Commercial investors put squeeze on utilities

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Such are the riches of the sea that Denmark's utilities could soon find themselves in competition with multi-national giants who are already indicating their willingness to make major investments in Danish waters

In 1998, Denmark's energy and environment minister, Svend Auken, presented what he called his "gift to the global environment" at the World Wildlife Fund's annual gathering in Washington: five offshore wind power plant with a combined generating capacity of 750 MW. The question now is whether Auken's gift to the world might end up as Denmark's gift to the utility sector.

The five wind plant are to be built between 2002 and 2008. They will be early contributors to Denmark's official energy goal -- to generate 50% of its electricity from wind energy by 2030. Of the 5500 MW needed, 4000 MW will be sited at sea. Denmark already has 2000 MW turning today, all but 10 MW of which is on shore. Two of the first five offshore plant are currently in public consultation. Each is expected to cost DKK 1.5-1.8 billion and both are planned for construction at more or less the same time. The Horns Rev project west of Esbjerg in the far west of the country is being developed by utility group Elsam, while the Rødsand project off the southeastern island of Lolland is being undertaken by utility Seas for the Elkraft group and the utilities of Zealand.

Nobody yet knows who is going to pay for the first wind farms, which together will cost DKK 3.0-3.6 billion. At the time of Denmark's electricity market reform last year it was announced that offshore plant "should not impact the utility sector's competitive abilities." The political parties behind that statement did not suggest how it should be interpreted. As a result no negotiations are proceeding, although "informal discussions" between the Danish energy agency and utilities on how Elsam's 300 MW of offshore plant by 2008 and Elkraft's 450 MW are to be financed. Aside from Horns Rev and Rødsand, sites have been identified south of the island of Læsø mid in the Kattegat, near the island of Omø, and at Gedser, both south of the main island of Zealand. These same five sites will be developed further to meet the 4000 MW goal for offshore plant by 2030.

Liberalisation of the Danish electricity market means that utilities can no longer finance new power plants off the balance sheet. As commercial enterprises they must borrow money on the financial market. Either way, the consumer pays in the end, which is why the current discussions are focussing on the price for offshore kilowatt hours.

The alternatives

In 1997 the energy agency analysed the cost of offshore wind power. It concluded that this lay between DKK 0.35-0.38/kWh, before the cost of financing. Since then wind turbines have become more effective and the price has dropped, says Birger Madsen of BTM Consult. But for investors there is a risk and they will demand higher returns in compensation. Investors expect to make a profit, too. Madsen says the price at which offshore wind has to be sold to make it viable could be up to DKK 0.60/kWh.

The energy agency will not comment on the informal discussions it admits are ongoing. But the agency's Stine Leth Rasmussen made it clear at a meeting of Denmark's Electricity Association on August 8 that "the gift to the world should preferably not end us a gift to the utilities." If an agreement on a fixed payment for offshore kilowatt hours fails to be reached, there is an alternative, according to Leth Rasmussen: "The utilities do not have to be the developers; in that way their economy cannot be impacted."

Unofficially there is talk that the actual cost of offshore kWhs today is DKK 0.032/kWh, but nobody is keen to comment on the figure. Discussions will continue through the autumn and there is no deadline as long as the EU Commission has not approved the law governing Denmark's electricity market reform. The alternative to utilities developing Denmark's offshore resource is perhaps more realistic than many imagine.

It is no secret that major investors, particularly institutional investors, have their sights on the offshore wind industry. At the same time, major commercial enterprises are registering their interest. American gas giant Enron is financing an offshore project now going up in Sweden using turbines from its subsidiary, Enron Wind. It is a project in the DKK 100 million class.

Enron is not the only energy company keen to own a slice of the future. European giant ABB is putting money into an offshore plant in the Netherlands using Vestas turbines. And the Danish Oil and Gas company, DONG, announced last month that it is ready to provide one-third of the DKK 1.8 million needed for the Rødsand project. The reason given for this generosity by chairman Holger Lavesen is that he expects it to be "a good business."

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