The Energy Regulation and Markets Review: Denmark
The Danish energy demand is primarily met by domestic natural gas resources and oil, and domestic renewable energy sources such as waste, woodchips, sun, wind and biogas. There is no large hydropower or nuclear power production in Denmark.
The first oil and gas exploration licence was granted in 1935, and since then both oil and gas have been exploited in Denmark. In 1966, hydrocarbons were discovered in the North Sea and the first oil was produced in 1972. During the first 50 years, exploration of oil was carried out under sole-right concessions, but in 1983 competitive licensing rounds were introduced and the first licences with more than one concession holder were awarded in 1984 – the latest in 2016. Oil and gas activities are governed by the Subsoil Act,2 which lays down the basic framework for oil and gas exploration and production.
The first comprehensive legislation governing electricity supply entered into force on 1 January 1977. Electricity activities are mainly governed by the Electricity Supply Act,3 which lays down the basic framework for electricity production and supply. The aim has been to ensure electricity supply in accordance with the principles of security of supply, economics, and environmental and consumer protection. Access to cheap electricity and consumer influence on the administration of electricity sector assets; promoting sustainable energy use, including in connection with energy savings and use of combined power and heating; lasting and environmentally compatible energy sources, as well as securing effective use of financial resources; and creating competition on the markets for production and trade in electricity are essential elements in the legislation.
The long-term goal of Danish energy and climate policy is to have all energy demand covered by renewable energy by 2050. The government and the parties in the Danish parliament entered into an agreement on 29 June 2018 to be followed up by the forthcoming Climate Act, which sets new objectives for 2030 with the aim of achieving net zero emissions by 2050. By 2030, it is expected that 55 per cent of all energy consumption in Denmark will come from renewable energy. Wind power alone is expected to cover between 53 and 59 per cent of electricity consumption in 2020, and the goal for 2030 will partially be reached by establishing three new offshore wind farms, each with a capacity of at least 800MW.
i The regulators
The overall administrative responsibility for the energy sector lies with the Danish Minister for Climate, Energy and Utilities (the Minister).4 Part of the Minister's authority has been delegated to the Danish Energy Agency (DEA).5 The DEA is responsible for the entire chain of tasks linked to energy production and supply, transportation and consumption, including energy efficiency and savings as well as national carbon dioxide targets and initiatives to limit emissions of greenhouse gases. In cooperation with the Minister, the DEA prepares the majority of the bills and other political proposals. The DEA carries out analyses and estimates of the development in the energy sector and represents Denmark in international forums.
The Danish Utility Regulator (DUR)6 controls prices and conditions in the energy sector. DUR's purpose is to ensure an efficient and transparent energy market in Denmark. Transmission, storage and distribution undertakings and supply-committed undertakings are under the supervision of the DUR. Decisions made by DUR may be appealed to the Energy Board of Appeal.7 Decisions made by the Energy Board of Appeal cannot be brought before any other administrative body but may be challenged before the courts.
Energinet,8 a state-owned undertaking, owns, operates and develops the Danish transmission network for electricity and gas, and is responsible for effective and safe supply and for a competitive energy market. Energinet must ensure open and equal access to the transmission networks for all users. It also issues rules on gas transport and coordinates the general planning of emergency supply for the natural gas sector. In March 2019, Energinet acquired the entire Danish gas distribution network.
The city councils in the municipalities9 are responsible for the planning of local heat supply.10 In each municipality, the city council must carry out planning in cooperation with the supply undertakings and other stakeholders.
The Energy Supplies Complaint Board is a private board established by the energy industry and the Danish Consumer Council. The Energy Supplies Complaints Board handles complaints about the purchase and delivery of energy from supply undertakings. As a principal rule, the board only accepts complaints from consumers. Decisions of the Board cannot be appealed to any administrative authority but can be brought before the courts.
