Denmark

Denmark

Free or not so free

It seems more and more sensible that the Danish green certificate market does not start until 2003, if for no other reason than there are not enough turbines -- and therefore not enough green certificates -- on the market in 2002 to form the basis for realistic certificate pricing. In the eyes of the wind industry, wind turbine owners, and future investors, it is realistic and credible pricing that will be the deciding factor for whether or not the Danish model is creditworthy.

Eighteen months after the Danish parliament passed legislation liberalising its electricity market, the European Commission has approved the law's provisions for "state aid" to renewables. For the first ten years of its life, a wind plant will receive a fixed price for its electricity, topped up by sales of green certificates to consumers who are obliged under the law to buy a certain number of them. After ten years, a plant will no longer be eligible for the fixed tariff and all its electricity will have to be sold on the open market, while trade of its green certificates will continue on a separate market.

Denmark's energy ministry expects the new system for sale of wind power to be functioning before the end of the year. It will mean radical change for the country's thousands of wind turbine owners, particularly those with older machines. They will immediately see a reduction in the sales price of their kilowatt hours from today's DKK 0.60/kWh to DKK 0.43/kWh. A transitional arrangement will apply to younger wind turbines still heavily loaned, but eventually they, too, will see their expected income from sales of power drop dramatically.

And in three years, when trade in green certificates starts, all older wind plant no longer eligible for the fixed tariff will have to sell their electricity at market prices. During last winter these averaged DKK 0.08-0.13/kWh. Sale of green certificates, however, will bring in additional income ranging between DKK 0.10/kWh and DKK 0.27/kWh, the lower and upper limits the government has fixed for certificate prices.

Even though there are those who still refuse to look the new future in the eye, there is no going back. It is a fact that Danish wind power is to be thrown onto the free market. What's more, it is the first of the electricity generating technologies to be so. Two questions remain to be answered: how is Danish wind power development and how are Danish wind turbine owners going to survive in the future? And how free will the market actually be when it comes to the crunch?

Despite the onset of a so-called free market, Denmark's politicians have reserved the right to use green certificates to regulate electricity consumption. They will raise or lower the minimum standard for the percentage of renewables in the national electricity supply portfolio if demand for green certificates does not meet the consumption pattern. The political goal is for 20% of consumption to come from renewables in 2003 to help Denmark live up to its Kyoto commitments to reduce emissions of greenhouse gases. All consumers will be obliged to buy a growing proportion of their electricity from green sources. Green certificates will document that they do so.

Since politicians may control both the issue of green certificates and the size of the renewables quota, they also have at their disposal the means to influence the payment for wind kilowatt hours. The two are intrinsically linked. It can be a two edged sword.

On the one hand, politicians must convince the fearful owners of older wind turbines that the free market is not just a ticket to bankruptcy. Just under 2000 of Denmark's 6000 turbines step into the free market in a matter of weeks. It is not hard to imagine what it will mean for future wind development -- and belief in the promises of politicians -- if the state has to step in and buy up the wind turbines of owners facing bankruptcy, as the new law requires if the green certificate system in practice fails to live up to its economic theory. The money for such purchases -- at the price of the remaining loan in the plant -- will come partly from green certificate revenues.

On the other hand, political meddling in the market amounts to an inbuilt straitjacket constraining the price movements of green certificates. The danger is that investors will be scared off because their opportunities for reward in return for risk -- the very basis of how a free market works -- are severely limited. Or they will demand higher returns on their investments to make up for this shortcoming, pushing up the price of wind just as competition was bringing it down. This is the opposite of what the politicians intend with the law. It must not be forgotten that also future investors must be convinced of the soundness of wind power. Already they are waiting in the wings while the utility sector negotiates with the energy ministry on where offshore wind fits into the new pricing system.

When environment and energy minister Svend Auken proudly says Denmark will become Europe's model for energy politics, many pieces of the puzzle have yet to fall into place. That requires planning and time. For this reason, it seems more and more sensible that the green certificate market does not start until 2003, if for no other reason than there are not enough turbines -- and therefore not enough green certificates -- on the market in 2002 to form the basis for realistic certificate pricing. In the eyes of the wind industry, wind turbine owners, and future investors, it is realistic and credible pricing that will be the deciding factor for whether or not the Danish model is creditworthy.

For the time being, sale of wind turbines for the new market in Denmark is at a standstill. But that has happened before in periods when the rules have been changed. The energy minister believes that the prices which turbine owners will be getting for their electricity in two or three months time will create a boom in development up to 2003. How likely it is that will happen will be quickly revealed.

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