This is an extract from a recent report “Making the EU electricity grid fit for net-zero emissions” by The European Court of Auditors.
The EU’s policy for electricity is one part of a broader energy policy with the aim of creating a competitive, secure, and sustainable internal electricity market that supports both the EU’s climate goals and economic growth. Multiple actors play distinct roles and have diverse responsibilities in the development of electricity grids. The Commission plays a key role in developing electricity grids by proposing and overseeing policies to: establish trans-European networks, promote cross-border grid interconnections, make grids smarter, and ensure network interoperability. It also focuses on enabling the internal energy market, energy security, and integrating renewable energy. To support these objectives, the Commission has developed market rules and guidelines for infrastructure investment, which are underpinned by a legal framework. At EU level, different entities (e.g. ACER, ENTSO-E and EU DSO Entity), among other specific responsibilities, promote cooperation and support coordination between the different actors in the national electricity systems. This extract examines how grid investments are funded, the influence of regulatory frameworks on grid operators’ investment decisions and the financial capacity data of the operators.
Funding grid investments
No single regulatory approach is optimal in every context. Regulatory frameworks that provide more advantages to grid operators to increase grid investments can lead to inefficient spending. This means that grid operators may invest too much in grid infrastructure (e.g. new lines) and underinvest in innovation and improved efficiency (e.g. development of digital solutions). Solutions to this bias include treating grid investments and operational costs equally, encouraging firms to choose the most cost-effective option, rewarding efficiency and focusing on performance rather than spending
Impact of grid investments on electricity bills is unclear
The regulatory frameworks set the maximum amount that grid operators are allowed to earn from the distribution and transmission of electricity to users who are typically charged through network tariffs. This is called allowed revenue. It generally allows operators to earn a return on their grid investments, while also covering asset depreciation and the operating expenses necessary to run the grid. Network tariffs are defined differently across the EU; each NRA sets its own methodology to allocate revenue and distribute costs among grid users (i.e. households, businesses, industry, storage units and generators). In 2023, EU households paid an average of €0.072/kWh for network tariffs and non-households paid €0.035/kWh, but these amounts vary across member states.
The long-term impact of grid investments on network tariffs is still unclear. The authors of the report asked NRAs for their estimations in terms of the effect of increased grid investments on tariffs. The vast majority (22 for TSO tariffs and 21 for DSO tariffs) either did not reply or had no available estimates. In the short term and as was the case in the Netherlands, tariffs could increase for consumers (Box 11), but going forward, growing electricity consumption could spread the costs across a larger total quantity of kWh and a larger group of users, potentially limiting increases in tariffs per kWh.
Network tariffs are generally not the largest component in consumers’ electricity bills. The electricity bill is composed of three elements: network tariffs, taxes and the cost of electricity itself, which usually makes up the larger part of the total. This means that the overall electricity bill is affected by other factors beyond network tariffs.
Industrial consumers in the EU traditionally pay lower network costs than households, but face higher electricity prices than in other countries, such as the United States. According to the Commission, historically, the EU retail electricity price has been one and a half to two times more expensive than in the United States. Between 2021 and 2023, however, EU industry paid two to three times more than their counterparts in the United States. This disparity could affect the EU’s competitiveness and presents a challenge for NRAs in addressing the growing investments needed for grid infrastructure. As a result, there may be pressure to either redistribute network tariff costs among consumers, or spread these costs through the tax system. The Commission estimates that as fossil fuels are replaced with increasingly cheaper renewables, electricity prices will remain relatively stable in the long term. That said, the need to dispatch electricity from often distant renewable generation sites could add costs to the system – costs which are not currently a factor in defining electricity prices.
Grid operators need access to finance
The electricity sector is highly capital-intensive, with significant upfront investment costs required for infrastructure development. Although grid operators recover their investments over time through remuneration, they must secure the financing in advance. This can be done through internal resources (equity capital) or by borrowing from the financial markets. However, various stakeholders have emphasised a key challenge: the gap between the significant upfront investment and the available funding. The financial capacity data of grid operators was analysed using Moody’s probability of default and the implied credit rating for 631 grid operators, along with financial data from the ORBIS database for 711 operators. Grid operators’ credit rating indicates their capacity to meet payment obligations to creditors. The analysis includes all the TSOs and DSOs who are members of the EU DSO Entity and GEODE and for whom we obtained up-to-date data from ORBIS.
Most of the analysed grid operators have very low to moderate credit risk ratings, with less than 18% considered to be at a substantial to very high risk of defaulting on their financial obligations, making them less attractive to banks. TSOs in particular tend to have lower credit risk. The risks are more prominent for DSOs. Around 34% of them, which together serve more than a quarter of the customers connected to the grid operators analysed, are in the lowest credit rating tiers, – including the speculative category. Those operators may face problems in securing affordable financing for future grid investments. It was noted that grid operators’ balance sheets show increased funding efforts, with rising levels of debt and shareholder funds. To strengthen their financial positions, grid operators are employing strategies such as selling non-core assets, recapitalisation, or issuing hybrid debt securities that combine debt and equity elements. The analysis also showed a declining trend in returns on equity. Distribution grid operators, especially small ones, have higher returns than transmission grid operators. In most years, grid operators achieve returns above the allowed revenue amount. This is because actual returns can differ from the allowed amounts due to several factors, such as operational efficiency and, specifically for distribution grid operators, additional revenue sources beyond the electricity sector.
To attract investors, grid operators must remain appealing, with regulatory frameworks playing a key role. These frameworks face the challenge of having to adapt to market conditions, such as rising interest rates or increasing operational costs, while still ensuring fair returns on investment for the operators. Another way NRAs can support grid operators in having access to finance is by allowing them to invest based on anticipated future needs, preparing the grid for future demand rather than waiting for these needs to be confirmed. While this strategy includes the risk of investments being underutilised or becoming obsolete before they have been fully utilised, it helps to mitigate the increased uncertainty faced by grid operators. According to ACER and the CEER, NRAs could allow grid operators to start pre-construction activities on grid projects before giving full project approval. This would help speed up the process but requires careful assessment and planning to ensure that such investments are needed.
EU initiatives on funding
To ease grid operators’ access to funding, the Commission, in the EU Action Plan for Grids:
o incentivises forward-looking investments, working with institutions like the European Investment Bank to explore new funding tools, and aims to increase the attractiveness of EU funding opportunities;
o encourages NRAs to revise network tariff methodologies on a regular basis, shifting from models driven by grid investments to more flexible approaches that align with the energy system’s evolving needs, while promoting the dissemination of best practices.
Several EU instruments are available to support electricity grid infrastructure investments. During the 2014-2020 period, roughly €5.3 billion in EU funding was available for grid investments. In 2021-2027 period, the amount increased to approximately €29.1 billion, mainly due to the Recovery and Resilience Facility (RRF) which is the largest funding source. These amounts represent a fraction of the total grid investments needed.
The EU funding for grid investments has also encountered some implementation challenges. The Commission reported that certain funding possibilities have been under-utilised. For both periods, a total of €3.7 billion was used as of 2024. Regarding the RRF specifically, member states are not required to report on incurred expenditures, making the amount spent unknown. Additionally, as stated in a previous audit report, the RRF is progressing with delays and facing risks related to the completion of its measures. Moreover, it is also a temporary instrument, which limits its suitability for addressing investment needs in the long term.
Access the report here
