Assessing Denmark’s Electricity Market
By Saiyam Shah
Executive Summary
Denmark's electricity market is characterized by a high share of renewable energy, particularly wind power, and a strong focus on climate protection. The country has set ambitious targets for renewable energy deployment and carbon neutrality, and has implemented policies to support these goals. The use of renewable energy must gradually replace fossil fuels in order to reduce emissions in the future. However, wind turbines historically provides highly variable output electricity, presenting an economic difficulty for Denmark's current energy infrastructure. This raises the question: As a global leader in renewables, how can Denmark continue to integrate wind power into its total energy supply while maintaining reliability? To improve electric reliability, lower costs, and reduce carbon emissions, Denmark should focus on expanding wind energy while investing in grid modernization, increasing energy storage, and promoting collaboration with neighboring countries.
Country Overview
Denmark has a land area of 42,933 square kilometers and a population of approximately 5.8 million people. Its location on the North Sea and the Baltic Sea makes it particularly windy, which makes it ideal for wind energy production. Furthermore, the country's flat terrain and relatively small size make constructing and maintaining wind turbines easier. Denmark's extensive coastline provides ample space for offshore wind farms, which generate a significant portion of the country's wind energy. Denmark has a long history of investing in wind energy, with the first wind turbine installed in 1891. Since then, the country has continued to develop its wind energy infrastructure, and in 2019, wind power accounted for 47% of Denmark's electricity consumption. In recent years, Denmark has made significant investments in offshore wind energy. The country's largest offshore wind farm, Horns Rev 3, has a capacity of 407 MW and consists of 49 wind turbines. Denmark is also working on several other large-scale offshore wind projects, including the Thor Offshore Wind Farm, which will have a capacity of 800 MW when completed. In addition to offshore wind energy, Denmark also generates significant amounts of onshore wind energy. The country's extensive network of wind turbines is spread throughout the country, with many located in rural areas. Denmark's experience with wind energy has also provided valuable lessons for other countries looking to transition to renewable energy.
In terms of economic growth, Denmark has a mixed-market economy that is highly developed and characterized by high-income levels, low unemployment rates, and a strong social welfare system. The country is heavily reliant on foreign trade and is known for its competitive exports, particularly in the areas of pharmaceuticals, renewable energy technology, and machinery. The energy sector is a key component of Denmark's economy, and the country has made significant investments in wind energy production. The wind energy sector is a major contributor to Denmark's economy, with many Danish companies involved in designing, manufacturing, and maintaining wind turbines. The country's commitment to wind energy has helped to create a thriving industry that provides jobs and generates economic growth.
Key Issues
Demand
Denmark’s demand response for energy load is mostly regulated by its primary transmission system operator (TSO), Energinet. One of the leading programs within Energinet is "FlexPower," a demand response system that allows industrial and commercial electricity users to reduce their electricity consumption during periods of high demand in exchange for financial compensation. The FlexPower program works by sending signals to participating consumers when there is a need to reduce demand on the grid. Consumers can then adjust their electricity usage by turning off or reducing the operation of non-essential equipment or machinery. Energinet compensates participating consumers based on the amount of electricity they can save during these periods of high demand. This incentivizes consumers to adjust their usage patterns to align with periods of low demand and low prices.
Figure 1: Electricity generation by source for Denmark between 1990 to 2021. Source: IEA
Supply and Emissions
Denmark has a high share of renewable energy in its electricity mix, particularly wind power. As seen in Figure 1, wind energy generated close to 17,00 GWh in 2020. Denmark has set ambitious targets for renewable energy deployment and has implemented policies to support this goal. The country has a target of 100% renewable energy in its electricity supply by 2030 and aims to achieve carbon neutrality by 2050. Denmark's electricity sector has relatively low greenhouse gas emissions compared to other countries, due to the high share of renewable energy in the electricity mix. However, the country still relies on some fossil fuels for electricity generation, particularly coal, contributing to emissions. To reduce emissions further, Denmark is phasing out coal-fired power plants by 2030 and is investing in new renewable energy projects, particularly offshore wind.
Figure 2: Denmark’s energy imports and exports based on neighboring regions. Source: Energinet
As seen in Figure 2, Denmark balances total demand and supply through trade with neighbors. Energy imports largely consist of oil and gas from surrounding nations. According to the Danish Energy Agency, in 2020, 33% of Denmark's primary energy consumption came from petroleum, and 15% came from natural gas. Most of the oil and gas that Denmark imports comes from Norway, the UK, Russia, and the Middle East. However, despite its reliance on energy imports, Denmark is a net exporter of energy, particularly wind energy. Denmark has been a leader in wind energy technology for many years and has invested heavily in wind turbines both onshore and offshore. Denmark's wind energy exports are primarily driven by its participation in the Nordic power market, a regional electricity market that includes Denmark, Norway, Sweden, Finland, and the Baltic states. Denmark exports wind energy to other countries through interconnectors, particularly during high wind energy production periods. For example, the Kriegers Flak interconnector, which was completed in 2018, connects the UK, Russia, and Denmark to export wind energy to Germany during periods of high production.
