MULTI-JURISDICTIONAL GUIDE 2014

ENERGY AND NATURAL RESOURCES

© This article was first published in the Energy and Natural Resources Multi-Jurisdictional Guide 2014 and is reproduced with the permission of the publisher, Thomson Reuters. The law is stated as at 1 September 2014.

Country Q&

A

Electricity regulation in Germany: overview Dr Dirk Uwer and Dr Daniel J Zimmer Hengeler Mueller

global.practicallaw.com/5-524-0808

OVERVIEW Electricity market

1. Provide an overview of the electricity market in your jurisdiction, including recent trends over the last 12 months.

Overview

The primary objective of German energy regulation is the supply of electricity (and natural gas) for society as a whole that is as secure, affordable, consumer-friendly, efficient and environmentally sustainable as possible. To that end, the regulation of the energy supply networks aims to ensure effective and undistorted competition in the supply of energy and at securing a long-term efficient and reliable operation of energy supply networks. Furthermore, in order to protect the climate and the environment, as well as to conserve fossil fuels, German energy policy promotes the generation of electricity from renewable energy sources.

Recent trends

The German "energy transition" (Energiewende), proclaimed shortly after the nuclear incident in Fukushima in March 2011, has been one of the main drivers for recent developments and trends in the electricity sector in Germany. The Energiewende:

• Revealed the need for reform of the Renewable Energies Act (Erneuerbare-Energien-Gesetz (EEG)).

• Exposed a lack of special rules with respect to the expansion of the German offshore grid.

• Triggered legislative changes to push through the required network expansion needed to integrate electricity generation from renewable energy sources.

• Provoked discussions of the future of "energy only" markets compared to capacity markets for new power plant projects.

The Energiewende has resulted in the German phase-out of nuclear energy by 2022 and an unparalleled promotion of electricity generation from renewable energy sources. The growing success of these concepts has led to an increased share of "green electricity", with around 24% of German electricity generation in 2013 (see Question 6), aiming to increase to 80% in 2050.

The Energiewende has revealed the need for reform of the EEG, the main statutory framework for the promotion of renewable energy in Germany. Reforms include:

• The production of electricity from renewable energy sources, which will be better integrated into the general electricity market by moving away from the fixed feed-in tariffs ("produce and forget") to a mandatory direct marketing scheme for new installations.

• Addressing concerns under EU state aid rules, as voiced by the EU Commission, about the feed-in tariff regime and its subsequent re-collection from end-users via the so-called EEG-levy (EEG-Umlage), as well as the exemptions from the EEG-levy granted to large industrial users.

The revised EEG entered into force on 1 August 2014 (see Question 24).

In order to attract investments into the German offshore grid, the German Energy Industry Act (Energiewirtschaftsgesetz (EnWG)) was amended in December 2012. The EnWG was amended to provide for a more structural approach to its development, and for a new liability regime in the case of delays in the construction, or interruptions of the operation, of offshore grid connection lines. After over a year in practice, the legislative changes have provided guidelines to investors in offshore infrastructure projects, and the overall capacity of the offshore grid has been raised to 8 gigawatts (in the North Sea) by 2019.

The offshore grid and onshore transmission and distribution grids require substantial investment to accommodate the increasing and highly volatile generation of "green energy". Since the production centres (primarily in the north and east) have moved away from the consumption centres (primarily in the west and south), new infrastructure projects, including direct current high-voltage power lines, rank high on the political agenda (see Questions 14 and 17).

Finally, as electricity from renewable energy sources also benefits from a priority connection and access to the grid (see Question 7), the increase of green electricity pushes conventional power plants with high marginal costs (in particular, modern gas-fired power plants) out of the market. The ongoing discussions of a potential move from energy-only markets to some form of "capacity markets" is expected to gain momentum in 2014 (see Question 24).

Regulatory structure

2. Describe the regulatory framework for the electricity sector, including the regulatory authorities.

Regulatory framework

The energy sector in Germany is governed by a number of acts and ordinances which are subject to constant modifications and amendments. The main pieces of legislation are the Energy Industry Act (Energiewirtschaftsgesetz (EnWG)) and the Renewable Energies Act (Erneuerbare-Energien-Gesetz (EEG)).

