Denmark proposes radical reform

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Trade in green electricity certificates combined with quotas for consumer and utility purchases of renewable energy are two main elements of a far reaching government proposal for reform and liberalisation of the electricity sector in Denmark. The plan, to be put before parliament this month by energy and environment minister Svend Auken, includes phasing out the existing system of fixed tariffs for electricity from wind energy and replacing it with a trading market for green credits.

Electricity distribution utilities will play a key role in Auken's proposal. In return for a supply franchise, a utility must safeguard consumer interests and meet a "public service obligation," as outlined in the EU Directive for the Internal Energy Market, which comes into force in February. In Auken's proposal, this obligation includes supplying a fixed amount of electricity from renewables -- a quota to be set by government to reach already decided targets -- and the administration of a market in green electricity credits.

"Licensed distribution utilities are obliged to take their relative share of the prioritised production from environmentally friendly plant according to settlement rules laid down by law," states the proposal. They will also be "responsible for realising the quota system for renewable energy electricity." The distribution companies can meet their quotas by either buying electricity from independent producers, or through their own generation, continues the proposal.

Auken stresses that the goals for renewables outlined in Denmark's "Energi 21" must be reached. "All consumers shall take the same minimum share of electricity consumption from renewable energy plant," he states. Energy 21's national goal is for renewables to provide 36% of Denmark's electricity by 2010. "The binding quotas will be fixed with the aim of reaching that goal."

The plan has been greeted with cautious optimism by Denmark's wind turbine owners association, which with 11,000 members packs a powerful political punch in a country with a population of just five million "But a couple of warning lamps are flashing," says association chairman Flemming Tranæs. "We welcome consumer quotas and trade in green certificates -- if they work effectively. We are concerned, however, that the people's engagement in wind development could be a victim if utilities or other financially strong entities are given the chance to undercut wind co-operatives, thereby securing a monopoly." Long term contracts with fixed prices would secure the future of small scale, independent producers, adds Tranæs.

Dutch model

The structure proposed for Denmark's green electricity market closely follows that already operating in the Netherlands -- and takes account of the role to be played by "many smaller players" in the production and sale of electricity. The green credit trading exchange will be organised as a "strictly financial market." Producers of renewable energy will sell electricity to utilities on the same terms as conventional generators. They will also receive green certificates in relation to the amount of electricity they sell. These certificates will be bought through the trading exchange by distribution utilities obliged to meet fixed quotas for the renewable content of the power they supply. If a utility fails to meet its quota it will be fined, with the proceeds deposited into a fund for renewable energy development.

Experience in the Netherlands has shown that utility demand for green certificates is such that competitive bidding for them has resulted in a good remuneration for renewable energy generators. "The decisive factor with this model is that the fixed minimum quotas ensure a tariff price which is attractive enough to finance new investments," says Auken.

Offshore open tender

For major power plant development -- such as large offshore wind farms and primary biomass plant -- Auken proposes a centralised tender procedure open to international developers. "These are large capital intensive projects for a small number of players. An international tender will ensure the best price by allowing potential developers to bid at the same time with comparable offers. An additional advantage is that the private sector and the utility sector will compete on an equal footing." The opportunity for citizens to invest in offshore wind is welcomed by Tranæs.

The plan includes separate regulations for the owners of existing renewable energy plant, including the many thousands of citizens with shares in wind turbines. For them there will be a transition period, governed by regulations for power purchases, after which they will enter the green quota market. The transition period will ensure that turbine owners have a "fair opportunity" for realising the investment they made based on the existing premium priced tariffs. All renewable generators will be free to enter the "quota market" at any time. A suggested transition period is 12 years.

Another element is a proposal for fixed C02 emission quotas for utilities (Windpower Monthly, May 1998). Auken's aim is to discourage utility generation of electricity using older and more polluting coal fired plant. Generating costs are extremely low due to the efficiency of the sector, which has made exports of surplus electricity commercially viable through the use of old generating plant. "C02 quotas will place restrictions on the export potential of utilities and can therefore have economic consequences," according to Auken's plan. The extent of these will depend on the prices dictated by the liberalised Nordic electricity market.

The government's liberalisation proposal comprises five main elements: regulation of distribution utilities; access to hardware in the supply sector; environment regulation of combined heat and power plant; establishment of a trading market for green electricity credits; and authority administration procedures.

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