Results and Challenges

Transcription

1 Results and Challenges 2011

2 Contents New framework - new tasks 4 Summary 6 Energy prices 7 Household expenditure on electricity and heating in Natural gas 9 District heating 10 Electricity 13 Composition of the price of electricity 14 Change of supplier in electricity market 16 Efficiency in the energy sectors 17 Efficiency in the natural gas sector 17 Efficiency in the heating sector 18 Efficient fuel purchases 18 Possibilities open to district heating plants for gas purchases 20 Efficiency in the electricity sector 22 Benchmark Changes in the revenue caps from 2007 to Municipalities, supply activities and rules on offsetting 32 Scope of the duty to notify 32 Uncertainty regarding the regulations 34 Energitilsynet

3 Municipal organisation of supply activities and the offsetting regulations 34 Offsetting regulations in enterprises with joint production 36 International work 40 The work of DERA 43 New legislation 44 Members of DERA 48 The DERA Secretariat 49 The electricity sector 50 The natural gas sector 50 The district heating sector 51 Case processing times 54 The Energy Board of Appeal 56 Economy 57 Other authorities in the energy area 59 2 Energitilsynet 2011

4 New framework new tasks As part of Danish implementation of the European Union's Third Energy Liberalisation Package, the DERA Secretariat was established as an independent institution in This means new functions for DERA - especially the top management (President and Vice-president) - and new tasks, including monitoring wholesale markets for electricity and natural gas as well as market operators etc. The new tasks are in line with the core tasks of DERA: Supervising the energy sectors, and regulation of grid companies in the electricity and natural gas sectors as well as district heating companies. In 2011, work by DERA resulted in specific decisions as well as thorough analyses in which DERA exploited its access to detailed information on sectoral operators. In 2011, DERA cut the revenue caps for electricity grid companies by DKK 104 million, so efficiency regulation of electricity grid companies in the period has reduced the companies' revenue caps by approx. DKK 460 million. Analyses by DERA indicate continued potential for efficiency improvements at the companies. Uffe Bundgaard-Jørgensen, Chairman, Energitilsynet In 2011, DERA compared the costs of gas bought by natural-gas district heating plants. The plants' costs of gas vary significantly. The reasons for this variation may be numerous, and DERA will continue its work to identify these in However, the material suggests that some plants should focus more on the cost of the gas they purchase. In recent years, studies have shown that some plants do not report their accounts correctly in accordance with the Heating Supply Act. This prompted the Danish Parliament (the Folketing) to amend the Heating Supply Act in June 2011, to authorise the Minister for Climate, Energy and Building to order heating enterprises to evaluate their own financial reporting. The objective is partly to retain enterprises' responsibility for proper accounts and partly to bring about an improvement in the area within a reasonable time frame. DERA hopes that this model will yield the intended result. Furthermore, DERA is working to support the development of well-functioning free markets for energy. In 2011, DERA stated that in the opinion of the Authority, tariffs charged by DONG for transport in the upstream system were too high and that transparency with regard to production conditions etc. should be improved. These are factors that have an impact on the wholesale market for natural gas. Spurred on by the European Union's Third Energy Liberalisation Package, Energinet.dk applied for certification as being unbundled in In this context this means that the ownership of the general grids in the energy sectors is separated Energitilsynet

5 from production and trade in energy. DERA certified Energinet.dk as being unbundled, provided that certain conditions were met. Energinet.dk thus became the first certified transmission company in Europe. The certification requirement also applies to regional transmission companies in the electricity sector, unless they are purchased by Energinet.dk, which has submitted offers to buy the companies. Such acquisitions will result in synergies for Energinet.dk and entail that the regional transmission companies' revenues of approx. DKK 500 million will shift from efficiency regulation to non-profit regulation. This will imply new requirements for efficient operation of Energinet.dk. In this connection it should be noted that the Council of European Energy Regulators (CEER) will initiate an international benchmarking of the efficiency of transmission companies, including Energinet. dk, in DERA will be involved in this work. The national frameworks and goals for the energy sectors are also undergoing change. The new energy policy agreement has set the framework for Danish energy policy from 2012 to The agreement entails a large number of initiatives which will affect DERA: regulatory supervision of grid companies, analysis of the role of district heating in future energy supply, and establishment of the so-called wholesale model. It is important for DERA that regulation provides the right incentive for energy companies to act in accordance with societal goals for energy policy etc. The Minister for Climate, Energy and Building has appointed a new DERA from 1 January I would like to thank the retiring members for their efforts and welcome the new members to DERA. 4 Energitilsynet 2011

6 Summary Households' total average costs of energy (electricity and heating) rose by 7% to 8% from 2010 to 2011, depending on whether they used district heating or natural gas. The price of electricity has risen by just under 9%, district heating by about 5% and natural gas by just under 8%. The three energy sectors - electricity, natural gas and district heating - are all still candidates for efficiency improvements, which will benefit consumers as well as the economy. o Grid companies in the electricity sector were imposed permanent requirements for efficiency improvements amounting to DKK 104 million in 2011 and a DKK 4 million requirement for one-year efficiency improvements. In total, the revenue caps of electricity companies have been reduced by permanent requirements for efficiency improvements of approx. DKK 460 million from 2008 to 2011 as well as an additional almost DKK 20 million in the form of one-year requirements. Moreover, natural-gas-fired district heating plants could benefit from investing time and resources in reducing fuel costs and developing effective procurement strategies for natural gas. Fuel procurement is the plants' largest cost item and studies by DERA indicate that this cost could be reduced significantly in many plants. o In 2009, grid companies in the natural gas sector were imposed requirements for efficiency improvements of approx. DKK 12 million for the period From 2007 to 2010, municipalities received a total of DKK 10.7 billion from their energy enterprises, for example as sales charges or dividends. These amounts are set off against the state block grant, and DERA is the ruling authority in terms of assessing the financial value received by municipalities. o The rules on offsetting are relatively complicated and often give rise to interpretations, etc. o DERA considers that the rules on co-production (electricity and heating) in particular could be simplified. Energitilsynet

