Energy Strategy 2025

Denmark is well placed to meet future energy challenges. The Danish energy system is robust, flexible and oriented towards competitive international markets. Denmark has a multi-faceted energy supply based on a variety of energy sources, a well-constructed energy infrastructure, a high degree of efficiency in energy consumption and significant auto-production of oil and natural gas.

Furthermore, the Government's policy will lead to improved use of market mechanisms and to more cost-effective initiatives. The Danish electricity and natural-gas markets have been completely liberalised and are part of larger Nordic and European markets with substantial cross-border trading. The previous purchase obligation for environmentally-friendly electricity production has been revoked and, with implementation of the CO₂ allowance system in the European Union, a decisive step has been taken towards flexibility in climate protection. It reduces energy costs and increases freedom of choice.

Finally, developments in the energy system are to a large extent based on Danish knowledge and technology. Today, Danish enterprises are in a particularly strong position internationally when it comes to energy-efficient technology and renewable energy.

Investments in the energy sector often have long time horizons. Infrastructure and production installations have long lifetimes and it takes time to develop new technologies. It is therefore necessary to think in the long term when setting energy policies. In the long term, there are three major challenges:

Long-term energy policy challenges:

Security of supply. Rapidly rising energy consumption around the world puts greater pressure on global resources. An ever greater percentage of oil in particular will be supplied by politically unstable regions. In the future, the Danish economy must maintain a high level of robustness vis-à-vis high and unstable energy prices.
Global climate change. Implementation of the Kyoto Protocol and future fulfilment of the Climate Convention's goal to limit anthropogenic climate change to a non-dangerous level assume major global reductions in greenhouse-gas emissions, particularly the emission of
CO₂ as a result of energy consumption and supply;
Growth and economic development. Globalisation leads to increased international competition and new commercial opportunities. Danish enterprises must have competitive framework conditions, including efficient energy use and access to well-functioning energy markets. In addition, Danish research into, and knowledge of, energy technologies must be transformed into exports and jobs.

The Government will meet these challenges with a coherent strategy which ensures a balance between security of supply, respect for the environment and economic growth. The strategy exploits the opportunities for these three factors to be coactive. It is essential to the Government that the means used be cost effective and appropriate to well-functioning markets in which competition can thrive to the benefit of consumers.

The energy strategy should be seen in the light of the Government's overall strategy to make Denmark a leading growth-, knowledge- and entrepreneur society and to make Denmark the world's most competitive society by 2015.

Most of today's global energy requirements are met by oil, coal and natural gas. The world's deposits of these resources are sufficient to cover growing demand until at least 2025. Over time, most of the global production of oil and natural gas in particular will, however, be concentrated in fewer and fewer regions. This is especially true of oil, the largest reserves of which are found in areas which are today politically unstable.

In order to meet the growing demand for oil and natural gas, major investments must be made in exploration and in production- and transport capacity. There is the risk that it may prove impossible to attract the investments necessary in order to further develop oil production in these regions. This in turn may very well lead to rising and unstable oil prices and therefore, to a certain degree, to similar conditions for natural gas and other energy sources.

Compared to other Western economies, the Danish economy is well protected against high and unstable energy prices. Energy is used in Denmark more efficiently than in most other countries. A wide range of energy sources is exploited, which reduces vulnerability to a tense supply situation (with respect to oil, for example). Increased energy expenses correspond, to a certain extent, to increased income for the State and for the private sector from the production of oil and natural gas in the Danish part of the North Sea.

The current high degree of robustness of the Danish economy must be ensured, including when North Sea production begins to fall. The long-term strategy to counteract unstable energy prices will involve continuing to make energy consumption more efficient and developing and using new, more effective technologies, including technologies based on renewable energy.

On 10 June 2005, the Government entered into a broad political agreement on intensifying energy-saving efforts. This ambitious agreement sets the framework for energy-saving initiatives as well as the main elements of those initiatives for the next several years. The parties are in agreement on the target: that overall energy consumption (exclusive of transport) must be reduced. Greater efforts will be made to achieve documentable energy savings corresponding to an annual average of 7.5 PJ during the 2006-2013 period. The additional savings will to a large extent be achieved by means of greater savings delivered by network and distribution companies in the electricity, natural-gas, district-heating and oil sectors.

