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Glossary · Energy industry & energy transition

CAPEX

CAPEX Investment costs financing power system cost structure WACC

CAPEX stands for capital expenditures. It refers to investment expenditures on assets that are used over several years. In the power system, this mainly concerns power plants, wind farms, solar installations, power grids, substations, transformers, storage systems, electrolysers, metering and control technology, heat pumps and industrial conversions. CAPEX is used to newly build, expand or fundamentally modernise technical installations. Ongoing operating costs are not included. Investments made during the period of use, however, also count as CAPEX, for example the replacement of battery modules, a repowering or the renewal of a transformer.

The distinction from OPEX, the operating costs, is particularly important. OPEX includes ongoing expenses such as fuel, maintenance, personnel, land leases, insurance, operations management, grid charges or short-term procurement costs. CAPEX usually arises before an installation is put to use. Economically, it is spread over the service life, in accounting as depreciation and in project calculations as debt service. A wind turbine costs a lot to build, but afterwards costs little per kilowatt hour generated. A gas-fired power plant is often cheaper to build per kilowatt of capacity, but incurs fuel and CO₂ costs as soon as it generates electricity.

Units, reference quantities and system boundaries

CAPEX is stated in euros and is often related to a technical quantity. For power plants, euros per kilowatt of installed capacity is customary. For storage systems there are two figures: euros per kilowatt of charging or discharging power and euros per kilowatt hour of storage capacity. The two values must be clearly kept apart. A storage system with a four-hour duration has significantly higher costs per kilowatt than one with a one-hour duration, but often lower costs per kilowatt hour. For grids, costs are calculated, for example, per kilometre of line, per substation or per grid connection.

The pure investment sum is not enough to compare generation technologies. A photovoltaic installation is inexpensive per kilowatt, but in Germany achieves significantly fewer full-load hours than an offshore wind turbine. For this reason, investments are converted into annual capital costs, operating costs are added, and the total is related to the energy generated, for example in euros per megawatt hour. This yields the levelised cost of electricity. They combine CAPEX, financing, service life, utilisation and operating costs. An example: in its 2024 study, Fraunhofer ISE cites installation costs of roughly 1,300 to 1,900 euros per kilowatt for new onshore wind turbines. Depending on the site, this results in levelised costs of electricity of around 4.3 to 9.2 cents per kilowatt hour. The range arises mainly from differing wind conditions, not just from differing investments.

The term "investment costs" is also used in different ways. Sometimes it means only the installation itself, sometimes the entire project including planning, permitting, grid connection, interest during construction, land and a risk buffer. In international comparisons, exchange rates, labour costs, supply chains, taxes, support conditions and interest rate levels also play a role. Anyone comparing CAPEX figures must therefore know the system boundary: Is it about module prices, turnkey installations, grid connection costs or fully financed projects? The reference year is also important, because CAPEX figures apply to a particular price level and become outdated quickly.

From investment to annual capital costs

An investment is initially a one-off expenditure. How heavily it weighs on each year depends on the period of use and the interest rate. An annuity is often calculated for this purpose, that is, a constant annual amount for repayment and interest. A simplified example: an investment of 1 million euros over 20 years costs around 67,000 euros per year at an interest rate of 3 percent. At 6 percent it is around 87,000 euros, i.e. almost a third more, even though the installation costs exactly the same. For this reason, the WACC, the weighted average cost of capital, and the economic service life are just as important as the purchase price for capital-intensive technologies.

Investment is not the same as cost impact

A common misunderstanding is to equate CAPEX with the total costs of a technology. The investment expenditure only describes how much money is needed to build or buy an installation. How expensive the electricity generated, the grid capacity provided or the energy stored ultimately becomes also depends on period of use, utilisation, technical availability, maintenance, financing costs and regulatory treatment. An installation with high CAPEX can be economically favourable if it runs for a long time, has low operating costs and reliably generates revenue. An installation with low CAPEX can become expensive if it is rarely used, needs a lot of fuel or requires additional infrastructure.

The difference between installed capacity and energy actually delivered is central. CAPEX per kilowatt shows how expensive it is to build capacity. For the power system, however, it also matters when and how often this capacity is available. A solar installation delivers mainly in daylight. A battery storage system can shift energy in time. A dispatchable power plant can deliver on demand as long as fuel is available. CAPEX thus shows which investment is needed. But on its own it does not show what an installation contributes to security of supply, flexibility or grid stability.

Why CAPEX is gaining importance in the power system

Through the expansion of renewable energy, electrification and grid expansion, the power system is becoming more capital-intensive. Wind and solar power need no fuel, but high upfront investments. Power grids must be reinforced and digitalised before new consumers and generation installations can be reliably connected. Storage systems, flexible industrial processes, charging infrastructure and heat pumps also result from investments whose costs have effects for many years.

This changes the cost structure. In a fossil-dominated system, a large part of the costs consisted of ongoing fuel expenditure. In a system with more renewable energy, more money is tied up in advance. Instead of fuel procurement, the focus shifts to financing, permitting and utilisation of installations. Capital tie-up, interest rate levels and investment risks thus become important for the whole system. If financing costs rise, annual capital costs also rise, even if turbines, modules or batteries become cheaper.

