September 21, Green Job Creation

Transcription

1 Green Job Creation September 21, 2011 Introduction and summary According to the UN panel on climate change, if we are to fulfil the target of a maximum increase in the average global temperature of two degrees, countries like Denmark have to reduce their greenhouse gas emissions by 40 % in 2020 and % in The climate commission has presented its suggestion to a transition to a fossil free Denmark which lives up to these recommendations as far as the energy sector is concerned. As seen in figure 1, the commission points to wind energy and biomass as the central energy sources in the electricity sector. Figure 1. Long term transition of Denmark s energy supply Source: The Climate Commission

2 The transition to a fossil free energy supply implies a number of investments in the energy sector both in the short and in the medium run. If the Climate Commission s ambitions are to be fulfilled, it would require substantial investments in the energy sector already before In addition to this must be added investments in the non-quota sectors such as agriculture and transport. In an independent report, From 30 % to 40 %, CONCITO has developed a concrete scenario for how Denmark can reach this target in The present report analyses the expected job creation effects towards 2020 at this target level. Investments in a 40 % target in 2020 will thus not only contribute to the green transition of Denmark s energy supply, it will also contribute to curb the rising unemployment; a consequence of the accelerating global economic crisis, containing substantial employment potentials both in the short and in the long run. Short term job creation: Bringing forward investments In the short run, creating additional jobs in a situation with relatively high cyclical unemployment is the main economic challenge. Towards 2020, there will be a need for green investment in the area of DKK 100b towards extending renewable energy (RE), matching infrastructure and energy optimization in existing and new buildings, etc. A number of these investments could be brought forward and this way benefit employment both in the short and medium run, i.e. from one to five years. A five year horizon is chosen because ever more is pointing to that the current job crisis won t be over by the end of 2012, regardless of how much of an effort the politicians make to kickstart the economy in the coming year. Focus should therefore not just be on investments that can be brought forward within a one-year horizon but also on investments that can be brought forward within a five-year horizon. Here, climate related investments have great potential. Furthermore, investments in the energy sector have the additional advantage of not burdening the public finances as the investments are held by the energy companies. On the contrary, in the short run, the positive derived employment effect contributes to improving the government finances. Table 1 shows CONCITO s suggestions to a number of concrete green investments for the next decade, allowing Denmark to be at the forefront of the necessary long run transition of the energy supply, as suggested by the Climate Commission. The total costs of investments in the transition to RE and matching infrastructure are around DKK 100b in This is equivalent to a total employment effect of about persons over 8 years. This investment potential should be considered included in the short and medium run business cycle policies, partly because these investments have a relatively high employment value, partly due to the fact that these are private investments which don t burden the public finances. 2

3 Table 1. Total investment and employment Investments (DKK billions) Employment (persons) Offshore wind (600 MW) Coast windmills (800 MW) Land wind turbines (1000 MW) Biomass in CHP supply Smart Grid and electric car charging stations Transmission connections Kriegers Flak Holland UK Cable action plan Electrification of railways Energy optimization Green agricultural transition Total Long term job creation: Value In the long run, employment is the challenge; what will Denmark live off in the future especially considering that traditional industrial workplaces are moved to the Far East. Here, an essential part of the solution is to create qualitative jobs, i.e. jobs with a high value and thus not primarily competing on low salaries. The premise for sustainable job creation is therefore that Denmark primarily focuses on existing technologies and new knowledge intensive green technologies. 3