The transport sector is a particular challenge. In the past, its energy consumption has risen uninterruptedly and is almost exclusively based on oil. It is the Government's intention to focus more attention on this situation. The costs involved in reducing the transport sector's energy consumption with national means are generally high, which must be seen in light of the already high level of taxation applied to the sector. The Government considers it to be essential that initiatives to limit energy consumption for transport are cost-effective. Many initiatives will propose common European Union efforts.

Technology offers many ways in which vehicle energy efficiency can be improved. Within the European Union, the Government will therefore work to promote initiatives which can lead technological developments in a more environmentally friendly and energy efficient direction and which can increase the production and marketing of such technologies. Efforts should be made, for example, to continue to develop and further strengthen the European Union's agreement with the automobile industry on the reduction of CO₂ emissions from passenger vehicles. On the national level, the Government will focus on the synergy between transport and energy by giving greater support to research and development in these sectors.

In addition, the Government will set up a committee to investigate long-term, proceeds-neutral and environmentally positive conversion of overall vehicle taxation.

With respect to establishing the basis for more ambitious, long-term efforts to limit and reduce oil dependency in the transport sector, the Government will set up a committee to establish an overview of the perspectives and potentials for developing and using competitive alternatives to gasoline and diesel. Such alternatives include biofuels, natural gas and, further down the road, hydrogen.

Renewable energy is increasingly used to produce electricity and district heating. In 2003, more than 25% of the electricity and district heating consumed was produced on the basis of renewable energy¹ and nearly 24% for electricity supply alone. On the basis of various scenarios, the Danish Energy Authority (DEA) has prepared projections to 2025 on the production of electricity and district heating. According to the basic projection²,which predicts moderate rises in oil prices and in CO₂ allowance prices, the contribution of renewables to electricity supply will amount to more than 36% in 2025 (see Figure 1). Wind energy will account for a major part of this increase.

The assumptions to 2025 regarding oil prices and CO₂ allowance prices are very uncertain.It is therefore important to point out that increased use of renewable energy will naturally adapt to actual economic framework conditions. If the price of oil remains high and if ambitious international climate objectives result in higher CO₂ allowance prices, both wind energy and biomass will become so advantageous that the amount of renewable energy produced could very well increase significantly. With high oil- and CO₂ prices, such a development could be achieved with reduced production subsidies or perhaps without any production subsidies at all for new installations.

It is the government's intention to use the market as a basis for continued increased use of renewable energy. An increased use of renewable energy in step with market needs for new capacity will be far more cost-effective than politically forced increased use of renewable energy. The framework for the market must be established so that renewable energy is promoted in ways that are of benefit to society. As operational experience is gained, consideration must also be given to the need for continuity in technological developments.

Note: The basic projection was prepared before the new agreement on energy saving was entered into. Therefore, both this figure and the following figures do not take the effects of the new energy-saving initiatives into consideration.

Today, renewable energy is promoted by means of direct production-subsidies and exemptions from energy taxes as well as indirectly by means of CO₂ taxes and CO₂ allowances on other forms of energy. In addition, increased use of wind energy is supported by means of necessary strengthening and development of the electricity grid. In the future, greater flexibility in electricity consumption, including more flexible use of electricity for heating, could facilitate an increase in the amount of renewable energy in the energy system.

It is the Government's intention that new wind-energy capacity, both onshore and offshore, continue to be established on an economically healthy basis. With the extension of systems already in place and with respect for impact on the landscape, onshore expansion can be done in step with the decommissioning of older wind turbines. Physical planning and the official approval involved will be fully clarified on an on-going basis. In this context, the basis for assessing possibilities for the physical location of new offshore wind farms and the various considerations relative to nature, the environment and the landscape, as well as the related challenges, will all be updated. Today, biomass-based installations use primarily domestic resources. With more widespread use, it may become necessary to import a greater percentage of the biomass required. The development of international biomass markets will contribute to improving the competitiveness of these fuels and their contribution to security of supply.

Initiatives for energy saving and renewable energy

The Government will:

Ensure intensified energy-saving efforts

On 10 June 2005, the Government entered into a broad political agreement on decisive strengthening of energy-saving efforts. The parties are in agreement on the target: that overall energy consumption (exclusive of transport) must be reduced.
Greater efforts will be made to achieve concrete, verifiable energy savings corresponding to an annual average of 7.5 PJ during the 2006-2013 period. In 2008, the efforts made and the results achieved will be assessed.
The additional energy savings will to a large extent be achieved by means of greater savings delivered by network and distribution companies in the electricity-, natural-gas, district-heating and oil sectors.
The agreement of 10 June 2005 also includes many other new initiatives to strengthen energy-saving efforts pursuant to the Government's draft energy-saving plan of December 2004.

