IEA Encourages Move towards an Open Market in Denmarks Energy Sector

In its report Energy Policies of IEA Countries – Denmark – 2002, released today in Paris, the International Energy Agency (IEA) recommends that the new government, elected in November 2001, complete the transition to competitive, free markets. Danish energy policy has traditionally focussed on environmental protection and energy security. In the past four years, greater emphasis has been placed on opening up the gas and power markets to competition. Since April 2001, large electricity customers are allowed to switch suppliers, and by January 2003, all electricity consumers will be able to do so. Since August 2000, 30% of the natural gas market has been open to competition. But there remain issues to be addressed. Electricity from renewable and combined heat and power (CHP) is given automatic priority, with the result that only 60% of the electricity market is governed by competitive price signals.

In addition, the long-standing debt problems of the gas distributors have been addressed through take-overs. This has given the state-owned gas company DONG a dominant position. Denmark was one of the first countries to implement major support programmes for renewables and CHP generation. Environmental protection was a major objective, but security of supply was also a powerful influence. Among these policies was the national heat plan that gave the national and local governments the power to prescribe for certain parts of the country, the form of heating that citizens should use. Today, Denmark has the highest share in the world, of electricity generated in CHP plants and one of the largest existing district-heating systems. In 2000, 12.6% of Danish electricity generation was from wind turbines, also the highest of any nation. Denmark is expected to come very close to meeting its CO2 commitments, if all of its current abatement policies remain in place especially a national system of tradable CO2 quotas for power plants.

Denmark is now a net energy exporter. In recent years, high prices have even led to increased exploration and new oil and gas finds in the North Sea. Estimated recoverable reserves of oil now stand at 260 Mtoe, which enables Denmark to sustain the current level of oil production for the next 14 years. Denmark has liberalised its power market beyond the requirements of the European Union’s 1996 Electricity Directive. Since 1 April 2000, customers consuming 10 GWh per year have been free to choose their supplier. On 1 January 2001 the threshold was lowered to 1 GWh. By 1 January 2003, all end consumers will be able to choose their supplier. A system of tradable CO2 quotas for power plants was introduced on 1 January 2001. The IEA recommends that the government extend the quota system beyond 2003. Without this system, electricity exports could soar after 2003, and national CO2 emissions could fall short of the Kyoto target by more than 19%. Further adaptation to market conditions will be necessary. Denmark’s grid operators currently must purchase power from these sources at fixed and above-market rates despite their higher costs, even if cheaper, fossil-fuel power stations have to be taken off the grid.

Consequently, only 60% of the electricity market is governed by competitive price signals, which makes the electricity prices for residential customers among the highest in IEA Member countries. The report recommends that support for renewables and CHP be better adapted to the competitive market. Denmark has liberalised its gas market in line with the minimum requirements of the EU Gas Directive. 30% of the market has been open to competition since August 2000 and the government has decided to open the gas market fully by 2004. In 2003, network-operation and gas-trading activities will be separated and DONG will eventually be privatised. There is some concern since DONG, through acquisitions, now controls nearly 95% of the Danish gas market. The IEA recommends that the Danish government and competition authority prevent DONG from becoming a monopoly supplier along the entire gas chain. They should also create incentives for new suppliers, foreign and domestic, to enter the Danish market.