Is the Danish Renewable Energy Model Replicable?
20 Mar, 2008 10:51 am
Energy policymakers wishing to promote clean energy would do well to replicate Denmark?s approach to electricity regulation.
How Did They Do It?
Denmark has a long tradition for broad political alliances on energy policies and the implementation of well-designed, consistent policy mechanisms. New policies are typically negotiated in a transparent manner with all political parties and possible stakeholders, and have included:
· Energy taxes, first passed in 1974 as a response to the energy crises, kept high and not lowered after fossil fuel prices dropped in the 1980s;
· A feed-in tariff requiring utilities to buy all power produced from renewable energy technologies at a rate equal to70 to 85 percent the consumer retail price of electricity in a given distribution area;
· Environmentally friendly zoning that forced cogeneration units to replace district heating units and prohibited the use of oil, diesel, and coal for many generators;
· Long-term financing reduced the risk of building larger projects and encouraging local manufacturing;
· Open and guaranteed access to the grid where Transmission System Operators (TSOs) are required to finance, construct, interconnect, and operate the transformer stations and transmission and distribution infrastructure for renewable energy technologies;
· A general carbon tax on all forms of energy, adding around 1.3 euro cents per kWh of additional income for renewable energy generators;
· Streamlined permitting that made the Danish Energy Authority the “one-stop-shop” for tendering of bids for renewable energy construction; approval of pre-investigation of sites, environmental impact assessments, construction and operation; and licenses to produce electricity.
What Can Other Countries Learn?
Not everything, of course, is easily copied outside of Denmark. The Danish economy is largely service based with a small industrial base; the particulars of the Danish geography and climate mean that the country experiences no significant need for air-conditioning in the summer months; the Danish T&D system is incredibly “tight” to facilitate power trading between its Nordic neighbors in the north and Germany in the south.
At least eight aspects, however, appear to be replicable for the U.S. and other countries. First, the environmental performance of Danish wind turbines has been remarkable, a direct result of the efficient but rigorous environmental monitoring required by the Danish Energy Authority.
Second, the Danish experience seems to prove that a carbon tax does not have deleterious effects on the overall economy, and that, implemented properly, it can be a useful tool for promoting cleaner energy systems.
Third, the Danish success with feed-in tariffs could be easily replicated in other countries. Indeed, more than 25 countries in Europe and around the world have already implemented some type of feed-in tariff scheme, and five states in the U.S. are currently considering similar mechanisms. Such tariffs can spur rapid growth in domestic renewable energy industries. Unlike policies such as green power programs (which are voluntary) and renewable portfolio standards (which guarantee a fixed quantity but uncertain price), feed-in tariffs provide long-term certainty to renewable energy developers and investors.
Fourth, the Danish model of financing can be a useful policy to overcome difficulties with raising capital to invest in renewable energy technologies around the world. Potential investors are unlikely to assume risks inherent with renewable energy where the costs of financing are comparatively large. Ten years ago, researchers at Lawrence Berkeley National Laboratory estimated that the uncertainties in the U.S. generated by inconsistent and unpredictable energy financing policies may increase the costs of renewable energy projects up to 50 percent compared to the probable costs under stable regulatory environments.
Fifth, guaranteed and open access to the grid demonstrates at least three advantages to promoting renewable energy. It minimizes barriers to market entry and prevents utilities from using their market power or power of incumbency to block renewable energy projects on T&D grounds. It increases the profitability of renewable energy projects by shifting the significant costs associated with interconnection to the grid from the project developer to the utility (and consumer, who ultimately pays for it). Ironically, it also helps utilities, as they can improve their debt-to-equity ratios on financed T&D infrastructure more quickly as new generating capacity is available to use the infrastructure. In theory, this policy change decreases the cost to ratepayers by allowing utilities to begin paying down the financing of a project sooner rather than later.
Sixth, the model of R&D funded through taxes is effective at providing financial support for public research, while spreading the costs of that research among all electricity customers.
Seventh, Denmark’s experience with streamlined permitting shows that it shortens the lead times with renewable energy projects, simplifies the siting process, and hedges against uncertainty and risk.
Eighth, the Danish approach to R&D—slow, bottom-up development—offers a useful model to all countries around the world about how to approach the energy innovation process. Rather than setting ambitious goals and focusing on immediately large-scale projects (such as multi-MW wind turbines deployed in massive wind farms), the Danish experience reminds us that small, incremental improvements can sometimes be a prerequisite for technical development.
Ultimately, the replicability of the Danish wind energy model is not an “all-or-nothing” proposition. Some elements will be extremely difficult to emulate, such as:
· The small heavy industrial base of the Danish economy;
· Natural climate precluding the need for summer air-conditioning;
· Decentralized nature of the power market;
· Liquidity of the T&D grid, with short gate closure times;
· Availability of imported base-load power driven by a real-time power trading market between Denmark, Nordic countries, and Germany.
Policymakers in the U.S. and other locations, however, can imitate other aspects of the Danish wind energy model, such as:
· Strong political commitment;
· Consistent policy mechanisms that do not change unexpectedly over time;
· More accurate energy pricing that includes taxes on carbon and properly valuing renewables for many of their “public goods” attributes;
· The use of tariffs and subsides to spur renewable energy development and local manufacturing, but also the foresight to abolish subsidies after they have fulfilled their purpose;
· The importance of financing and streamlined permitting to renewable energy investment;
· An incremental and “hands-on” approach to energy R&D.
Sovacool, Benjamin K., Hans Henrik Lindboe, and Ole Odgaard, “Is the Danish Wind Energy Model Replicable for Other Countries?” Electricity Journal 21(2) (March, 2008), pp. 27-38, available at http://dx.doi.org/10.1016/j.tej.2007.12.009.
Wiser, Ryan and Pickle, Steven. “Financing investments in renewable energy: The role of policy design and restructuring,” Ernest Orlando Lawrence Berkeley National Laboratory, March, 1997.