The Effects of an Ambitious Danish Energy Policy

Professor Eirik S. Amundsen,University of Bergen, Norway, University of Copenhagen/ Danish Economic Councils

As for other EU-countries, Denmark is required to achieve a country-specific target on renewables and on reduction of carbon emission within the sectors not covered by the EU ETS. In particular, the renewables’ target facing Denmark is a share of 30% by 2020. However, the Danish Parliament has set out to follow a very ambitious policy of expanding the renewables capacity. This will result in an over-fulfillment of the EU requirement. Most likely the share will attain 35% by 2020.

In this paper we evaluate the effects over-fulfilling the renewable target, both in terms of price and quantity effects in the Nordic electricity market and in terms of welfare foregone due the alternative use of resources put into to the support schemes. As Denmark is not alone in planning for a more ambitious renewables’ policy, the results should be of some general interest.

In order to evaluate these effects we analyze a case where the direct subsidies for all new renewables projects are removed. In so doing, we apply a computable equilibrium model (BALMOREL) for the Nordic electricity market. The model takes account of demand and supply of electricity in the various countries connected to the market and calculates prices, quantities, and capacity investments in generation and transmission of electricity. Also we apply a macro-economic model for Denmark (SMEC) to assess the effects on employment, productivity and consumption.

It turns out that the 30% EU target facing Denmark is almost achieved even without the additional support. Furthermore, the capacity expansion of renewables in Denmark (primarily ocean and close to shore wind projects) results in a reduction of the wholesale price (by about 15%). Hence, this capacity comes in addition to existing generation capacity for electricity and results in increased consumption of electricity in the market. The macro-economic model shows that a continued ambitious policy will result in a reduction of employment, a reduction of productivity and a reduction of consumption in the long run.

The conclusions to be drawn from this analysis, are threefold. The over-fulfillment of the renewables’ target in Denmark is costly, it does not create jobs in the long run, and, sadly enough, it has no effect on the global carbon emission. The last point is often emphasized: even if the expansion of renewables encompassed by the EU-ETS  results in less carbon emission in Denmark (which is not obvious), it will not have any effect globally, as the “liberated” carbon-quotas simply would end up elsewhere in the EU, to be used or banked for future use.

This analysis has been executed by secretariat of The Danish Economic Councils (DEC), which is an independent think tank appointed by the Danish Parliament. The advice given to the Danish Government, by the chairmen of DEC is that the over-ambitious renewables policies should be dropped and the large ocean wind power plants should at least be postponed. Rather the government should focus on achieving the 2020 carbon target within the non-EU ETS sectors (transportation, agriculture and heating of buildings) which will probably not be attained.

References: Amundsen, E.S., Whitta-Jacobsen, H.J. , Kreiner, C.T. and M. Svarer (Chairmen of The Danish Economic Councils) “Omkostninger ved VE-støtte” (“Costs of renewables support”), in “Økonomi og Miljø” The Danish Economic Councils, Copenhagen, 2014.

Key words: Renewables, carbon emission, EU-targets, Denmark, Costs of Policy