Danish energy reform: policy implications for ...

Energy Policy 31 (2003) 597–607

Danish energy reform: policy implications for renewables Niels I. Meyera,*, Anne Louise Koefoedb a

Department of Civil Engineering, Technical University of Denmark, 2800 Lyngby, Denmark b Norwegian School of Management, Elias Smiths vei 15, 1302 Sandvika, Norway

Abstract For decades, renewables have been promoted in Denmark by the feed-in model (fixed price scheme) with favourable tariffs for green electricity. This has resulted in successful penetration of wind power covering more than 13% of Danish electricity consumption (2001). Changing the promotional scheme to a quota-based system with tradable green certificates has been on the political agenda since 1999. This article discusses Danish energy policy with focus on the implications for the penetration and deployment of renewables. It has turned out to be more complicated than anticipated to create an efficient operational system for trade in green certificates, and the starting date for trading has been postponed several times. The national green certificates market was to be fully operational by the beginning of 2003, however, political negotiations in the fall of 2001 seem to postpone the initiation of the certificate market until 2005. Transitional rules for green electricity during the period from 2003 to 2005 are under negotiation after a national election in November 2001. This situation has created widespread uncertainty among potential investors in green electricity. The article evaluates a number of problems related to the shift in Danish energy policy. r 2002 Elsevier Science Ltd. All rights reserved. Keywords: Renewables; Liberalisation; Wind power

1. Introduction Liberalisation of electricity markets in Europe was initiated by the UK (1989) and Norway (1991), followed by Sweden (1994) and Finland (1996). Agreement on the Directive specifying the rules for electricity liberalisation in the EU was reached in December 1996 by the Council of Ministers (European Communities, 1997). The goal of the Directive is to achieve higher efficiency and lower consumer prices by introducing conditions of intensified commercial competition. It may be noted that some EU Member States did not fully comply with the Directive when it came into force on February 19, 1999, with France as an extreme example. However, countries such as Denmark, Sweden, the UK, Germany and Holland have opened their national markets by more than required in the Directive.

*Corresponding author. Tel.: +45-45-25-19-30; fax: +45-45-88-3282. E-mail addresses: [email protected] (N.I. Meyer), [email protected] (A.L. Koefoed).

The Directive does not give high priority to energy conservation and renewable energy sources. On the contrary, there is an apparent conflict between the commercial goal of profit maximisation that is often based on a time horizon of 5–10 years and the need for long-term comprehensive energy planning, including energy conservation and implementation of supply systems based on renewable sources. As a compromise the Directive gives national governments the option of introducing ‘‘public service obligations’’ (PSOs) based on considerations of supply security, energy quality, price and environmental protection (article 3–2 in the Directive). After the EU directive in 1996 on liberalisation of energy markets, a number of EU Member States have introduced new energy acts in order to adapt to the Directive, and in Denmark a new energy act was confirmed by the Parliament in June 1999. Since it was foreseen by the Danish government that the feed-in model would not survive in the long run due to strong trends in the EU that favour a market-based model, the new energy act introduces a significant shift in the promotional scheme for the deployment of renewable

0301-4215/03/$ - see front matter r 2002 Elsevier Science Ltd. All rights reserved. PII: S 0 3 0 1 - 4 2 1 5 ( 0 2 ) 0 0 1 4 5 - 3

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N.I. Meyer, A.L. Koefoed / Energy Policy 31 (2003) 597–607

energy sources in the Danish supply system. The new promotional scheme is based on green certificates trading and obligatory consumer quota of green electricity, and therefore breaks with the previous feedin model (fixed price scheme) that was the basis for the successful penetration of wind power in Denmark in the 1990s. The article uses Denmark as an example of the process and consequences involved in setting up a special market for electricity from renewable energy sources (RES) based on green certificates trading and obligatory consumer quota of green electricity. The Danish case further illustrates the complications arising from the drastic change of model for the promotion of renewables. Complicated transitional rules for electricity from renewables are still under negotiation and the lack of clear operational solutions has created widespread uncertainty among investors. At this point in time it is uncertain whether the green certificate model will work in accordance with policy intentions (Danish Ministry of Environment and Energy, 2001) or whether it will end up being counterproductive to the promotion of renewables in the energy supply system.

2. Promotion of green electricity in Europe The European countries have used a number of different models for the promotion of electricity from renewable energy sources (RES-E). The intensity of the promotion has also varied considerably from country to country. An overview is given in another article in this issue (Meyer, 2003), and a summary of the main models is given in this section with focus on the Danish situation. The development of wind power and other forms of green electricity in Denmark has been promoted for more than a decade by the so-called feed-in model. In a feed-in scheme a long-term minimum price is guaranteed for electricity obtained from renewable sources. The feed-in tariffs in Europe have typically varied between 7.7 and 9.3 eurocents per kWh. In combination with standardised costs for grid connections and short lead times, this pricing system has made it possible for developers to obtain easy bank financing for investments in, e.g. wind power installations. In promoting wind power, the feed-in system has been used with some variations in Denmark, Germany and Spain and has proved superior to other methods that have been tried in the EU for promoting green electricity when evaluated in terms of installed RES-E capacity. Thus, the wind power capacity of Denmark, Germany and Spain comprises around 84% of the EU total. Countries which have used other approaches—including the UK with one of the best wind potentials in Europe—

