The Federal Network Agency (Bundesnetzagentur) is reforming the way it determines network incentive regulation in Germany, giving it a new basis and a significantly different structure.
Latest developments
Since February 2024, the Bundesnetzagentur has been working on new ground rules for electricity and gas incentives. The final draft decisions on the RAMEN proceedings on electricity and gas, as well as the decisions on network charges for electricity and gas (StromNEF and GasNEF), will shortly be sent to the Bundesnetzagentur’s Länder Committee, which coordinates between the agency and state regulators. This committee will then decide at its meeting on 13 November 2025 whether or not to approve the agency’s determinations. Should it choose not to, the Bundesnetzagentur will have to incorporate these regulators’ objections or comments when finalising the drafts.
Backdrop and impact of the Bundesnetzagentur’s determinations
The determinations will replace Germany’s Incentive Regulation Ordinance (Anreizregulierungsverordnung) as well as its current Electricity Grid Charges Ordinance (Stromnetzentgeltverordnung) and Gas Network Charges Ordinance (Gasnetzentgeltverordnung). The impetus to these changes is an ECJ judgment of 2 September 2021 (Case C-718/18), which found that certain provisions in these ordinances breached EU law, in particular because they had not been issued by the Bundesnetzagentur as the competent regulator in Germany. The Bundesnetzagentur is therefore obliged to regulate key requirements itself by issuing its own determinations in future.
The determinations made in the NEST process govern how network operators’ costs and revenue are regulated. Electricity network charges are being reformed in parallel, in the AgNes process, whose outcome will be a general electricity framework determination.
Bundesnetzagentur determinations are general orders issued by the agency’s ruling chambers. Appeals can be brought against them before Düsseldorf Higher Regional Court, and they become final and incontestable if no appeals are brought in time. In practice, determinations can generally be enforced immediately. Final determinations can only be annulled or amended subject to the strict requirements laid down in sections 48, 49, 51 Administrative Procedure Act (Verwaltungsverfahrensgesetz) or pursuant to section 29(2) Energy Industry Act (Energiewirtschaftsgesetz). The agency has broad discretion in such cases.
New three-tiered regulatory system
To implement the reform, the Bundesnetzagentur initiated several determination proceedings. These proceedings were launched based on a three-tiered system consisting of framework determinations, methodology determinations, and determinations relating to individual periods or cases. Framework determinations, such as the RAMEN determinations on electricity and gas, form the top level of the new regulatory system, both describing it in abstract terms and defining its basic standards. Then come the methodology determinations, which flesh out the methods that individual regulatory tools use to specify efficiency, productivity factors and quality metrics. The final, lowest tier, comprises individual determinations, which set out company-specific or period-based rules, such as rules regarding the return on capital and the productivity factor.
Key provisions in the final draft determinations are detailed below:
RAMEN framework determinations on electricity and gas
The two RAMEN framework determinations on electricity (GBK-25-01-1#1) and gas (GBK-25-01-2#1) are the backbone of the new incentive regulation system. They (i) set the length of the next regulatory period (initially a further five years, but future terms may be reduced to three years from 2033, depending on the outcome of a review to be completed by 2030), (ii) define key tools such as efficiency benchmarking and the general sectoral productivity factor (“Xgen”), (iii) standardise the methodology for calculating the cost of capital, and (iv) introduce a list of special cost categories (“KAnEu”). The determinations also specify the purpose and effects of the supplementary OPEX adjustment factor.
The Bundesnetzagentur is also planning to present a proposal at the end of 2025 for a new quality metric called “energy transition competence”, which will address issues such as digitalisation, training and best-practice transparency.
StromNEF and GasNEF framework determinations on base levels for electricity and gas
The StromNEF and GasNEF determination proceedings (GBK-24-02-1#3 and GBK-24-02-2#3 respectively) concern the rules for setting the base level used to calculate network operators’ revenue caps. The new regime converts the present capital maintenance system to one based purely on real capital maintenance, and introduces new rules regarding the reference basis for the weighted average cost of capital (WACC) rate, trade tax, and the flat-rate recognition of working capital. Trade tax will still be recognised on an imputed basis, including where municipal utilities combine for tax purposes.
