Germany’s revision of the Energy Industry Act: a paradigm shift for gas and electricity grid regulation (Part 1)

On 10 November 2023, the German parliament (Bundestag) adopted a major amendment to the Energy Industry Act (Energiewirtschaftsgesetz - EnWG) introducing regulations for the development of a core hydrogen network in Germany as well as a significant increase of competences for the Federal Network Agency (BNetzA) regarding the regulation of the gas and electricity grid. With the legal framework for a core hydrogen network, Germany intends to enable the ramp-up of its hydrogen industry. The chances and challenges this may present will be outlined in Part 2 of this blog. Here in Part 1, we look at the amendment’s paradigm shift for gas and electricity grid regulation. The German legislator responds to the European Court of Justice’s (ECJ) ruling in 2021 that found Germany had failed to implement the EU’s electricity gas market directive and the gas market directive which stipulate that national regulators must be autonomous within their sphere of competence not only from instructions by higher administrative authorities and the government but also from influences in the form of regulations and ordinances. Accordingly, the amendment provides for the extension of competences of BNetzA to ensure the independence of the agency required by EU law. It marks a turning point in Germany’s previous approach of an extensive normatively structured regulation of gas and electricity grid access and tariffs and entails a significant shifting of power to BNetzA. However, even two years after the ECJ’s ruling, its correct implementation in German law is subject of much critical debate. We present four of the challenges the legislator and the industry will have to face:

1. Checks and balances: Germany’s system of normative regulation 

The German legal framework for grid regulation is rooted in a continuous chain of democratically legitimized decision-making. Administrative agencies that are independent from a legislative framework are the exception in Germany, as they “break” the chain of democratic legitimacy. Under German constitutional law, essential decisions must always be made by the legislator and its democratically elected representatives in the form of laws (Vorrang des Gesetzes). This is based on the recognition that the executive body does not have the same degree of direct democratic legitimacy as the legislator whose representatives are elected. 

Against this background the so-called normative regulation (normative Regulierung) under the Energy Industry Act, has taken the shape of a net of regulations and ordinances governing the energy industry and the competences of BNetzA. The Gas Grid Access Ordinance (Gasnetzzugangsverordnung, GasNZV) and the Electricity Grid Access Ordinance (Stromnetzzugangsverordnung, StromNZV) provide details on the way in which network operators must grant access to their networks. Similarly, the Gas Grid Tariff Ordinance (Gasnetzentgeltverordnung, GasNEV) and the Electricity Grid Tariff Ordinance (Stromnetzentgeltverordnung, StromNEV) contain the establishment of the method for determining the tariffs for the gas and electricity grid access. Based on this, the Incentive Regulation Ordinance (Anreizregulierungsverordnung, AregV) sets out the revenues of the network operators for specific regulatory periods. Moreover, the laws and ordinances to regulate the to-be -installed hydrogen grid also follow this legislative approach. Such a detailed regime of legislative provisions, according to the ECJ, infringes the level of independence of BNetzA required under EU law. The German legislator must thus do away with the system of normative regulation. 

2. Independency on the EU level

As an independent higher federal authority, the BNetzA falls within the area of competence of the Federal Ministry of Economic Affairs and Climate Action (Bundeswirtschaftsministerium, BMWK). Still, this suggested independence is mostly organizational and limited by a tight set of provisions specifying its tasks. Thus, BNetzA is not only bound by the normative regulation but also obliged to follow instructions of the BMWK. This, according to the ECJ, also infringes the level of independence required under EU law. With the ECJ’s firm emphasis on the independence of regulatory agencies one cannot help but consider the European equivalent, the Agency for the Cooperation of Energy Regulators (ACER). ACER coordinates the regulatory authorities of the Member States of the European Union and might play a role in drafting the European Network Codes; however, it is far from independent from the European Commission, which oversees the drafting and establishes the codes itself. Concerning the tasks entrusted on ACER by the European Network Codes, the agency has defined competences within a net of regulations. European law appears to require a higher degree of independence for national regulatory authorities than for the EU’s counterpart. This discrepancy between national and European authorities may be legally justified; but it is difficult to explain in practice. 