Under the EnWG of 2005, electricity grid operators could not be involved in electricity production or electricity sales activities of a vertically integrated energy utility. Electricity grids, in general, needed to be operated through legally separate entities ("legal unbundling"). In addition, organisational structures had to guarantee the independence of the decision-makers responsible for the operation of the grid ("operational unbundling"). In addition, the rules on "informational unbundling" required the strict confidentiality of economically sensitive information obtained through grid operations, as well as the non-discriminatory disclosure of grid-related information potentially offering economic benefits to the upstream or downstream level. Finally, internal accounting as well as financial reporting had to be separated from trade-related accounting ("unbundling of accounts").

global.practicallaw.com/energy-mjg

Coun

try

Q&

A

Since the transformation of the European third energy law package into German law in 2011, the revised EnWG provides for stricter unbundling rules for electricity transmission system operators (TSOs). The new law provides for three unbundling models with different levels of structural separation of grid operation from production and supply activities. The three unbundling models are:

• Full ownership unbundling.

• Independent system operator (ISO).

• Independent transmission operator (ITO).

All three models are aimed at discouraging vertically integrated energy utilities from discriminating against competitors in terms of access to, and investments in, the grid.

Regulatory authorities

The main regulatory authorities are the:

• Federal Network Agency (Bundesnetzagentur (BNetzA)).

• State regulatory authorities (Landesregulierungsbehörde).

• Federal Cartel Office (Bundeskartellamt (BKartA)).

• Market Transparency Authority for Electricity and Gas (Markttransparenzstelle Strom und Gas (MTS)).

• Federal Environment Agency (Umweltbundesamt (UBA)).

• German Emission Trading Authority (Deutsche Emissionshandelsstelle (DEHSt)).

The BNetzA and the regulatory authorities of the federal states (Bundesländer) are responsible for the regulation of the electricity grids. The state regulatory authorities are responsible for regulating energy supply companies with fewer than 100,000 customers connected to their electricity supply grids and whose grids do not extend beyond a federal state's borders. Hence, the BNetzA is generally competent for electricity TSOs in Germany.

The BNetzA's central task is to create the conditions for fair and effective competition on the upstream and downstream markets for the supply of electricity. The BNetzA's regulatory task is to:

• Ensure non-discriminatory grid access.

• Control grid access tariffs charged by grid operators.

• Safeguard against anti-competitive practices by grid operators.

• Monitor the implementation of the regulatory regime.

The BKartA is responsible for:

• Merger control.

• The protection of competition.

• The operation of the MTS in co-operation with the BNetzA.

The UBA is the competent authority for environmental issues. It includes the DEHSt which governs the trading of emission certificates under the Kyoto Protocol.

See box, The regulatory authorities.

ELECTRICITY COMPANIES Main companies

3. What are the main companies involved in electricity generation, transmission, distribution and supply in your jurisdiction?

The German electricity market has undergone substantial change over the decades. Until 1998, the market was characterised by a few electricity companies, who benefited from regional monopolies covering all levels of electricity production. Following on from

European Union efforts to liberalise the market, starting with the first internal energy market package in 1996, the German electricity market has gradually become more differentiated. In addition to regulation, the different levels of the electricity markets continue to be subject to scrutiny by the Federal Cartel Office (Bundeskartellamt (BKartA)). In particular, the BKartA has been critical of minority shareholdings in municipal utilities from the "Big Four" electricity generators: RWE, E.ON, Vattenfall or EnBW.

Generation

In 2013, the "Big Four" still accounted for 65.3% of electricity production in Germany, disregarding their indirect production by minor shareholdings in other electricity companies. However, compared to their share of 78.5% of electricity production in Germany in 2008, the attempt to liberalise the market appears to have been a success.

The German Monopoly Commission (Monopolkommission), which advises the German federal government, stated in its 2013 report that it no longer considered the electricity generation market to be controlled by the "Big Four". Apart from these major producers and a few other large-scale generation companies (such as STEAG), the electricity generation market consists of a large number of independent companies, most importantly public utility companies.

Transmission

The electricity generated in domestic power plants or imported into Germany is transported to the end customers through an interconnected electricity system. There are currently four transmission system operators (TSOs) that form the German interconnected system (Verbundnetz):

• 50Hertz.

• Amprion.

• TenneT TSO.

• TransnetBW.

Due to the increased unbundling requirements of the European Union, the structure of the electricity transmission market has changed significantly over the last few years. Three of the "Big Four" vertically integrated energy suppliers have sold at least a majority stake of their electricity TSO to third parties. E.ON and Vattenfall sold their transmission systems in their entirety and RWE has retained a minority shareholding of 25% in Amprion. Only EnBW remains as a sole owner of TransnetBW. Currently, 50Hertz is owned by the Belgian TSO Elia and an Australian fund, Amprion is held by a consortium of several banks and insurance companies, and TenneT TSO is ultimately owned by the Dutch State.