have installed wind power capacities that are much lower. One (political) problem with the system is that a fixed price level does not conform to traditional market principles. At the same time, it has been broadly claimed that the quota-based systems with certificates trade are more market conform. This claim has recently been questioned by Hvelplund and Krohn, indicating that both the fixed price system as well as the green certificate system use the market mechanism to set quantity or price, but that both are only pseudo-markets, because governments set the other parameter: price or quantity (Hvelplund, 2001; Krohn, 2002). Another criticism against the feed-in model has been that the favourable tariffs have not been reduced in step with technological development. Windfall profits have been obtained by operators of the most modern wind turbines located at the most favourable sites. However, such problems could be overcome in several ways without abandoning the main elements of the feed-in model. The Danish Council for Sustainable Energy has proposed that tariffs could be reduced after a designed production and profitability level has been reached. A supplementary solution would be to adjust the tariff for new installations at regular intervals taking into account the best technology on the market (bench-marking principle). This would also introduce an element of competition into the system. As the market share of renewable energy sources increases, the burden of the feed-in premium tariff for green electricity on government finances can become politically unacceptable. This political problem may be avoided by letting all electricity consumers cover the premium tariff in proportion to their electricity demand like in the German feed-in model. It should also be mentioned that the feed-in model may well include the introduction of green certificates for other reasons than trading, e.g. with a view to operating a differentiated taxation system. Typically, a government will want to release RES from some of the energy taxes, like in the German case. If this is the case, the certificate will support information disclosure and facilitate a renewable electricity tracking system. In spite of these possibilities for improvements of the feed-in model, the Danish government decided in 1999 to replace the fixed-price system by a system based on green certificates traded in a special green market. This is described in more detail in the section on the Danish Energy Reform. In contrast to Denmark, the German government has decided to continue its previous feed-in system (Stromeinspeisungsgesetz, SESG). More details on the European schemes for promoting RES-E are given in another article in this issue (Meyer, 2003), which includes a discussion on the market conformity of the different support schemes.


3. Danish energy policy Since 1990, the overall goal of Danish energy policy has been to create a sustainable energy development and to comply with commitments to reduce greenhouse gas emission in an effort towards the mitigation of climate change.1 This has been manifested through the two latest official Danish energy plans from 1990 and 1996 (Danish Energy Ministry, 1990; Danish Ministry of Environment and Energy, 1996). These policy plans strongly pursue continuity in their priorities on the development of RES and the expansion of electricity generation based on RES-E, and a primary focus is on increasing the share of wind and biofuels in electricity production. The specific target for RES in these plans is 12–14% of primary energy by year 2005 and 35% coverage by year 2030. Wind power has been given an important role in these plans with targets for installed capacity of around 1500 MW in 2005 and 5500 MW in 2030, covering 10% and up to 50% of Danish electricity consumption, respectively. The 2030 target includes 4000 MW offshore wind capacity. The 2005 target has already been exceeded by a significant amount. At the end of 2001, the installed wind power capacity has surpassed 2400 MW covering more than 13% of Danish electricity consumption. Offshore wind farms have been promoted since the end of the 1980s due to increasing difficulties with finding favourable sites on land. The first offshore wind farm was made operational in September 1991 at a site northwest of the island of Lolland in the Baltic Sea. The wind farm consists of eleven 450 kW turbines positioned in two rows at water depths between 2 and 6 m. The distance from shore varies from 1.2 to 2.4 km, while the distance between the turbines is about 300 m. The second offshore wind park was made operational in October 1995. It is sited at Tun Knob in the sea between Jutland and the island of Sams. The total capacity is 5 MW based on ten 500 kW turbines. A special investigation concerning bird strikes has been carried out in connection with the Tun Knob project. This problem has turned out to be negligible. A recent offshore wind farm is sited close to Copenhagen Harbour and has started to operate from 1 The official Danish target is to stabilise CO2 emission at 80% of 1988 levels by year 2005 (20% reduction of Denmark’s CO2 emissions 1988–2005). This is based on the recommendations of the World Commission’s Toronto meeting (The Changing Atmosphere) in 1988, which recommended stabilisation of emissions by year 2000, a 20% reduction by year 2005, and a 50% reduction within 30–50 years. Following the Kyoto negotiations, a Danish commitment was made to reduce the emission of greenhouse gases by 21% below 1990 levels between 2008 and 2012. This is part of the common ‘‘bubble’’ for greenhouse gases and the reduction commitment of 8% for the EU countries.

