IEA commends Danish energy efficiency but advises more focus on efficient transport, cost-effectiveness and market concentration

“Denmark has been a pioneer in promoting energy efficiency and renewable energy,” said Claude Mandil, Executive Director of the International Energy Agency (IEA), today in Copenhagen at the launch of Energy Policies of IEA Countries – Denmark 2006 Review. While still a full energy sector report, this in-depth review focuses for the first time on specific themes. “Both energy efficiency and renewables bring important benefits in reduced emissions and enhanced energy security. However, energy efficiency will likely be more cost-effective in achieving these goals in the near- and mid-term”, Mr. Mandil added. “While efficiency and renewables should both continue to play important roles in the Danish energy sector, cost-benefit analyses should guide all future policy decisions.” In addition, Mr. Mandil urged the government to do more for efficiency in the transport sector and to further investigate market concentration on a regional basis.

Energy Efficiency
Denmark has the lowest energy intensity in the European Union, owing to both the relative absence of energy-intensive industry and strong government efforts to promote greater efficiency. The government wisely mixes standards (e.g. for buildings and appliances) and more market-oriented approaches such as allowing distribution companies to achieve their mandatory savings in the manner they think best. The report commends these and other programmes, but urges that additional efforts be made in the transport sector. “Numerous evaluations of Danish efficiency programmes indicate that they are extremely cost-effective,” Mr. Mandil noted, “but while the IEA report concurs with these findings, we also encourage the government to develop a more robust and transparent methodology to evaluate these programmes.”

Renewable Energy
Government support has dramatically increased Danish renewable energy production. The share of renewables in electricity generation rose from 3% in 1991 to around 25% in 2004, with estimates for 2005 showing a slight increase over the previous year. While this achievement has reduced emissions, enhanced energy security and promoted Danish industry, it has also been costly to consumers. Subsidies to renewable energy in 2004 were equal to approximately 20% of the wholesale electricity price in that year, or 0.2% of national GDP.

The report calculates that under the existing mix of historical subsidies, renewable energy reduces emissions at a cost of roughly between EUR 35 and EUR 50 per tonne of CO2. This is well above the price of emissions in the EU Emissions Trading Scheme and the cost of emission reduction through energy efficiency. Certain efficiency programmes have cut emissions at around EUR 7 per tonne while others are entirely cost-effective based solely on demand reduction and thus decrease emissions at no net cost.

The current government has sharply curtailed subsidies for renewable energy and now relies more on market forces to determine the generation mix. The one exception to this is the pair of tenders for two off-shore wind plants which are to be supported at subsidised prices. While the competitive bidding reduces cost, these off-shore wind plants nevertheless represent large capacity additions determined by the government rather than the market. “Danish policy makers should take care that such programmes are consistent with the liberalised Nordic market and the government’s position to let the market pick new capacity,” stated Mr. Mandil. “The expectation of subsidised plants in the future would deter private investment in generation and otherwise distort the market.”

Market Concentration
The merger between state-owned DONG and Denmark’s two major electricity companies will have to be watched attentively, as the newly formed company will be a formidable competitor. The merged company will have a dominant position in electricity generation in both east and west Denmark, own most of the electricity and natural gas distributors and control a large share of Denmark’s gas storage. While interconnections with other countries will curb the potential for market power abuse, the government should closely monitor the situation to ensure the market remains competitive. Any appraisal of market power must take place on a regional or European level and the government is encouraged to engage its neighbours and the European Commission in discussions on this topic.