For the impact of the German Energiewende (energy transition) on electricity transmission in Germany, see Questions 8 and 14.

Distribution

German distribution system operators (DSOs) are typically owned by municipalities. This accounts for the large number of 869 electricity DSOs in Germany in 2014. While the "Big Four" have managed to acquire shares in numerous DSOs through privatisation efforts by the municipalities in the past, the German distribution market has seen a reverse trend in recent years. This is due to municipalities, often guided by the will of the local people, increasingly attempting to regain sole control over the DSOs (Rekommunalisierung). Secondly, the Federal Cartel Office also tends to prohibit new acquisitions by the "Big Four" in order to ensure the success of the liberalisation efforts on the transmission and generation level.

Supply

The liberalisation of the supply market has been even more pronounced than the liberalisation of the transmission market. Under the EnWG and the Ordinance on Electricity Network Access

global.practicallaw.com/energy-mjg

Country Q&

A

(Stromnetzzugangsverordnung (StromNZV)), the position of supply companies, as well as end-consumers, is strong. Therefore there is a large and competitive supply market. Since the beginning of the liberalisation efforts in 1998, at least one-third of customers had changed electricity supplier. In 2014 this ratio is expected to rise to some 40% or 50%. Renewable energy suppliers are particularly benefiting from this trend.

Unbundling requirements

In accordance with the transposed EU unbundling requirements, electricity grid operators on both the transmission and distribution level must comply with legal, operational and informational unbundling as well as unbundling of accounts. In addition, electricity TSOs are subject to either full ownership unbundling or must ensure that the grid operation is independent of both electricity production and supply within a vertically integrated energy utility (independent transmission operator (ITO)). In Germany, a third unbundling model (independent system operator (ISO)), provided by EU regulation, is of no practical relevance (see Question 2).

Foreign ownership

4. Are there any restrictions concerning the foreign ownership of electricity companies in your jurisdiction?

The Federal Ministry of Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie (BMWi)) is empowered to review the acquisition of any German company by a non-EU purchaser or a purchaser not in the European Free Trade Association, under the German Federal Foreign Trade Act (Außenwirtschaftsgesetz) and its corresponding ordinance (Außenwirtschaftsverordnung).

In order to guarantee public order and security, and to protect, inter alia, the energy needs of Germany, the BMWi may prohibit foreign acquisitions or impose restrictions. Despite the importance of the electricity market, the BMWi has so far not intervened in any foreign investments in this market.

In any case, acquisitions by foreign companies are, similar to those of German companies, subject to merger control by either the Federal Cartel Office (Bundeskartellamt) or the European Commission.

Import of electricity

5. To what extent is electricity imported in your jurisdiction and are there interconnection issues?

Germany is currently a net exporter of electricity. In 2013, Germany imported 43 terrawatt-hours (TWh) of electricity, but at the same time exported 77TWh. The export surplus increased by 50% compared to 2012, which had already been a record year. With electricity production from renewable energy sources increasing, and the continuing importance of conventional power generation (to account for the volatile production from renewables and to gradually replace phased-out nuclear power plants), it is expected that Germany will continue to be a net exporter of electricity in the near future.

Germany trades electricity with nearly all its neighbouring states and Sweden. In 2013 nearly half of the German power exports went to Austria, followed by The Netherlands, France, Denmark, Switzerland and Sweden. Imports mainly came from Austria (40%) and the Czech Republic (28%), followed by Switzerland, Denmark, France, Poland and Sweden.

Such cross-border trades are today facilitated by the North Western Europe (NWE) Price Coupling Initiative covering the Nordic region (Denmark, Finland, Norway and Sweden), the Central

Western Europe region (BeNeLux, France and Germany) and Great Britain. The Baltic States, Poland and Austria are indirectly part of the system due to their tight coupling with some of the mentioned states. In addition, a new 1400MW interconnector Nord.Link between Norway and Germany is currently in the development phase and scheduled to be operational by the end of 2018.

ELECTRICITY GENERATION AND RENEWABLE ENERGY Sources of electricity generation

6. What are the main sources of electricity generation in your jurisdiction?

The overall electricity generated in Germany in 2013 came from the following sources:

• Lignite (Braunkohle), 25.6%.

• Renewable energy, 23.9%.

• Hard coal (Steinkohle), 19.6%.

• Nuclear fission, 15.4%.

• Natural gas, 10.5%.

Fossil fuels

While both Germany and the EU are committed to decreasing carbon dioxide emissions, fossil fuels are currently still the main source for electricity generation (55.7%). They are expected to remain important in the medium term due to the German nuclear phase-out and the challenges of renewable energy sources (that is, their volatility in production and insufficient transmission capacities, see Question 8).