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December 2000. It consists of twenty 2 MW turbines, and it is still a relatively small farm compared to the size of 150–300 MW which is presently considered to be closer to the optimum from an economic point of view. There is an agreement between the previous Danish government and Danish utilities that they shall establish five wind farms each of 150 MW capacity before year 2008.2 The sites for these five offshore farms have been decided and the first farm is planned to be in operation during 2002. Recent political negotiations have indicated the possibility that the last three of these offshore farms may be subjected to a tender procedure. Using experiences from the first two Danish offshore wind farms, one finds a utilisation time of about 3000 h per year (at rated power) for such wind farms. From this result, it is concluded, that there exists a total potential for offshore electricity production in Danish waters of at least 20 TWh per year, corresponding to about twothirds of the electricity consumption foreseen in year 2030. Thus, the technical wind resources do not constrain the fulfilment of the target for wind power in Denmark. Energy policy efforts since the late 1980s have also focused on converting heating plants to combined heat and power (CHP) plants and thereby to expand the use of biofuels in electricity production as well. At ELSAM (now Elsam A/S) and ELKRAFT (now Energi E2 A/ S)’s central production stations, experience has been gained either with firing in retired coal boilers or in separate boilers adapted to the combustion properties of biofuels. Since the early 1990s, a transition to larger scale use of biofuels in power production has been driven by the Biomass Agreement of 1993. Following this agreement, the central power stations were supposed to use 1,4 million tons of straw and wood by year 2000 which would substitute 6% of coal-fired production.3 This biomass plan has however been destabilised by the liberalisation process and low Nordic electricity prices. The status by early 2000 is that only close to half of the planned biofuel volume is being used at the central power plants.4 A follow-up agreement to the Reform from 1999 was reached on March 22, 2000,5 and the Parties behind the original electricity reform agreed that the Biomass Agreement shall be fulfilled by the end of 2005 and that a couple of larger biomass plants shall be constructed before the end of 2003. 2 With a new Danish government after a national election in November 2001 this agreement has been changed to include only two offshore wind farms. 3 The Biomass Agreement would imply that the exploitation of straw is doubled and the use of wood is increased by 15–20%. This would increase the use of biofuels for energy purposes from 50 PJ to 75 PJ/ year (20 TWh) by the end of 1999, accounting for about 10% of the projected Danish fuel consumption by year 2000. 4 See Dansk BioEnergi, February 2000. 5 http://www.mem.dk/nyheder/presse/dep/refaftale.htm.

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4. Danish energy reform The present regulations for the Danish electricity sector are laid down by a new Energy Act from June 1999. It provides for a faster opening of the electricity market than required by the EU directive. By January 2001, the market has been opened for all electricity customers, who consume over 1 GW a year, and by January 2003 liberalisation will extend to all consumers. The Act breaks with the traditional Danish non-profit principle as power plants are to be operated as ordinary commercial enterprises in the future. Users of district heating are to be protected against unfair price increases. The profits of grid companies will be regulated and majorities of their board of directors will be elected by customers. The system operators are supposed to be completely independent of commercial interests. The law also introduces quota for the annual CO2 emission of Danish utilities starting with 22 million tonnes in 2001 and decreasing to 20 million tonnes by year 2003. Trading of quota from different Danish utilities to American and German utilities has started in 2001 corresponding to a total amount of 160,000 tonnes of CO2. This seems to be the first case in the world of trading CO2 quota. The Energy Act also introduces a shift from the previous feed-in model to a special green market for trade in green certificates (RES-E labels) in combination with consumer quota for green electricity specified by the government. The Danish government was inspired to make this shift by an expectation that the certificates trading model would be the standard at the EU level (Danish Energy Agency, 2001). It has turned out, however, that the EU negotiations in relation to the new directive for renewables has resulted in a compromise that permits the continuation of present national models for more than 5 years (EU Directive, 2001). In addition, the EEC court has confirmed in March of 2001, that the previous German feed-in model is neither in conflict with EU State Aid rules nor with the rules of the Single Market. Thus, the Danish policy decision has been based on wrong assumptions in this context. In accordance with the PSO possibilities of the EU directive, the Danish Electricity Act gives priority to RES-E in the supply system. It has been questioned whether it is possible in practice to give priority grid access to RES-E in the free market system, e.g. in connection with trading on the NordPool exchange. Recent proposals from the Danish Energy Agency seem to weaken the priority rule for RES-E. At the end of the day, this may be mainly a question of price competition. In the case of wind power, the marginal production cost is relatively low, which may support the intended priority access for RES-E.

After extended negotiations, the Energy Act from June 1999 was finally confirmed by the EU Commission in September 2000. The Act has been adjusted by supplementary acts in December 1999, May 2000 and November 2000. One of the latest adjustments is concerned with more explicit formulations of the responsibilities of the system operator in relation to supply security, including the right of the system operator to impose changes in transactions on producers and consumers. The Energy Act introduces some new concepts and institutions as exemplified in the following. 4.1. Supply committed enterprise A supply committed enterprise (distribution company) is licensed to supply electricity in a certain geographical area to customers who either do not yet have the possibility to choose their own supplier, or do not want to exercise this possibility. Supply committed enterprises are regulated in relation to profits by the Energy Supervisory Board (see below). 4.2. RES-E fund The function of the RES-E fund is to buy up green certificates in cases where the national quota has not been fulfilled. The functional details of the RES-E Fund are given below. 4.3. Energy supervisory board The Energy Act introduces a new Energy Supervisory Board (Regulatory Committee) to undertake a regulatory and complaints functions for the Danish energy system. The Supervisory Board is an autonomous committee with seven members from the fields of energy, environment, economy and law. The members are nominated for 4 years in their personal capacity and do not represent any interest groups. As an example of regulatory responsibilities of the Energy Supervisory Board can be mentioned price regulation of the 51 supply committed enterprises based on a calculated reference price. 4.4. Unbundling of activities Licences to supply committed enterprises, system operators, grid companies and transmission companies may, with a few exceptions, not be granted to the same company, and the licensee may only operate the activities that lie within the terms of the license of the company. The breaking up of existing utilities have met with some problems in practice where the unbundling sometimes is more symbolic than real. This has


