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Green Certificates in Denmark:

The Litmus Test

by
Christian Kjaer,
Danish Wind Turbine Manufacturers Association
January 2001

Denmark was the birthplace of fixed tariff payments to encourage renewable energy investment. Now it is slowly moving towards a market-based system with tradable green certificates which is not proving an easy ride.

The year 2000 was another record-breaking period in the history of Danish wind energy. At the latest count app. 600 MW of capacity had been installed when the calendar flipped to 2001. But the contracts which accompanied those wind turbines were all signed before the end of 1999. Uncertainty about Denmark's new renewables portfolio standard meant that, at the time of writing at least, the millennium still had to produce its first Danish contract for new wind capacity.
The political framework for a new Danish support system based on a renewables portfolio standard (RPS) has in fact been in place since March 1999. It succeeds the 15 year old system of fixed tariffs, under which a standard payment was made for every kilowatt hour of energy produced.
What Denmark hopes to achieve with its new RPS-based system is a steady decline in the cost of renewables through the introduction of competition between suppliers of green electricity.
The new system places an obligation on all Danish electricity consumers, requiring them to buy 20% of their electricity from renewable energy sources by 2003. The RPS is also backed by a market for green power credit trading under which producers are issued with certificates for their output. They can then sell these to the highest bidding electricity supplier. This market was supposed to have been in place by 1 January 2000.

Two Year Delay
Creating a Danish market has proved a far more complicated task than anybody dared to dream, however. The result has been that it has had to be postponed for at least two years. The first green certificate will not now be traded until 2002 at the earliest.
Turbine owners signing contracts for new installations between 1 January 2000 and 31 December 2002 will meanwhile receive two forms of payment for the electricity they feed into the grid: a fixed minimum price of DKK 0.33 plus a green certificate with a politically dictated minimum value of DKK 0.10 and a maximum value of DKK 0.27 (see Figure 2).
After ten years of the turbine's operation, the system becomes fully dependent on the market. Owners will receive the market price for their electricity plus a green certificate whose value is unlikely to be hedged by any price cap or lower limit.
Even though the credit market is not in place yet, turbines that are contracted after 1 January 2000 will still be eligible for green certificates once trading commences. Danish buyers of wind turbines therefore have to include green credits in their budgets. But estimating a price for a green credit that does not yet exist, and will not reach the market for at least the next year, is no easy task.
Equally difficult is convincing people to invest in anything, be it stocks, bonds or wind turbines, by promising a return on the investment in the form of a currency ­ in this case a certificate ­ that does not yet exist. That is why no contracts for new wind turbines have been signed this year in Denmark. All the turbines erected last year were contracted for before 1 January 2000, and are thus entitled to the old fixed price tariff of DKK 0.60 (see Figure 1), for a transition period of five to six years, before entering the certificates market.

What Price for Green Credits?
Wind power is supposed to satisfy up to three-quarters of the Danish government's 20% renewable energy obligation by 2003. The remaining 5-6%, according to the Danish Energy Agency, will mainly come from biomass. With an additional 400 MW of wind power capacity coming on line during 2000, the 2003 target for wind will be met two years in advance.
Given the inherent mechanics of the credit market, that should send the price of a Danish green certificate towards the bottom of the politically determined range of DKK 0.10 to 0.27.
However, because of the considerable uncertainties about the future certificates market, Danish wind turbine owners are likely to demand a risk premium in return for the lack of a properly functioning system. That would send the price of green certificates banging against the DKK 0.27 ceiling.
Uncertainties contributing to this upward pressure on certificate prices include the lack of details about possible "banking" of certificates and the introduction of financial instruments such as "futures" and "options". These are complicated issues to deal with for a private wind energy investor. Nevertheless, they are crucial to the effectiveness of the certificate market.

Investment on Hold
The complexity of the new support scheme, and the worrying number of unanswered questions still outstanding, have therefore together effectively put investors on hold until further notice.
When the Danish market does start picking up again the industry may find itself with a completely new customer base. The Danish Wind Turbine Manufacturers Association predicts that the advanced financial engineering tools which will be necessary for the market to function will leave little room for the wind co-operatives and individual owners who currently control approximately 80% of Denmark's turbine capacity. Large transaction costs, economies of scale for large investors and a lack of transparency for small investors will gradually erode this local ownership, unless political action prevents it.
The same scenario could well apply to investment in the 4,000 MW of offshore projects which are expected to be built between now and 2030 in order to reach the government's ambitious goal of covering 50% of electricity consumption with wind power by 2030.
Whilst the Manufacturers Association is not opposed to the principle of moving towards a market-oriented system, the way in which it is being implemented in Denmark runs the risk, to use a classic English phrase, of "throwing the baby out with the bath water".

  Figure1

   
Figure 2
 

 
Figure 3
 

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© Copyright 2001 Christian Kjaer
Updated 9 May 2001
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