7 Energy prices DERA and energy prices DERA works to make the energy sector efficient within the framework stipulated by legislation on energy. DERA approaches this challenge through regulation of the natural monopolies in the energy sectors - the entire district heating area and "transport" (transmission and distribution) within electricity and natural gas. The regulation includes the companies' terms etc. and prices, and replaces the competition that exists in free and well functioning markets. DERA also aims for the best possible framework conditions to develop efficient energy markets, with effective competition in the liberalised markets for electricity and natural gas. Finally, DERA regulates consumer prices of the so-called supply obligation products in the electricity and gas markets. Supply obligation products are products that are automatically delivered to consumers who have not chosen a supplier of electricity or gas in the liberalised markets for electricity and natural gas. The cost of energy - heating and electricity - is a significant item for both consumers and enterprises. Therefore the prices of electricity, natural gas for heating as well as district heating are of major economic importance. In 2011, prices of electricity and natural gas have risen significantly more than consumer prices in general, while prices of district heating rose more moderately, see figure 1. Electricity and natural gas, respectively, rose by approx. 9% and approx. 8%, while district heating rose by about 5%. For the entire five-year period from 2007 to 2011, prices of electricity and natural gas have risen by approx. 20% and prices of district heating have risen by about 12%. 6 Energitilsynet 2011

8 Figure 1 Changes in energy prices and the consumer price index Consumer price index Forbrugerprisindeks Electricity Elektricitet Natural Naturgasgas District Fjernvarme heating Source: DERA s price statistics, the Danish District Heating Association and Statistics Denmark. Household expenditure on electricity and heating in 2011 From 2010 to 2011, costs for electricity and district heating for a standard family rose from approx. DKK 23,650 to approx. DKK 25,300, corresponding to an increase of just under 7%, see figure 2. Figure 2 Expenditure on electricity and heating for a standard family 1 in 2011 DKK District Fjernvarme heating Electricity Elektricitet Source: DERA s electricity price statistics and the Danish District Heating Association s report on district heating prices in Denmark. 1 Expenditure has been calculated on the basis of an average electricity consumption for a household of four people (4,500 kwh/year) and on the heating requirement for a standard house of 130m 2. Energitilsynet

9 Energy costs for a standard family that uses natural gas for heating rose from approx. DKK 23,500 in 2010 to approx. DKK 25,500 in 2011, corresponding to an increase of about 8%, see figure 3 Figure 3 Expenditure on electricity and natural gas for a standard family 2 in 2011 Natural Fjernvarme gas Electricity Elektricitet DKK Source: DERA s electricity price statistics and natural gas price statistics. The overall increase in the energy bill in the period 2007 to 2011 is approx. 15% for homes with district heating and approx. 20% for homes with natural gas. Price trends for the individual types of energy - natural gas, district heating and electricity - and the individual price elements (energy cost, grid payment, taxes etc.) are described in detail in the following sections. Natural gas The natural gas sector includes generation, transport and trading in natural gas. DERA regulation includes transport tariffs (transmission and distribution) as well as the prices of the three supply obligation gas companies. DERA also regulates the conditions for use of the two natural gas storage facilities owned by DONG Energy and Energinet.dk. 2 Expenditure has been calculated on the basis of average electricity consumption for a household of four people (4,500 kwh/year) and on an average natural gas consumption of DKK 1,708 m 3 /year. 8 Energitilsynet 2011

10 Supply obligation natural gas DERA regulates the price of supply obligation gas through efficiency regulation, where DERA approves a company's operating costs as well as its profit, which should be reasonable when compared to turnover and efficiency in connection with gas purchases. Supply obligation natural gas is supplied by a number of natural gas companies that have been granted a supply obligation licence which obligates them to supply natural gas to all customers in their licence area who have not changed natural gas supplier. The average consumer price for the supply obligation product rose by just under 8% from 2010 to 2011, see figure 4. The largest part of the price increase is due to an increase in gas prices of approx. 15%. The price of natural gas in the Danish market is partly determined on the gas exchange Nord Pool Gas (supply and demand). However, most of the natural gas sales are still contract-based and the price follows the trends in oil prices. Distribution costs rose just under 3%, corresponding to the general increase in the consumer price index in Figure 4 Average price for supply obligation natural gas, DKK per m VAT Moms 2525% % Distribution CO2-afgift tax Natural Naturgasafgift price Price Gaspris of gas Note: The figure shows the price of natural gas including energy taxes and VAT. Source: DERA s natural gas price statistics and own calculations for 2007 and Energitilsynet

11 District heating The district heating sector comprises about 600 district heating suppliers, which together supply about 60% of Danish homes with district heating. The largest enterprises supply 60% of district heating. A total of 75% of district heating production is at CHP plants. The remaining 25% is produced at, usually smaller, heating plants. DERA regulates the full consumer price of district heating. There is no specific tax on district heating, however the fuels used in district heating production (e.g. natural gas) are subject to taxes. The average price of district heating rose by about 5% from 2009/2010 to 2010/2011, see figure 5. This is primarily due to increases in fuel costs. Figure 5 Average district heating costs in DKK including VAT, 2006/ /11 DKK VAT 25% Heating Source: The Danish District Heating Association report on district heating prices in Denmark. Note: The price has been calculated on the basis of the actual settlement prices during the season, including VAT, for a standard house of 130 m2 with a consumption of 18.1 m3. per year. The actual price of heating includes taxes on the fuels used in district heating production. The statistics do not make it possible to break down the price of heating into subcomponents such as grid payment, subscription, etc. DERA regulation of prices for district heating plants is based on a non-profit principle, where prices may only reflect the necessary costs of production and administration. The Heating Supply Act establishes which costs can be factored 10 Energitilsynet 2011

12 into prices. The prices of each district heating plant therefore reflect the costs of the plant in question. There may be large differences between the costs of each plant- and thus also between the prices charged by the plants, see figure 6. Natural-gas-fired plants have the highest average price of heating while the large-scale plants have the lowest. While there is relatively little difference between the cheapest plants, the price disparity is significant between the prices at the most expensive plants. The biggest price dispersion can be found among the natural-gas-fired plants, while the lowest price dispersion can be found for plants using waste and the large-scale plants. The natural-gas-fired plants also represent the highest price of approx. DKK 40,000, while the lowest rates are found among biomass-fired plants (approx. DKK 7,000) and waste (about DKK 8,500). Figure 6 Average of highest/lowest district heating costs by type of plant 2009/ Large-scale plants Biomass etc. Natural-gas-fired Waste Lowest Highest Average Source: The Danish District Heating Association s report on district heating prices in Denmark ( Fjernvarmepriserne i Danmark i 2010 ). Note: The figure shows the highest/lowest price of heating a standard house of 130m2, broken down by type of plant and fuel. Energitilsynet