Nuclear fission

In Germany, since the 1970s the policy on nuclear power has been controversial and subject to many changes in recent years. In 2000, the federal government and the operators of the German nuclear power plants agreed on a complete nuclear phase-out, prohibiting the construction of new plants and limiting the generation of the existing plants to maximum quantities. In 2010, the then federal government substantially increased the maximum quantities, effectively extending the lifetime of the existing nuclear power plant fleet.

However, as an immediate reaction to the Fukushima catastrophe in March 2011, the federal government issued a moratorium ordering the immediate shut-down of the seven oldest as well as one additional nuclear power plant which was, at the time, temporarily out of order due to safety issues. At the same time, the 2010 extension of nuclear power in Germany was withdrawn, reinstating the complete phase-out from nuclear power by 2022. Both measures have provoked a number of legal proceedings by operators of nuclear power plants which are currently pending before German courts. In 2014, nine nuclear power plants are still in operation in Germany with the next plant to be shut down in 2015.

Renewable energy

Renewable energy sources accounted for 24% of German electricity generation in 2013. It marked yet another historic high following the overall trend of increasing importance of renewable energy sources in the German energy mix (growing from 6% in 2000 to 20% in 2011 and 23% in 2012).

Based on the overall electricity generation, the share of the renewables was spread over the various sources as follows:

• Wind energy, 8.4%.

• Biomass, 6.7%.

global.practicallaw.com/energy-mjg

Coun

try

Q&

A

• Photovoltaics, 4.7%.

• Hydroelectric power, 3.2%.

• Renewable waste generation, 0.8%.

7. Are there any government policies, targets or incentives in place to encourage the use of renewable energy?

The German policy on renewable energy is primarily regulated in the German Renewable Energies Act (Erneuerbare-Energien-Gesetz (EEG)), which is at the time of writing (summer 2014) subject to legislative revision (see Question 1).

Government policies/incentives

Under the current EEG, electricity generation from renewable sources enjoys, in particular, the following privileges:

• Priority connection to the grid (with the grid operator's obligation to optimise, enhance or expand the grid if necessary).

• Priority access to the grid.

• Fixed feed-in tariffs (or, alternatively, direct marketing including a market premium and management fee).

Renewable energy targets

Under the coalition agreement, the current German federal government aimed at setting the targets for the amount of electricity generated from renewable sources to 45% in 2025 and 65% in 2035. However, the most recent draft of the EEG in 2014 softened these targets to 40% to 45% in 2025 and 55% to 60% in 2035, which nearly correspond to the targets already provided for under the current EEG. In 2050, 80% of the electricity generation should be sourced from renewable energies.

However, since these targets are only addressed in the general purpose part of the EEG, they are mere policy statements. Hence, there are no defined sanctions should these targets not be met in the future.

See table, Common forms of renewable energy.

8. What are the main obstacles to the development of renewable energy in your jurisdiction?

Both the increasing amount of electricity generated from renewable sources and their volatility in production is challenging both from the perspective of stability of the grid and security of supply.

During the times when renewable energy sources generate sufficient electricity, transmission and distribution can develop into a "bottleneck". In comparison to traditional fossil and nuclear plants, which are located near Germany's industrial centres in the west and south, electricity from renewable sources is mainly produced in the north and east, requiring transmission and distribution capacities to the load centres in Germany. The electricity grid development plan 2014 is aimed at addressing this issue by, among others, providing for the construction of 800km of new lines and the improvement of 4,400km of existing lines.

By contrast, with regard to renewable energy's low-phases, the need for generation capacity in conventional power plants has initiated discussions regarding different forms of capacity markets, potentially replacing the traditional German energy-only market (see Question 1).

9. Are there any plans to build new nuclear power stations in your jurisdiction?

Since the first nuclear phase-out implemented in 2002, it is illegal to build new nuclear power plants in Germany. The last operational nuclear power plant will be shut down in 2022 (see Question 6).

Authorisation and operating requirements

10. What are the authorisation requirements to construct electricity generation plants?

The construction of electricity generation plants generally requires the following authorisations:

• A permit under the Federal Emission Control Act (Bundes-Immissionsschutzgesetz (BImSchG)), including an environmental impact assessment under the Federal Environmental Audit Act (Gesetz über die Umweltverträglichkeitsprüfung).

• A building permit under the Federal Building Act (Baugesetzbuch) and the building acts of the federal states (Landesbauordnungen).