CAPEX in grid regulation

Power grids are natural monopolies with high CAPEX and long periods of use. Grid operators invest in lines, substations, transformers, protection technology and metering systems. These costs are not earned back through a competitive price, but through regulated grid charges within a revenue cap. In Germany, under the Incentive Regulation Ordinance (ARegV), capital costs are defined as imputed depreciation, imputed return on equity, imputed trade tax and interest on debt. For investments made after the base year, the regulatory authority can approve a capital cost surcharge on the revenue cap.

For electricity distribution system operators, an annual capital cost reconciliation has existed since the start of the third regulatory period in 2019. It consists of two parts. A surcharge accounts for new investments. A deduction reflects the fact that the capital costs of existing assets decline through depreciation. In this way, the revenue cap is continuously adjusted to changing capital costs and not only with the next regulatory period.

This framework is currently being restructured. In the so-called NEST process, the Federal Network Agency (Bundesnetzagentur) is gradually replacing the previous ordinances such as ARegV and StromNEV with its own determinations. It published the central determinations on 10 December 2025. A key point is that the imputed return on capital will in future be determined via a WACC. According to the authority's summary of October 2025, capital costs are to be remunerated on a flat-rate basis with a ratio of 40 percent equity and 60 percent debt. Interest on debt for new investments is to be dynamised, i.e. adjusted to interest rate developments. In addition, the inflation adjustment and productivity factor are to apply only to OPEX, so that CAPEX is not inflated twice. The capital cost reconciliation is retained in principle. The new rules form the basis for the fifth regulatory period, for gas grids from 2028 and for electricity distribution grids from 2029. Until then, the previous framework continues to apply in the electricity sector. For transmission system operators, there is a separate procedure.

For grids, CAPEX is therefore closely tied to regulation, security of supply and the distribution of costs between consumer groups. The central questions are: Which investments are recognised? What return is allowed on them? Over what period are they depreciated? And what incentives do grid operators have to expand with foresight?

Financing, risk and incentives

Investments in the power system do not happen automatically just because a technology is available. They come about when expected revenues, support rules, regulatory recognition or contractual safeguards make financing possible. For wind and solar farms, tenders, market premiums, power purchase agreements or direct marketing can be decisive. For storage systems, price differences on the electricity market, grid charges, balancing energy markets, connection conditions and the question of how electricity withdrawal and feed-in are burdened with levies all matter. For industrial installations, it often depends on whether electrification, compared with fossil alternatives, offers predictable operating costs and a viable payback.

CAPEX thus makes the link between technology and institutions visible. A battery can provide balancing energy, shave load peaks or shift solar power in time. Whether it is built, however, depends on whether these services are paid for, whether double levies are avoided, whether a grid connection is available and whether revenues are secure enough. Conflicts arise where technical possibility, market rules and political responsibility diverge.

High CAPEX makes predictability more important. Delayed permits, uncertain support conditions, unclear deadlines for grid connection or fluctuating revenue models make projects more expensive. Capital stays tied up for longer or financiers demand higher risk premiums. These costs rarely appear as a separate item in public debate. They are embedded in bids, power purchase agreements, grid charges or return expectations. The installation does not become technically worse as a result, but it becomes economically more expensive.

Typical misinterpretations

  • "The cheapest solution has the lowest CAPEX." For individual components this may be true, but not necessarily for the power system. Low investment costs help little if they result in more grid bottlenecks, more curtailment, additional reserve capacity or higher operating costs. Conversely, higher CAPEX can make sense if it lowers operating costs, avoids bottlenecks, extends service life or creates flexibility. The overall view is provided by the system costs.

  • "Falling CAPEX means falling electricity prices." Cheaper solar modules or battery cells do lower project costs. However, the end-customer price of electricity also includes grid charges, taxes, levies, sales costs, market risks and costs for system services. With high shares of weather-dependent generation, additional requirements for grids, storage, flexible demand and firm capacity come into play. CAPEX reductions in a single technology therefore explain only part of electricity costs.

  • "CAPEX is a burden on the national economy." An investment is initially an expenditure, but it creates a usable asset. Whether it becomes productive infrastructure or a misinvestment depends on demand, use, service life and alternatives. A power plant that is decommissioned early can leave behind lost investments, so-called stranded assets. A grid expanded in good time, by contrast, can avoid expensive bottlenecks, redispatch and delayed connection projects.

  • "CAPEX figures from different sources are directly comparable." This is true only if system boundary, price level, currency, reference quantity (per kilowatt or per kilowatt hour) and financing costs match.

Assessment

In the power system, CAPEX describes how much capital is needed for lasting technical capabilities. The term becomes meaningful only when it is read not as the price tag of an installation, but together with service life, utilisation, financing, regulation, operating costs and function in the system. Those who classify CAPEX correctly recognise which costs are tied up in advance, which risks must be financed and which rules decide whether necessary infrastructure is actually built.

Sources

Related glossary entries

Edited by eCMS on 11.11.2026 16:50

© 2026 Erik Schmidt. All rights reserved. Quotations with a link to the source are welcome.