Potential of the energy transition for investors in Germany – Noerr Insight No 5: Electricity grids

In our briefing German energy transition: Potential for investors we gave a detailed overview of the opportunities and risks of the energy transition in Germany for domestic and foreign investors. After looking in detail at the opportunities and challenges in the offshore wind, onshore wind, photovoltaics and storage sectors in our series, we take a closer look at electricity grids in part 5.

1. Current situation and challenges

An efficient power grid is the cornerstone and greatest challenge of the energy transition in Germany. This is because Germany is increasingly focusing on renewable energies such as wind and solar, which are mainly generated in eastern and northern Germany or in some cases at sea. This electricity has to be transported to the consumer. However, the largest consumers are located in the centre and south of the country. The expansion of these energy sources requires a corresponding electricity grid to transport and distribute the electricity generated from the north to the south, where the majority of energy-intensive industry is located.

Grids and other networks are attractive to investors looking for secure, long-term minimum returns rather than particularly high margins. High construction costs, a natural monopoly position of the grid/network operator (except for certain areas of the telecommunications infrastructure) and the resulting state regulation of network charges are typical characteristics. Companies that are technically capable of carrying out the expansion are ready to do so. Given the global need for expansion, some companies are now anticipating IPOs.

However, the grid expansion itself is the responsibility of the transmission and distribution grid operators, who so far seem less inclined to initiate the necessary capital procurement measures. It is also unclear whether there is a real market of potential investors who would be willing to provide this capital to the grid operators in view of the fairly low grid fees. This is because the Federal Network Agency (Bundesnetzagentur) is currently only planning to finance the expansion and renewal of the power grids (as well as financing the hydrogen core network) via grid fees, which in turn will be passed on to consumers and thus increase the price of electricity. In any case, these are currently very low; so low that the Dutch government is reluctant to make any major investments and now intends to sell its stake in the transmission system operator TenneT.

Other important networks such as gas, district heating and the future CO₂ grid, are also attractive and future investment options, some of which are still at a very early stage of project development.

2. Regulatory environment

The government’s coalition pact stipulates that the grid development plan should first focus on achieving a climate-neutral grid by 2045. The transmission system operators have complied with this with the 2037/2045 grid development plan; for the first time it maps the transport requirements for a greenhouse gas-neutral energy system in 2045. The power grid is already designed for a feed-in capacity of approx. 160 GW of onshore wind, at least 50 GW of offshore wind and 350 GW of installed solar capacity by 2037.

On 12 June 2023, the transmission system operators published their second draft of the 2037/2045 grid development plan, which includes a total of 123 new measures and over 4,800 additional kilometres of lines. The plan was approved by the Federal Network Agency on 1 March 2024. The approval includes more measures than were planned by the transmission system operators. For example, the Federal Network Agency has expanded two of the five new direct current connections by 2 GW each, in order to increase transmission capacity to the south. A total of 21 new offshore grid connection systems were confirmed. The Federal Network Agency thinks a total of 35 additional connection systems will be needed by 2045. Based on the schedules submitted by transmission system operators, the Federal Ministry for Economic Affairs and Climate Action announced that around 10,000km of grid are to be approved and put into operation by the end of 2030.

Extra-high voltage direct current transmission lines (HVDC lines), known as electricity superhighways, are a particular focus of grid expansion. The SuedLink converter is scheduled to go into operation in 2026. It will then make an important contribution to grid stability in Baden-Württemberg even before SuedLink goes into operation in 2028. SuedOstLink is scheduled to go into operation from 2027 (two years later than initially planned). The SuedOstLink converter was approved in seven months and is set for completion in 2025.

In addition to legal changes, greater financial monitoring is planned to speed things up. The Federal Ministry for Economic Affairs and Climate Action has been carrying out onshore grid expansion monitoring since 2018 and offshore grid expansion monitoring since 2020. The project sponsors and the Federal Network Agency update the Federal Ministry for Economic Affairs and Climate Action on the progress of individual projects quarterly. In October 2021, a Practical guide to grid expansion was also published. This is primarily aimed at transmission system operators and approval authorities with best practice examples and attempts to minimise delays in the approval process.

At the legislative level, the Easter Package created the option in certain cases of bringing forward the examination of preferential areas. This will take them to the stage of preparing a grid development plan and subsequently avoid federal sectoral planning.

On 3 March 2023, the Bundesrat adopted amendments to the German Renewable Energy Act (EEG), Energy Industry Act (ENWG), Federal Nature Conservation Act (BNatschG), Environmental Impact AssessmentAct (UVPG) and Wind Power Area Requirements Act (WindBG) to implement the EU framework to accelerate the deployment of renewable energy (Regulation 2022/2577), according to which both the environmental impact assessment and the species protection assessment are partially omitted in grid areas in which a strategic environmental assessment has already been done.

The German Act to Amend the Energy Security Act and Other Energy Industry Regulations (EnSiG 3.0) introduced the option of an earlier start to construction, and isolated planning approval for ancillary facilities was made possible. Short-term increases in capacity utilisation are also exempt from approval requirements.

While there is certainly movement on legislation and planning, actual progress is significantly delayed. The groundbreaking ceremony for the SuedLink power line took place on 27 July 2023. Completion of the line was originally planned for 2022, but was delayed considerably for various reasons. In 2023, only 17 of the approx. 700 km long grid had been approved; the first cables for the grid were laid just last Tuesday. Nevertheless, the expected commissioning date of 2028 is to be met.

3. Outlook

Grids are natural monopolies. In other words, it would be highly impractical and above all macroeconomically undesirable to have several power grid operators in one region. Accordingly, there are four large transmission system operators in Germany, each of which operates the grid in one control area: TenneT operates the control area from Schleswig-Holstein to Bavaria, 50Hertz operates the control area extending across eastern Germany and Hamburg, Amprion operates the control area in North Rhine-Westphalia, Rhineland-Palatinate and Saarland, and Transnet operates the control area in Baden-Württemberg.

Progress of the energy transition hinges on the expansion in particular of the TenneT grid, which is owned by the Dutch state. An attempt by the German government to acquire the German part of TenneT and form a state-controlled Deutsche Netz AG recently failed due to the associated costs for the German budget. This clearly shows the limitations imposed by the Federal Constitutional Court in its budget judgment. While private investors naturally consolidate acquisition costs with the acquired companies when taking over companies and parts of companies, the federal government would have had to finance the acquisition costs via its development bank (KfW), but would have had to recognise the interest and repayment burden in the federal budget. Whether this acquisition would really have been the right step, however, was disputed among experts, irrespective of the budgetary situation. In addition to the high purchase price, considerable investment would have been needed to further expand and repair the grid. Given these sums, one can rightly ask whether it would have been desirable for the federal government to cover these costs as the future owner simply because of its low refinancing expenses (compared to private industry) and low expected returns.

For its part, the Netherlands has signalled that it is not prepared to make the necessary investments in upgrading the German electricity grid. According to newspaper reports, the Dutch electricity grid operator is therefore currently examining another exit, e.g. an IPO or sale of its German subsidiary.

Further developments remain to be seen, even if a decision for one direction or another seems necessary. Maintaining the status quo is not an option.