• Water permits for, for example, waste water discharge and water abstraction, regulated in the Federal Water Act (Wasserhaushaltsgesetz (WHG)) and the water acts of the federal states (Landeswassergesetze).

However, the permit under the BImSchG (if required) includes any building permits and/or installation-related water permits.

11. Are there any requirements to ensure new power stations are ready for carbon capture and storage (CCS) technology, or requiring a plant to retrofit CC technology once this is ready?

In Germany, CCS technology is regulated in the Carbon Dioxide Storage Act (Kohlendioxid-Speicherungsgesetz (KSpG)) of 2012, which also implements EU Directive 2009/31/EC into national law. For political reasons, the KSpG only deals with the research on CCS and not with its potential large-scale future use. Hence, the KSpG itself does not contain any requirements for new generation plants. However, under relevant environmental law provisions, new power stations with a nominal capacity of 300MW and above already require an assessment of respective retrofit capabilities as well as storage or transport capacities. While there is not yet a retrofitting obligation, relevant areas (for storage or transport) of the construction site need to be reserved for that purpose. By contrast, a negative assessment does not block the project's eligibility for approval.

It should be noted that the most prominent German CCS pilot research facility operated by Vattenfall was abandoned in April 2014 due to uncertainty about future legislation and strong reservations by the general public.

12. What are the authorisation and main ongoing requirements to operate electricity generation plants?

The relevant operating permits (Betriebsgenehmigungen) required for the operation of an electricity generation plant generally correspond to, and are already contained in, the respective construction permits (see Question 10). There are no further ongoing requirements except for those individually stipulated in

global.practicallaw.com/energy-mjg

Country Q&

A

the construction/operation permits (conditions, determinations, and so on).

Since December 2012, the final shutdown of an electricity generation plant with a nominal capacity of more than 10MW must be announced to the "system-responsible" (systemverantwortlicher) TSO and the Federal Network Agency (BNetzA) at least 12 months in advance. If the plant is considered "system-relevant" (that is, required to ensure a security of supply) and the continued operation is technically and legally feasible, its shutdown is prohibited.

13. What requirements are there concerning interconnection of generation to the transmission grid?

The interconnection, that is, the physical connection (Netzanschluss), of electricity generation facilities to the transmission grid is regulated in the Ordinance on the Connection of Power Plants to the Supply Grid (Kraftwerks-Netzanschluss-Verordnung (KraftNAV)) (for power plants with a nominal capacity of 100MW and above connected to the 110kV transmission grid and above) or in the EnWG for smaller-scale power plants. Accordingly, TSOs are generally obligated to connect power plants on an economically reasonable, non-discriminatory and transparent basis. In addition, the Renewable Energies Act (Erneuerbare-Energien-Gesetz (EEG)) as well as the Combined Heat and Power Act (Kraft- Wärme- Kopplungsgesetz (KWKG)) provide for a priority connection of renewable energy or co-generation facilities (see Question 7).

ELECTRICITY TRANSMISSION Authorisation and operating requirements

14. What are the authorisation requirements to construct electricity transmission networks?

In general, the construction of transmission networks is subject to a two-pronged authorisation process. Based on a regional land use planning procedure under the Federal Spatial Planning Act (Raumordnungsgesetz), a planning approval procedure under the EnWG takes place. The approval of the plan substitutes all other public-law permissions (Konzentrationswirkung). For both, the authorities of the federal states are competent to approve the plans. Therefore, projects which cover more than one federal state necessitate the co-ordination of different state authorities.

For the construction of electricity transmission networks and to support the German energy transition (Energiewende), two further Acts were recently implemented:

• The Federal Network Expansion Act (Energieleitungsausbaugesetz (EnLAG)), enacted in 2009 and amended in 2013.

• The Federal Network Expansion Acceleration Act (Netzausbaubeschleunigungsgesetz (NABEG)), enacted in 2011 and amended in 2012.

While the EnLAG left the two-pronged approach under the EnWG unchanged, it allows several named projects to skip the usual necessity analysis procedure (Bedarfsanalyse) under the EnWG. Furthermore, it shortens the legal recourse for actions to only one instance at the Federal Administrative Court (Bundesverwaltungsgericht). By contrast, the NABEG introduced a simplified permitting procedure for spatial planning and established a special planning approval procedure for certain other projects. Most importantly, under the NABEG, the Federal Network Agency (BNetzA) is the competent authority for both procedures.

