NEST Decisions Set New Course For German Electricity And Gas Network Regulation

Background:

Germany's framework for regulating electricity and gas networks is entering a new phase. On 10 December 2025, the Federal Network Agency (Bundesnetzagentur) ("BNetzA") adopted the first framework and methodological determinations under the so‑called NEST process (Netze. Effizient. Sicher. Transformiert.).

These determinations fundamentally reshape how network costs, revenues and efficiency incentives are regulated. They replace large parts of the long‑standing ordinance‑based regime – in particular the Incentive Regulation Ordinance (Anreizregulierungsverordnung) ("ARegV") and the Electricity and Gas Network Tariff Ordinances ("StromNEV" and "GasNEV") – with binding regulatory decisions issued directly by the independent regulator.

The reform follows the European Court of Justice's 2021 ruling, which held that tariff-setting powers must lie with independent regulatory authorities and may not be exercised by governments through statutory ordinances. In response, the German legislature amended the Energy Industry Act (Energiewirtschaftsgesetz) ("EnWG"), creating the legal basis for the BNetzA's new role and establishing the Grand Ruling Chamber for Energy (Große Beschlusskammer) as the competent decision‑making body.

RAMEN Strom and RAMEN Gas – The New Regulatory Framework:

At the core of the NEST process are the two framework determinations:

• RAMEN Strom, governing incentive regulation for electricity distribution system operators; and
• RAMEN Gas, covering gas distribution networks and gas transmission networks.

These framework determinations define the structure and mechanics of future incentive regulation, including the regulatory formula for annual revenue caps, adjustment mechanisms within a regulatory period and the interaction with supplementary methodological decisions.

Alongside RAMEN, BNetzA adopted several methodological determinations, notably on:

• the determination of the base level (Ausgangsniveau),
• capital remuneration and the weighted average cost of capital (WACC),
• efficiency benchmarking, and
• the general sectoral productivity factor.

Taken together, these decisions form a comprehensive regulatory framework that will gradually apply from the fifth regulatory period onwards (electricity: from 2029; gas: from 2028).

Shorter Cycles, Faster Adjustments:

One of the most consequential changes is the shortening of regulatory periods. As a rule, regulatory periods will move from five to three years, enabling cost developments and efficiency outcomes to be reflected more quickly in network tariffs.

The fifth regulatory period will remain a transitional five‑year period, during which the BNetzA intends to evaluate whether the new simplification and acceleration tools are sufficient to manage the shorter cycle. However, the regulator has made clear that the shift to three‑year periods from the sixth regulatory period onwards is a core element of the reform.

For network operators, this means reduced time to correct inefficiencies, but also faster recognition of structural cost increases.

Greater Flexibility for Operating Costs (OPEX)

The RAMEN determinations significantly revise how operating costs ("OPEX") are treated.

Under the previous regime, OPEX was largely fixed at the start of a regulatory period. RAMEN introduces annual adjustment mechanisms, allowing changes in operating costs – for example due to inflation, maintenance requirements or grid digitalisation – to be reflected during the period.

Notably, this adjustment mechanism will apply not only to operators in the standard efficiency benchmarking procedure, but also to smaller distribution system operators using the simplified procedure. This reflects the regulator's acknowledgement that rising operating costs affect networks of all sizes.

While this change is expected to increase permissible revenues, it also entails greater ongoing scrutiny, as adjustments are subject to subsequent review via the regulatory account.

Capital Costs and Investment Incentives

Investment incentives remain a central objective of the new framework, but the mechanics have been refined.

RAMEN continues to distinguish between:

• capital cost deductions, which gradually remove legacy capital costs already embedded in the base level; and
• capital cost mark‑ups, which allow new investments made after the base year to be included in the revenue cap.

For new investments, the determination of financing costs has been adjusted to better reflect actual market conditions. In particular, the methodology now differentiates between existing assets and new investments, allowing borrowing costs to be determined with closer reference to the interest rate environment prevailing at the time of investment.

This approach reduces the diluting effect of long historical averages from low‑interest years and improves the bankability of investments made in today's higher‑interest environment, even though the calculation remains standardised rather than operator‑specific.

Efficiency Benchmarking: Higher Floor, Broader Coverage:

Efficiency benchmarking remains a cornerstone of incentive regulation, but with notable adjustments.

The minimum efficiency value has been raised to 70%, compared to 60% under the ARegV. This means that even particularly inefficient network operators will no longer be able to recover costs below this higher threshold. The change is intended to reduce the number of hardship cases and streamline regulatory administration, while increasing efficiency pressure.

In addition, BNetzA aims to stabilise efficiency outcomes by ensuring that a large majority of network operators remain subject to the standard benchmarking procedure. The precise economic threshold separating the standard and simplified procedures will be determined separately and communicated to state regulatory authorities.

Transparency, Quality Regulation and Reputational Effects:

On 19 December 2025, the Bundesnetzagentur published a draft determination on the future methodological design of quality regulation for operators of electricity and gas distribution networks. The draft provides for a targeted expansion of existing quality regulation, while largely retaining its established core elements.

Under the proposed framework, the traditional quality element of network reliability will remain in place. Reliability will continue to be measured annually using the established SAIDI (low voltage) and ASIDI (medium voltage) indicators and will be published for each operator. From the fifth regulatory period (starting 1 January 2029), deviations from reference values may continue to be monetised through quality‑related bonuses or deductions within the revenue cap, subject to predefined limits.

In addition, the draft introduces a new quality dimension of network performance capability, comprising two components:

Energy transition competence, measured through indicators such as the additional connection of renewable generation, electrified consumption and storage technologies, as well as the duration between application and commissioning of relevant network connections; and

Digitalisation, assessed via a set of indices covering smart grids, digital processes and systems, data management and analytics, and customer management.

For both components, the BNetzA intends to calculate and publish operator‑specific indicator values on an annual basis. At this stage, these new indicators are not linked to financial incentives; any future monetisation would require a separate regulatory determination.

The draft determination is initially limited to electricity distribution system operators, as the BNetzA considers that sufficiently robust and comparable indicators are not yet available for gas distribution networks, transmission systems or closed distribution networks.

Within the broader NEST framework, the draft quality regulation operationalises the increased emphasis on transparency and performance‑based assessment. While financial effects are currently confined to network reliability, the systematic publication of quality indicators introduces a higher degree of comparability and visibility of individual network operator performance under the future regulatory regime.

Parallel and Pending Procedures:

The NEST package does not conclude the reform process.

Separately, BNetzA has launched a procedure to define the future regulatory framework for electricity transmission system operators, including a shift towards annual, cost‑based tariff determination from 2029.

In parallel, the AgNes procedure (Allgemeine Netzentgeltsystematik Strom) addresses the allocation of network charges among grid users – in other words, who pays which share of network costs. This procedure focuses on the distributional side of grid fees, whereas NEST governs the revenue side. Final AgNes decisions are expected towards the end of 2026.

Outlook:

The NEST decisions mark a turning point in German network regulation. They introduce shorter regulatory cycles, more dynamic cost adjustments and a refined investment framework, while increasing transparency and efficiency pressure.

For network operators, the coming years will require:

• careful reassessment of investment strategies,
• closer integration of regulatory mechanics into financial planning, and
• early engagement with pending consultations, particularly on quality regulation and simplified procedure thresholds.

As the new framework is phased in from 2028 and 2029, its practical implications for revenues, financing and operational strategy will become increasingly visible across the electricity and gas sectors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.