Pressure politics applied to Danish legislative draft

The Danish wind turbine owners association is manoeuvring aggressively for political power in the energy policy arena. Last month it warned that the government's proposed framework for a transitional market during liberalisation of Denmark's electricity sector--from a support model based on subsidies to a market-driven model based on trade in green credits--will bankrupt hundreds of its members and stop Danish wind development in its tracks.

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Manoeuvring aggressively for political power in the energy policy arena, the Danish wind turbine owners association last month advised its members not to invest in new turbines and advised the country's wind turbine manufacturers to halt sales to the home market. The dramatic step was in response to the latest government proposal for a new market framework for wind power, part of draft legislation for liberalisation of Denmark's electricity sector.

The turbine owners association is warning that the government's proposed framework for a transitional market-from a support model based on subsidies to a market-driven model based on trade in green credits-will bankrupt hundreds of its members and stop Danish wind development in its tracks. It is proposing alternative rules for the transitional period.

The government intends to phase out wind power's long standing production incentive of DKK 0.17/kWh (EUR 0.023/kWh) from next year, replacing the subsidy with legislation obliging electricity consumers to buy 20% of their power from renewable sources by 2003. The obligation is backed by a guaranteed market price for wind power and a system of green credit trading. By selling credits to utilities required to meet the 20% obligation, turbine owners will earn extra income to replace the production incentive. The credits can be auctioned to the highest bidder.

In transition

Under the government's proposal, existing wind turbines will receive a market rate payment of DKK 0.33/kWh, plus a refund of Denmark's C02 tax, DKK 0.10/kWh-DKK 0.43/kWh in total (EUR 0.06/kWh). The DKK 0.17/kWh production incentive will be phased out gradually. Wind turbines of 500 kW and larger will lose the subsidy after they have operated for 6000 full load hours. Machines of 100-500 kW in size will be eligible for the subsidy until they have operated for 30,000 full load hours. Machines under 100 kW will lose the subsidy altogether from January 1, 2000. The stated aim is to "stimulate the replacement of old wind turbines." Owners who scrap these and join a co-operative to invest in new, larger units "producing twice as much power," will be eligible for a flat rate payment of DKK 0.60/kWh up until 2002.

"If this model is implemented, 1999 will become a fateful year in the bleakest sense of the word, not only for many turbine owners, but also for national wind development and the Danish wind industry," says the wind association's Flemming Tranæs.

From today's average price for wind power of DKK 0.60/kWh (EUR 0.08/kWh), the proposal means a drop in payments averaging 28%, according to the association. It stresses, however, that prices will fall as much as 35-40% in areas where power prices are high and turbines are on sites with only average wind strengths, or less. (Payment for wind power is based on a percentage of the selling price of electricity in each region.) This is likely to result in owners forfeiting on their bank loans and thus losing their wind turbines to the banks, says the association.

It concedes that under the government's proposal, the rate of return for the owners of large turbines will be 6%. But it points out that tax write-off regulations will push owners into a "liquidity hole" after the first five years, a hole they cannot climb out of until their bank loans have reached their 12th or 13th year. "The risk will be biggest for wage earners and small farmers," warns the group's Jørn Larsen.

An alternative model, put forward by the association on February 23, proposes a longer period for phasing out the production incentive, also for turbines under 100 kW. It suggest a ten year period, or until a turbine has run for 20,000 full load hours; or a market price of DKK 0.43/kWh, as the government proposes, plus a guaranteed minimum price of DKK 0.17/kWh from sales of green credits until the turbine is paid for. From that point, in both cases, wind plants would operate without support.

The problem

A major flaw in the government's proposal, says the association, is the phasing out of the subsidy before the establishment of a market for green credits, which will not be fully in place until the start of 2004, leaving an earnings vacuum of several years.

The association's fears are shared by the wind turbine manufacturers. "If this proposal becomes reality, ninety-five percent of all wind turbine sales in Denmark will stop," warns Søren Krohn of the industry association. "For this reason we don't believe it will become law." If it did, only turbines with an annual output of more than 1.6 million kWh are viable, says Krohn.

The main problem, he says, is not the drop in payment but the lack of security. "It seems as though the politicians have forgotten that wind turbines must be financed," he says. "No bank will give a ten year loan for a wind turbine if they only know the conditions for four or five years. We must have an agreement for turbine installations over the next five years, which covers the ten years over which the turbine is financed and ensures that investors can meet their loan repayments."

Another fault with the government's model for transitional subsidies is its basis in size of machine, he says. This will result in manufacturers artificially raising the nominal rated capacities of their turbines, a "generator inflation" seen previously in both the United States and the Netherlands. "The manufacturers will set large generators on small units. It decreases production, but increases the subsidy payment," says Krohn. The result is less electricity and a dramatic slow down in technology development, where efforts will be concentrated on exploiting a subsidy system, rather than making more effective wind turbines.

A compromise proposal for legislation, taking into account the views of the wind lobby, is already being worked on by environment and energy ministry officials, confirms the ministry's Knud Pedersen.

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