given rise to some complaints from trading companies and others (Eltra-Magasinet, 2000). 4.5. Green certificate market A special certificate market will be introduced for green electricity with obligatory consumer quota. The Danish government has specified that 20% of the electricity demand shall be covered by RES-E by 2003. It was planned, that the Danish Energy Agency (DEA) should work out a more comprehensive plan for the future consumer quota during the fall of 2001. However, the call of a national election in November 2001 has postponed the decision on the future quota. During 1999, the operational elements of establishing a green certificate market were evaluated by the DEA in cooperation with a group of actors from the Danish energy sector. A number of institutional and practical problems have been revealed in this connection as described in the following. One of the problems of green certificate markets concerns the fairness of competition between renewable technologies at different stages of development. If an open market with free competition between different renewable technologies were created today, wind power would probably sweep most of the market. Solar electricity would not have a chance, while biomass and small hydro might be competitive in special cases. Such a market situation could not be considered optimal for the long-term promotion of the total renewable potential. One possible solution is to reserve the green market for the most mature renewable technologies and to promote other desired technologies through a tender model. Another solution could be to introduce government investment subsidies to the less mature technologies and to phase these subsidies out as the technologies become more competitive. In a green certificate market with obligatory consumer quota, the price of green certificates can be expected to fluctuate strongly. When there is a shortage of electricity based on RES-E, the price of green certificates will be very high, while the price will fall to a very low value when there is a surplus. The uncertainty about the price formation increases the risks of investors and reduces investments in renewable technologies. The same problem in connection with swings in market prices has been encountered with the market rules used in California (Ford, 1999). In the new Danish system, minimum and maximum prices of, respectively, 0.10 D.kr./kWh (1.3 eurocents/ kWh) and 0.27 D.kr./kWh (3.6 eurocents/kWh) are defined for green certificates. It can be expected that the market price will fluctuate between the minimum or maximum value depending on the production capacity compared to the specified quota as suggested above. Thus, the investors will still face an uncertain situation.

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The ‘‘uncertainty’’ problem can be alleviated by longterm electricity supply contracts and flexible conditions for fulfilment of the quota. Another approach is to take advantage of financial mechanisms like banking and futures. Other problems are related to yearly climate fluctuations and the concern of consumers who wish to buy more green electricity than required by the specified quota (‘‘green pricing’’). One solution for the first problem would be to make the quota more flexible, e.g. by allowing 3 months from the next year to be included in the accounting for the previous year. This could also contribute to a reduction of fluctuations in the price of green certificates. Finally, there is the question of international trade of green certificates. A number of European governments are interested in this possibility because the volumes of the national green markets are estimated to be small in relation to the number of market actors and to the anticipated transaction costs. 4.6. Transitional rules for RES-E In order to secure a smooth transition from the feedin system to the green certificates trading system, the Danish Electricity Act opens up for a number of (complex) transitional rules for RES-E from existing plants and new plants introduced before 2003. The political agreement in relation to the transitional rules is only valid in the period up to 2003. The extension of these rules was to be negotiated during the fall of 2001. However, the national election on November 20, 2001 has postponed these negotiations and left the RES-E producers and potential investors in widespread uncertainty. In order to find operational solutions for these and other problems related to the establishment of the green certificate market, the Danish Energy Agency (DEA) has postponed the start of the market from the originally planned date of January 2000. Negotiations during the fall of 2001 seem to indicate that the certificate market will not be fully operational before 2005.

5. Status of preparatory work for a green market in Denmark A number of institutional and operational questions have to be resolved before trading of green certificates may be started. These questions include decisions about certification, monitoring of trade, registering of data, lifetime of certificates, documentation of consumer quota, criteria for international trade, etc. It is also necessary to introduce a number of transitional tariff systems for present RES-E producers. These issues have been under consideration in the DEA during the last few

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years, and a review of the status of the preparatory work is given in the following (Danish Energy Agency, 2001). 5.1. The Danish green certificate Each green certificate will represent a production of 1 MWh of RES-E. The certificates will be issued to certified producers by the two Danish system operators, Elkraft-System and Eltra, based on the accumulated production typically during one month. Fractions of a MWh are transferred to the following accounting period. Depending on the final decision whether to postpone the green market or not, the administrative procedures are expected to be operational by the end of 2002. The green certificate will only exist in electronic form in a register of RES-E producers with information concerning date of issuing, geographical site, technology, etc. The lifetime of a certificate is in principle infinite, i.e. until the owner decides to use it to fulfil a consumer quota obligation. The DEA aims at establishing a certificate format in accordance with the ‘‘Basic Commitment’’ of the RECS project (RECS, 2000), where each certificate should include the following information: (a) (b) (c) (d) (e) (f)