13 Differences in costs and prices can be attributed to several things - such as differences in costs of equipment, type of installation, size etc. In addition, the individual plants may also be subject to various framework conditions such as choice of fuel and consumers may be subject to a duty to connect to the grid. An analysis of price dispersion among the natural-gas-fired plants shows that relatively few plants charge the very high prices, see figure 7. The price of individual heating with oil and natural gas is also shown for purposes of comparison.. Figure 7 Price spread between natural-gas-fired district heating plants 2009/2011 Kr. Natural-gas-fired district heating Individual oil heating Natural gas Number Source: The Danish District Heating Association s report on district heating prices in Denmark ( Fjernvarmepriserne i Danmark i 2010 ).. In terms of heating with natural gas, about 45 plants (approx. 25% of all naturalgas-fired plants) have higher prices than the average price of heating with natural gas. In terms of heating with oil, five plants (approx. 3% of all natural-gas-fired plants) have higher prices than the average price of heating. Among the most expensive natural-gas-fired district heating plants are open-field plants, which are generally relatively small and have relatively few consumers. Prices of these plants are adversely affected by several factors, including 12 Energitilsynet 2011

14 Large investments in plants to be paid by relatively few consumers. A distribution grid typically with long connections which have to be paid for by the same, few consumers; The long connections also mean large pipeline losses. These aspects are generally contributory factors to a higher price of district heating for consumers connected to the open-field plants. In addition to special framework conditions and other aspects, the prices of a given plant are primarily determined by its operation and efficiency. It is therefore vital that the board and management of the individual heating plant are able to operate the plant with the greatest possible efficiency etc. within the framework set out. Consumers can compare consumer prices of district heating for residential apartments and detached houses on the DERA website where DERA publishes the most recent prices (incl. VAT) submitted to DERA by district heating suppliers. These prices however do not show the actual price of heating a specific home. In order to calculate the actual price, the consumer must look at the actual consumption of the home (variable charge) and the specific basis for calculating the fixed charge (subscription etc.). Electricity The players in the electricity sector are producers (powerplants), trading companies (including trading companies with a supply obligation licence), transmission companies and distribution companies. DERA's regulation of the electricity sector includes prices and terms of the 36 trading companies with a supply obligation licence, and the tariffs of the 10 regional transmission companies, the roughly 60 distribution companies and 20 transformer associations. In addition, DERA also regulates Energinet.dk, the transmission company with system responsibility. Energitilsynet

15 Supply obligation electricity A number of trading companies have a supply obligation licence which obligates them to supply electricity to all customers within their area who have not changed electricity supplier. There are two supply obligation products. One product is aimed at households and smaller businesses. For this supply obligation product, DERA regulates the price to ensure that the mark-up on supply obligation products is not higher than the mark-up on corresponding products in the free market. The other supply obligation product is aimed at large businesses and hourly metered consumers. The price of this supply obligation product corresponds to the hourly spot price in the price area in which the consumer buys electricity, added to a balancing and administration contribution. The maximum balancing and administration contribution is determined by DERA. In the following, focus will be on the market for households and prices of supply obligation products for private consumers etc. The average price of electricity for households (the supply obligation product) increased by approx. 9% from 2010 to 2011, see figure 8. Figure 8 Average consumer prices for supply obligation electricity for households 2007 to 2011 VAT Fees and PSO Subscription Grid payment Energy DKK 0.00 pr kwh Source: DERA s electricity price statistics. 14 Energitilsynet 2011

16 The increase in price is largely due to a rise in the actual price of electricity of almost 20%. The actual price of electricity reflects prices on the Nordic Electricity Exchange, Nord Pool Spot. In addition, grid payment has risen by approx. 8% and fees/pso (Public Service Obligation) by 3 approx. 6%. The grid payment is the price the consumer pays to have electricity transported to his or her address. The price comprises payment for transmission to Energinet.dk as well as payment to the local distribution companies. DERA regulates methods of price determination by both the distribution companies and Energinet.dk. Energinet.dk tariffs Energinet.dk tariffs are set on the basis of forecasts of costs for the following year and the volume of electricity transported in the company s grid etc., so revenues and expenses balance in accordance with the nonprofit principle. However, the forecasts cannot always be 100 percent accurate, and the company will therefore either charge too much (over coverage) or too little (under coverage). This over or under coverage is included in the tariffs for the subsequent year. Over coverage will mean lower tariffs in the following year, while under coverage leads to higher tariffs. Composition of the price of electricity The consumer price of electricity is composed of various elements - energy prices (electricity), grid payment (payment for distribution and transmission), subscription (fixed contributions to grid companies) and fees/pso (Public Service Obligation), see figure 9. 3 Public Service Obligations (PSO) are taxes that finance funding for renewable energy and energy research. Energitilsynet

17 Figure 9 Composition of the price of electricity (2011) Energy Grid payment Subscription Fees and PSO VAT 20% 22% 11% 8% 39% 2011 Source: DERA s electricity price statistics. Note: Public Service Obligations (PSO) are taxes that finance funding for renewable energy and energy research. The actual price of electricity represents about a fifth of the total consumer price whereas fees, PSO payment and VAT represent just under 60%. Grid payment and subscription together constitute almost 20%. The subscription price primarily includes grid subscription and represents the fixed payment that all consumers must pay to be connected to the grid. Subscription is the same for all consumers within the individual grids. The energy tax is a fixed tax per kwh, which means that even relatively large fluctuations in the actual price of energy only result in relatively small fluctuations in the overall consumer price of electricity. The actual price of electricity includes a wholesale component and a retail element, see figure 10. Figure 10 Composition of the price of electricity wholesale - retail 11% Energy wholesale Energy retail Subscription Grid payment VAT Fees and PSO 8% 20% 22% 40% 19% 2% Source: Own calculations Energitilsynet 2011

18 About 90% of the actual price of electricity goes to the wholesaler, and the price is determined on the Nordic Electricity Exchange. The rest of the actual price of electricity is the price element that retailers can use as a competitive parameter. On the basis of DERA s price statistics, which show an average electricity price of just under DKK 0.47/kWh, companies at the retail stage thus compete for the modest sum of around DKK 0.05/kWh out of a total average consumer price of DKK 2.18/ kwh in There is thus a relatively modest turnover for retailers in relation to individual consumer. However, overall, a consumer market for retailers exists with an estimated turnover of DKK 450 to DKK 500 million. 4 Change of supplier in electricity market Since the liberalisation of the electricity market was finally completed in 2003, all electricity consumers are free to change supplier, and change of supplier can be used as an indicator to gauge the condition of the market and market competition. Table 1 Change of supplier % % % % % % % Percentage of template customers* who have changed supplier 1,10 1,25 2,87** 2,8 6,13 4,22 3,52 * Template customers are households and small enterprises with a consumption of less than 100,000 kwh/yr. ** The change percentage in 2007 was affected by the fact that an electricity supplier ceased trading in Q Source: Association of Danish Energy Companies In 2011, the percentage of households changing supplier dropped in relation to the previous two years, and judging from this indicator in isolation, consumers interest in exploiting the liberalised electricity market has declined. In both 2009 and 2010, information campaigns etc. were carried out to raise consumer awareness of the liberalised electricity market. Similar efforts were not conducted in The trend towards increased use of hourly metered consumption in households and a form of payment where electricity prices vary over the hours of the day is expected to strengthen market orientation. Consumers' interest in using the free electricity market, however, should also be seen in connection with regulation of the prices of supply obligation products and the relatively modest proportion of the actual price of electricity compared with the total price consumers pay for electricity. 4 Based on an estimated total electricity consumption in households of approx. 10,000 GWh in Energitilsynet

