Regulatory frameworks

Most of our business activities are regulated and we have strict corporate governance rules to follow, since we hold a monopoly on the operation of the transmission grid in Belgium and a regional monopoly in the north and east of Germany. Our TSO licences in these two countries mean that Elia, 50Hertz and Nemo Link are subject to the European regulatory system and to different legal and regulatory systems at local levels. As regulatory risks are of high importance to us, operating under different regulatory regimes enables us to diversify our regulatory risk.

At a European level

At the European level, ENTSO-E defines common technical standards like the European Network Codes to facilitate the harmonisation, integration and efficiency of the European electricity market. Additionally, through close consultation with national TSOs and in order to better shape a fully interconnected European grid, ENTSO-E publishes a TYNDP every two years. The organisation also provides a transparency platform, which provides all European market participants with free access to European electricity market data. Moreover, the European Agency for the Cooperation of Energy Regulators (ACER) helps to ensure that the single European gas and electricity markets function properly, taking action at EU level for the benefit of all EU citizens. It assists national regulatory authorities with their functions at the European level and, where necessary, coordinates their work.

At a national level

At a national level, Elia Group’s subsidiaries must adhere to different national regulatory frameworks. In Germany, 50Hertz’s activities are overseen by the BNetzA; in Belgium, Elia’s extrahigh-voltage activities (110 kV to 400 kV) are regulated by the Belgian Federal Commission for Electricity and Gas Regulation (the CREG). Additionally, the high-voltage sections of Elia’s grid (30 kV to 70 kV) are subject to regulations set by regional regulators: the VREG in the Flemish region; the CWaPE in the Walloon region; and BRUGEL in the Brussels-Capital Region. Nemo Link is subject to a cap and floor regulatory regime, which was developed by the Office of Gas and Electricity Markets (Ofgem) in the UK and the CREG. The regime provides regulated revenue at the floor to limit the downside of the investment. Consumers in Great Britain and Belgium have to compensate for the difference if the revenue falls below the floor. At the same time, consumers are protected through the cap, which ensures that high returns are passed back to them.

Regulatory developments in Germany

The regulatory framework in Germany is based on incentives to increase productivity and reduce costs in order to avoid any negative socioeconomic impacts. This compensates for the lack of competitive pressure on grid fees due to the regional monopoly 50Hertz holds.

• For every regulatory period, a revenue cap is calculated for 50Hertz, which is based on costs during the base year. This serves as an incentive for reducing the actual costs below the cap in order to generate a corresponding additional profit.

• The return on equity (ROE) ensures an adequate return on 50Hertz’s investment in and operation of the network; this is currently fixed at 5.64% post-tax (it stands at 6.91% including corporate tax).

Given that the fourth regulatory period will run from 2024 to 2028, the current regulatory framework and relevant regulatory parameters are expected to change. In October 2021, the BNetzA set the ROE for the next regulatory period at 4.13% post-tax (or 5.07% including corporate tax) for most grid assets (those built since 2006), which represents a significant reduction compared to the current ROE. Further parameters, such as the individual efficiency factor that is subject to a national TSO benchmark and the general sector productivity factor, have yet to be determined. In 2022, the BNetzA will start assessing the cost of the base year (2021), which will serve as the basis for the revenue cap during the fourth regulatory period.

With regard to the regulatory framework as a whole, the German Bundesrat and the Federal Government confirmed an amendment to the Incentive Regulation Ordinance in July 2021. This amendment will introduce a new regime from 2024 to refinance investment cost - the so called “Capital Cost Adjustment”. Under this regime, there will be no distinction between investment measures and replacement projects, and total asset values will be updated on an annual basis. During a transition period which will cover the next regulatory period, specific arrangements such as the right to continue ongoing projects under the current regime and a fixed adder (socket) for specific assets will be in place. Moreover, an incentive mechanism for redispatching costs was introduced for the four TSOs.

Belgian tariff methodology: preparations underway for upcoming negotiations with the regulator

Although most regulatory regimes across Europe are based on a revenue cap mechanism, Elia is operating under a cost-plus model. Profit is determined by a fair remuneration mechanism and supplemented by incentives. The incentives include those for cost efficiency, market integration quality of service, innovation and continuity of supply.

The Belgian tariff methodology includes different types of tariffs: connection charges; charges for access to the network; balancing fees; and tariffs for public service obligations or other taxes, levies, additional surcharges and contributions.

Negotiations between Elia and the CREG regarding changes to the regulatory framework and the tariff methodology for the next regulatory period (2024-27) started in early 2022. We expect the new tariff methodology to be set by the end of June 2022.

The new regulations for 2024-27 should reflect the elements which are imperative for Belgium to undergo a successful energy transition, such as: the further development of infrastructure in order to integrate more RES into the system; an increase in the number of interconnectors to protect consumers against price peaks and encourage system resilience; the development of a consumer-centric market design to unlock decentralised flexibility provided by end consumers; innovation along the value chain and the digital transformation of our organisation; and any additional necessary activities to manage this additional complexity.