A unique identification number. Reference to the issuing authority. Reference to the specific RES-E plant. Date of issuing. Energy source and technology. Indication of public investment or production subsidy (if relevant). (g) Installed capacity.

they are correctly included in the wind power database. Biomass plants may require a more detailed investigation, especially concerning the fuel input. It is expected that the corresponding certification system will be operational by the middle of 2002. The certification operation may be left with a company with expertise in this field. However, the procedure may be influenced by future requirements in connection with international trade in green certificates. 5.4. Register for green certificates The DEA has made an agreement with the two system operators that they establish a mutual company to run the register for green certificates. The detailed rules for this company were negotiated between the DEA and the system operators during the fall of 2001. The register is planned to be operational by October 2002, and to be financed by fees on transactions and information services. The main functions of the register will be the following: *

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5.2. Register of RES-E producers The DEA is establishing two registers of RES-E producers in co-operation with the system operators. One database contains information on wind power plants and the other on other types of RES-E producers (at present mainly plants using biomass). The database for wind power producers will be located in DEA and it is expected to be operational in the beginning of 2002. It will include detailed information on all wind turbines in relation to technology, production, geographical locality, ownership, type of tariff payment, etc. Detailed data are necessary in order to administrate the relatively complicated transitional tariff rules for existing RES-E producers, and the input data are supposed to be provided by the grid companies and the system operators. 5.3. Certification of RES-E producers It is estimated that a simplified procedure can be used for wind turbines, which will be considered as certified if

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Opening of new accounts, changing data in existing accounts, closing of accounts. Allowing the system operators to issue new certificates to the accounts. Registering green certificates with identification of owner and status of the certificates (available for trade, reserved for quota fulfilment or used in quota fulfilment). Transferring certificates between different accounts in connection with a trade. The system will allow such transactions to take place via the internet, including certified pools. All transactions must however be registered. Reporting to relevant actors in the field, including the control authorities (statistical information, trading prices, etc.).

5.5. Trading area The DEA is presently considering whether a specialized ‘‘green pool’’ should be established in cooperation with existing pools or whether a new and independent green pool should be established. It is also under consideration to leave the trading operation completely to the market to decide. 5.6. Documentation of consumer quota Documentation of the consumer quota cannot be based on the green certificates solely, as some green electricity producers will not receive certificates from the beginning. The documentation of the fulfilment of the national consumer quota will therefore be based on


green certificates in combination with independent statistics worked out by the grid companies and the system operators. The control system for consumer obligations of green electricity will be coupled to the normal accounting of electricity consumption as measured by the grid companies. The ongoing control on quota will secure a relatively uniform consumption of green certificates over the year. The system operators will have the overall responsibility for the control system, including collection of penalties in cases of non-compliance with the quota obligation. It is expected that most of the small- and mediumsized consumers will leave it to their electricity supplier to handle the consumer obligations of green electricity. The suppliers will thus have a new role as traders of green certificates and they will be coupled to a number of certified balancing actors that have the final responsibility in relation to the RES-E consumer obligation. More than 10 direct electricity traders have already been certified as balancing actors in addition to a number of electricity companies like Energy E2, Elsam, NESA, etc. The system operators will finally control for each balancing actor that the number of submitted green certificates are in accordance with the corresponding electricity consumption. The total transactions costs of these control procedures are shared by all electricity consumers. 5.7. Green pricing Voluntary demand for more green electricity than required by the consumer obligations (green pricing) should not give rise to ‘‘free riding’’ for other consumers. As a consequence, the green pricing consumers will have special accounts in the certificate register. The special accounts for green pricing certificates will be established by the electricity supplier on behalf of the customer, including information concerning the ‘‘retiring time’’ of these certificates. 5.8. Minimum price of Danish green certificates A minimum price for Danish certificates of 10 re/ kWh appears to be part of the political agreement that formed the basis of the new Electricity Act. However, there is an uncertainty on this point in the present formulation of the text which states that the RES-E Fund shall buy surplus certificates at a price between 10 re/kWh (1.3 eurocents/kWh) and 27 re/kWh (3.6 eurocents/kWh)—but only up to a level corresponding to the national quota. Thus, according to the text of the Act there is no complete guarantee of the minimum price. According to personal information from the DEA this ambiguity will probably be adjusted in connection