The main legislation for energy regulation is the Continental Shelf Act,11 the Act on Raw Materials,12 the Subsoil Act,13 the Pipeline Act,14 the Natural Gas Supply Act,15 the Heat Supply Act16 and the Electricity Supply Act.17
ii Regulated activities
A licence issued by the DEA is necessary for all exploration, production, transmission, distribution and storage activities.18
A permit is required for the establishment of plants and for expansion or changes to plants that cause increased pollution.19 Permits are issued by the relevant city council or regional council, depending on the size of the plant. Permits for major plants require a prior public hearing, and for major plants there may be a duty to complete an environmental impact assessment under the Planning Act.20 Offshore plants are primarily subject to approval under the Subsoil Act and the Continental Shelf Act. Offshore installations are subject to approvals and permits issued by the DEA. These include operation permit, manning and organisation plan approval and approval for the contingency plan. To obtain an operation permit, there must be an evaluation of safety and health conditions for the installation and the operational conditions (health and safety review or safety case) and other relevant information regarding health and safety conditions (e.g., certificates). Offshore installations operating in Denmark must have a workplace assessment system.
iii Ownership and market access restrictions
The Danish state has a general right to all hydrocarbons in the subsoil of the Danish territorial jurisdiction area. The state can grant licences for preliminary investigation, exploration and production of hydrocarbons. Licences are granted through tender procedures or under the 'open door' procedure.
The majority of the natural gas on the Danish market is produced in the Danish North Sea. Through the Danish North Sea Fund, the Danish state participates in concessions for exploration and production of hydrocarbons. The fund is administered by the Danish North Sea Partner, a unit under the Ministry of Climate, Energy and Utilities. The fund, which was established in 2005, is the Danish state's oil and gas company, which contributes to the decision-making processes in connection with exploration, production and development activities with respect to Danish licences. The aim is to use existing knowledge across licences and support the development of new technologies that can enhance the recovery rate of oil and gas resources in the subsoil.
Partly state-owned Ørsted A/S (previously DONG Energy) owns upstream pipelines and operates the gas treatment plant at Nybro. The establishment and operation of upstream pipeline networks require a licence issued by the DEA. Any interested party is entitled to access an upstream pipeline network subject to payment. In March 2019, Energinet's last acquisition of the gas distribution network was finalised, and Energinet now owns the entire gas distribution network. The physical planning of the system for the supply of natural gas is governed by the Heat Supply Act. Establishment of new distribution network facilities for natural gas and major alterations to existing facilities requires approval from the relevant city council and, in certain cases, the DEA. A storage undertaking is obliged to place storage capacity at the disposal of Energinet, but only to the extent necessary to enable Energinet to maintain physical balance in the network and to ensure security of supply. A storage undertaking must grant access to the storage facilities on the basis of objective, transparent and non-discriminatory criteria. The Danish market for natural gas was fully liberalised on 1 January 2004, and since then customers have had a right to choose a natural gas supplier. Anybody may in principle establish a natural gas supply undertaking.
Electricity grid undertakings have a monopoly on the distribution in their areas and are governed by the Electricity Supply Act. The transmission system operator (Energinet) is responsible for the general security of supply in Denmark and must ensure the overall balance and quality of the electricity supply system. Also, the operator must ensure players have access to the transmission system on objective, fair and transparent terms. Electricity supply undertakings supplying electricity on commercial terms are generally not governed by the Electricity Supply Act.
iv Transfers of control and assignments
Natural gas and electricity licences, where applicable, can only be issued to applicants with the necessary expertise and economic capacity. The licence can neither directly nor indirectly be transferred to others without approval by the DEA. A gas distribution network or shares in companies that own distribution networks are generally only allowed to be transferred to the state. In 2016, 2018 and 2019, the Danish state purchased the three large gas distribution networks in Denmark. The Danish state now owns the entire gas distribution network.
Since 1998, Danish competition legislation has been strongly influenced by EU competition law, but the Danish rules are generally stricter than those of the European Union in terms of support for free competition.
Transmission/transportation and distribution services
i Vertical integration and unbundling
The level of unbundling in Denmark generally exceeds the requirements of the electricity and gas directives. Through the establishment of Energinet, Denmark has secured ownership of unbundling of the main transmission grids and the gas distribution network.
In the electricity and natural gas industries, there is a requirement for legal unbundling in relation to the parts of the value chain of monopolistic character. The Natural Gas Supply Act requires a company with a licence for transmission, distribution, storage, liquefied natural gas business or universal service obligations to conduct only activities allowed under the licence.