4 As seen in figure 2, the added value per employee in energy technology today is slightly lower than the added value for the industry as a whole. If Denmark is to seriously focus on green technologies, the ambition should be that the added value is higher for energy technology than for the industry as a whole. For this to succeed, it is crucial to increase focus on long term research and innovation. A substantial part of the current subsidy given to RE is given as short term maintenance subsidies to existing renewable energy technologies (RET). A larger focus on developing the RET s of tomorrow is needed. The current Danish subsidy of DKK 4.3b to promote new energy technologies is mainly in the form of maintenance subsidies. Thus, around 80 % goes to production such as reduction in energy taxes as well as direct subsidies of production of biomasse, biogas, windmills, etc. The rest is used for basic research (10 %), R & D (5 %) as well as demonstration and market maturing (8 %). Maintenance subsidies are still to some extend necessary when renewable energy is extended, however, for a number of reasons it is preferable to continuously try to adjust the subsidies and, at the same time, increase the amount of funding to research and development: Firstly, maintenance is primarily related to an extension of globally known technologies (i.e. land wind turbines), for which reason it doesn t as such provide Danish businesses with new competitive advantages in the increasingly important foreign market, unless the maintenance subsidy is combined with a larger effort to promote research and development in the same areas. 4

5 Secondly, RETs have a production cycle known from other industry products where, in time, the industrial production can be moved to countries with low salaries. Vesta s current decision about moving several thousand workplaces from Denmark to Asia is an example of this problem. Strategy A green employment strategy for both the short and the long run, incorporating the current business cycle crisis as well as long run Danish job creation considerations can thus advantagously be based on six main focus areas: Short term job creation: 1. Investments in renewable energy 2. Investments in energy infrastructure 3. Investments in energy optimization Long term job creation: 1. Good economic scope for energy research 2. EU as a driver 3. Home market as a driver The strategy is shown in table 2. The six focus areas listed in the table are elaborated below. Table 2. Energy political focus areas 1. Energy production 2. Infrastructure 3. Energy optimization Wind turbines Biomass Waste NOx cleansing Energy storage Smart Grid Transmission connections Cable action plan Electric car charging stations Electrification of railways 4. Energy research The economic scope of energy research The universities priority of energy research and commercialization Total energy research system 5. EU as a driver 30 % reduction in 2020 CO2 quota system ensuring uniform RE-support 6. Home market as a driver Existing core strenght New RETs Residential Industry Public sector Transport Agriculture 5

6 Focus area 1: Energy production In the decades to come, the green transition of the energy supply will first of all make wind energy and biomass the central energy sources in Denmark. The transition of the energy production to wind and biomass implies an increased focus on the development of these technologies. These investments are commercial investments and thus held by the energy companies and will not as such burden the public finances. Here, it is an example of one scenario; however, naturally, the same amount of MW can also be achieved with other combinations of land wind turbines, coast windmills and off shore windmills. Table 3. RE extension scenario Off shore wind 860 MW 1900 MW Coast windmills MW Land wind 2800 MW 3800 MW Biomass 50 PJ 100 PJ ANM: Off shore and land wind follow the climate commission scenario. Biomass is based on the prognosis of the Danish Energy Associtation. A. Establishing off shore windmill parcs Off shore windmills are different from land wind as they have the advantages of economics of scale. To obtain future success, it is crucial for off shore windmills to be industrialized, also with regards to establishing the parcs. This requires both the producers and the project developers to have an international pipeline of projects. In particular, off shore windmill parcs have a large technological development potential and Krigers Flak is one of the most promising projects. A new sea-based electric infrastructure between Denmark and Germany via Kriegers Flak is one of the projects allowing possible technolocical development for both the transmission net and the off shore windmills. The EU has already agreed to financially support the first part of the project. The project, Kriegers Flak in the Baltic Sea, contains large technological and organisational challenges. The project could be the first step on the road to the technological development of large off shore wire nets in the North Sea. This way, Krigers Flak can help create the necessary experience and technological development for a future electricity system, using large amounts of off shore wind. Additionally, Kriegers Flak will contribute to the flow of new off shore windmill projects in Northern Europe needed for the continuous industrialisation of this technology. Particularly, the challenge of the project is the coupling of several elements with wind turbines and transmission connections. The realization of a transnational project like Kriegers Flak requires the support of both countries. However, the Danish parc has not yet been agreed upon politically, whilst in Germany, building permits have already been issued. 6

