gas. Gas grid operators should think about their long-term grid strategy:
Realistically speaking, what do we actually still need to create hydrogen grids?
What happens in terms of municipal heating planning (unfortunately, gas grids cannot be used for conventional district or local heating grids, but it might be possible to use them for cold local or district heating grids)?
These questions need to be answered by collecting all the relevant data at an early stage and using a digital twin, for example, to run through scenarios, evaluate them and get ready to implement them in exchange with all stakeholders.
You can find more exciting blog posts from the adesso world in our previously published posts.