As a general rule, the Electricity Supply Act does not allow both grid and transmission licences to be issued to the same company. Undertakings producing electricity by means of waste incineration are not allowed to carry out other types of electricity production or trading activities. The requirement for unbundling of activities, however, does not preclude the use in combined waste incineration plants of other types of fuel (e.g., straw, chipped wood or natural gas) with waste suitable for incineration.
The requirements are supplemented by demands for managerial unbundling in the Electricity Supply Act and in the Natural Gas Supply Act. To prevent conflicts of interest, executives and managers of a distribution undertaking must not participate, directly or indirectly, in the operation or management of an associated undertaking selling or producing natural gas or electricity, or participate in an associated undertaking that indirectly owns such an undertaking. Members of the board of directors of distribution undertakings must not participate, directly or indirectly, in the operation or management of associated undertakings selling or producing natural gas or electricity.
ii Transmission/transportation and distribution access
Danish law allows full access on a non-discriminatory basis to the transmission and distribution systems in both the natural gas and the electricity sectors.
The transmission network for natural gas is connected to the natural gas transmission networks in Germany and Sweden. The transmission network is connected to the distribution network to which the end users are connected. Both the Danish transmission network and the distribution network are owned by Energinet. There is a general right to use the transmission network against payment of applicable fees. Access can be denied if the transmission undertaking cannot meet the capacity requirements, cannot ensure the quality of the natural gas, cannot ensure security of supply, cannot ensure sufficient quantities of natural gas, or if a natural gas undertaking has severe economic and financial difficulties with fulfilling contracts (including take-or-pay commitments). Access can also be denied if a natural gas undertaking does not comply with the access requirements laid down by the transmission undertaking. Reasons must be given for denial of access, and a denial of access can be brought before DUR.
The transmission grid for electricity is the part of the electricity grid that transports electricity to local grid undertakings, which then distribute the electricity to end users. The transmission grid also transports electricity to and from other countries. The transmission grid is owned and operated by Energinet,21 which is responsible for the security of supply and the overall balance and quality of the electricity supply system. Energinet is also responsible for the overall planning and development of the transmission system. Energinet must ensure that players have access to the transmission system on objective, fair and transparent terms. The grid undertakings deliver electricity from the transmission grid to individual end users. Each owns and operates a distribution grid within a local supply area. Grid undertakings have a monopoly on the distribution within their area. However, the grid undertakings must ensure that players have access to the grid on objective, fair and transparent terms.
iii Terminalling, processing and treatment
The storage facilities for natural gas are currently situated at two locations in Denmark: Stenlille and Lille Torup. These facilities are owned and run by Energinet.
It is a general rule that access to transmission and distribution grids must be provided on the basis of objective, transparent and non-discriminatory criteria. When setting prices, grid undertakings must not discriminate between users. Transmission and grid undertakings must prepare a plan for internal supervision and describing the undertaking's measures to prevent discriminatory practices. Prices must be based on the undertaking's costs and a reasonable return on capital invested by the undertaking.
v Security and technology restrictions
Undertakings that sell oil in Denmark must keep oil reserves in storage ready for emergency use by the Danish state. Denmark's obligations to maintain a store of oil follow from an EU directive and from rules laid down by the International Energy Authority. The Danish Act on Emergency Oil Supplies22 ensures emergency supply in the event of disruptions or threats in the oil sector, including keeping reserves of crude oil and petroleum products, and collecting data on the oil conditions in Denmark. The Danish emergency oil management system is primarily handled by the Danish Central Oil Stockholding Entity, which is an independent organisation set up by the oil companies and appointed by the DEA.
i Development of energy markets
Nord Pool Spot runs a power market in northern Europe and offers both day-ahead and intraday markets; 380 companies from 20 countries trade on the market. Nord Pool Spot is owned by the Nordic and Baltic transmission systems operators (in Denmark, Energinet). In 2019, the group had a total turnover of 494TWh. The power price is determined by the balance between supply and demand. Factors such as the weather or power plants not producing to their full capacity may affect how much power can be transported through the grid and may therefore influence the price of power.
ii Energy market rules and regulation
The Minister can decide that oil undertakings must submit information on the conditions of import, export, production, sale, storage and transport, and on other general matters. The Minister can stipulate that undertakings producing or importing oil must sell oil in accordance with international distribution schemes.