7 The total investment project for Anholt and Kriegers Flak is around DKK 25b, distributed over 10 years, i.e. DKK 2.5b annually, equal to about full-time employees per year in the building and construction phase. From an employment point of view, it is appropriate to spread the investment evenly over 10 years. Both projects are a part of the government s Energy Strategy 2050; however, if brought forward, they could have a substantial employment effect. B. Coast windmills Coast windmills are a good opportunity for developing and demonstrating sea windmills, thus enabling the costs of these to be reduced. This way, the projects in the coastal areas will provide us with the opportunity of developing methods of integrating wind energy in the energy system and thereby creating green jobs. There are five concrete project proposals for Bornholm, Kalundborg, Copenhagen, Aarhus and Sonderborg. Two or three of these projects could profitably be carried out before At the moment, the RE law stops these projects being realised. The government s Energy Strategy suggests establishing 400 MW of off shore wind before In CONCITO s scenario, the ambition level is raised to 800 MW. C. Land wind turbines If half of the electricity production is to come from wind energy by 2020, we must make the most of the extension potential, as land wind is the cheapest form of renewable energy. The extension potentail, and thus the investment potential, is estimated by the cities to be around MW towards 2020, of which about 450 MW already is being planned. An extension of land wind of 100 MW per year towards 2020 is assumed. In the short run, there are two important barriers: 1. A quick decision on prolonging the subsidy of DKK 0.25 until to ensure the continuation of the current extension. 2. Focus on the cities planning, ensuring they all work actively to optimize their location possibilities. This suggestion is part of the opposition s climate proposal ClimateDenmark

8 D. Biomass The national objective of extending renewable energy and the desire to make Denmark less dependent on imported fossil fuels requires increasing use of biomass. From 2010 to 2020, a doubling of the use of biomass (straw and wood pellets) is expected. This requires investments in conversions of existing CHP stations of about DKK 5b annually. Besides straw and wood pellets as fuel for the CHP stations, there is also potential in using manure as biogas in the natural gas net as well as straw as fuel in the transport sector in the form of second generation bioethanol. The government s and the opposition s energy objectives are both based on a massive extension of the use of biomass towards Focus area 2: Infrastructure A. Smart Grid and electric car infrastructure Together with the energy companies, Energinet.dk has carried out an analysis of future investment needs in the electricity system which can ensure an intelligent incorporation of 50 % wind energy in the electricity production as well as an expected increase in electricity consumption especially to transport and heating. The analysis concludes that an extension of the electricity system based on Smart Grid technology in total will lead to a net social benefit of about DKK 1.6b compared to a traditional extension of the electricity system, i.e. by solely focusing on thick cables. The analysis shows an investment need in the national electricity net towards 2025 of around DKK 10b. In reality, a substantial part of these investments could be brought forward without increased social costs, as the time profile for the investments are based on the evaluation of when the necessary investments at the latest should be carried out to ensure a continuously high delivery security in the electricity system. It is estimated that half of the total investment could be brought forward to The other half could be completed between 2015 and

9 Figure 4. Illustration of Smart Grid elements Smart Grid investments in the electricity system includes investments in i.a. measuring and management technology in the net as well as with the consumers; new technological constructions ensuring system stability through an increased amount of wind power in the electricity system; new data and communication systems which can support rapid market activation of flexible consumption potentials such as heat pumps and electric cars. With regards to electric cars, it is necessary to invest in a new public charging station infrastructure. The net companies play a crucial role in facilitiating the construction of the public charging station infrastructure. However, the existing income frame regulation doesn t provide the appropriate incentives as infrastructure such as charging stations are not incorporated into the current definition of investments included in the income frame regulation. 9

