Part 2: Denmark's Wind Energy Program

One of the greatest barriers to robust renewable energy support by the U.S. government is the notion that government programs necessarily create a reliance on subsidies that is ultimately self-defeating. In reality, properly designed and implemented programs can gradually coax an industry and specific technologies into commercial maturity. This is illustrated by the Danish government's coordinated and systematic efforts to build a wind industry that must now be considered the world's best.

Governmental support has made this small country not only a major center of wind power, but an industrial center for what is currently the only renewable energy technology that can compete head-to-head with fossil fuels in terms of costs—and the fastest growing energy source in the world.⁹ Denmark is now manufacturing about 1 gigawatt of wind capacity a year, the rough equivalent of two large nuclear or coal-fired power stations, and creating about 16,000 jobs at the same time.

Denmark's success in the development of a wind turbine industry has been measurable: in 1983, Denmark exported 20 MW of wind turbines while in 1997 Danish wind turbine exports reached 681 MW. At home, wind energy generated 27 GWH of electricity in 1983 and steadily increased in each consecutive year to 1830 GWH of electricity in 1997.

Although Germany has recently overtaken Denmark in terms of installed wind capacity, the Danish wind turbine industry still produces more equipment than all other nations combined in the fast-growing global market. After establishing both a stable home market as the basis for development of wind turbine technology and a strong export sector, the Danish government is now extending that model into other areas of energy as well, including combined heat and power. Wind turbines now constitute the nation's second most important export.

Recently, sales of wind turbines in Denmark and elsewhere have been spurred by the need to reduce carbon emissions. Denmark's "Energy 21" policy aims to bring national carbon dioxide emissions by 2005 to 20% below the levels in 1988. Launched in 1996, Energy 21's goals for the longer term are even more ambitious: to halve carbon dioxide emissions by 2030.¹⁰ Clearly, however, Danish wind power development predates current concerns over climate change.

To stimulate the development of wind energy, the Danish government has relied principally on a combination of taxes and subsidies. Relatively simple at its outset in the 1970s, wind policy became more complex in the 1990s with the introduction of new taxes designed to cope with SO₂ and CO₂ emissions, together with new subsidy schemes. Still, the Danish government has remained fixed on its goal of protecting the environment in a way that also shields and stimulates domestic industry.

The Original Incentives

Today's wind energy program is part of an overall energy plan published in 1976. Its main objective was to make Denmark less dependent on imported energy, especially oil. Since the mid-1980s, however, environmental concerns have propelled the Danish program. The initial steps taken in Denmark to build the turbine industry included the following:

• R&D: A comprehensive energy research and development program started in 1976 with wind energy as only one area of work. This funded efforts to collect fundamental information regarding the planning and construction of large (more than 500 kilowatts (kW)) wind turbines. About 10% of the total Danish energy research budget since 1976 has been devoted to wind.

• Turbine certification: The Risoe Test Station for Wind Turbines began in 1978 as a pilot project, paid for by the Danish Energy Agency. Initially, Denmark required certification only as a condition of eligibility for government subsidies, and manufacturers paid just a token fee for the procedure. Now, however, certification is required for connection to the Danish grid, and the process has evolved into a commercial activity for Risoe; manufacturers must pay the full cost of testing and certification. In addition, the government has extended the authority to issue certificates to other organizations. The certification standard is updated by the Danish Energy Agency with advice from an advisory committee that includes representatives from the Danish Wind Turbine Owners Association, the Danish Utilities Association, the Insurers Association, and the Wind Turbine Manufacturers Association. Risoe supplies a technical expert to advise the committee.

• Capital Subsidies: A subsidy equal to 30% of the investment costs of a wind turbine started in 1979, leading to the deployment of 200—300 machines a year. After steady increases in the reliability and cost-effectiveness of turbines, the subsidy for wind power was repealed in 1989. (It was retained for other forms of renewable energy, however, and is now helping spur an increase in electricity generation from bioenergy, principally from burning straw and wood chips.)

• Mandated electricity purchases: Danish power companies are required to pay 85% of the retail electricity price for the wind energy purchased from privately owned wind turbines.

As a result of these programs, Denmark has seized a position of clear dominance, with 58.5% of global sales in 1997, followed by Germany with 16%, the United Kingdom with 14.1%, and the United States with just 2.4% of global sales. From 1993 to 1995, the wind industry grew at a rate of 50% a year in Denmark, with annual growth rates of 10—20% projected through 2000.

The Wind Guilds

Because of the large size, location in visible wind-swept sites, noise, effect on wildlife, and other impacts of wind turbines, landowners, planners, environmentalists, and others sometimes resist these technologies. In the United States, such "environmental" opposition frequently proves the final barrier to the development of a project. The Danish solution to this—parts of which appear to have evolved independently of any overarching guidance from the government—was to allow turbine ownership by guilds or co-operatives, and to require member-owners to live within 3 kilometers of the site. The guilds eventually organized as the Danish Wind Turbine Owners Association, which became a powerful political force. Today, 100,000 Danish families own wind turbines or shares in wind co-operatives.

In the mid-1980s, this ownership rule was modified somewhat, to require that guild members live in or within 10 kilometers of the same borough as the turbine and to limit the share of any individual owner to the greater of 6,000 kilowatt-hours (kWh) per year or 135% of that person's electricity consumption. This change was made in part because of pressure from electric utilities, which were seeking to limit private ownership of generating facilities. Under pressure from the various guilds, the law was amended again in 1992 to relax ownership requirements. The geographic area of residency was expanded to include residents of the borough in which the turbine was located and those of neighboring boroughs. The ownership share was increased to the greater of 9,000 kWh per year or 150% of consumption. The rules were expanded further in 1996 to allow ownership of up to 30,000 kWh per year by any person who lived or worked in the borough or who owned a house or real estate there.