The liberalisation of the gas market on 1 January 2004 meant that all natural gas customers would have a free choice of supplier. Any party can establish a natural gas undertaking supplying natural gas, provided that it enters into agreements with the relevant transmission, storage (if needed) and distribution undertakings. An undertaking trading in natural gas can sell its products on market terms. Natural gas suppliers may be licensed as a supply-committed undertaking in areas designated for natural gas pursuant to the Heat Supply Act, with the effect that the undertaking has the right and duty to supply natural gas to all customers within the area that have not used their right to choose an alternative gas supplier. The undertaking may deny supply of natural gas to a customer that does not pay for the deliveries.
Sale and delivery of electricity to end users are made by electricity suppliers, which are either supply-committed undertakings or undertakings supplying electricity on commercial terms. Supply-committed undertakings deliver electricity to consumers who have not exercised their right to choose an alternative supplier.
iii Contracts for sale of energy
Most power in the Nordic and Baltic regions is traded on Nord Pool Spot. Natural gas, on the other hand, is still primarily traded through bilateral contracts, although an increasing quantity is traded at the market exchange Pegas. In 2017, for instance, 17,380,709MWh of natural gas from the Nordic and Baltic regions was traded on Pegas; this figure rose in 2018 to 25,097,094MWh. Danish energy legislation generally only regulates end-user contracts.
iv Market developments
There is a large number of new energy policy initiatives seeking to accelerate the transition to green energy. The four critical focus areas are: energy efficiency, electrification, expansion of renewable energy and research, and development and demonstration.
Renewable energy and conservation
i Development of renewable energy
Denmark has a long tradition of active energy policy, initiated by the first oil crisis in 1973. When oil prices accelerated in 1973, Denmark was one of the OECD countries most dependent on oil in its energy supply, with more than 90 per cent of all energy supply deriving from imported oil. Denmark launched an active energy policy to ensure the supply and enable Denmark to reduce its dependency on imported oil. In combination with oil and gas production from the North Sea, Denmark progressed from being a net importer of oil in 1973 to being more than self-sufficient in energy from 1997 and beyond.
In the Kyoto period 2008–2012, Denmark committed itself to a greenhouse gas reduction target of 21 per cent. Currently, renewables account for more than 40 per cent of Danish electricity consumption and, through expanded offshore wind production and use of biomass, the government expects that renewables will reach 100 per cent of Danish electricity production in 2030. A new political agreement between the government and all the major opposition parties was reached in June 2018. The agreement sets out the following goals for 2030: approximately 55 per cent renewable energy in final energy consumption, 100 per cent of Danish electricity production to be covered by renewable energy, at least 90 per cent of district heating consumption to be covered by renewable energy and more than 50 per cent of electricity consumption to be supplied by wind power. These are all goals that will enable Denmark to be a net zero emissions society by 2050 at the latest.
Energy taxes on electricity and oil were introduced in 1977, since when taxes have been increased several times and have been extended to coal and natural gas. In 1992, the taxes were supplemented by carbon taxes.
Other means of achieving renewable energy are heat-savings initiatives in buildings, use of renewable energy in buildings, municipal heat planning, energy-efficient electricity and district heat production, and use of renewable energy in electricity and district heat production, plus energy savings and use of renewable energy in industry and transport.
Wind turbines have been supported politically for many years, including through state subsidies, feed-in tariffs, orders to the electricity utilities to build wind turbines, tenders for offshore wind farms and orders to the municipalities to allocate suitable areas for new onshore wind turbines. Approximately 40 to 45 per cent of electricity is currently produced by wind turbines (this is expected to exceed 50 per cent in 2020).
In 2009, the Promotion of Renewable Energy Act23 was introduced to promote the production of energy through the use of renewable energy sources, in accordance with climate, environmental and macroeconomic considerations, to reduce dependence on fossil fuels, ensure security of supply, and reduce carbon emissions and other greenhouse gases.