The relevant NABEG-projects are to be found in the Federal Necessity Plan Act (Bundesbedarfsplangesetz (BBPlG)), enacted in 2013. This statute is the result of a completely new necessity analysis process. Under the EnWG of 2012, the four German electricity TSOs have to submit a joint national grid development plan to the BNetzA on 3 March each year. The plan needs to be based on a framework scenario (Szenariorahmen) which takes into consideration the future production and consumption of electricity. The plan must also consider future infrastructure projects and the non-binding, EU-wide grid development plan established by ENTSO-E under Regulation (EC) 714/2009 (Article 8). Based on this, the BNetzA must draft the three year federal necessity plan (Bundesbedarfsplan), which in turn is the basis for the BBPlG.

15. What are the authorisation and main ongoing requirements to operate electricity transmission networks?

An operating permit by the state regulatory authority and certification by the Federal Network Agency (BNetzA) are required to operate a transmission network. Operating a transmission system without such a permit or certification is an administrative offence and can be punished by a fine of up to EUR1 million or up to three times the amount of the additional proceeds obtained by the violation.

Under the Energy Industry Act (EnWG), grid operators are obligated to operate a safe, reliable and efficient grid on a non-discriminatory basis. They have to maintain, expand and optimise the grid meeting the demands of the market, to the extent that this is economically reasonable. In addition, TSOs responsible for a control area are obligated to continuously ensure the capability of the system to satisfy demands for the transmission of electricity and, particularly, to contribute to the security of supply by the appropriate transmission capacity and reliability of the system. Finally, TSOs must connect power plants to their grid and grant access to them (see Question 13).

Rates

16. How are the rates and conditions for the transmission of electricity regulated?

While the conditions for access to electricity transmission grids are governed by the Ordinance on Access to the Electricity Supply Grid (Stromnetzzugangsverordnung (StromNZV)), the rates for such access are regulated in the Ordinance on Tariffs for Access to the Electricity Supply Grid (Stromnetzentgeltverordnung (StromNEV)) and the Ordinance on Incentive Regulation (Anreizregulierungsverordnung (ARegV)).

In 2009, the previous ex ante cost-oriented regulation of the grid access tariffs was to a large extent replaced by an incentive regulation (Anreizregulierung). It aims to enhance efficiency among the grid operators. Different from the previous static cost-based tariff regime, the incentive regulation stresses dynamic efficiencies. Within a regulatory period (of five years), grid operators are allowed to collect the economic benefits resulting from efficiency gains. However, during the next regulatory period the benefit resulting from the improvement in efficiency must be passed on to the customers through a decrease in grid access tariffs.

For each grid operator, the Federal Network Agency (BNetzA) defines a revenue cap (Erlösobergrenze) for each calendar year of a regulatory period. For electricity TSOs, the first regulatory period ended on 31 December 2013 and the second regulatory period extends from 1 January 2014 to 31 December 2018.

global.practicallaw.com/energy-mjg

Coun

try

Q&

A

ELECTRICITY DISTRIBUTION Authorisation and operating requirements

17. What are the authorisation requirements to construct electricity distribution systems?

The authorisation requirements for the construction of electricity distribution systems are generally the same as for transmission systems (see Question 14). However, distribution network operators do not benefit from either the Federal Network Expansion Act (EnLAG) or Federal Network Expansion Acceleration Act (NABEG) procedures as those are reserved for projects on the transmission level.

18. What are the authorisation and the main ongoing requirements to operate electricity distribution systems?

The requirements to operate distribution systems in Germany are equivalent to those for transmission systems (see Question 15) with the exception that distribution system operators do not need to be certified by the Federal Network Agency (BNetzA).

Under the Energy Industry Act (EnWG), distribution system operators (DSOs) are responsible for the safety and reliability of their grids. They are also generally responsible for (smart) metering to monitor both electricity consumption and effective utilisation periods. Larger DSOs also have to annually report the current state of their grids and the impact of the expanding renewable energy sources to the competent regulatory authority. As regards the latter, DSOs are obligated to grant both priority connection and access to operators of renewable energy facilities under the EEG (see Question 7).

Rates

19. How are the rates and conditions for the distribution of electricity regulated?

The rates and conditions for access to distribution systems are generally equivalent to those for transmission systems (see Question 16). However, under the current incentive regulation scheme, investments on the distribution level are treated differently from the transmission level. In addition, tariffs for electricity distribution systems are calculated by taking into account a quality element reflecting network reliability and network performance.

ELECTRICITY SUPPLY Authorisation and operating requirements

20. What are the authorisation and the main ongoing requirements to supply electricity systems?

The commencement or termination of supply of electricity to household customers must be notified to the competent regulatory authority, the Federal Network Agency (BNetzA) or the respective state regulatory authority (see Question 2). The authority is empowered to prohibit the business at any time if the supplier does not have the adequate human, technical or economic resources.

