The fourth regulatory period for energy networks in Germany begins for gas networks in January 2023 and for electricity networks in January 2024. In this context, Oxera has been advising the networks on regulatory price-control parameters. One of the areas of ongoing debate is the regulated cost of equity for new investments.
A key question is whether the methodology used by the Federal Network Agency (Bundesnetzagentur, BNetzA) for determining the allowed equity return is robust and internally consistent. The BNetzA applies a global capital asset pricing model (CAPM), combining a German risk-free rate with a world market risk premium based on the well-known Dimson, Marsh and Staunton (DMS) dataset.
In earlier work with the German energy networks, Oxera has explored the appropriateness of using the world DMS dataset for assessing German regulated returns. This report builds on that earlier work, examining how the differentials in estimation of the risk-free rate and the market risk premium can be accounted for—including adjusting for differences in maturity and default risk in Germany relative to other countries in the DMS dataset. The report also evaluates the appropriateness of the global CAPM model application to the German context, and the adequacy of using 121 years of historical data to derive the market risk premium over a period of changing interest rates.
For an automatic translation of the report from German to English, please click here.