10 As an alternative to a public finansing of the charging infrastructure and thus a burdening of the public finances, the definition of necessary new investments could be expanded, in this way allowing net companies to finance the electric car charging infrastructure. B. Transmission connections against high price markets in central Europe Exchanging electricity with our neighbouring countries is crucial if the main part of our total electricity production is to be covered by (fluctuating) wind energy. Special attention must be given to critical corridors in the European transmission net as indicated in the European infrastructure package. In their Energy Strategy 2050, Energinet.dk has identified a number of potential transmission connections between Denmark and abroad. Towards 2020, extensions of the following cable connections could be commenced: The Cobra Cable from Denmark to Holland must be established as soon as possible a part of the North Sea area. The size of the connection must be determined from a socioeconomic point of view. COBRA has been granted subsidy from the European Economic Recovery Plan. Ensuring rapid progress of establishing a multiletral off shore windmill parc at Krigers Flak with matching transmission net which can be used to develop a multilateral cooperation model, handling questions concerning establishing nets across borders, financing as well as electricity trading across countries and distributing RE shares with regards to the EU obligation. The net connection of windmills at Krigers Flak has been granted subsidy from the Europen Economic Recovery Plan. A sea cable from Denmark to the UK must be established as quickly as possible. This will contribute to a gradual extension of a Super Grid in the North Sea, integrating wind power in the entire area. At the same time, it is an investment of apparent high socioeconomic value, as it improves the supply security as well as the exchange of electricity in the entire region. In reality, this cable will not be established until , also contributing to spreading the investments. 10

11 Figure 5. Reinforcing exchanging connections Source: Energy 2050; Energinet.dk Between 2010 and 2020, the Danish part of the expenses will be around DKK 8.5b. The investments are commercial investments, loan-financed through a governmental loan framework and paid via the system tariff by the consumers of the nets. The proposal will not burden the public finances. C. Cable action plan In 2008, the governmental parties behind the Energy Agreement of February 21, 2008, agreed on the guidelines for the future extension of the general electricity transmission net in Denmark. According to the guidelines, new transmission connections must be established as underground cables and the existing regional tranismission net must be cabled underground in reference to a coherent cable action plan. Subsequently, in cooperation with Energinet.dk and with contributions from the environmental centres, the regional transmission companies have composed a Cable Action Plan, mapping investments in cable laying of the transmission net to DKK 14.5b over the next 30 years. 11

12 The investments time profile is based on operation, technical and economic evaluations of optimal dismantle times for existing overhead wires. Seen from a macroeconomic point of view which includes employment effects, the time profile would be brought forward. It is estimated that up to a third of the total investments could be brought forward to and an another third to D. Electrification of the railways Compared to other countries, the Danish railways are to a high degree diesel based. An electrification of the Danish railway net in linie with most other countries will for one thing improve the environment and for another lead to a substantial lower energy consumption as an electric engine is significantly more energy effective than a diesel engine. There are substantial construction investments and therefore job creation connected to an electrification of the railways. The traffic political agreement (Jan. 2009) proposes a gradual electrification of the railways but synchronised with the deployment of a new signal system. The costs are estimated to DKK 11-14m per km. In CONCITO s scenario, the first phase of the electrification towards 2020 will cost DKK 2b in construction investments. Focus area 3: Energy optimization Energy optimization is by far the most cost effective instrument when it comes to reducing the use of fossil fuels and CO2 emissions. In praxis, the return on investments of many energy savings is 0-2 years which in reality gives negative CO2 displacement costs. Denmark has good traditions when it comes to energy optimization, i.a. as a consequence of high energy taxes. In CONCITO s scenario, a doubling of the energy companies saving efforts is therefore accounted for. The energy companies play an important and active part in the energy optimization activities and must according to the Energy Saving Agreement from 2009, implement savings targets for 6 PJ. At the same time, the evaluation of the energy savings measures in 2008 showed that this area is among the most effective. The main part of the energy companies efforts takes place within the industry. Additionally, several parties have expressed a wish to allocate DKK 1b to ensure further energy savings for businesses as well as for private households. Below are listed different examples of what such an effort could cover: A. Residential: 1. Free residential climate check. All homeowners are offered a visite by an energy consultant who will carry out a free climate check, focusing on concrete steps that the homeowner can take to reduce their energy consumption. The arrangement has to be organized in such a way that it becomes attractive for housing associations; including housing cooperative associations often representing older houses with great potential. 12