In 2006, the BNetzA issued guidelines on business processes for the supply of electricity to customers (Geschäftsprozesse zur Kundenbelieferung mit Elektrizität (GPKE)). The supply companies must comply with these rules. In addition to these general requirements, the supply company with the highest market share in a given network area is responsible for the basic supply

(Grundversorgung), subject to the Ordinance on Electricity Basic Supply (Stromgrundversorgungsverordnung (StromGVV)).

Trading between generators and suppliers

21. How is electricity trading (between generators and suppliers) regulated?

Both stock exchange trading and over-the-counter trading of electricity are subject to general trading regulations.

With regard to specific energy regulation, the EU Regulation 1227/2011 on wholesale energy market integrity and transparency (REMIT) is aimed at combatting electricity insider trading and market manipulation. In co-operation with the Federal Network Agency (BNetzA) and the Federal Cartel Office (Bundeskartellamt), the newly established Market Transparency Authority for Electricity and Gas (Markttransparenzstelle Strom und Gas) acts as the national monitoring body under REMIT. Non-compliance with REMIT may constitute an administrative offence and be subject to a fine of up to EUR1 million. A breach may even constitute a criminal offence punishable with imprisonment of up to five years.

Rates and conditions of sale

22. How are the rates and conditions of sale regulated at the consumer and wholesale level?

Consumer

Conditions of sale are subject to the guidelines on business processes for the electricity supply of customers (Geschäftsprozesse zur Kundenbelieferung mit Elektrizität (GPKE)). In order to encourage competition, the GPKE provides, in particular, rules for transparent billing and for changes of supplier. In addition, basic suppliers (see Question 20) must publish their basic tariff and supply household customers in accordance with the Ordinance on Electricity Basic Supply (Stromgrundversorgungsverordnung (StromGVV)).

Wholesale

On the wholesale level, the trading of electricity is done at the stock exchange as well as over-the-counter. There is no sector-specific regulation except for the monitoring by the Federal Network Agency (BNetzA), the Federal Cartel Office (BKartA) and their new joint authority MTS Strom und Gas (see Question 21).

TAX ISSUES

23. What are the main tax issues arising on electricity generation, distribution and supply?

In Germany, electricity is subject to electricity tax (2.05ct/KWh) and the general value added tax (19%), both to be paid by the end-consumer.

However, there are several additional costs and levies passed on to the private end-consumer. Accordingly, only 31% of the price for electricity paid by household consumers reflects the actual electricity price, whereas the remaining 69% consists of:

• 20% for the network access fees (see Question 16).

• 18% for the EEG levy (EEG-Umlage), for additional costs arising from the fixed feed-in tariff scheme for electricity generated from renewable sources (see Question 7).

• 16% for value added tax.

• 7% for electricity tax.

• 6% for concession fees (Konzessionsabgabe).

global.practicallaw.com/energy-mjg

Country Q&

A

• 1% for the Section 19 StromNEV-levy (§ 19 StromNEV-Umlage), for the reduction of, or exemption from, network access tariffs for large electricity consumers (see below).

• 1% for the offshore liability levy (Offshore-Haftungsumlage), for compensation payments from the responsible TSOs to operators of offshore wind farms for delays in the construction and/or interruptions of the operation of offshore connection lines.

• 0.4% for the KWK levy (KWK-Umlage), for additional costs arising from the fixed surcharge for operators of co-generation plants.

The Section 19 StromNEV-levy is currently under review both by the German Federal Supreme Court (Bundesgerichtshof) and, with respect to state aid rules, the EU Commission. In March 2013, the Higher Regional Court (Oberlandesgericht) of Düsseldorf ruled that the exemption from network access tariffs lacked a legal basis and that, hence, the Section 19 StromNEV-levy was unlawful.

In January 2014, another surcharge to the electricity price was introduced to apply for the following two years. The surcharge was

for the sheddable load-levy for compensation payments to operators of appliances (Verbrauchseinrichtungen) in accordance with the Ordinance on Agreements on Sheddable Loads (Verordnung über Vereinbarungen zu abschaltbaren Lasten). In 2014, the levy amounts to 0,009 ct/kWh.

REFORM

24. What reform proposals are there for the regulation of the electricity sector?

The reform of the Renewable Energies Act (EEG) (see Question 1) entered into force on 1 August 2014. In addition, the Federal Minister of Economic Affairs and Energy, Sigmar Gabriel, has announced that the political debate concerning capacity markets will be initiated shortly after the conclusion of the EEG reform.

