The German energy association BDEW commissioned NERA to benchmark the German cost of equity determination for regulated energy networks against international precedent cases.

The study prepared by Managing Director Tomas Haug, Consultant Lorenz Wieshammer, and Research Officers Philipp Hiemann and Jakob Lutz has three main findings.

First, the German cost of equity determination by the Federal Network Agency is at the lower end of precedent cases from energy network regulation and, on average, more than one percentage point below comparable decisions. Second, the cost of equity figures used by equity analysts when valuating stocks of listed European network operators are significantly higher than the German regulatory cost of equity determination. Third, several European regulatory authorities have recently rejected the method used by the German regulator to determine the equity risk premium, which is a key parameter of the regulatory cost of equity determination. According to NERA’s study, there is an international trend towards considering dividend discount models, survey data, and overall historic returns instead of or in addition to historic excess returns when setting this parameter.

Mr. Haug and Mr. Wieshammer have presented their findings to the regulator as an input for the upcoming cost of equity decision for the fourth regulatory period running from 2023 to 2027. The BDEW published the NERA report on their webpage, available at https://www.bdew.de/media/documents/1972_NERA_Gutachten_2020.pdf.

Handelsblatt Cites NERA Report on Cost of Equity Determinations for Regulated Energy Networks.