The guilds played a significant role in the steady technological improvement of Danish turbines by providing regular reports in the membership magazine, Naturlig Energi. Each month Naturlig Energi had a list of all turbines with an indication of what they produced and what technical problems were encountered. This accountability had a positive effect on development. The turbine owners themselves had then the opportunity to explain how well or how badly their turbines produced, and the manufacturers discovered that their own turbines quickly became either a good or a bad advertisement for their business. In the process of development the statistics also showed the importance of good siting.

The association and its magazine also played a pivotal role in establishing the credibility of wind power and exploding myths of unreliability and high cost. And it helped create both a market for insurance and a free-standing firm to supply it. As a result, consumers can buy insurance at the same time as a turbine, providing protection not only against damage and losses but also against the risk of a manufacturer going bankrupt within the warranty period. By 1997-, the association had a membership of 2,150 wind turbines, while the turbine guilds had 54,844 members.

Danish Taxes

With the advent of concerns over local air pollution and global warming, Danish support for wind energy has been revitalized. Denmark levies a tax on all electricity; the basic support mechanism for wind energy is a partial rebate of this tax. The actual tax structure is quite complex, for there are three environment-related taxes: an energy tax that varies for natural gas, unleaded gasoline, diesel fuel, and other energy; a carbon dioxide tax; and a sulfur dioxide tax. Denmark also applies different rates to space heating and to "heavy" and "light" uses of energy. Heavy uses include 35 different energy-intensive production process, such as cement production.

The taxes have three specific goals: to reduce CO₂ emissions from 1988 levels by 20% by 2005, to reduce SO₂ emissions from 1980 levels by 80% by 2000, and to increase the share of Denmark's gross energy consumption provided by renewable energy to 35%—or perhaps even 50%—by 2030. Of course, the taxes also provide income for the national government. Together, they account for about 7% of domestic revenue.

The tax system is further complicated by a set of 15 subsidy schemes related to energy production and consumption. The bulk of these are directed primarily at converting central and electric heating systems to district heating and to expanding and renovating the existing district heating network. But the largest one in terms of money is a production subsidy of 0.27 kroner (3.8¢) per kWh for electricity generated from renewable energy sources. In addition, natural gas generators receive a subsidy of 0.07 kroner (9.7¢) per kWh. These subsidies accounted for about 45% of the total subsidy budget, or about 855 million kroner ($119 million) in 1996. The share is expected to rise in coming years because of the increase in electricity production from natural gas and renewable energy sources.

Denmark's New Renewable Portfolio Standard

The liberalization of the electricity market has caused Denmark to enact a very recent and fundamental change in its support for renewables: from fixed payments to a renewable portfolio standard (RPS) system. This change is projected to happen gradually over the next decade, and the Danes are working on the details.¹¹ Most importantly, as the shift takes place, a system is being created to insure the survival of existing projects and the continual growth of near-term future renewables. Also, the Danes will maintain current taxes on electricity and carbon dioxide will adapt them to work with the RPS.

Very briefly, the RPS works as follows: a target for renewables is legislatively set, usually in terms of a percentage contribution from renewables. Electricity distributors are held responsible for meeting this target in most RPS systems. To meet their obligation, distribution companies may either develop renewable resources themselves or purchase renewable generation credits from other renewable generators as proxies for their own renewable generation. The RPS is competitive because electricity distributors will seek the lowest cost option to meet their obligation. No matter which option is chosen, the extra costs of renewable electricity are handed down to all of the consumers of the distribution company.¹²

The components of an RPS are all evident in Denmark's new system: renewable implementation targets, the creation of renewable energy certificates with the goal of creating a special market for renewables, and an obligation on all consumers to purchase electricity from renewables. It is notable that a nation recognized for being a world leader in renewable energy has chosen to implement a renewable support mechanism invented in the U.S.¹³

It should be noted at this stage, however, that the Danish RPS is a hybrid system retaining fixed payment characteristics: it maintains a guaranteed payment of .33 kroners (4.6¢) to renewable generators and then allows the market for renewable energy credits to determine the additional value of the renewable energy credit. This renewable energy credit is bounded between .10 kroner (1.4¢) and .27 kroner (3.8¢) by law.

The adoption of an RPS represents a distinct transition from a steady, fixed premium system to a competitive system. This transition is consistent with a worldwide trend toward liberalization of markets. Denmark is moving towards a market system for its renewables to retain consistency with the liberalization in the rest of its electricity sector. The liberalization of its electricity sector, in turn, is consistent with trends in Europe to decrease market barriers between nations.

The decision to implement an RPS reflects a definite confidence in the Danish ability to achieve renewables targets, as targets are the focal point of the RPS. The benefits of competition also appear to be desired for the continual evolution of the renewables industry in Denmark: a recent policy paper by the Danish Energy Agency specifically identifies the element of competition to produce cost-effective development of renewables as a major driver for this shift in the renewable program.¹⁴

Renewable Energy Policy Outside the United States

1. Abstract
2. Message from REPP Staff
3. Why Are They Doing it?
4. Introduction & Overview
5. Danish Wind
6. German Encouragement
7. Non-Fossil Fuel in Britain
8. Dutch National Plans
9. Japanese Efficiency
10. Successful PVs
11. Lessons for the U.S.

copyright © 1999 by Renewable Energy Policy Project