19 Efficiency in the energy sectors DERA and efficiency in the energy sectors This regulation by DERA serves to act in the same way as the efficiencyimprovement pressure that enterprises meet in competitive markets. DERA helps promote efficiency among grid companies (natural monopolies) in the electricity and natural gas sectors. The efficiency regulation is thus partly to reflect the efficiency pressure that competition puts on enterprises in competitive markets and partly be able to obtain the same dynamics in market and structural trends in the regulated markets that competition helps establish in markets with effective competition. Specifically, DERA places a cap on the individual companies' revenues (establishes revenue caps) and determines requirements for their efficiency, so that the companies become increasingly effective every year, if they wish to retain their profit margins, because DERA trims their revenue caps. In the district heating sector, the prices of companies are only allowed to reflect the costs necessary for production and distribution (non-profit regulation). DERA does not determine efficiency targets directly, but the requirement that a cost must be necessary includes both the type of the cost and its size. This allows DERA to make demands on cost developments in companies. Energinet.dk is also regulated in accordance with a non-profit principle, whereby the company's tariffs may only cover the necessary costs incurred in efficient operation and an interest rate to ensure the real value of the company's capital base as at 1 January The regulation does not facilitate the determination of general efficiency requirements for Energinet.dk. However, DERA may determine that a specific cost - or the amount thereof - does not constitute a necessary cost at efficient operation and therefore may not be included (or only partially included) in the Energinet.dk tariffs. In 2008, Regional Net A/S, that owns the regional transmission grid in North Zealand, was acquired by Energinet.dk from Dong Energy. In regulatory terms, the acquisition meant that Regional Net A/S, like other regional transmission companies and distribution companies, went from being efficiency regulated to being regulated on the basis of the non-profit principle, just as Energinet.dk. The same will apply to other regional transmission companies that are taken over by Energinet.dk. 18 Energitilsynet 2011

20 Efficiency in the natural gas sector There are only three distribution companies in the natural gas sector - DONG Distribution A/S, HNG/Midt-Nord I/S and Naturgas Fyn A/S. The net turnover of the three companies in 2009 and 2010 are shown in table 2 Table 2 Turnover of Dong Gasdistribution A/S, HNG/Midt-Nord I/S and Naturgas Fyn A/S 2009 and DONG Gasdistribution A/S Net turnover (DKK mill. 589,4 771,2 HNG/Midt-Nord I/S Net turnover (DKK mill.) 951, ,1 Naturgas Fyn Distribution A/S Net turnover (DKK mill.) 149,5 214,7 Three companies do not provide a sufficient basis for an analysis of the spread of efficiency. However, DERA's benchmark of the companies in 2009 showed differences in efficiency measured on the basis of different operating cost items within each company. This suggests that companies within the sector could become more efficient. On this basis, in 2009, DERA imposed efficiency requirements on the companies of between 0.6% and 1.2% of the companies' cost framework (operating costs and depreciation of investments made after 1 January 2005) per year from 2010 to This corresponds to an overall efficiency requirement for the companies of more than DKK 12 million in the period. The efficiency improvement requirement was determined on the basis that companies must achieve a productivity increase, which corresponds to the competitive economy as a whole. Furthermore, the less efficient companies must be made more efficient on the basis of the result of the benchmarking of the companies. Energitilsynet

21 Efficiency in the heating sector The district heating sector is regulated according to the non-profit principle, which means that district heating must be sold at cost of production and distribution. DERA determines which costs are necessary and can be included in the sales price. At present, no explicit efficiency requirements have been laid down, nor has a revenue cap for heating enterprises, and therefore regulation of heating enterprises differs from the efficiency and revenue cap regulation of grid companies in the electricity and natural gas sectors. Non-profit regulation is primarily based on the fact that the efficiency gain of the enterprise is reflected directly in the consumer price. A requirement for efficient operation with resultant low prices could, for example, come from the consumers, either as a consequence of direct influence at general meetings or indirectly through elections to the municipal council. Efficient fuel purchases Fuel costs constitute a significant cost item for district heating plants. Efficient fuel purchasing is therefore of great importance to the overall economic efficiency of the plants. Therefore, DERA has begun to examine fuel purchases by naturalgas district heating plants that - as mentioned previously - both have the highest average price of heating and the largest spread in prices for district heating plants. There is a great difference in actual purchase prices for natural gas among the district heating plants, see figure 11. DERA calculations show that the purchase prices of the majority of the plants fluctuate between DKK 250/MWh and DKK 650/MWh including taxes. The data basis used in figure 11 is prices submitted by district heating plants to DERA. Note that interpretation of figure 11 is subject to certain reservations, partly because data from a single year (2010) has been applied, and this is not necessarily representative, and partly because it is possible that data could have been be calculated on the basis of different accounting periods. 20 Energitilsynet 2011

22 Figure 11 Correlation between average fuel costs (DKK/Mwh including taxes) and quantity (MWh) in 2010 DKK / MWh Quantity natural gas MWh Source: Reports by district heating plants to DERA based on accounts closed between 31 December 2009 and 31 December 2010 In general, district heating plants may vary greatly in terms of size, number of customers etc. This could cause an assumption that there is a correlation between consumption and purchase price, so that purchase of larger quantities will be reflected in a more advantageous purchase price. Therefore, DERA has also examined whether there is a correlation between individual district heating plants' actual purchase price of natural gas and the size of the plants, see figure 11. The diagram shows that there is no clear correlation between a low price and level of consumption. However, there is a tendency that the variation between low and high price becomes smaller if larger quantities are purchased. Therefore, the large variation in price of gas purchases between district heating plants cannot be explained solely by differences in size, gas consumption etc. Instead, there is a possibility that part of the explanation may be differences in how actively district heating plants are working to minimise the purchase price of natural gas and their choices of purchasing strategies etc. Preliminary calculations etc. do not provide a basis for further clarification, however, in 2012 DERA will conduct further analysis to elucidate this issue. Energitilsynet