13 2. Map of Denmark s heat waste. With the aid of new technology, a map of the heat waste from all buildings in Denmark is worked out, enabling everyone citizens, authorities as well as public instituations to see their heat waste on the internet. 3. Phasing out individual oil and natural gas fired boilers. The government will block the installation of new oil-fired boilers in existing buildings from 2017 and block for the installation of oil and natural gas fired boilers in new buildings from Here, the ambition level could be raised to a total ban on installing new oil-fired boilers as early as 2012 and phasing out all oil-fired boilers by The new rules will support the energy companies efforts as well as the special initiatives for the businesses, also making it possible to directly subsidy the replacement of oil-fired boilers. To this, a specific ESCO inspired funding model should be developed for those families who cannot immediately finance the replacement of their oil-fired boiler. Equivalently, an end date for individual gas fired boilers should be considered, i.e In total, the additional contribution in 2020 is estimated to 1mio tons of CO2. B. The industry: 1. Deduction for investments in energy savings. Previous experience shows that the most cost effective savings are found in the industry. The industry needs incentives to make a targeted effort on energy savings. The agreement scheme with the large energy consumers is one example of an arrangement; effectively spurring the companies to behave in an energy effiecient manner. The principle of energy optimization as a condition for tax exemption can be an efficient tool which can go hand in hand with the energy saving initiatives of the energy companies. In January 2010, new energy taxes on businesses came into effect, at the same time as the government abolished the previous arrangement scheme. A new arrangement scheme could be coupled with a reduction in the energy tax strain on contestable businesses. Through a new arrangement scheme, the energy consuming companies risk of reducing their competitive power due to taxes is avoided. On the contrary, the greater energy efficiency will improve their international competitive power. Energy savings for small and medium-sized businesses. Currently around 4 mio tons of CO2 is emitted from fossil fuel combustion from production in businesses outside of the quota sector, typically from small and medium-sized businesses (SMB), construction machineries, public institutions, offices, etc., and about 1.8 mio tons in agriculture, tractors included. In general, a significant energy saving potential in SMBs is estimated, which is picked up by the energy companies to a smaller extent than large companies, due to the fact that the units are smaller and thus are connected to large costs per saved kwh. It is therefore not deemed possible to pick up the existing energy saving potential without direct economic incentives or a larger consulting effort. On the other hand, the initiatives will give the companies a substantial competitive advantage. According to CONCITO s report on SMBs, there is a savings potential of about 34 % from a ten-year return on investment. However, a ten-year return on investment requires attractive loan and/or subsidy schemes for most SMBs. The savings potential is estimated to 10 %, if only a two-year return on investment is chosen. 13

14 C. The public sector: There are still very profitable savings in the public sector. A research project from DTU estimates the potential in public buildings to almost 16 PJ, equivalent to around 74 % of the energy consumption. In 2011, the total capital budget for cities and regions constitutes around DKK 18b. Furthermore, with the new hospital plan, the regions must invest about DKK 40b in new hospitals over the next years. Thus, with a targeted effort, the state has a unique potential to strongly influence the market for efficient products. The private businesses as well as the suppliers are thus urged to develop more energy efficient instruments and technologies. However, a number of barriers are obstructing this. 1. The cities have commited themselves to take energy saving steps with a less than five-year return on investment. The regions have a similar agreement which has increased the awareness of this potential. Unfortunately, several good projects are rejected due to the five-year requirement; in particular those with a long life span as the calculations do not take the projects long life spans into account. An overall economic evaluation accounting for life span would be a better method of evaluating profitable savings measures on property development. 2. Energy efficient development is often more expensive in the construction phase but cheaper when it comes to maintenance. To overcome this barrier, overall economic calculations on new developments should be demanded. The regions do not i.e. have the possibility of investing in a more energy efficient development of the new hospitals even though the additional investment would be returned after just a few years. Therefore, the financial framework for new development in the cities as well as in the regions should allow for the possibility of choosing profitable energy measures already in the construction phase. D. Green transition of agriculture A green transition of agriculture also requires a number of investments. Below are estimated the extent of investments for the most employment intensive measures. Table 4. Investments in agricultural green transition Measure Investment Removal of arable land of ha lowland DKK 0,2-1b Afforestation of ha sandy soils DKK 1-2b Energy crops of ha DKK 0,7b Catch crops of a further ha DKK 0,6b Afforestation of ha loamy soils DKK 1-2b Total investment for all measures DKK 3,5-6,3b 14