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with a future revision of the Act in order to secure agreement with the political intentions. 5.9. Maximum price of Danish green certificates The Electricity Act specifies a penalty for not fulfilling the consumer quota of 27 re/kWh (3.6 eurocent/kWh). In practice, this number also defines the maximum price of green certificates sold on the market. 5.10. Financing of the RES-E fund According to the Electricity Act, the RES-E fund is supposed to be financed through the penalties paid for not fulfilling the consumer quota. It is uncertain at this time, how the Fund will operate in a situation where an insufficient amount of penalty money has been received, and where there are not enough buyers that will pay at least 10 re/kWh for green certificates. This question will have to be solved politically. 5.11. Trade in green certificates Trade in green certificates may take place bilaterally and on different types of pools. In both cases, the trade must be registered in the certificate register in order to have effect. In order to facilitate this process, the certificate register is expected to offer direct access to the register for certified pools. It is also expected that information about trading prices will be submitted to the certificate register for all transactions above a specified minimum size. In order to stabilise price fluctuations on green certificates, ‘‘banking’’ will be allowed in accordance with the infinite lifetime of the certificates. The possibility of ‘‘borrowing’’ has also been considered, but this mechanism has been discarded due to administrative transaction costs and a fear of loosing credibility of the whole system. There is an increasing interest in setting up international markets for green certificates. This could help to stabilise certificate prices, while most national markets, like the Danish, are likely to remain too small for the creation of price stability. An additional problem for the Danish certificate market is that the market is expected to be dominated by only three suppliers of RES-E certificates (Elsam, Energy E2 and the Association of Danish Wind Turbine Owners, DV-Energy) in the first phase. This may seriously constrain the fair functioning of the market. As a consequence, there is an increasing interest in the promotion of international certificates trading. A precondition for an international market is, however, that national rules are harmonised to such an extent that unfair competition is avoided, and

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complicated negotiations have to be carried out before a fair international market can be established.6 The present attitude of the DEA shows a positive interest in participating in international trade in green certificates. The legislative text of the Act does permit import of foreign certificates when fulfilling stringent reciprocal conditions. The specific conditions of common criteria have not yet been decided upon, but the DEA has outlined requirements such as: transparency in subsidy arrangements; technology type and acceptance of certificates following the Danish RES-E definition; the ‘‘additionality’’ principle meaning that the Danish RES-E quota shall be fulfilled by a real growth in total RES-E production (meaning that it should be possible to use foreign certificates if they represent a production, which would not have taken place without the trade); and finally that only foreign certificates from other RES-E quota-based systems will be accepted. The detailed acceptance criteria are under considerations in the DEA and negotiations with Swedish energy authorities have been initiated with a view to reaching common criteria. The DEA is also positive in relation to the so-called RECS project, which attempts to provide experience with trade in green certificates in the form of a pilot project (RECS, 2000). However, the DEA is not ready to guarantee the certificates involved in this pilot project at the present time.

6. Implications of the Danish choice of model One of the main arguments by the Danish government for the shift from the feed-in model to the quotabased certificate model was that of obtaining more conformity with market principles. This policy was promoted from the beginning by reference to the Dutch certificate model that was anticipated to be the future preference of the EU Commission. The Danish government expressed its desire to go in front in order to influence the operational rules of the model that it believed would be the future choice for the EU. In the present Dutch model, the consumers of green electricity are given a favourable tax rebate so that the net price for green electricity is more or less the same as the price of fossil electricity. This means that the price of green certificates in practice is fixed by the government corresponding to the tax rebate. There is no obligatory consumer quota so the quantity of green electricity is in principle determined by market forces. Interesting to note is also that the total premium cost of green electricity (market price plus tax rebate) is higher than the tariff in the original feed-in model in Denmark. 6 Some recent EU projects have been analysing these problems (RECerT, 2000).

After the EU Court decision, which confirms that the German feed-in law is not in conflict with State Aid rules, it has been proposed by NGOs and a left-wing political party in the Danish Parliament that Denmark should return to a feed-in model, e.g. in accordance with the new German feed-in model. However, representatives from the DEA have argued that the Danish situation is different from that of Germany because the relative coverage by prioritised RES-E is much higher in Denmark than in Germany. They argue, that when the coverage by RES-E reaches levels of 30–40% as expected in Denmark during this decade, then the distortion of the total Danish energy market will be unacceptable with a feed-in model. The DEAs concern thus seems to be focused on the functioning of the market rather than on the promotion of Danish RES-E. As a follow-up on this argument, the DEA has proposed another change to the Danish Energy Act, which will discontinue the priority access granted to green electricity in the Danish supply system. If this is confirmed by the Danish Parliament, there is not much left of the original political intentions and arguments for securing the development of RES-E, despite the fact that these intentions were important for the broad political support of the energy reform. As mentioned above, it has been found during the preparation for the energy reform, that there are many operational obstacles in the transition from the feed-in model to a certificate model. As a consequence, the initial date for the first certificate trading has been postponed several times and the most probable time is now in 2005 or later. This is to be contrasted to the original plan with a starting time for the first limited trading in year 2000. The original political agreement concerning the energy reform included a consumer obligation of 20% RES-E by 2003. Future consumer quota were to be negotiated before 2003. This agreement has now been overtaken by the rapid increase in wind capacity, and it is anticipated that the coverage by RES-E will be as high as 27% by 2003. This is a problem for the principle of using the obligatory consumer quota as a driving force of demand in the green certificate market and thus for new investments in RES-E. At the same time, the transition rules for RES-E (see below) will significantly reduce the fraction of total RES-E with green certificates for at least the coming 5 years. It is anticipated by the DEA (Danish Energy Agency, 2001) that by 2003 about half of the RES-E production will be outside the certificate market. If the income from sale of green certificates is to be preserved as the main driving force for new investments in RES-E, then the obligatory consumer quota should be coupled directly to the coverage of the electricity consumption by RES-E, which is already in the certificate market. Instead of specifying the total coverage by RES-E, the