Wholesale Electricity Prices
Since the country’s wholesale market is heavily influenced by its large wind capacity, specific fluctuations in wind speeds could temporarily cause changes in the electricity prices. According to Nord Pool power exchange data, Denmark's average wholesale electricity price in 2020 was 27.13 EUR/MWh (or approximately 32.78 USD/MWh). This was lower than the average price in many other European countries, such as Germany (41.58 EUR/MWh) and the United Kingdom (43.07 EUR/MWh). The abundance of wind energy has helped to keep electricity prices low in Denmark, as wind energy is a low-cost source of electricity compared to many other forms of energy. However, the variability of wind speeds can also lead to significant fluctuations in electricity prices. When wind speeds are high, Denmark's wind turbines generate a surplus of electricity, causing electricity prices to drop. Conversely, when wind speeds are low, electricity prices can spike due to an electricity shortage. This variability can make it difficult for energy suppliers to predict and manage their costs, and can lead to volatility in the wholesale electricity market.
Climate Protection Policies and Impact
Denmark has implemented several policies to promote renewable energy deployment and reduce greenhouse gas emissions. The country has set a target of 100% renewable energy in its electricity supply by 2030 and aims to achieve carbon neutrality by 2050. Denmark has implemented a carbon tax and a feed-in tariff system to support renewable energy deployment. The country also strongly focuses on energy efficiency, with policies in place to promote energy-efficient buildings and appliances. The impact of these policies has been significant, with Denmark achieving a high share of renewable energy in its electricity mix and relatively low greenhouse gas emissions. Denmark's energy transition has been supported by its strong research and development sector. The country has invested in research and development in areas such as renewable energy, smart grids, and energy storage. The country has been vocal in calling for ambitious targets for reducing greenhouse gas emissions, and it has played a crucial role in developing international agreements such as the Paris Agreement. The country's renewable energy targets are ambitious, but achievable with continued investment and policy support.
Recommendations
Wind power as an intermittent source can pose a problem for grid operators and energy experts, even in Denmark where strong winds are prevalent. Denmark is on a path right now to significantly increase energy production in the offshore wind sector through new and large wind projects, especially with the help of government support and public approval. In order to keep increasing wind and other renewables while maintaining electric reliability, Denmark should focus on investing in grid modernization, increasing energy storage, and promoting collaboration with neighboring countries
Grid modernization
Denmark has a well-developed electricity grid, but there is still room for improvement. Upgrading and expanding the grid infrastructure could improve the reliability of wind energy supply by allowing electricity to be transmitted more efficiently from wind farms to consumers. Denmark could also consider implementing smart grid technologies, which use digital communication and automation to optimize electricity supply and demand. Smart grids could help to manage the variability of wind energy production more effectively, which would help to improve reliability and reduce costs.
Energy Storage
One of the main challenges with wind energy is its variability, which can lead to fluctuations in the electricity supply. Energy storage technologies such as batteries and pumped hydro storage can help balance the variability of wind energy production by storing excess energy when it is available and releasing it when needed. Denmark has already invested in energy storage technologies, but there is room for expansion in these areas. By investing in energy storage, Denmark could improve the reliability of its wind energy supply and reduce the need for backup power from conventional power plants.
Increased collaboration with neighboring countries
Denmark is part of the Nordic power market, which includes Sweden, Norway, Finland, and Iceland. Increased cooperation with these countries could improve the reliability of Denmark's wind energy supply. For example, Denmark could collaborate with Norway to use its hydropower resources to balance the variability of wind energy production. Denmark could also consider building interconnectors with neighboring countries, which would allow electricity to be traded across borders. By increasing collaboration with neighboring countries, Denmark could improve the reliability of its wind energy supply and reduce costs.
Conclusion
Denmark's electricity market is characterized by a high share of wind energy and a strong focus on sustainability. The country has set ambitious targets for renewable energy deployment and carbon neutrality, and has implemented policies to support these goals. To improve electric reliability, lower costs, and reduce carbon emissions, Denmark should invest in grid modernization, promote energy efficiency, and further expand its renewable energy capacity. With continued investment and policy support, Denmark can continue leading the way in transitioning to a low-carbon economy.
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