Incentive-based regulation provides a framework for the German grid business

Incentive-based regulation was introduced for Germany’s electricity and gas grids in 2009. The gas transmission network is exempt from this until year-end. Incentive-based regulation decouples approved grid fees from actual costs. Prior to its introduction, the competent authorities verified the grid operators’ efficiency. Some companies were classified by the regulator as 100 % efficient. Lower-ranked companies have to achieve 100 % within two regulatory periods. The regulatory periods each last five years for the electricity grid. The first regulatory period for the gas grid is shorter. The regulator also requires all grid companies to achieve general efficiency improvements. The mandated rate of improvement is 1.25 % per annum in the first regulatory period and 1.5 % per annum in the second one. We consider the required efficiency enhancements to be ambitious. However, the RWE Group’s grid companies are already relatively efficient compared to their peers. Several of the incentive-based regulation’s major details have not yet been clarified. They mainly relate to full reimbursement of certain costs (e.g., procurement of balancing power Glossary and offsetting of grid losses), a reasonable return on debt, and the approval of budgets for big investment projects.