The energy ministry said it would provide DKK 1.3 billion (€169 million) to procure new renewable capacity, either from solar or wind, in auctions in the next two years, after the current system expires in February 2018.
"For the first time we let the sun and wind compete against each other to provide the most green power [to Denmark], said energy minister Lars Lilleholt.
"So far it has been such that we politicians have determined how much renewable energy we want from a specific technology. And then we have paid for it.
"Now... the market says how much renewable energy it can deliver for a particular amount of money. I expect a fierce competition between the sun and wind, and I am very excited to see what is being offered in with," Lilleholt added.
But the new proposal has been heavily criticised by the Danish Wind Industry Association (DWIA) calling it "unambitious".
CEO Jan Hylleberg said: "It is meaningless that the government in this way puts a brake on the green transition, especially given that the government will reach at least 50% renewable energy in 2030. Today it is 8% for wind and sun together, so what we need is a retention of expansion pace and not a slowdown."
DWIA said the proposals could halve the pace of the green transition. Since 2011, Denmark has added roughly 215MW every year, it said.
The trade body also warned, given the time scales with implementing the new system, installation in 2018 will fall "to a standstill".
Fellow trade body, the Danish Wind Turbine Owners Association, also said the government's ambitious had reached a new low.
"The Danish Wind Turbine Owners' Association shares wholeheartedly the minister's desire for a market-based approach to the future development of energy in Denmark, but the government's proposal is at best a short-term and risky occupational therapy to a Danish wind turbine industry, which for too long has been challenged by both land policy and local political uncertainty," said Christian Kjaer, director of the Danish Wind Turbine Owners' Association.