government will have to specify the coverage by RES-E included in the certificate market. The DEA has argued that there is an urgent need for announcing the quota for 2003 and the following years in order to reduce the uncertainties around the certificate market. However, the political parties have not been willing to commit themselves in this respect before after the national election in November 2001. From the beginning of the political process, the RESE producers (especially in the wind power sector) have been sceptical or opposed to the change of model, which they fear will delay or even interrupt the successful Danish RES-E development. In order to counteract such an interruption, the Danish government has introduced a series of complicated transition rules for RES-E producers, which, e.g. distinguish between existing wind turbines and new turbines. Existing capacity is defined as those wind turbines that have been installed or have binding contracts and formal permits before the end of 1999. These turbines will typically receive a total tariff of about DKK 0.60/ kWh (8.1 eurocents/kWh) for a specified number of fullload hours or until the turbine is 10 years old. The number of fully paid full-load hours decreases with the rated capacity of the turbines. For further details see (Koefoed, 2001). New wind turbines purchased after January 1, 2000 and before 2003 receive a base tariff of DKK 0.33/kWh (4.4 eurocents) plus the income from sales of green certificates. As this trade is now not expected to start before 2003, the government has decided that these new turbines will receive an additional tariff of 0.10 DKK/ kWh so that the total tariff will amount to 0.43 DKK/ kWh (5.8 eurocents). After 2003, new RES-E installations were supposed to be paid the price on the ordinary electricity market supplemented by the income from sales of green certificates on the special green certificate market. Details for other types of RES-E producers can be found in the paper written by Koefoed (2001). It is obvious from the above numbers that it is a significant economic advantage to belong to the group of existing RES-E producers rather than to the group of new RES-E producers. This has led to a rush of investors who wanted to settle the formal requirements for wind capacity before January year 2000. As a result, year 2000 turned out to be a record year with a total of about 600 MW new installed wind capacity. As a striking contrast to this, very few turbines for the Danish market have been bought in year 2000 under the new conditions! The tariffs are considered too low and the uncertainty in relation to future tariffs after 2003 are considered too large by investors. It therefore seems that the Danish home market for wind turbines will have to mainly rely on the negotiated offshore projects between the government and the utilities while the development of new land-based turbines to a high

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degree will depend on the success of a replacement scheme for old turbines. This replacement scheme for machines taken off line between March 1999 and December 2003 offers favourable conditions for new turbines, which replace old turbines of a rated capacity of 100 kW or less.7 New turbines with three times the rated capacity of the scrapped units are guaranteed a payment of DKK 0.60/ kWh (8.1 eurocents) for 12,000 full-load hours of production, which typically will correspond to a period of about 5 years production with the high tariff. After that the replacement turbines will have to rely on the electricity market price supplemented by the income from green certificates. It remains to be seen whether this offer is sufficiently advantageous to promote a perceptible market for new land-based turbines. The sparse experience with the replacement scheme so far seems to indicate a trend where the old turbines with many local owners on a cooperative basis are being replaced by a turbine having only one (or a few) owner(s), and the replacement scheme does not require the new owners to be locally sited. This trend may increase the opposition to land-based turbines that has been significantly reduced previously due to local ownership. As a result of political negotiations in the fall of 2001 that seems to postpone the start of certificates trading expectedly until 2005, it also seems most likely that new transitional rules are needed for the period after 2003. These rules will not be confirmed until some time after the national election in November 2001, which has left the potential investors in new wind turbines with even larger uncertainty. It is therefore to be expected that very few new land-based wind turbines will be contracted by private investors until the new economic conditions are known.8

7. Opposition to a fast introduction of a Danish certificates market The Confederation of Danish Industries, 2001 has published a short report on its views concerning the Danish energy reform in connection with a conference that took place on August 30, 2001. The report is very critical in relation to the present Danish energy policy with reference to the following main points: Danish electricity prices have increased in contrast to the case of other EU Member States. The price increase is mainly due to a growing contribution from RES-E at a premium tariff. As a

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The 100 kW or less criterion concerns about 1.300 older turbines. Political agreement on new rules were reached by July 2002. These rules are so unfavorable for RES plants that investments in land based wind turbines in Denmark are expected to stop. 8


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consequence, it is proposed to replace this premium price by an ‘‘environmental bonus’’ paid by the government over the finance bill. In addition, it is proposed, that the limit for exemption from the premium tariff for large consumers should be reduced from the present value of 100 GWh/yr to 1 GWh/yr. It is further proposed to postpone the start of the Danish trading of green certificates until a functioning international market for green certificates has been established. The argument is that an isolated Danish market will be too small to function in accordance with sound market principles.