2. Farewell to normative regulation: a challenge for democratic legitimacy

The German legislator will have to implement the ECJ’s ruling by granting BNetzA the necessary autonomy regarding network regulation, while also complying with the requirements of democratic legitimacy under German constitutional law.

The amendment provides BNetzA with several new determination competences (Festlegungskompetenzen), allowing it to redesign the previous regulatory framework. At the same time, new sections of the EnWG contain rules previously laid out in the Grid Access and Grid Tariff Ordinances as well as the Incentive Regulation Ordinance. This is to provide, as detailed as permissible under the ECJ’s ruling, a regulatory framework for the BNetzA to operate within, without infringing upon the BNetzA’s independence. For instance, certain basic rules for the systems currently used for grid access, have been transferred to the EnWG. Similarly, the incentive regulation is now only suggested as one method for the determination of grid tariffs to preserve the independence of BNetzA. In this way, the legislator is trying to ensure a degree of continuity and some legal certainty for the industry.

The change may appear technical, yet it is significant considering the usual organisation of the German administrative authorities. BNetzA will be able to make use of its competences from the get-go but, even so, the ordinances in question will remain in effect during a transitional period to ensure the continuity and reliability of the regulatory framework. For the Grid Tariff Ordinances, the transitional period is based on the duration of the regulatory period for gas and electricity, respectively. As the ARegV is linked to the regulatory periods, it will remain in force until both current regulatory periods are over. The GasNEV will remain in force until 31 December 2027, the StromNEV as well as the ARegV until 31 December 2028. Both ordinances on grid access (StromNZV and GasNZV) will remain in force until 31 December 2025. BNetzA will have to enact framework determinations which will replace the previous regulations. It remains to be seen if and to what extent BNetzA will make material modifications to the regulatory framework or if the current model will simply be ‘redressed’ or upheld. 

3. Who controls BNetzA?

The regime change also raises the question of the extent to which stakeholders will be involved in the BNetzA’s decision-making and what legal remedies will be available. The current system of normative regulation may provide a detailed regulatory regime with some margins of appreciation for the regulatory authority, yet judicial control of theses margins of appreciations is limited to adherence to substantive and procedural laws.

The legislative proposal includes an increased requirement for in-depth reasoning for BNetzA’s derterminations, including economic analysis being required to reflect the current state of science (Stand der Wissenschaft). This is arguably an effort to alleviate the deficit of legislative involvement. However, we note BNetzA has been obliged to provide reasoning for its decisions before, and extending the depth of this obligation, might, in practice, provide only minimal change. Indeed, the German Federal Supreme Court has already ruled that in cases where BNetzA has a margin of appreciation (Beurteilungsspielraum) in its decision, it is obliged to provide in-depth reasoning. 

However, the new regime may provide stakeholders with improved legal protection. Determinations (Festlegungen) enacted by BNetzA under its new competences are administrative acts (Verwaltungsakte). They can therefore be challenged by stakeholders more easily than the abstract-general regulations of the current regime. For instance, stakeholders may challenge if BNetzA’s decision has sufficiently complied with the current state of science. Judicial practice will show whether the legislative deficit can be countered with more intensive judicial control.

Finally, while the amendment boosts the powers of BNetzA, it lessens the influence the Federal States (Bundesländer) may have on the regulation of grid access and tariffs. Previously, these regulations were passed by the German Government with approval of the Federal Council (Bundesrat), made up by representatives of the Federal States. The Federal States would retain some level of influence on the BNetzA by way of their members on the advisory committee (Beirat) to the BNetzA. This, however, does not allow for any decision or advisory power to the specific grid regulations. The amendment merely provides that BNetzA shall consider statements by the committee of the Federal States (Länderausschuss), but is not obliged to follow this.

4. What’s to come? 

The amendment was adopted by the Bundestag and notified to Federal Council (Bundesrat). It is expected that the amendment will come into force in the current version. It remains to be seen to what extent the German regulatory environment of grid access and grid tariffs for gas and electricity will change. The legislative proposal has the potential to shake up the landscape of the German gas and electricity regulation as well as shape the design of the nascent hydrogen grid. However, BNetzA has announced that it will aim for a transitional period with stable and predictable conditions.