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Glossary · Energy industry & energy transition

Unbundling (Entflechtung)

unbundling grid operation regulation grid access electricity market

Unbundling (in German: Entflechtung) refers to the separation of different activities in energy supply. At its core, it is about separating network operation from competitive areas such as electricity generation, electricity trading and supply. A company that operates an electricity grid should not be able to use its position in the grid to favour its own supply or generation companies or to disadvantage competitors. The principle applies to electricity and gas. This entry mainly describes the electricity sector in the EU and in Germany.

Why networks are unbundled

Electricity networks are regarded as natural monopolies. It would make no economic sense to build several parallel line networks to every household connection just so that each provider has its own infrastructure. Competition therefore takes place not between networks but on the network. Households, businesses and industry can switch their supplier even though electricity always physically flows through the same lines. For this to work, access to the network must be regulated in a non-discriminatory way. One can picture it like a motorway: if the motorway operator also owns a haulage company, clear rules are needed so that it does not make competitors' lorries wait at the slip road.

Unbundling is therefore not a technical side issue but an institutional prerequisite for liberalised energy markets. It determines which information a network operator may use and pass on, how costs are allocated, who decides on network connections, and how independent the network company must be from its group. Without such rules, an integrated energy company could use network information strategically, delay connection procedures, shift costs into the regulated network area or favour its own supply division.

Levels of unbundling

Unbundling can go to different lengths. The German Energy Industry Act (EnWG) regulates it in Part 2 (Sections 6 to 10e). Four levels are usually distinguished, which build on one another.

  • Accounting unbundling: Network activities are kept in separate accounts, apart from supply, generation and other business areas. This makes visible which costs actually arise in the regulated network. This is important because the network charges are paid by all network users. Costs from supply or generation must not be covertly shifted into the network area.

  • Informational unbundling: Commercially sensitive information from network operation must be treated confidentially. Information that may confer advantages may only be disclosed in a non-discriminatory manner.

  • Operational (organisational) unbundling: This concerns personnel, management functions, decision-making channels, IT systems and access rights. The network operator is to decide independently on network planning, connection requests, network operation and congestion management. This includes a compliance programme (equal treatment programme), the observance of which is monitored.

  • Legal unbundling: Network operation is carried out in a separate company. It may continue to belong to the group but must be independent in its legal form from the other energy supply activities. For distribution system operators, EU law does not result in an obligation to separate ownership of the network assets.

  • Ownership unbundling: The same person may not simultaneously control a generation or supply undertaking and exercise control or rights over a transmission system operator, and vice versa. This most far-reaching form applies only to transmission system operators, i.e. the operators of transmission networks for electricity and of transmission pipeline networks for gas.

Transmission networks: three models

For transmission networks, the EnWG permits three models. The standard case is ownership unbundling under Section 8. Here the transmission system operator must itself own the network, directly or through shareholdings. Alternatively, there is the Independent System Operator (ISO) under Section 9: the network remains owned by the group, but it is operated, planned and expanded by an independent third party, which must grant third parties non-discriminatory network access. The third model is the Independent Transmission Operator (ITO) under Sections 10 to 10e. It may remain within the group but must meet strict requirements regarding assets, personnel, management, supervisory board and equal treatment. ISO and ITO are in principle open only to transmission networks that were owned by a vertically integrated undertaking on 3 September 2009. Transmission system operators must be certified by the Federal Network Agency (Bundesnetzagentur) before being designated.

Distribution networks and the 100,000-customer threshold

For distribution system operators, the EU Electricity Market Directive (EU) 2019/944 in Article 35 does not require ownership separation. If they belong to a vertically integrated undertaking, however, they must be independent in legal form, organisation and decision-making. Member States may exempt integrated undertakings with fewer than 100,000 connected customers or small, isolated networks. Germany makes use of this option: under Section 7(2) EnWG, vertically integrated undertakings to whose electricity distribution network fewer than 100,000 customers are directly or indirectly connected are exempt from the obligation of legal unbundling. The same applies correspondingly to gas distribution networks. Many smaller municipal utilities (Stadtwerke) therefore continue to operate network and supply in one company. Obligations such as separate accounts and the confidential handling of information continue to apply regardless.

Storage and charging points

With the energy transition, unbundling has also been extended to new installations. Under Section 7(1) sentence 2 EnWG, operators of electricity distribution networks may in principle not own, develop, manage or operate energy storage facilities. A battery storage system is therefore, as a rule, a matter for market participants, not for the distribution system operator. For the charging point, a similar principle applies under EU law: distribution system operators may own or operate charging points only exceptionally, for example if no other interested party is found in an open, regulatorily approved tendering procedure. In the EnWG, the exception for charging points is regulated in Section 7c. The same logic lies behind this: whoever controls the network should not at the same time compete in markets to which it itself controls access.

Distinctions

Unbundling is not the same as privatisation. A network can be publicly, municipally, cooperatively or privately held and still be unbundled. Conversely, a private company can be vertically integrated. EU law even provides that two separate public bodies may control generation and supply on the one hand and transmission on the other. Nor is unbundling identical to liberalisation. Liberalisation opens generation and supply to competition. Unbundling separates the monopoly area of the network from this competition. Finally, regulation oversees the network, approves revenues and controls network access. The three areas interlock but fulfil different tasks.

Unbundling also delimits the market roles from one another. A supplier sells electricity to customers, a trader trades electricity volumes, a generator operates power plants. A balance responsible party ensures that feed-in and withdrawal are balanced in accounting terms. The network operator provides the physical infrastructure and keeps the network within its technical limits. These roles may lie within the same group. They must, however, be separated in such a way that no market participant is treated less favourably in network access.

Practical significance and areas of tension

Network operators decide on connections for wind farms, photovoltaic systems, storage, charging infrastructure, heat pumps and industrial plants. They draw up expansion plans, levy network charges and procure ancillary services. Each of these decisions has economic consequences. Unbundling is not meant to prevent these consequences but to ensure that they are not distorted by group interests.

The tension is particularly evident with data. Network operators need ever more precise information on feed-in, consumption, network load and controllable installations. The same information would be valuable in supply. Whoever knows early where bottlenecks arise or which customers have flexible loads has an advantage in competition. Unbundling therefore does not mean getting by with as little data as possible, but using data according to clear rules. Directive 2019/944 requires, for example, that equal treatment programmes ensure non-discriminatory data access for eligible parties where smart metering systems have been introduced and distribution system operators manage data.

It is often objected that unbundling makes coordination in the energy system more difficult. The objection makes a genuine point: network, generation, storage and consumption must cooperate more closely the more renewable electricity is fed in and the more loads such as electromobility and heat pumps grow. A return to integrated regional monopolies would not automatically solve this problem, however, but would make discrimination harder to verify. What is needed is neutral coordination: standardised connection procedures, transparent congestion information, fair rules for the use of flexibility and clear responsibilities. The burden resulting from separate companies, reporting and compliance is real. It replaces, however, the hidden costs of an opaque monopoly in which competitors cannot tell whether they are being disadvantaged for technical reasons or out of strategic calculation.

Limits of the concept

Unbundling does not solve all problems of the electricity market. It does not answer how quickly networks are expanded, which returns are appropriate, or how local bottlenecks are managed efficiently. It does, however, set the framework within which these questions can be decided neutrally. The more generation, consumption, storage and digital control grow together, the more it matters to have unbundling that regulates neutrality, data access and coordination at the same time.

Sources

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Edited by eCMS on 11.11.2026 19:47

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