15 Focus area 4: Energy research There are in particular three central focus areas in research policy: A. The economic framework for energy research B. The universities priority of energy research and commercialisation C. The total energy research system A. The economic framework for energy research The OECD has pointed out the need for a significant boosting of public energy research funds in the next decade. In the 1970 s, the rise in oilprices iniciated a substantial increase in public funds; both with regards to its share of GDP and as share of the public research funds, whilst especially from towards , the stagnating/falling real oilprices led to a long period with a significantly lower level, see figure 6. Figure 6. Public RD & D energy investments Source: The OECD Driven by higher energy prices and climate- and political objectives, the last few years have yet again lead to an upward adjustment of public RD & D funding, although it remains significantly below the 1970 s level. However, a study from the OECD indicates that the need for actual quantum leaps in technologies rather than marginal improvements, requires a substantial increase in public research investments towards 2020, equivalent to 0.12 pct. of global GDP (dotted line in figure 6), compared to 0.04 pct. today. Given the expected GDP growth over the next ten years, in constant prices this is equivalent to a 3-4 doubling of the public RD & D funds. 15

16 Figure 7. Energy research share of total research expenses (2008) Source: Eurostat (GBAORD, Nab07 - Energy) The last couple of years, although Denmark has seen an increased effort and is now more or less on a par with comparable countries, it is far from the required level. The Danish energy research as a percentage of total public research is currently at the EU average, see figure 7. In the long run, a siginificant increase in the Danish innovation budget in the energy field of about DKK 1b will be necessary. Stability in funding is as important as an increase in the research funds. The energy field is characterized by investments in production equipment and infrastructure with a very long life span. At the same time, there is a high fluctuation tendency in the energy prices over time which has the inclination to affect investments in research and development in the energy field. To ensure higher stability in public energy research funds, a limit under the climate and energy field grants of 7.5 % of the total national research funds should be introduced; as is the case for total research funds (1 pct. of GDP). This is equivalent to the energy research share of the EU s framework programme. B. The universities priority of energy research and commercialisation There are good arguments for increasing national energy research. In the next reasearch framework for , the EU commission is thus planning to significantly increase EU s energy research funds and the energy research is indeed by far the research area where Danish researchers and businesses are best at getting a share of EU s research funds. 16

17 As seen in figure 8, Danish researchers and businesses receive about 8 pct. of EU s research funds which by far exceed the average share of research funds in Denmark of 2.4 pct. Figure 8. Denmark s share of EU research funds Source: Danish Energy Associtation Energy research is often interdisciplinary which can be problematic in relation to the basic funds of the universities that typically are shared amongst the different faculties where the energy research risks being given a lower priority. The universitites ability to get a share in external Danish and foreign research funds are both a part of the Danish and the Norwegian scale of basic research funds. In Norway, however, foreign research funds are attached far greater importance than national research funds. In Denmark, this is not the case. Greater importance should therefore be considered attached to the ability to attract foreign research funds through the distribution of basic research funds. This kind of mechanism would kill two birds with one stone. Partly it would strengthen the universities incentives to enter into international research partnerships; partly it would give the universities incetives to give higher priority to the energy research field where Denmark is good at getting a share of the EU funds. The incentives of the universities to cooperate with businesses to commercialize the national targeting of the energy research are also important. 17