23 Possibilities open to district heating plants for gas purchases The purchase price paid by district heating plants for natural gas must be seen in correlation with the opportunities that exist in the gas market. Traditionally, plants typically purchased natural gas on the basis of bilateral longterm contracts where the price had been adjusted according to developments in oil prices during the contract period (oil indexation). Liberalisation of the gas market gives the plants new possibilities for gas purchases; both in terms of contracts based on direct sourcing via hubs or gas exchanges, but also in terms of long-term contracts in which prices are regulated according to developments in gas prices of gas in hubs/gas exchanges instead of oil indexation. Therefore, DERA has examined developments in prices at the Title Transfer Facility (TTF) and in oil indexation from January 2007 to September 2010, see figure 12. In the figure, TTF shows developments in gas listings, BAFA shows the trend in import prices of gas for the German market, and Brent shows oil listings, i.e. developments in oil indexation. 22 Energitilsynet 2011

24 Figure 12 Comparison of developments in the gas listing and oil price index BAFA; EUR/MWh TTF APX; EUR/MWh Left axis: BAFA; EUR/MWh Right axis: TTF APX; EUR/MWh Note: BAFA: The German BAFA index contains import prices of gas to the German market and is published each month by the Bundesamt für Wirtschaft und Ausfuhrkontrolle. APX TTF: Spot price of gas delivered to the Title Transfer Facility (TTF) traded on the Dutch gas exchange APX. Brent: The spot price of Brent oil as published by the US. Energy Information Administration (EIA). Energitilsynet

25 The comparison of gas listings and oil price indexing does not clarify whether trading on gas hubs or exchanges results in lower prices than a bilateral oil-indexed contract. However, historically the trend seems to be that prices are lower on hubs/ exchanges - especially after the financial crisis in In recent years, prices on hubs/exchanges have converged towards oil-indexed contracts, albeit at a lower level. However, it must be emphasised that this is a trend; not a guarantee. The available documentation indicates that it would be advantageous for many plants to invest time and resources on reducing the purchase price of natural gas. Fuel costs are by far the largest cost item of district heating production, and the documentation available suggests that the price could be considerably reduced in many plants. The need for the plants to invest both time and resources in developing efficient gas purchasing strategies etc. is supported by the fact that no discernible and unambiguous "best practice" can be established in relation to e.g. oil indexing/ gas hubs etc. Therefore it is necessary for the plants to build competences and to constantly focus on the area in order to exploit and benefit from all the opportunities provided by the market. Efficiency in the electricity sector Electricity grids are owned and operated by the grid companies on the basis of an authorisation from the Danish Energy Agency. The authorisation entitles the holder to a monopoly on supplying electricity within the authorisation area. Energinet.dk owns and operates the main transmission grid of 400 kv with a total length of approx. 6,000 km. The regional transmission companies own grids with a voltage level of kv, which lead electricity from the main transmission grid to the distribution grids. These grids have a total length of about 9,000 km. The distribution companies own and operate grids with a voltage level of 60 to 0.4 kv. These companies, together with transformer associations, are responsible for transporting electricity to consumers, metering the use by each consumer as well as collecting taxes and duties. Transformer associations are the smallest players among grid companies and they are also the most non-homogeneous with regard to size etc. They have the same functions as the distribution companies. 24 Energitilsynet 2011

26 The total length of grids operated by distribution companies and transformer associations is about 150,000 km. Each year DERA benchmarks the grid companies in the electricity sector, which are subject to revenue caps and efficiency regulation, i.e. regional transmission companies, distribution companies and transformer associations. Based on this benchmarking, DERA determines efficiency requirements for the companies. Benchmark 2011 DERA's benchmark for 2011 indicates that large differences in efficiency between grid companies will continue to exist - both internally in the different groupings of companies as well as between the groups, see figure 13. The benchmark is carried out using a so-called net-volume model on the basis of accounting figures for The differences in efficiency between the grid companies are therefore based on model calculations. In competitive markets, competition between companies implies that the least efficient companies are either forced to be efficient or to leave the market. This means that there is only a small difference in efficiency of companies in competitive markets. Transformer associations have the highest calculated efficiency difference. At the same time, according to model calculations, the least efficient companies are among transformer associations. This indicates that transformer associations are a very heterogeneous group with large differences in size, number of employees etc. (for example, small associations without employees), and this affects the material. In addition, in terms of other grid companies, the calculations indicate that regional transmission companies have the lowest level of difference between the most and least efficient company. Energitilsynet

27 Figure 13 Difference in the efficiency of electricity grid companies Least efficient Most efficient Average Regional transmission Distribution Transformer associations Note: The figure shows the index for the cost efficiency of the electricity grid companies, a high index means high efficiency; low index, low efficiency. The average is set equal to index 100 and expresses the averagely efficient grid company within each category. Source: Own calculations on the basis of efficiency analyses. DERA established efficiency requirements for grid companies based on the benchmark of their economic efficiency and quality of supply. These requirements mean an overall reduction in the companies' revenue cap of DKK 108 million. Of this amount, DKK 104 million is a permanent requirement, based on low economic efficiency, while DKK 4 million is a one-year efficiency improvement requirement as a result of relatively poor quality of supply. Overall, DERA has reduced grid companies revenue caps with permanent efficiency requirements of approx. DKK 460 million in the period , in addition to one-year reductions totalling about DKK 20 million. The purpose of the efficiency regulation is to replace the efficiency pressure from competition on companies in competitive markets. DERA calculations (see box on standard deviation below) show that the differences in the efficiency of grid companies are still significantly greater than the differences in competitive markets. In other words, efficiency pressure is substantially higher in competitive markets. 26 Energitilsynet 2011

28 Standard deviation Not only the difference between the most efficient and least efficient enterprise is of interest. It is also important to see whether there is generally a great difference between companies efficiency within the group. This can be done by examining how much each company s efficiency deviates from the group average (eg. distribution companies). This can be measured by calculating the standard deviation of the spread in the cost efficiency of the companies. Standard deviation 5 is a statistical measure that shows how much the efficiency of individual enterprises deviates from the average. A high standard deviation shows that there is generally a great difference between enterprises efficiency, whereas a low standard deviation shows that in general there is no significant difference in efficiency. The Danish Competition and Consumer Authority uses a threshold of 9.6 for standard deviation of the spread as an indicator of competition intensity (corresponding to the average spread for all industries in Denmark plus 25%). If the spread exceeds this threshold, this is seen as an indication of competition problems. The standard deviation of the spread in the cost efficiency of grid companies based on the DERA benchmark from 2011 lies between just under 12 (regional transmission) and 29 (transformer associations) and is therefore substantially higher than the Danish Competition and Consumer Authority threshold. Compared to 2010, the standard deviation has decreased significantly among regional transmission companies and risen correspondingly among transformer associations. The standard deviation for distribution companies is on a par with All else being equal, this means that differences in the efficiency of distribution companies have become smaller. On the other hand, differences in efficiency among the regional transmission companies have increased, however the fact that only 10 companies are included in the material should be taken into consideration Regional transmission Distribution Transformer associations Standard deviation 2011 Threshold for potential efficiency improvement 5 5 Xxxxxxxxxxxxxxxxxxxx Standard deviation is the square root of the variance. The variance shows by how much individual observations vary in relation to the average. A high level of deviation, and thus a high standard deviation, represents a large spread in observations. Energitilsynet