At a subsequent hearing in the Danish Parliament in September 2001, the proposed postponement of the green certificates market was supported from many sides, including environmental NGO’s, wind turbine owners and wind turbine producers. In addition to the need for an operational international market, reference was made to a general scepticism in relation to the functioning of green certificates markets. After the hearing, several of the political parties behind the new Danish Energy Act have expressed their support for a postponement until year 2005. On this basis, the DEA has initiated work on supplementary transition rules covering the period from 2003 to 2005. However, decisions have had to await the establishment of the new government after the national election in November year 2001.

8. Conclusions In promoting the use of electricity produced from renewable energy sources, the greatest successes in Europe have been obtained by the application of the feed-in system in Denmark, Germany and Spain. Thus, if highest priority is given to fulfilling ambitious goals for the penetration of renewable energy sources, the natural conclusion would be to rely on the feed-in model. The burden on the government budget can be reduced by sharing the premium tariff between electricity consumers, and competitive features may be introduced by using bench-marking principles. The Danish government has postponed the start of a green certificate trading market due to a number of unsettled operational questions. The green market in Denmark is now expected to be operational at the earliest by 2005. The creation of green certificate markets is a complex process. Throwing renewable technologies into an uncertain commercial market may cause serious setbacks in extending the use of clean energy sources. The problems related to market competition between technologies at different stages of development may

be reduced by combining the certificate model with a centralised tender model for less mature technologies. The overall political trend in EU favours the use of commercial markets as a driving force for technical change. This political preference presents a dilemma for the long-term development of clean energy sources. It is the judgement of these authors and others (Illum and Muller, . 1998) that a cost-effective and sustainable energy solution requires comprehensive planning— including the transport sector—with time horizons of 30–50 years. This is in conflict with the characteristics of a commercial market. The feed-in model is being preserved in large EU member states like Germany and Spain after a confirmation by the EU Court that these schemes are neither in conflict with State Aid rules nor with the rules of the Single Market. Another large member state-like France is also introducing a feed-in model, which resembles the German model. Considering the importance of promoting RES-E in order to stabilise the global climate there are good reasons for reconsidering and comparing the overall advantages of the two competing support schemes. The planning of an energy supply system that includes a large contribution from fluctuating energy sources is a much more complex project than planning traditional energy systems based on fossil fuels. Decisions based on short-term profits may well block the least-cost longterm sustainable solutions. The challenge for the proponents of market principles is to demonstrate that this dilemma can be solved in a satisfactory way. If such a solution cannot be found, the whole base for continuing the liberalisation of energy markets should be reconsidered.

References Confederation of Danish Industries, 2001. Consequences of the Danish energy reform for Danish industry. Copenhagen, Denmark (in Danish). Danish Energy Agency, 2001. Status of green certificate market development. Copenhagen, Denmark. Danish Energy Ministry, 1990. Energy 2000—an energy action programme. Copenhagen, Denmark. Danish Ministry of Environment and Energy, 1996. Energy 21—the Danish government’s action plan for energy 1996. Copenhagen, Denmark. Danish Ministry of Environment and Energy, 2001. Reform aftale, March 22 http://www.mem.dk/nyheder/presse/dep/refaftale.htm. Dansk BioEnergi, 2000. February issue. Published 4 times annually by Biopress with support from the Danish Energy Agency. BioPress, Vestre Skovvej 8, 8240 Risskov. ( Eltra-Magasinet, 2000. Arhus, Denmark, October 2000. EU Directive, 2001. 32001L0077 77/EC of the European Parliament and of the Council of 27 September 2001 on the promotion of electricity produced from renewable energy sources in the internal electricity market. Official Journal L 283, 0033–0040.

N.I. Meyer, A.L. Koefoed / Energy Policy 31 (2003) 597–607 European Communities, 1997. Directive 96/92/EC of the European Parliament and of the Council of 19. December 1996 concerning common rules for the internal market in electricity. Official Journal of the European Communities January 30. Ford, A., 1999. Cycles in competitive electricity markets: a simulation study of the western United States. Energy Policy 27. Hvelplund, F., 2001. Renewable energy governance systems. Report from Institute for Development and Planning, Aalborg University, Aalborg, Denmark. Illum, K., Muller, . B., 1998. Technological options for Danish energy policy. Report from the Department of Development and Planning, Aalborg University, Denmark (in Danish).

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Koefoed, A.L., 2001. Renewable energy reform in Denmark—the development of a green certificate market to promote electricity from renewable energy sources. Centre for Energy and Environment, ISSN 1501-2697, report # 4/2001. Krohn, S., 2002. Danish political collapse explained. Letters to the editor. Windpower Monthly 18(1), 6. Meyer, N.I., 2003. European schemes for promoting renewables in liberalised markets. Energy Policy, this issue. RECerT Project, 2000. EU Commission FP5 Project (NNES-199900051), Brussels, Belgium. RECS, 2000. What is RECS. Renewable Energy Certificate System (URL: http://www.recs.org/).