Increased focus on the transport sector's energy consumption and oil dependency

Development of more effective technologies and alternative fuels
Analysis of the perspectives for the development and use of alternative fuels, including natural gas, biofuels and hydrogen, in the transport sector.
Within the framework of the Act on Sector Research, the Government will seek to expand the Danish Transport Research Institute so that it will also focus on energy-related challenges; it will then become the Danish Transport and Energy Research Institute.
Ambitious efforts at the European Union level for long-term improvement in the energy efficiency of the transport sector by means of the development and marketing of more energy-effective vehicles.
Study of the possibilities to undertake a proceeds-neutral, environmental beneficial conversion of overall vehicle taxation over several years.

Ensure increased use of renewable energy by means of continued effective framework conditions

Expansion of the electricity infrastructure to support increased use of renewable energy.
Continued good economic conditions for a market-oriented expansion with renewable energy.
Prioritising of renewable energy and energy efficiency in connection with public research-, development- and demonstration programs and by working for corresponding prioritising within the European Union.

Updating of the basis for assessing possibilities for the location of future offshore wind farms.

At present, the use of biomass to produce electricity is a relatively expensive solution in socio-economic terms but, with higher prices for CO₂ and fossil fuels, biomass-based electricity and heat production may very well become an economically viable choice. Today, a significant amount of biomass is used at power plants as a result of the biomass agreement and related subsidies. This contributes to maintaining the experiential basis for increased use of biomass in the future. The European Commission is working on an overall biomass action-plan. In general, the use of biomass within the European Union is expected to rise in coming years.

In Denmark, it has proven to be possible to build and operate large biogas installations which are socio-economically viable as long as a certain amount of organic waste is added. It is therefore expected that the use of biogas will rise.

The energy sector's major environmental challenge is global climate-change caused by the emission of CO₂ and other so-called greenhouse gases. Most of the world's CO₂ emission is

attributable to the use of coal, oil and natural gas for electricity, heat and transport. The same applies in Denmark. According to the International Energy Agency (IEA³), if no political action is taken before 2030, global CO₂ emissions will by then have increased by 60% relative to today's level.

It is the European Union's objective to limit anthropogenic climate change to a non-dangerous level, defined as global temperature increases of less than 2°C. In March 2005, the European Council agreed on an approach to international climate negotiations. It stressed the importance of joint global efforts against climate change. It is proposed that reductions amounting to 15-30% of total greenhouse-gas emissions in industrial countries up to 2020 and beyond should be considered in the spirit of the conclusions arrived at during the previous Council meeting of Ministers of the Environment. The European Council also intends to develop a European Union strategy for limiting climate change.

The Government will encourage the European Union to actively seek an ambitious agreement on reduction of greenhouse gases in good time, before the first phase of the Kyoto Agreement expires in 2012. It is the Government's hope that clarification of future climate obligations will ensure a more stable framework for investments in the energy sector.

By implementing the EU Emissions Trading System, the Government has ensured the decisive instrument that will enable Denmark to fulfil its Kyoto obligations for 2008 to 2012. The EU Emissions Trading System guarantees that enterprises covered by the system live up to their obligations and that they have the opportunity to do so in the most efficient and flexible way possible. The Danish energy sector has already been given major joint responsibility for Danish CO₂ obligations.And this will remain the case in the future. The framework for the future allowance system must, however, be set so that the conditions for investing in new energy installations in Denmark are not significantly different from such conditions in other European countries.

Energy saving and the use of renewable energy will be promoted as a result of the allowance system. At the same time, continued development of energy-efficient and CO₂-neutral technologies will, in the long term, support fulfilment of Denmark's future climate commitments.

The extent of future challenges both globally and in Denmark indicates that the development of new, efficient energy technologies will become the driving force in long-term climate initiatives. Furthermore, technological development within the energy sector could make a concrete contribution to fulfilment of the Government's overall objective of making Denmark a leading growth- and knowledge society.

National and regional environmental considerations create challenges to energy supply. Although the emission of sulphur dioxide has gradually been brought down to a low level, achieving Denmark's international NOx goal remains a serious challenge.Also, more local environmental impacts due to energy supply could constitute a major issue.