Furthermore, in the course of 2014, the Federal Network Agency (BNetzA) will present an evaluation report on the incentive regulation. The report will also contain suggestions by the regulator with respect to the further evolution of the incentive regulation. This will mark the first step towards the revision of the incentive regulation prior to the beginning of the third regulatory period (for gas network operators) in 2018.

THE REGULATORY AUTHORITIES

Federal Network Agency (Bundesnetzagentur (BNetzA))

Address. Tulpenfeld 4, D-53113 Bonn, Germany T +49 228 140 F +49 228 14 88 72 E info@bnetza.de W www.bundesnetzagentur.de

Main responsibilities. All regulatory tasks and powers which, under the EnWG (Energy Industry Act), have not been assigned to the state regulatory authorities are performed by the BNetzA. Its regulatory task covers ensuring non-discriminatory grid access, the control of the grid access tariffs charged by grid operators, the safeguarding against anti-competitive practices by grid operators and the monitoring of the implementation of the regulatory regime.

Federal Cartel Office (Bundeskartellamt (BKartA))

Address. Kaiser-Friedrich-Str 16, D-53113 Bonn, Germany T +49 228 9499 0 F +49 228 9499 400 E info@bundeskartellamt.bund.de W www.bundeskartellamt.de

Main responsibilities. The BKartA is responsible for the protection of competition including merger control. It also operates the Market Transparency Authority MTS in co-operation with the BNetzA.

Federal Environment Agency (Umweltbundesamt (UBA))

Address. Wörlitzer Platz 1, D-06844 Dessau, Germany T +49 340 2103 2416 F +49 340 2103 2285 E buergerservice@uba.de W www.umweltbundesamt.de

Main responsibilities. The UBA is the competent authority for environmental issues. It includes the German Emission Trading Authority (Deutsche Emissionshandelsstelle (DEHSt)) which governs the trading of emissions certificates under the Kyoto Protocol.

global.practicallaw.com/energy-mjg

Coun

try

Q&

A

ONLINE RESOURCES

W www.clearingstelle-eeg.de/english

Description. This is an official up-to-date website in English with information on renewable energy sources.

W http://bmwi.de/EN/root.html

Description. This is the up-to-date English website of the Federal Ministry for Economic Affairs and Energy. Apart from general information on German energy policy, the website especially provides content on the Energiewende.

W http://www.bundesnetzagentur.de/cln_1422/EN/Home/home_node.html

Description. This is the official up-to-date English website of the Federal Network Agency. Apart from general information on electricity regulation, the site contains numerous recent statistics.

W www.gesetze-im-internet.de

Description. This is the official up-to-date website of the Federal Ministry of Justice with all texts of legal acts (in German).

Practical Law Contributor profiles

Dr Dirk Uwer, Partner

Hengeler Mueller T +49 211 8304 141 F +49 211 8304 170 E dirk.uwer@hengeler.com W www.hengeler.com

Professional qualifications. Admitted to German bar.

Areas of practice. Energy; regulatory and environment; public law; compliance.

Non-professional qualifications. Dr. jur., University of Berlin; Mag.rer.publ., German University of Administrative Sciences, Speyer; LLM, Northumbria University, England.

Languages. German, English, Italian

Publications. More than 50 publications on various topics of European and German public law with a particular focus on environmental and energy law.

Dr Daniel J Zimmer, Counsel

Hengeler Mueller T +49 211 8304 753 F +49 211 8304 170 E daniel.zimmer@hengeler.com W www.hengeler.com

Professional qualifications. Admitted to German bar.

Areas of practice. Energy; competition.

Non-professional qualifications. Dr. jur., University of Bonn; LLM, Duke University, Durham, USA.

Languages. German, English

Publications

• The New German Offshore Liability Regime – Its First Year in Practice, EEJ 2014, p77 to 81.

• The German Offshore Transmission Grid – (Finally) A Success Story?, RELP 2013, p. 32 to 41 (with Jörg Meinzenbach and Juan Restrepo Rodríguez).

• "Network Acquisition from an Investor's Perspective: Importance of the Rules on Imputed Depreciation and Return on Equity under the Ordinance on Electricity Network Tariffs, Gas Network Tariffs and Incentive Regulation for the Investment Decision" (Netzerwerb aus Investorensicht: Zur Bedeutung der Regelungen zur kalkulatorischen Abschreibung und Eigenkapitalverzinsung nach StromNEV, GasNEV und ARegV für die Investitionsentscheidung), RdE 2009, p109 to 118 (with Dirk Uwer).