Germany’s distribution system operators (DSOs) must invest €647 billion by 2045 to expand and modernise electricity and district heating networks and to maintain and gradually decommission gas distribution networks in line with national climate targets. Most of this investment will be financed through debt and retained earnings. However, DSOs also need €68 billion of new equity by 2035[Ga3.1] as lenders only provide debt financing for grid investments if DSOs have a sufficient equity base. We show that an equity gap of roughly €13 billion, concentrated among municipal DSOs, remains even after DSOs use all available levers – higher debt leverage, greater earnings retention, and fresh equity from financially stronger shareholders. To close this gap, we propose equity-like instruments: subordinated shareholder loans from municipalities, mezzanine capital from public promotional banks, and state-backed project financing solutions.
Financing Germany’s distribution grid build-out
English summary of our studies on DSO financing needs and instruments
Why did we write this paper?
Distribution system operators (DSOs) are central to the clean electrification of the European economy. However, despite the regulated nature of energy grids, European DSOs face significant financing challenges that constrain their investment activity. To address these challenges, our joint studies with Agora Energiewende and Climate Neutrality Foundation examine the financing needs of Germany’s DSOs and how they can be met. Germany is a relevant case for European DSO financing both because of its progress in implementing initial financing instruments and because it is home to roughly one third of Europe’s 2,674 DSOs. We are therefore now publishing a summary of our findings in English.
What have we learnt?
Germany’s nearly 900 DSOs must invest €647 billion by 2045 to expand and modernise electricity and district heating networks and to maintain and gradually decommission gas distribution networks in line with national climate targets. Financing these investments requires DSOs to substantially strengthen their equity base. Even if they exhaust all available levers – higher debt leverage, greater earnings retention, and fresh equity from financially stronger shareholders – an equity gap of roughly €13 billion remains that needs to be addressed. As DSOs differ in financing capacity and ownership structure, there is no one-size-fits-all solution. We see the largest challenges among municipally owned operators: small municipal utilities and large publicly owned energy groups. To close the equity gap, we propose three equity-like instruments: subordinated shareholder loans from municipalities, mezzanine capital from public promotional banks, and state-backed project finance.