Initiatives against global climate change

The Government will:

Nationally

Ensure that emission of greenhouse gases in Denmark is regulated in a cost-effective way and in cross-sector balance. The Government will work towards future expansion of the
CO₂ allowance system so that it includes other sectors, including transport.
Support the development of new and effective energy technologies which can contribute to fulfilling future climate obligations at the lowest possible cost.
Continue to take local and regional environmental factors into consideration when establishing energy-policy priorities.

Internationally

Encourage the European Union to actively seek an ambitious agreement on reduction of greenhouse gases in good time, before the first phase of the Kyoto Agreement expires in 2012.
Work actively during international climate negotiations in order to achieve a long-term, tenable framework for international climate policy which contribute to positive environmental impact and, at the same time, ensure stable, predictable investment conditions for industry.

The government will make Denmark a leading growth-, knowledge- and entrepreneur society. The energy sector can contribute to reaching this objective by means of:

In order for energy supply to be efficient, the course set by the Government with market liberalisation and market-oriented instruments must be maintained and taken further. Denmark is closely connected to markets in Scandinavia, in the rest of Europe and around the world. Healthy development of these markets towards full integration, openness and competition must be ensured for the long term. Integration of the electricity- and natural-gas markets requires a well-developed infrastructure which physically connects regional markets. By means of expansion of the electricity infrastructure, the Government will also ensure both security of supply and an effective framework for the introduction of more renewable energy.

An electricity connection under the Great Belt will improve the functioning of the overall Danish electricity system, improve security of supply and promote stronger competition to the benefit of consumers. It will also have a significant socio-economic value if it can prevent even 1 hour's power outage every 10 years. According to assessments, the setting up of a link under the Great Belt in 2010 will result in a socio-economic surplus of more than DKK 400 million during the connection’s lifetime.

A key element in evaluating the connection is the need to improve the functioning of the Danish electricity market and to strengthen competition. It is estimated that the connection will foster competition to the extent that there will be an average drop in the market price of electricity by between 3% and 6%. The precise extent of this effect is, however, highly uncertain.

Development of the Danish gas market is influenced by the fact that Denmark is located physically on the edge of the European gas market and that its market is of minor importance on the European scale. The effects of these factors on competition must be counteracted with effective market conditions and greater integration with surrounding markets. Today, the Danish gas infrastructure sufficiently supports consumption and production. In the longer term, the need may arise both in Denmark and throughout Europe to access new sources of gas. The

Government will therefore carry out an analysis of the long-term need to develop the gas infrastructure.

Effective, competitive international markets require a uniform set of rules which ensure equal and fair cross-border competition. It will be in the Danish interest to ensure unified development of national gas markets within Europe. The Government will support new, ambitious initiatives within the European Union in order to improve market functioning.

Economic growth also depends on the continued security of supply of electricity and natural gas being maintained at a high level in the liberalised markets. Security of supply can be reinforced with an effective infrastructure but the Government will also prioritise a clear, stable framework for the commercial decisions regarding establishment of new production capacity. The need to expand the infrastructure will depend on concrete market developments, including the use of gas in the electricity sector.

A new, large, Danish-based electricity and natural-gas company will be a player on the Northern European market and will contribute to stronger competition in relationship to large European companies. A large Danish-based energy company will also make a major contribution to maintaining and developing knowledge environments, competencies and development within the new energy technologies in close co-operation with industry, research institutions and public research- and development programs.

Energy- and CO₂ taxes are complicated and have been established according to conditions which are expected to change in the future. The Government intends to modernise and simplify the Danish energy- and CO₂ tax system in light of the fact that CO₂ allowances were introduced at EU level as of 1 January 2005. The Government will therefore propose that future energy- and CO₂ taxes be changed. The Government has set up a committee which is studying the question. It may be necessary to amend certain rules before the taxes are revised, depending on specific conditions. Various organisations, etc., in the energy sector have proposed that taxes on district heating be revised.

The taxes on heat from co-production of electricity and heat are lower than the taxes on separately produced district heating and much lower than the taxes on heat produced with electricity. In a number of situations, this results in socio-economically and environmentally inappropriate overproduction of electricity. With low market prices for electricity, electricity is produced at power plants in spite of the fact that the electricity price is lower than the costs involved since this loss is often more than offset by the taxes saved.

Similarly, tax regulations, etc., discourage the use of electricity to produce district heating. This means that tax regulations can constitute an obstacle to socio-economically advantageous possibilities being taken into consideration for the production of district heating with electricity. With low market prices for electricity, the socio-economic costs of electrically produced heat, inclusive of environmental costs, are lower than the costs incurred with the use of other energy sources.