29 Changes in the revenue caps from 2007 to 2011 Electricity grid companies are regulated overall on the basis of revenue cap regulation which sets the permitted revenues for the companies at a level in real terms corresponding to 1 January 2004, see below. Revenue caps Establishment and regulation of the revenue caps are described in the Executive Order on revenue caps for grid companies and regional transmission companies covered by the Electricity Supply Act, Executive Order no. 335 of 15 April The revenue caps are set on the basis of the companies' regulation prices and the amount of electricity they supply. The regulation price is set on the basis of the company's operating revenues in 2004 divided by the amount supplied in The regulation price is adjusted annually by the change in the regulation price index. If the level of activity is unchanged, the revenue caps will therefore be held at the same level in real terms. The regulation price can be increased or reduced under different circumstances; establishment of necessary new investment, changes in the costs imposed by the authorities, or grid losses. Therefore the revenue caps comprise a basic level based on the 2004 revenues, price adjustments and increases in the revenue caps as a result of necessary new investments. From 2005 to 2008, the revenue caps rose by about DKK 1.1 bn. This increase is primarily due to a price adjustment of about DKK 800 mill. and to a lesser degree to necessary new investments of about DKK 300 mill., see figure Energitilsynet 2011

30 Figure 14 Changes in the revenue caps from 2005 to 2011, current prices DKK mill Indexation Necessary new investments Revenue caps 2005 Note: The above figure does not include the regional transmission companies. The revenue caps have not been finalised for 2005 and after. The above revenue caps have been projected by the regulation price index on the basis of the 2005 revenue caps and assuming unchanged activity. The size of the necessary new investments have been estimated with a reservation for un-notified necessary new investments, as there is no period of limitation for recognising these. Source: The DERA Secretariat. In 2007 revenue cap regulation was supplemented by a benchmark for the costeffectiveness of the electricity grid companies. The purpose of the benchmark is to encourage the companies to make their operations more efficient and to reduce costs in the same way as companies in a free market. In 2008 the benchmark was further extended to include companies' quality of supply. This extension will ensure that the companies do not reduce their costs to the detriment of quality of supply. Energitilsynet

31 The financial efficiency and quality of supply of the electricity grid companies has basically been benchmarked using the same models throughout all the years, but DERA regularly develops the models further. In the period from 2008 to 2012, DERA has imposed permanent reductions on the electricity grid companies in the revenue caps with an accumulated value of approximately DKK 460 mill. In 2012 this means that the total revenue caps are about 6% lower than they would have been, if the efficiency requirements had not been imposed on the electricity grid companies, see table 3. Table 3 Efficiency requirements for electricity grid companies - regulation years Efficiency requirement (DKK mill.) Efficiency requirement in relation to revenue cap for the year (%) Accumulated efficiency requirement (current prices, DKK mill.) Accumulate efficiency requirement in relation to the revenue cap for 2008 (%) 0,6 0,9 1,7 1,6 1, ,5 1,5 3,2 4,8 6,2 Note: The revenue caps for have not been finalised. Note also that benchmarking of the companies is done in advance for the regulation year in which the revenue caps are reduced. The reduction of the revenue caps in 2008 was therefore on the basis of DERA benchmarking in 2007 and so on. Source: The DERA Secretariat. The effect of DERA's benchmarking on the electricity grid companies' revenue caps can also be illustrated by projecting the changes in the revenue caps with and without the efficiency requirements, respectively, see figure Energitilsynet 2011

32 Figure 15 Changes in revenue caps with and without efficiency requirements, current prices Millions Annual revenue cap Annual indexed revenue cap Note: The above figure does not include the regional transmission companies. The revenue caps have not been finalised for 2005 and after. The above revenue caps have been projected by the regulation price index on the basis of the 2005 revenue caps and assuming unchanged activity plus approved necessary new investments. Source: The DERA Secretariat. In the period after addition of the efficiency requirement ( ) the revenue caps in current prices are relatively constant, which corresponds to a reduction in the revenue caps in terms of fixed prices. This is because of a combination of falling necessary new investments, slower increases in prices, and more efficiency requirements. The revenue caps are solely an expression of the maximum permitted revenues for the electricity grid companies and therefore they do not necessarily reflect their actual revenues or costs. The companies are free to charge less than their revenue cap and there can be large differences from company to company. The average electricity grid company utilises about 90% of its revenue cap. 6 However, there is the reservation that there may be unprocessed and un-notified applications to increase the revenue caps because of necessary new investments. This is especially relevant for the last year in the period. Energitilsynet

33 In the period from 2006 to 2010, the operating costs of the electricity grid companies have fallen by about DKK 750 mill., see figure 16. In the same period, depreciation has increased by about DKK 400 mill. and the proportion of total costs made up by depreciation has increased from 28% to 36%. Figure 16 Electricity grid companies' costs Depriciations Energy-saving costs Operating costs Note: Costs are stated at current prices. Source: The DERA Secretariat. The costs of energy-saving activities have previously been paid as part of the operating costs, but for accounting purposes, for 2010 they have been separated from the other costs. The costs amount to about DKK 400 mill. and they include the costs of the electricity grid companies to satisfy energy-saving obligations of GWh. Overall costs are relatively stable (at current prices) over the period, which means that, all else being equal, the electricity grid companies have been able to introduce efficiency improvements at the same rate as prices have increased. However, it should be stressed that this development is for electricity grid companies as a whole and the development for individual companies may well deviate from this. On this basis, it is not possible to assess the performance of individual companies, or to assess the potential for further efficiency improvements. A fundamental assumption in the legislative foundation for benchmarking by DERA of the electricity grid companies is that it should be possible to operate the companies equally efficiently, after taking into account the differences in the composition of the grid etc. Therefore there will continue to be potential efficiency 32 Energitilsynet 2011

