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How Denmark turned an efficiency obligation into opportunity

Power lines in Copenhagen, Denmark. (Photo by David Dai via Creative Commons)

Power lines in Copenhagen, Denmark. (Photo by David Dai via Creative Commons)

Editor’s note: Dan Haugen is traveling in Scandinavia this month as part of the Heinrich Böll Foundation’s Climate Media Fellowship program.

COPENHAGEN—In the U.S., there’s rising anxiety and speculation about how flat or falling electricity demand could affect utilities’ long-term business models.

Here in Denmark, though, electric companies have long operated in a slow- or no-growth market, and they continue to invest in further lowering customers’ energy use.

The Danish efficiency scheme has become the model for a new European Union efficiency law currently being implemented, and it could offer ideas and inspiration for U.S. policymakers, too, as they attempt to design incentives that can convince electric utilities to take a lead role in helping customers use less of the very product they sell.

Denmark has steadily invested in energy conservation ever since the 1970s energy crisis, when an Arab oil embargo caused fuel shortages and skyrocketing prices. As President Reagan was pulling solar panels off the White House roof, Denmark continued to spend money improving its building and power plant efficiency.

The country’s conservation commitment recently increased with a 2012 agreement that’s expected to cut energy use 12 percent by 2020 compared to 2006.

The pact has also generated demand for energy efficiency services, prompting several utilities to launch new businesses to capitalize on the opportunity.

“A lot of the companies now as see this as a potential to increase their market in advising on energy savings,” says Tina Sommer Kristensen, administrator for Denmark’s Department of Buildings and Energy Efficiency.

A collaborative process

Like much of Denmark’s regulation, the efficiency policy is the result of a consensus negotiation process, in this case between the Danish Climate, Energy and Buildings Ministry and the trade associations for approximately 450 energy distribution companies, including oil, electricity, natural gas and district heating.

The agreement is an update of a pact originally signed in 2006 and updated again in 2009. It sets a total, nationwide annual savings goal of nearly 3,000 gigawatt hours for 2013 and 2014, and a target of nearly 3,400 gigawatt hours for 2015 — a 75 percent increase compared to the previous three-year agreement.

Each sector — oil, electricity, natural gas and district heating — is assigned a specific share, roughly proportional to their market share. It’s up to the trade associations for each sector to then delegate responsibility for those obligations to its member companies, typically also based roughly on market share.

Companies can claim credit for energy savings that they themselves helped realized, either by providing technical advice or financial support. The utility’s involvement needs to be documented before an energy savings project begins. They may also partner with energy savings companies and others to help find opportunities.

The Ministry is indifferent about whether an individual company fails to hit its target for the year, so long as the sector as a whole meets its energy savings obligation. Utilities are allowed to buy, sell or share savings certificates with each other when one company exceeds their own requirements for the year.

Since 2007, companies covered under the agreements have surpassed the nationwide energy savings goals in every year.

Utilities embrace the changes

Sommer Kristensen said in the beginning there was some reluctance among some energy companies, but most have since come around to embrace the scheme, for several reasons.

One, the arrangement is cost-neutral for the utilities. Whatever a company spends to meet their obligation, they can pass along the full cost to customers in the form of a tariff on the following year’s energy bills.

Secondly, the system is highly flexible. The Ministry doesn’t care how sectors meet the targets, just that they do. There are no requirements to achieve a certain amount of savings from residential or low-income customers, for example. There’s even no requirement to achieve savings from your own customers or own sector.

Kamilla Thingvad, senior consultant for the Danish Energy Association, said that flexibility has driven companies to find the best, most cost-effective savings, no matter where they exist.

“It also takes away this [idea] that you have to reduce what you’re selling,” says Thingvad, whose organization represents the country’s electric companies.

A regional electric distributor, for example, could meet its obligation by helping to change out inefficient light bulbs in another part of the country. Or it could meet the obligation by helping their own customers insulate their homes and businesses, lowering their heating bills instead of their electricity consumption.