18 C. The total energy research system Today, through the innovation political food chain, a significant number of pools and players are involved in the allocation of Danish funds related to innovation in the energy field. As seen in figure 9, the Danish Agency for Science, Technology and Innovation (DSF) primarily focuses on applied research and development. Funds from Energinet.dk (ForskeEL and ForskVE), the Danish Ministry of Climate, Energy and Building (EUDP), the Danish Energy Association (Elforsk) and the Advanced Technology Foundation are used on applied research, development and demonstration; from 2010, Green Lab and the Business Innovation Fund who focuses on demonstration and market information. Finally, there is Vækstfonden, a publicly based financed foundation who delivers different kinds of capital investments to private companies to enable them financially to get their products on to the market. This kind of funding can finance actual production equipment, marketing expenses, etc. Vækstfonden is active on all innovation fronts but also focuses somewhat on energy. The largest funds are distributed by DSF and EUDP (the largest arrows in figure 9). Figure 9. Instruments and funds distributed on the scale from idea and demonstration to market development (the size of the arrow reflects the size of the programme) urce: Energi 2010, annual report on Danish energy research programmes So Given the need to add significantly increased funds to energy research in the next few years, developing a total strategy for the structure in the public funding system should be considered and the support models should be checked. In particular, the need to develop new models to support promising, but not yet market mature, technologies where the task is to lower the costs of energy production prior to actual commercialization should be looked into. 18

19 Strategic recommendations Firstly, it is important to focus on the balance between short term operation support for larger volumes of existing technologies and long term support for the development of new high value technologies. The funds for research and demonstration should constitute a larger share of the RE-funds. Secondly, the universities incentives to cooperate with businesses and international research environments should be strengthened. This can happen by attaching greater importance to the universities ability to attract foreign research funds as well as private co-financing by allocating basic research funds. Focus area 5: EU as a driver An effective way to reduce the pressure on Denmark s national RE-funds, and this way create more space to long term innovation support, is through an increase of EU s 2020 CO2 reduction target from 20 to 30 pct and/or an adoption of the EU Roadmap Such an increase will lead to a rise in the CO2 quota price and thus lead to a lesser need for specific production support; i.e. higher CO2-quota prices will lead to an equivalently smaller need for national RE-subsidies for biomass and windmill production. Figure 10. Marginalcosts of alternative RE-technologies Source: Copenhagen Economics 19

20 The effect is, although very simplified, illustrated in figure 10. At a quota price of 20, only a relatively modest amount of the most market mature technologies (biomass, hydropower, coast wind turbines) will be profitable, i.e. be able to produce more cheaply than marginal coal plants. If the quota price is equivalent to a 30 pct. objective, this amount increases significantly. A higher quota price will thus increase the costs of using coal as fuel whilst the costs of RE technologies remain unchanged. Figure 11. The significance of different export markets Source: Brøndum & Fliess For a small country like Denmark with a limited home market, it is of great advantage that RE technologies compete on the same terms in all the ETS-covered countries. This way, Denmark and the Danish energy technologies will get the entire EU as a home market ; also as an exporting starting point to the markets outside of the EU. Today, Danish companies already have a large international focus, not least as a consequense of the small Danish home market. For energy equipment, the export share is thus typically over 60 pct. Up to now, the neighbouring markets in the Nordic countries as well as the rest of Western Europe have been dominating, however, the companies have clear expectations that future growth to a larger extent will be coming from outside of Europe, see figure 11. Therefore, it is important not to rest on one s laurels and keep focusing on developing cost effective and competitive solutions as these also are the technologies demanded by the less well-off countries. 20

