The German energy transition requires power transmission highways running from wind turbines in the north to factories in the south. There's no doubt about that. Transmission system operator Tennet, responsible for the lion's share of this task, now has to raise the necessary funds from private investors after a failed deal with the federal government.

That won't be easy. The government initially intended to have state owned bank KfW take over the German unit of Tennet for 22 billion euros, which would have accelerated grid expansion. Currently, progress is slow partly because the Dutch government, Tennet's sole shareholder, understandably has little interest in pre-financing the German energy transition. Tennet's grid expansion, both onshore and offshore, requires unprecedented investments. The company recently announced a ten-year investment plan of 160 billion euros through 2033. This enormous sum will mainly come from debt via bonds and loans, but a significant portion must be financed through equity – and that's the problem.

As a potential solution for the equity needs of Tennet Germany, over a two year period the company explored and negotiated the complete sale of its German operations to KfW. Citigroup acted as an advisor on the German side, while ABN Amro and Deutsche Bank were involved on the Dutch side. But no agreement has been reached.

The Federal Constitutional Court's ruling on the Climate Fund limited the federal government's financial capabilities. And the next budget requires 20 billion euros in savings, roughly the amount needed for the Tennet deal. The government already holds stakes in transmission system operators 50Hertz and Transnet BW via KfW, creating a nucleus for a potential state-owned Deutsche Netz AG. The Green-led Ministry of Economic Affairs would likely have sought funding for the Tennet deal, but the FDP Finance Minister and SPD Chancellor do not prioritise this.

Tennet now plans to „also consider the possibility of tapping public or private capital markets to meet the equity needs of its German business.“ This means private investors are expected to finance grid expansion. Financial investors like Macquarie, Brookfield, or KKR might be considered. However, they are currently not eager to finance German transmission networks. The reason – the nearly risk-free returns on US Treasury bonds have become much more attractive over the past two years compared to the equity returns on power grids offered by the Federal Network Agency.

The equity return rate for new investments will be based on an annual variable base rate plus a constant risk premium of around 3%. Previously, the base rate was determined by average ten-year yields. According to the Federal Network Agency's forecast last summer, the equity return rate would be about 7.09%, or around 8.1% including trade tax. This doesn't sound overly attractive to investors. At Amprion, two shareholders – Degussa Pension Fund and Swiss insurer Swiss Life – put their shares up for sale in January. This indicates that without a state takeover, and with continued low equity returns, grid expansion at Tennet and the other three transmission system operators may be significantly slowed.