Developments in 2021
Funding the energy transition
The energy transition is leading to rapidly increasing demand for electricity and substantial growth in the network operators’ work package. This is clearly reflected in Alliander's investments. The level of investment almost doubled in 2021 compared to five years ago, and exceeded €1 billion for the first time. The demand for energy will continue to increase in the coming years, leading inevitably to a further rise in our investments. This is not only due to the much larger work package; significant price increases caused by the scarcity of technical staff, a shortage of external contractors and limited availability of materials also play a role. Other factors are the rising energy prices and the growing work package at TenneT, which have resulted in an increase in our purchase costs and negatively affect our result.
In our current regulatory framework, in which the network operators themselves provide up-front financing for investments, it takes an average period of 40 years to recoup the investment via the network tariffs. Given the increasing level of investments, we are no longer able to finance them from our operating activities.
Consequently, the substantial growth in the investments that are now required to fulfil our social mission leads to a significant annual funding shortfall. In both 2021 and 2020, we had a financing requirement of nearly €300 million. Our debt position increased by these amounts as a direct result.
Due to the low interest rates, the tariffs will rise more slowly than our costs in the coming years. This is because the interest rate is a component in our regulated tariffs. The effect of the low interest rate on the tariffs is partly offset by a number of measures set out in the ACM's new Method Decision for 2022-2026, for example, allowing for a nominal return (rather than the real return) and the application of degressive depreciation on gas, which have an upward effect on tariffs. For further information, see Method Decision 2022-2026.
Investments are rising faster than the tariffs, so the financing need will increase further in the coming years. We have now taken action to keep the financial ratios within the specified ranges. In 2021, our shareholders provided €600 million in the form of a reverse convertible hybrid shareholder loan (convertible shareholder loan). This represents a substantial non-recurring cash flow, 50% of which counts as equity in rating agency assessments: subject to certain conditions, Alliander is entitled to convert all or part of the loan into shares, so part of the loan counts as extra capital for the purposes of determining creditworthiness. Furthermore, Alliander has been carrying out a cost-cutting programme for some years now, in part to preserve its ability to finance investments in a responsible manner.
Other options are also being investigated to ensure long-term financing, such as participation by the central government. Exploratory talks in this respect, initiated by the Ministry of Economic Affairs and Climate Policy and the Ministry of Finance, are currently ongoing with Alliander, Enexis and Stedin. We are also looking at opportunities to attract new shareholders, which is necessary for financing and for strengthening equity. This has a positive effect on the ratios, allowing us to continue to attract loans on attractive terms. Both the investments required in the future and their financing reflect the magnitude of the task we face in implementing the energy transition.
Developments relating to associates
In 2021, Alliander AG sold a large part (75%) of its shares in 450connect GmbH and the licence was simultaneously extended until 2040. In addition, agreement on the transfer of the activities relating to traffic control installations in the city of Berlin was reached with a company owned by the German Federal State of Berlin in November. This transfer will be effected on 31 December 2022. Furthermore, in the same context, the contracts for maintaining public lighting in a number of cities in Germany are being scaled back or transferred to third parties at an accelerated pace. In December 2021, Alliander signed the agreement with Van Gelder Group regarding the sale of the shares of Alliander's wholly owned contractor Stam Heerhugowaard Holding B.V. (Stam). The shares were transferred on 10 January 2022.
These divestments are a direct result of Alliander’s redefined strategy. The sale of the contractor Stam also fits in with the new contracting strategy that came into effect in 2021.
Early termination of CBLs
In December 2021, with the agreement of the relevant US counterparty, Alliander prematurely terminated two of the three remaining cross-border leasing (CBL) contracts. They were due to run until 2028. The early termination substantially reduced both our off-balance-sheet investments and related lease obligations. In addition, as part of this termination, the on-balance-sheet General Electric bonds (€147 million) were sold and the associated loans repaid. As a result of these transactions, only one CBL contract remained in place at the end of 2021. For further explanation, see note [3] to the financial statements.
Additions to the reporting scope
Under the EU’s Sustainable Finance Action Plan to make the European economy more sustainable, Alliander must comply with the reporting obligations set out in the EU taxonomy from the 2021 financial year. This specifies a classification system that indicates whether business activities and related cash flows — particularly revenues and investments — are sustainable. This reporting information, new as of the financial year 2021, has been added to this section.
In addition, as an issuer of securities in the European Union, Alliander is required to publish its annual report in digital form in accordance with the European Single Electronic Format (ESEF) as of the 2021 financial year. ESEF makes the reports published by issuing institutions more accessible and facilitates the analysis of and comparability between annual financial reports.
Alliander's financial policy is explained in further detail in this chapter. Furthermore, the financial results and position in 2021 in terms of the balance sheet, cash flows and financing are also presented, followed by taxation, the impact of the method decision and the impact of the EU taxonomy.
The main changes resulting from the 2022-2026 method decision are considered next. This method decision, established by the ACM, serves as the basis for determining the permitted income and, by extension, the regulated tariffs. The chapter ends with a look ahead at the results expected for 2022.