Switzerland's electricity supply is governed by the Federal Electricity Supply Act 2007 which, among other things, regulates the fee structure to be applied by electricity suppliers when delivering electricity to end consumers. More specifically, the federal government adjusts this fee structure annually based on a pre-defined calculation method. Similarly, the Federal Energy Act 2016 uses the same calculation method to incentivise investments in renewable energy production. An important element of this calculation method is the capital cost rates, which electricity suppliers have criticised for being too low.
On 2 March 2021 the Federal Department of the Environment, Transport, Energy and Communications (DETEC) reaffirmed the capital cost rate of 3.83% for investments in the electricity grid for the 2022 tariff year, as well as some higher capital cost rates for investments in renewable energy production for the 2021 tariff year (ie, 4.98% for hydroelectric power, 4.53% for biomass and 5.44% for geothermal power).
The capital cost rate applied to operators of high-pressure natural gas networks is governed by a settlement agreement concluded in September 2020 between the price supervisor and operators. In particular, the parties agreed to a gradual reduction of the capital cost rate from of 4.2% in 2021 to 3.8% in 2024. This will lead to lower prices for the super-regional and regional transport of natural gas.
Compensation for investors versus low consumer prices
Under the Electricity Supply Act, fees to be paid by end consumers for using electricity cannot exceed certain chargeable costs comprising of operating and capital costs. The reason for considering capital costs in this calculation is that investors should receive market and risk-oriented compensation for the capital tied up or to be invested in electricity infrastructure. The compensation thus covers the investors' cost of providing capital and the risk of loss. If the investors' return is too low, they might refrain from investing in electricity infrastructure, which could have an adverse effect on innovation, particularly regarding the transition to renewable energies, and, more generally, the security of energy supply in Switzerland. Similarly, the Energy Act implements new tools for incentivising investments in the production of renewable energies and stipulates that market and risk-oriented capital cost rates must be determined to compensate the investor for the corresponding risks.
The goal of compensating investors by determining comparatively higher capital cost rates provides plenty of friction with consumer interests, which reflects the inherent difficulty of finding the right balance between sufficient investment and innovation on the one hand and low prices for (end) consumers on the other hand.
Under the current regime, the weighted average cost of capital (WACC) represents the compensation for investments in electricity infrastructure. The WACC is determined annually by the Federal Office of Energy, an administrative unit of the DETEC. Prior to determining the WACC, the DETEC consults with the Federal Electricity Commission and certain other federal authorities. The commission is in charge of regulating prices and tariffs and may prohibit unjustified electricity price increases or retroactively reduce excessively high tariffs.
The calculation of the WACC is further specified in the Federal Electricity Supply Ordinance 2008. It is composed of the equity cost rate of 40% and the debt cost rate of 60%. For calculating these equity and debt cost rates, various components such as the risk-free interest rates, the market risk premium and credit spread are considered.
The DETEC recently signalled in its notifications that the method for calculating these capital cost rates is under review, the results of which are expected to be published in mid-2021. Depending on these results, a revised calculation method could lead to a change of the WACC for upcoming years and affect investors' compensation for infrastructure investment.
