Governments tussle over future of Dutch-owned German power grid operator

Long-running negotiations between the Dutch and German governments over the future ownership of a Dutch state-owned slice of Germany's power network continue to drag on, and possible capital markets options are now being explored.

Dutch state-owned transmission system operator TenneT Holding BV is considering a potential third-party sale or IPO of its German operations after so far failing to reach an agreement to sell the network to the German government.

The Netherlands and Germany have been in talks for more than a year about the future of TenneT, given its central role in the energy transition in both countries. With grid infrastructure a major bottleneck in the rollout of renewables, the utility's capital expenditure needs are €160 billion for the next decade.

TenneT Germany, legally known as TenneT TSO GmbH, accounts for 70%-80% of the expected capex, according to ING analyst Nadège Tillier.

The business, formerly known as Transpower, was acquired by TenneT from E.ON SE in 2009 for €1.1 billion, creating what was heralded at the time as the first cross-border European transmission grid.

It is now valued at €20 billion to €25 billion, according to press reports — a not insignificant sum for a German government grappling with federal budget complications.

Large equity needs

TenneT's €160 billion capex plan will be funded primarily through debt but also requires significant equity, a large chunk of which is earmarked for its German activities.

The company's equity needs through 2030 stand at €13 billion in the Netherlands and €18 billion in Germany, Dutch Finance Minister Steven van Weyenberg said in a May 16 letter to the country's parliament.

The Dutch and German governments have long stated their desire to fund, control and own only their national electricity grids. Van Weyenberg said the sale of TenneT Germany would see €1.6 billion of capital invested in TenneT in 2023 returned to the Dutch state, adding that the proceeds could be partly used to fund TenneT Netherlands' equity needs.

While a deal continues to be negotiated, it has been held up by Germany's budget issues, van Weyenberg said. Talks on these issues are set to conclude around July 1.

"Let me emphasize: We still aim for the full sale of TenneT Germany to the German state," TenneT CFO Arina Freitag said in a May 16 post on LinkedIn outlining the "alternative structural solutions" that the company is exploring.

They include a potential IPO of TenneT Germany to raise equity in the public capital markets or a sale of a stake to private investors.

The latter is likely to pique the interest of infrastructure investors, which have long had major interest in Europe's power and gas grids given their regulated returns and relatively low risk.

Both alternative routes have been mooted throughout the negotiations. However, analysts said the announcement by TenneT may be a sign that the company and the Dutch state are beginning to run out of patience with the German government.

With talks dragging on, the Dutch government in January provided TenneT with a €25 billion shareholder loan to safeguard its investments in the Netherlands and Germany through 2025.

As recently as March, TenneT considered it "highly probable" that a transaction would be concluded this year.

In a May 24 response to S&P Global Commodity Insights' request for comment, TenneT declined to provide further details and instead referred back to van Weyenberg's letter.

German state involvement

The German government's interest in buying TenneT Germany reflects a heightened desire by the state to safeguard critical infrastructure.

TenneT Germany's transmission system is seen as a key strategic asset, traversing more than 25,000 kilometers across the entire length of Germany, from the Danish border in the north to the Alps in the south. The company is also responsible for parts of Germany's offshore grid in the North Sea.

Massimo Schiavo, an analyst at S&P Global Ratings who covers European utilities, said Germany is "quite an exception in Europe," as it is one of the few countries with more than one power transmission system operator (TSO), none of which are fully owned by the state.

The government, via development bank KfW, has already invested in two of the four German TSOs. KfW bought a 20% stake in 50Hertz Transmission GmbH in 2018 and last year acquired a 24.95% interest in TransnetBW GmbH from EnBW Energie Baden-Württemberg AG.

Meanwhile, RWE AG is also said to be exploring options for its minority stake in the fourth TSO, Amprion GmbH, which is majority owned by a consortium of German institutional investors.

Given Germany's budget complications, analysts suggested TenneT could follow a similar route to its peers and pursue a minority sale of TenneT Germany to KfW.

Any investment into the company by the German government would boost Berlin's role in the country's critical infrastructure, as well as improve TenneT Germany's access to equity for the next decade.

"[Government] ownership offers faster (less subject to market conditions and less fragmented) access to capital, notably for utilities with sizable negative free cash flow after capex and dividends like TenneT," Schiavo said in an email.