21 Strategic recommendations Denmark should work towards increasing the EU s climate objectives. For one thing, this is relevant to the existing 2020 objective which ought to be raised to 30 pct. and/or the adoption of the EU roadmap 2050 objectives, including an explicit reduction target for 2030 which should be raised to 50 pct. These measures will contribute to an increase in the CO2 quota price which will create a more uniform and predictable investment framework for the RE extension and at the same time reduce the need for national operation support to the RE technologies. Focus area 6: Home market as a driver Even though a small country like Denmark is completely dependent on being able to sell its products in the export markets see above during the development phase, new technologies require good marketing possibilities in the home market. Thus, the core strength of Denmark s existing energy optimization and RE industrial policy to a high degree stems from the energy political priorities of previous years. In future, the energy and industrial policy priorities should also go hand in hand, and the development of new green technologies should originate in cost effective solutions from Denmark s own climate and energy policy goals. Existing core strenghts For the past years, Danish energy policies have mainly focused on both energy optimization and CO2 reduction. Today, the Danish energy sector consists of a broad palette of services ranging from energy production (i.e. CHP solutions), consultancy on the implementation of energy technological solutions as well as production of a number of products (wind turbines, thermostats, etc.) employing a total of persons with an annual added value of about DKK 35b. Figure 12. The export share of energy technology in EU15 Source: Danish Energy Agency 21

22 This potential is seen in figure 12, which shows that today Denmark is already good at exploiting the export potential for energy technology. Thus, energy technology consists of 10 pct. of the Danish exports which is almost twice the amount of the EU average. The Danish businesses are therefore well equipped to exploite the new commercial opportunities from the globale transition of energy supply. Among the 28 Danish energy technology s heavyweights, the producers specialising in energy optimization are just as important as the producers of RE equipment. One should continue to keep an eye out for this potential, i.a. due to the fact that RE technologies are exposed to tough global competition and there are continuous examples of the actual production of the RE technologies - i.e. solar panels and wind turines being moved to countries with low production costs. As seen in figure 13, today, Denmark is a pioneer with regards to energy efficiency (energy consumption per unit of GDP) and there are therefore both environmental and industry politicy perspectives in transferring the energy efficient Danish solutions to other countries. Source: Denmark s Nationalbank

23 At the same time, it is important to pay attention to the development in the global demand which is focused on RE technologies as well as energy optimization. The former is primarily expected to be demanded by developed countries that have had high energy prices for several years, i.a. as a result of high national energy taxes. On the other hand, the less well-off countries will especially demand greater energy efficiency, i.a. because these countries have given substantial subsidies to keep the energy prices down and therefore are not used to the high world market prices. As seen in figure 14, subsidies to fossil based energy consumption are widely used in the developing countries, constituting over DKK 2.000b. Figure 14. Third World countries energy consumption subsidies Source: World Energy Outlook; IEA 2010 The RE technologies of the next generation The next phase of Denmark s RE commitment should not just be based on operating aid to larger volumes of existing technologies (i.e. land wind turbines) but also focus on developing the technologies of the next generation (off shore windmill parcs, sec- 23

24 ond generation bioethanol, etc.) as well as integrating wind energy with the current energy system, i.e. through the development of Smart Grid solutions (intelligent electricity nets) and energy storage (i.e. in the heat and transport sectors). At the same time, there is a potential to substitute coal for biomass in the necessary adjustable part of the electricity production. From an industry policy point of view, it is important to focus on concrete demonstration projects of the next generation of RE technologies, enabling Denmark to continue to create employment in the high end of the value chain. At the same time, the inflexible wind electricity needs to be enabled to be used in new sectors, i.e. as heat pumps for domestic heating and electric cars in the transport sector. Figure 15. Electricity as the central energy carrier Source: Eneginet.dk Strategic recommendations Focus has to be on the development of RE technologies as well as energy optimization. Denmark has core strengths within both areas and the global demand for energy efficient solutions are independent of a global climate agreement. The national energy policy should encourage the development of cost effective home market solutions. This will increase the chance of selling the solutions to other countries. 24