Simplified procedure: OPEX adjustment and new access criterion
Smaller operators of electricity distribution networks may opt out of efficiency benchmarking by participating in a simplified procedure. To reflect their changing role in supply over the upcoming five-year regulatory period, their operating costs (such as staff and digitalisation costs) will be adjusted on a flat-rate basis. This will boost projected revenue in the simplified procedure as well; the Bundesnetzagentur estimates it will lead to a 2% increase across the sector. Access to the simplified procedure is also being redefined: In future, access will be determined by the adjusted revenue cap, recognising the latest changes to cost structure. Network operators in the standard procedure are expected to achieve a market coverage ratio of approx. 90% (electricity) or 84% (gas). The Bundesnetzagentur estimates that the reform will only marginally affect how many operators participate in either procedure. Objective economic performance – an easily verifiable indicator – will therefore play a greater role in determining what category operators fall into. In short: More small network operators will benefit from the potential to have OPEX adjusted. The changes will make the threshold for the simplified procedure more transparent, and bring that threshold into line with the updated revenue cap.
Efficiency benchmarking (methodology determinations)
The efficiency benchmarking determinations on electricity (GBK-25-02-2#1) and gas (GBK-25-02-1#2) define the methods and parameters for conducting efficiency benchmarking. Under the new framework, efficiency requirements will increase to better reflect the interests of network users. Key elements include defining the inefficiency reduction schedule, the calculation methods used, and rules for reconciling the determined efficiency values. Minimum efficiency in benchmarking procedures is now 70%. Inefficiency must be reduced over three years up to the next base year; the previous “best-of-four” approach has been discontinued, as has the scaling of SFA values.
Productivity factor (Xgen – individual determinations)
Draft determination GBK-24-02-3#4 defines future methodology for calculating the general sectoral productivity factor. In future, the Xgen will be calculated using a basic Malmquist model (productivity index that measures technology or efficiency-driven change) based on overall costs, and it will be applied exclusively to operating costs. In the Bundesnetzagentur’s view, this ensures that productivity-based cost reductions are systematically and transparently recognised in revenue.
Return on capital (individual determinations)
The draft determination on return on capital (GBK-25-02-3#1) contains the methodological specifications for determining the weighted average cost of capital. It specifies the methods for calculating return on equity and cost of debt as well as the gearing ratios to be applied. Standardised capital cost remuneration adjusts the debt component, attaching greater weight to years of significantly higher investment when calculating the discount rate. Weighting will be based on industry data and performed before each regulatory period. The gearing ratio for the WACC model is to be 40% equity to 60% debt. For new investments, cost of debt will be adjusted dynamically. This will increase planning certainty and reduce project financing risks, according to the Bundesnetzagentur.
Reactions from industry
For network operators, the Bundesnetzagentur stresses, the determinations mean “maximum investment security and a favourable environment for transformation”. For consumers, meanwhile, the rise in costs “has been limited to what is efficient and required”. For the operators of electricity distribution networks, the Bundesnetzagentur points out, these changes will boost revenues by around 1.4% over the 5th regulatory period. Returns above and beyond the imputed return on equity will still be possible, but will be based on genuine improvements in efficiency and productivity.
Network operators have reacted cautiously to these proposals. The majority of responses have in fact been critical, according to the German Association of Local Public Utilities (VKU). The industry is sceptical as to whether the determinations will indeed open up the anticipated room for manoeuvre. One major criticism is that the determinations take insufficient account of storage solutions and flexibility, which could create a regulatory environment that disincentivises investment. According to the VKU, however, the industry welcomes the Bundesnetzagentur’s intention to recognise the rising operating costs faced by small and medium-sized electricity network operators every year.
Conclusion and outlook
The RAMEN determinations are the new basis of incentive regulation in Germany. The upcoming regulatory period will remain five years, but a change to three-year terms will be investigated by 2030 and could apply from 2033 onwards. Efficiency benchmarking will become stricter (minimum efficiency 70%; reduction in inefficiency over three years), the methodology for determining the general productivity factor (Xgen) will be redefined, parts of the cost of capital will be standardised (WACC at 40/60), and costs not subject to benchmarking (KAnEu) will be addressed. New developments include the expansion of OPEX adjustment to operators of electricity distribution networks using the “simplified procedure” (i.e. not subject to efficiency benchmarking) as well as an objective access criterion for the adjusted revenue cap. At the end of 2025, the Bundesnetzagentur is due to present the energy transition competence rating it proposes as a quality metric.
The NEF determinations set a standardised base level for the permitted revenue, which the RAMEN rules are then applied to.
The determinations headed for the Bundesnetzagentur’s Länder Committee are due to take effect at the end of 2025, forming the basis of cost audits from 2026/2027 and for the 5th regulatory period from 2028/2029.
The electricity and gas network industry is paying close attention to the NEST process, as new methodologies and an ambitious timeline spell uncertainty for the industry. It remains to be seen whether the changes will increase efficiency and improve the business environment for network operators, as the Bundesnetzagentur envisages. We will update you on any changes that occur in the wake of the consultation with state regulators.
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