In practice, though, most companies have focused on finding savings in their own territory and sector, because that is where their expertise lies, Sommer Kristensen says.

Another factor that’s helped reduce some of the potential tension between energy conservation and electricity sales is the structure of Denmark’s utility industry. Electric distribution companies operate separately from generation companies. Customers also have their choice of retail companies, which buy power from producers and pay distributors to get it to customers.

This “liberalized” or deregulated structure means the distribution companies covered under the agreement aren’t directly affected by falling demand for generation. Most distribution companies are either municipally or customer-owned and considered common good companies rather than profit-driven.

New business opportunities

In addition, most distribution companies have formed sister companies that focus on providing energy savings services, which directly benefit from the conservation targets.

An electricity distributor will typically partner with energy savings companies as well as builders, installers and others to identify projects for the utility to participate in.

In 2006, the first year of the original agreement, all of the savings were achieved through contracts with distributors’ own “sister companies” that provide energy savings services. The money spent by distribution companies on efficiency was fully reimbursed by customers and went to pay energy services companies that were often affiliated with the distributor.

The agreements include rules to encourage competition, however, and so as more companies and consultants have entered the field, the share of energy savings work going to distributors’ own sister companies had fallen to around a third of the total spending in 2012.

“There’s been quite a change in how savings are made,” says Thingvad.

As the competition to provide retail services increases, companies are also beginning to package energy efficiency in retail service pitches to prospective customers. A company might approach a large electricity customer and offer rebates or other financing for equipment upgrades if the customer switches to their retail service.

Companies are expected to meet the targets for the lowest possible cost. Utilities annually report their spending to the Ministry, which makes the data public so that customers can compare their utility with others. “That’s a pretty strong driver to keep the costs low,” Thingvad says.

While electric companies have embraced the new system, there’s been less enthusiasm from the district heating sector, Sommer Kristensen says. These heating companies tend to be very small and local in scope. They’ve seen less incentive to pursue efficiency projects beyond their territory because they can’t bundle them with other services.

In general, though, both the government and energy companies view the agreement as a success. Thingvad says companies don’t see efficiency as a conflict.

“It’s part of their identity,” Thingvad said. “The distributors see it as a way to fulfill an obligation to society, and also part of the green transition of the energy system. You have to put in more renewables, but you also have to reduce consumption to make ends meet.”

Comments (1)

The author of this post hides his head in the sand to avoid several of the 900-lb. gorillas in the room. As do most ‘green’ bloviating cheerleaders, Gaugen fails to distinguish between energy conservation vs. energy efficiency. Conservation measures like turning off the light or lowering the thermostat are prudent and can be effected without market-distorting mechanisms. Efficiency, by contrast, requires some offsetting investment, the justification of which is predicated solely upon the economics of the proposal at hand.

Because Denmark suffers under electricity rates that are close to 4 times the amount borne by ratepayers in the U.S., the economic return on energy efficiency investments is vastly different than in the U.S. When you spend 100 euros to save a bunch of kilowatt-hours, you reap 4 times as much benefit in Denmark as you would in the U.S.

But does that mean the money is well-spent? Is that what we really want to do? Do we really want to impair our economies by driving up the cost of power so that power savings proposals appear economically warranted by comparison? Let’s have a show of hands: how many want to quadruple your electricity bills next year?

Gaugen should have consulted the recent financial performance of European electric utility companies to understand how well the Danish and German programs are working. Investors in once financially-stable E.On have lost 70% of their investment since 2008. Likewise, RWE has surrendered 72% of its capitalization value during the same period. EnBW has lost nearly 60% of its shareholder value. ‘Green’ bleating authors looking to boast about the wondrous economic opportunities being enjoyed by electric utility companies outside the U.S. should probably avoid discussing Europe’s situation to avoid the derisive laughter.

Joseph Toomey
Baltimore, MD

By Joseph Toomey on Oct 15, 2013