34 improvements as long as there is a difference in the cost-effectiveness of the least efficient electricity grid companies and the most efficient electricity grid companies. Note that the DERA benchmark and statement of potential efficiency improvements etc. for the grid companies are based on the model calculations included in the net-volume model used to benchmark the companies. The benchmark model is regularly adjusted in order to ensure the best possible alignment between the model and the actual conditions in the grid sector. Furthermore, when actually running the model there is priority on ensuring that results for specific companies which deviate from the general trends in the sector are extracted for closer assessment and that the results for the individual companies are generally subject to a specific assessment. On the basis of the assumptions etc. behind the benchmarking model, DERA has calculated the average potential for efficiency improvements for the electricity grid companies for the years , see figure 17. Figure 17 Calculated potential for efficiency improvements ,25 0,2 0,15 0,1 0, Benchmark basis (2006=100) Potential for efficiency improvements (%) Note: The average potential for efficiency improvements and benchmark basis have been calculated in the same version of the net volume model (the most recent, from 2011) on the basis of data for the relevant year. The potential for efficiency improvements is weighted in proportion to the net volume of the electricity grid companies. Source: The DERA Secretariat. Since the introduction of benchmarking, DERA has made regular adjustments to the model applied. The above calculations have therefore been made separately, using the same model assumptions. The benchmark basis is stated in annual prices, but the potential for efficiency improvements is fully comparable throughout the period. Energitilsynet

35 According to calculations, the level of costs for the most efficient electricity grid companies (benchmark basis) fell over the period by about 7% in current prices. The results of the benchmark model for this area indicate that the most efficient electricity grid companies have become more efficient since The fundamental premise for the benchmarking is that all electricity grid companies should be able to achieve the same cost-effectiveness. Therefore, all else being equal, increased cost-effectiveness amongst the most efficient electricity grid companies will result in stricter efficiency requirements for the least efficient electricity grid companies. It is clear from the above that there are large differences between the cost-effectiveness of electricity grid companies calculated by the model, and, except for in 2008, these differences have been relatively constant over the period. An average electricity grid company has a potential for efficiency improvements of about 15%. The constant potential for efficiency improvements indicates that the average electricity grid company has not become more efficient over the period compared with the most efficient electricity grid companies. The least efficient electricity grid companies therefore have to continue to reduce their costs in order to catch up with the most efficient companies. This applies irrespective of whether the rest of the sector has become more efficient over the period. Therefore DERA still finds good reason to impose efficiency requirements on electricity grid companies on the basis of a comparison of the companies' costeffectiveness. 34 Energitilsynet 2011

36 Municipalities, supply activities and rules on offsetting If a municipality receives something of financial value from its own energy enterprise, this may be consideration for sales or dividends from the enterprise, a number of rules on offsetting in the state block grant come into play. DERA is the ruling authority in terms of assessing the amount of this financial value. If funds are transferred to the municipality, these will be offset against the funds the municipality receives in the state grant. For example, this happened when the Municipality of Aalborg's electricity grid company distributed about DKK 61 mill. to the municipality. After this DERA determined the sum received by the municipality and the Ministry of the Interior and Health at that time made a subsequent reduction in the state grant to the municipality. Focus is on whether the tax-financed area receives value from the charges-financed area in the municipality, or whether another charges-financed area, for example waste water management, receives value from electricity, gas or heating activities. The value may be capital, ownership interests, physical assets or something else. If something of value is transferred to the municipality, it has to be determined whether this is part of an ordinary trading situation or whether it is in connection with a restructuring of an enterprise, as both these situations do not lead to offsetting. Therefore the rules should be considered in the context of other rules, for example company or tax rules, as these rules sometimes underpin actions by enterprises. Decisions on whether a specific transaction triggers offsetting are therefore based on considerable interpretation work, and as the regulations are still relatively new, there remain a number of issues which DERA has not previously made a decision on and therefore the legal effects have to be clarified. The fact that the regulations are not directly available or established in legal practice means that there is a challenge for municipalities to ensure compliance with the regulations while maintaining appropriate organisation of the tasks. Therefore DERA is focussing on being able to assist municipalities with advisory statements and so on. This section is a brief account of the results of DERA's activity in this area and of the regulations, as well as a proposed simplification of the regulations. Scope of the duty to notify Municipalities which directly or indirectly own interests in enterprises with a duty to notify (see box below) have a duty to notify DERA annually of whether the Energitilsynet

37 municipality has received funds or whether the municipality's enterprises with a duty to notify have transferred funds from electricity or heating activities to water or waste management. A total of 89 municipalities are subject to the duty to notify. In 2011 these municipalities notified about 233 enterprises, of which 16 enterprises are owned jointly by more than one municipality. There is considerable variation in the amount of funds notified to DERA since the regulations were introduced. As an illustration, municipalities notified about DKK 7.1 bn. as received in 2007, while in 2009 only DKK 0.3 bn. was notified, see table 4. The Ministry of Economic Affairs and the Interior offsets the funds in the municipality's block grant in accordance with the regulations, which somewhat rigidly mean that offset for municipalities is either 40% or 60% of the amount received. That means that in a year in which DKK 7.1 bn. is notified, the municipalities' state grant will be reduced by an amount of between DKK bn. Table 4. Registered amounts received, (DKK bn.) Year in which transfer occurred I alt Total amount (DKK bn.) 7,1 1,9 0,3 1,4 10,7 Source: The DERA Secretariat. 36 Energitilsynet 2011

38 Background for the offsetting regulations The regulations on municipalities' registration obligation in the Electricity Supply Act have existed since they were introduced in 1997 to ensure cohesion between the municipal tax rate and the level of service. In some municipalities there could be significant revenues which did not appear in the system for taxes, state grant and balancing, and therefore it was decided that municipalities' revenues from activities subject to the Electricity Supply Act should be fully offset against the state grant to the municipalities. This was to preserve cohesion between the municipalities' service level and tax rates independently of their involvement in electricity supply activities. In 2000, legislators decided to have similar offsetting regulations apply for the heating area and therefore the Heating Supply Act was introduced with parallel regulations corresponding to the offsetting provisions in the Electricity Supply Act. Note that the gas companies owned by the municipalities are also subject to the offsetting regulations. However, regulation of the gas area is not entirely parallel with the electricity and heating area. In 2003 it was decided to change the offsetting scheme for both electricity and heating so that the rate for offsetting was reduced from full offsetting to a lower percentage. On the other hand, the previous statement of municipalities' 'contributed capital' in energy enterprises was cancelled. Prior to 2003 this could be returned to municipalities with no offsetting at all. Therefore the scope of offsetting was extended to include distributions, e.g. in the form of dividends, in order to avoid avoidance and in order to counter municipalities' incentives to sell. Furthermore, the 2003 explanatory notes to the Act stated that the registration obligation was not only to cover enterprises with activities covered by the Electricity Supply Act or Heating Supply Act, but funds from every company subject to the duty to notify, so that companies in the same group as an electricity or heating company are covered, such as service companies, biogas companies, water companies etc. This was explained in that other activities in the same group as electricity and heating activities were assumed by the legislators to be exclusively related to activities which originally arose from the Electricity Supply Act or the Heating Supply Act, or were covered by the municipal power of attorney and therefore subject to non-profit principles. Energitilsynet