The Government will study the possibilities for revising the taxes on district heating. The objective will be to ensure that these taxes do not unnecessarily result in electricity production when the costs involved are higher than electricity prices and that these taxes do not discourage use of electricity in district-heating systems when the socio-economic costs, including environmental costs, involved are lower than the costs associated with other energy sources. In addition to the fact that any changes must be proceeds neutral, the Government considers it to be important that the effects on distribution of wealth be acceptable and that the regulations be simplified.

For many years now, valuable experience has been gained in the energy sector through the marketing of new knowledge and ideas. And this has led to the creation of new jobs. It is very likely that Danish energy-technology competencies will attractive in the globalised market. This applies not only to existing areas of strength, such as wind energy, but also to other technologies, such as fuel cells, biofuels and entire energy systems in which new technologies are interconnected. This implies potentially significant economic perspectives for Denmark given that, in the coming decades, it is expected that there will be substantial growth in the international demand for new, environmentally-friendly energy technologies and solutions.

In general, it is the Government's intention to further promote the development of green technology in Denmark so that Danish positions of strength (in the energy domain, for example) can be extended and transformed into exports and jobs.

For the 2005-2008 period, the Government has allocated an additional DKK 280 million for strategic research into energy and the environment. This research is to be co-ordinated by the Danish Strategic Research Council. The Government has also decided to establish a High Technology Foundation, the purpose of which will be to carry out advanced technological research and innovation. The Foundation's assets will be used in selected areas, nanotechnology, biotechnology and information- and communication technology in particular. Special attention will be paid to promising areas of particular interest commercially and in which Denmark has unique qualifications and possibilities. This may include support for the development of advanced technological solutions in the energy field.

Overall technological development within the areas on which the High Technology Foundation will concentrate may naturally play an important role in connection with the development of new energy technologies, both in the development of individual technologies and of technologies for the management of interconnected energy systems. For example, the development of fuel cells and biofuels requires particular attention so that the technologies can be brought up to a commercial level.

Furthermore, the Government will prepare an ambitious, co-ordinated multi-year strategy aimed at making Denmark a leading growth-, knowledge- and entrepreneur society. In the years leading up to 2010, the government will allocate DKK 10 billion to further education, research, innovation and entrepreneurship. It is expected that the strategy will be presented in Spring 2006 and that it will constitute the basis for prioritising the new means.

Initiatives for well-functioning energy markets

The Government will:

Ensure a well-functioning electricity market by

Carrying out a socio-economically viable expansion of the overall electricity infrastructure. Energinet.dk will introduce a project for an electricity connection between Eastern and Western Denmark under the Great Belt. In addition, efforts will be made to strengthen the electricity connections to Norway and Germany.
Setting both clear requirements and the framework for necessary security of supply in the local electricity grid (this as part of a dialogue with network companies).
Establishing an action program for more flexible electricity consumption.
Investigating the possibilities for removing tax-related obstacles to socio-economically and environmentally viable use of electricity in the district-heating systems; ensuring that taxes do not unnecessarily results in electricity production at times when the related costs are higher than electricity prices.

Promote a more effective gas market by

Working on the European level to further integrate the Danish gas market with other European gas markets by establishing unified and transparent framework conditions.
Ensuring a socio-economically viable expansion of the gas infrastructure in step with long-term development of Danish gas consumption and production.

Ensure consumers the lowest possible heat prices by

Continuing to increase the efficiency of the supply of district-heating, focusing on supply companies’ costs and appropriate inclusion of new technologies in heat supply generally.

Initiatives for technological development

The Government will

Promote development of new technologies and the use of industrial potentials by

Increasing research efforts in general and strengthening co-operation between public and private initiatives.
Intensifying development and demonstration of new, energy-efficient technologies and renewable energy.
Co-ordinating efforts across the various public research and development programs.
Focusing efforts in the energy field towards the realisation of particular Danish industrial potentials and energy-policy priorities.

The government will closely monitor developments in the production and consumption of energy in order to ensure security of supply, respect for the environment, well-functioning markets and cost effectiveness. By 2010, the Government will prepare an overall stocktaking of its energy strategy on the basis of actual developments in energy prices, international CO₂ allowance prices and technologies and markets.

This page forms part of the publication 'Energy Strategy 2025' as chapter 1 of 4

This digital publication was made in compliance with government rules for publishing on the internet.
© Danish Energy Authority 2005

1. The Government's energy strategy in brief