In this white paper, Senior Managing Director Tomas Haug and Directors Marco Schönborn and Lorenz Wieshammer challenge recent claims that direct state equity investments in German electricity transmission system operators (TSOs) reduce the cost of capital of TSOs and the cost to consumers.

Allegedly, governments’ access to “cheap” financing can be passed on to TSOs. However, using financial economic principles, the authors show that state ownership does not eliminate investment risk but shifts it to taxpayers. The authors explain that the cost of capital depends on the use to which that capital is put, not its source. Therefore, so-called “cheap” government capital functions as a subsidy rather than true cost savings. Subsidies may be justified to correct market failures, but such claims need to undergo a careful economic assessment first.

A related German version of the article was published in Wirtschaftsdienst.