In 2018, the Danish government and parliament entered into an agreement that allocates 19 billion kroner to investments in renewable energy, 3.5 billion kroner to easing of taxes on electricity generally and on electricity for heating purposes, and has the purpose of accelerating the phase-out of coal through a modernisation of the heating sector.
ii Energy efficiency and conservation
Denmark has long supported energy efficiency and conservation initiatives, which played an important part in the efforts to free Denmark from dependence on fossil fuels. In the 1976 Energy Plan, energy efficiency was one of two main targets. During the 1970s, a number of acts and initiatives were implemented to support energy efficiency, with a focus on three main areas:
- heat consumption in buildings;
- industrial and process – covering industrial and production-related consumption; and
- appliance and components – covering electrical appliances and components not directly related to industrial use.
A number of schemes have also been implemented, designed to promote energy savings in buildings and industry. Major current initiatives include:
- taxes on domestic and public sector energy consumption of energy and carbon;
- taxes on industrial consumption of carbon;
- carbon emission allowance trading scheme;
- voluntary agreements for industry;
- energy labelling for large and small buildings;
- energy labelling of appliances and lighting;
- norms for energy efficiency and voluntary agreements; and
- reduction of standby consumption.
iii Technological developments
The Danish strategy for energy-efficient technologies provides a framework for prioritisation and development of research and development efforts to achieve the greatest possible effect by public funds used in the field.
The year in review
i Technology neutral tender scheme for renewable energy
On 27 September 2019, the DEA opened for bids on Denmark's technology neutral tender scheme for renewable energy. Seven bids were received and the DEA expects that seven contracts will be signed with four onshore turbines and three solar photovoltaic (PV) installations, corresponding to the electricity consumption of approximately 154,000 households. The yearly tender is successful in securing competition between renewable energy sources, with the latest tender securing a record low level of aid to onshore wind turbines and solar PV.
ii Broad agreement on Climate Act
On 6 December 2019, the Danish parliament signed an agreement to adopt a new Climate Act during the first half of 2020. The Act will secure that the government will work to realise a 70 per cent reduction in greenhouse gas emissions by 2030 compared to 1990 levels. The Act will further call for future climate ministers to achieve net zero emissions by 2050. The Act will include assurances to work towards these goals, and secure continuous follow-up through climate action programmes. The final Act is yet to be negotiated and enacted, and the concrete regulation is yet to be determined.
iii Eighth licensing round for exploration and exploitation of oil and gas deferred
The eighth licensing round ended on 1 February 2019. The five applications for exploration and exploitation of oil and gas in the Danish North Sea came from four corporations: Ardent Oil Ltd, Lundin Norway AS, MOL Dania ApS and Total E&P Danmark A/S. Owing to political pressure on the government to increase the use of renewable energy, the eighth licensing round has been put on hold indefinitely.
iv Denmark calls for greater climate ambitions in the European Union
The government in Denmark, with 11 other EU Member States, has called for an increase in targets for the reduction of greenhouse gas emission from 40 per cent to between 50 and 55 per cent by 2030. Even though the Danish goal calls for an even further reduction, by 70 per cent, the Minister stresses that the European Union has the potential to set a good example for the rest of the world.
Conclusions and outlook
Denmark is continuously increasing its focus on renewable energy with the aim of being an international leader in the area and ensuring self-sufficiency. There is a significant focus on cost-effectiveness and ensuring cheap energy for consumers while maintaining incentives for new investments in the sector.
1 Nicolaj Kleist is a partner at Bruun & Hjejle.
2 Act No. 1533 of 16 December 2019 on the Use of Danish Subsoil.
3 Act No. 119 of 6 February 2020 on the Supply of Electricity.
8 Established by Act No. 1097 of 8 November 2011.
9 There are 98 municipalities (city councils).
10 Act No. 120 of 6 February 2020.
11 Act No. 1189 of 21 September 2018.
12 Act No. 124 of 26 January 2017.
13 See footnote 2, above.
14 Act No. 807 of 13 August 2019.
15 Act No. 126 of 6 February 2020.
16 See footnote 10, above.
17 See footnote 3, above.
18 See also Section III.iii.
19 Act No. 681 of 2 July 2019.
20 Act No. 287 of 16 April 2018.
21 See footnote 8, above.
22 Act No. 354 of 24 April 2012 on Emergency Oil Supplies.
23 Now Act No. 125 of 7 February 2020 on the Promotion of Renewable Energy.