The three pillars of European energy policy have together triggered a need for investment in the electricity and gas transmission grids. Historically, the whole liberalisation process initiated in 1996 in the electricity sector and in 1998 in the gas sector with the first energy package and continued with the second and third energy packages has created a push for increased cross-border trade in electricity and gas, increasing the need for cross-border infrastructures.
Upgrading and expanding the energy transmission networks, as laid out in the Ten-Year Network Development Plans (TYNDP) 2015 (for gas) and 2016 (for electricity), is crucial. On the one hand, this is necessary for the development of renewable generation in the electricity sector, as such generation is often located far from consumption centres (like cities). On the other hand, it is needed in order to complete the gas and electricity internal markets so that physical trading constraints are removed and security of supply is maintained.
In this context, BearingPoint and Microeconomix were appointed by the DG Energy of the European Commission to realise a study on comparative review of investment conditions for electricity and gas Transmission System Operators (TSOs) in the EU.
This study aims to assess the investment requirements of the European TSOs in relation to their financing capabilities. The impact of the planned investments on the financial health of 39 TSOs present in 14 EU Member States was assessed. Below are some of the main insights of the report. The full study is available here.
How will the financing needs of TSOs evolve in the next 10 years?
Based on their comprehensive national development plans consolidated with the TYNDPs 2015 for gas and 2014 for electricity, between 2015 and 2024 the 39 TSOs studied will invest some € 65 billion in electricity transmission assets and € 20 billion at most in gas transmission.
The amount of annual network investment for the electricity TSOs in the study panel is expected to increase by 28% by 2020 compared to the average figure for the 2010-2014 period (i.e. from € 5,900 million annually on average to € 7,600 million). By contrast, in the gas sector, the total amount of network investment in the years to come (around € 2,600 million annually including the competing projects) will decrease by 13% compared to the last five years.
By simulating over 10 years both their comprehensive national development plans and current regulatory parameters, the study provided the following findings:
- Five gas TSOs (43% of 2015-2024 gas transmission investments in the panel studied) and one electricity TSO (9% of 2015-2024 electricity transmission investments in the panel studied) will face no financial problem in investing and increasing their Regulatory Asset Base (RAB);
- Eight gas TSOs (20% of gas TSOs’ investments) and 4 electricity TSOs (8% of electricity TSOs’ investments) will face no financial problem in the future due to RAB decrease;
- In addition, 3 other gas TSOs (24%) and 4 electricity TSOs (15%) will see their RAB increase end up in the upper medium grade with a debt level lower than 60% over the period studied;
- Among the other TSOs increasing their RAB, according to the results of our modelling, the adaptation of the financial behaviour of their shareholders will be needed for 2 gas TSOs (12%) and 4 electricity TSOs (41%);
- Two gas TSOs (1%) and six electricity TSOs (27%) will end up with a non-investment grade.
Considering the expected evolutions of the financial situation until 2024, some investments are at risk from a financing point of view:
- Financing needs concentrated on a small number of TSOs, requiring direct or indirect equity injection;
- Financing needs concentrated mainly on the electricity sector: ten TSOs representing 68% of 2015-2024 electricity transmissioninvestments in the panel studied.
What are the main barriers to finance investments?
The overall assessment of financing barriers from the point of view of each category of actors (gas and electricity TSOs, NRAs and investors) shows that the main barrier to finance investments is the regulatory framework of each Member State. Investors look at five criteria:
- Stability within a regulatory period and between regulatory periods;
- Recoverability of costs (capital expenditure and operational costs);
- Flexibility in the face of uncertainties linked to the investment plan;
- The authority and autonomy of the regulator;
- The equity capital access to the TSO’s shareholder structure and SPV shares.
BearingPoint and Microeconomix main recommendations
A set of recommendations were proposed based on best practices identified by the study in Member States in order to accelerate network infrastructure implementation, better allocate the global finance available and avoid over- and under-investment. Fifteen best practices, which are general recommendations, were proposed. These recommendations are represented in a benefit – implementation effort matrix in the figure below.
What impact will have future transmission investments on the transmission network tariff paid by end-users?
The wave of investments to come is expected to result in a clear increase in transmission tariffs with an evolution of transmission tariff more important in the power sector than in the gas sector (including inflation).
Nevertheless, due to the low impact of transmission on the energy bill (<10% on average) and thus on the average household expenditure basket (<0.2% on average – see fig. 6), the final impact of tariff increases and investment plans on the end-user should remain limited. All other things being equal (i.e. assuming that the other components of the energy bill do not increase more than inflation) transmission tariff variation would lead to a mean 0.05% annual increase in the gas bill, and a mean 0.14% increase in the electricity bill.