39 Uncertainty regarding the regulations The DERA Secretariat receives regular queries regarding interpretation of the offsetting regulations in the Electricity Supply Act and the Heating Supply Act, and it seems there has been an increasing number of enquiries for advisory statements in recent years. The wording of the regulations seems primarily to give rise to questions of interpretation from municipalities on two issues; distributions subject to the registration obligation and exemptions to distributions subject to the registration obligation in section 37(2) of the Electricity Supply Act on company restructuring. On the basis of registered amounts received in recent years, it is not possible to ascertain an increase in the amounts paid to municipalities. Therefore is seems likely that the greater number of queries about company reconstructions is because the simpler company reconstructions have now been completed, for example in connection with liberalisation of the electricity market or reorganisation of the water sector after This leaves reconstructions which require further interpretation of the provisions of the Electricity Supply Act. To a certain extent, the complexity is because interpretation of the offsetting regulations has to be done in parallel with other regulations such as company law and tax law. Municipal organisation of supply activities and the offsetting regulations Originally, supply activities were typically dealt with by municipalities' technical administration. The organisation could be illustrated as follows 7 : Municipality Electricity grid Waste water Water Heating What can be complicated in the above illustration is assessing when funds are actually available for the municipality; that is the tax-financed area. A closer assessment is required of the current accounts which separate the finances in the tax-financed areas from areas financed by charges.. 7 This structure is common in municipalities in which the activities are dealt with by the technical administration. That is authority is exercise in the box marked Municipality, while operational tasks in supply activities are dealt with by the technical administration, for example in the Wastewater box. 38 Energitilsynet 2011

40 However, for many years there has been a tendency for municipalities to separate their supply activities into limited companies, either as independent companies or in supply groups. This can be illustrated thus for independent companies: Municipality Electricity grid Waste water Water Heating The two organisational structures above make it impossible to transfer funds from the company to other municipal companies without offset in the municipality's state grant. This is because the funds have to go through the municipality to get to another supply area. As mentioned above, other municipalities have separated all supply activities into supply groups, including groups in which the municipality has decided to keep part of the supply activities within the municipal administration with a sort of holding function in the technical administration. An example supply group is illustrated below: Municipality Holding company Electricity grid Waste water Water Heating In the example above, to a certain extent, funds can be transferred internally within the group, without the municipality receiving any funds. If funds are transferred to a holding company, these funds have not been received by the municipality, and the municipality therefore will not be subject to offsetting in the state grant. However, this does not apply for transfers from electricity and heating enterprises to water and waste management. Energitilsynet

41 In this context it can be difficult to distinguish between different supply activities and therefore the municipality can risk being subject to offset for funds which have not been received by the municipality. This is illustrated below, where the red arrows indicate transfers which result in offsetting and the blue arrows show possible transfers without offsetting. Municipality Holding company Waste 1 Electricity grid Waste 2 Heating Offsetting regulations in enterprises with joint production As mentioned above, offsetting is required if funds are transferred from the chargesfinanced area to the tax-financed part of the municipality. Furthermore municipalities are also subject to offsetting in the state grant if funds are transferred from energy supply activities to water or waste management, as illustrated above. These regulations give rise to new computational problems, if the transfer of funds from the energy area to the wastewater area is within the same company. An example is joint production of several supply activities, for example wastewater companies with electricity production. These wastewater companies are electricity companies in the context of the Electricity Supply Act. The Electricity Supply Act requires that municipalities separate these wastewater treatment plants into an electricity company and a company responsible for wastewater management. According to the regulations in the Act, a wastewater treatment plant with electricity production should have a corporate structure as follows: 40 Energitilsynet 2011

42 Municipality Wastewater treatment plants with electricity production Electricity company (pursuant to the Electricity Supply Act) Means => settlement Means => settlement Wastewater treatment companies (pursuant to water regulations) The corporate separation provides a basis for calculating possible transfers of funds between the electricity production part and the wastewater treatment part. However, the DERA Secretariat can see that a number of wastewater treatment plants have not implemented this corporate separation of electricity and wastewater activities. This type of plant can be illustrated as below: Municipality Waste water treatment plants with electricity production Both electricity companies and waster water companies Means => settlement Means => settlement Energitilsynet

43 The figure illustrates that within the same company, funds can be transferred between electricity activities and wastewater activities which should be subject to offsetting. However, from a purely accounting perspective, it is difficult to calculate the amount of the funds transferred. In reality, this involves calculating whether funds have been transferred through an accounting separation which corresponds to two distinct activities separated in two companies. This calculation involves an accounting statement of the following: Waster water treatment plants with electricity production Opening balance Quantity of electricity generated Price of electricity at the time of use Investment for production Distribution of manual labour Means realised by sale of electricity However, such separation is not done by many companies currently being processed by the DERA Secretariat in order to notify the relevant authorities. Electricity production at a wastewater treatment plant is generated from exploiting the biogasses formed in the sludge from treating the wastewater. The DERA Secretariat has the impression that electricity production at a wastewater treatment plant has not been considered as an independent activity, but rather as an underlying activity for wastewater management. As the administrative authority, DERA is responsible for supervising compliance with the regulations. DERA considers that an important element of this responsibility is to be able to pass on the information and experience arising from being in contact with the regulative parties and from being able to see the consequences of the regulations. In this context, work on the issue of wastewater treatment plants with electricity production has led to the following considerations: If they were aware of the fact that own production of electricity rather than buying electricity externally for use at a wastewater treatment plant requires the establishment of an electricity company, would municipalities have organised activities differently? Instead of making a corporate separation, would municipal owners of wastewater treatment plants with electricity production consider selling electricity production and in turn buying electricity externally? 42 Energitilsynet 2011

44 Can the regulations on offsetting mean that joint wastewater treatment and electricity production become unprofitable, despite the synergy effects from such joint activities? DERA has no basis on which to answer these hypothetical questions, but they are important for the Authority, so in collaboration with authorities, trade associations and others, DERA will take them further. In the specific example described here, this could lead to identifying possibilities to simplify the regulations. In the opinion of DERA, it could be appropriate to examine more closely the consequences of exempting the relevant wastewater companies from the duty to notify in the Electricity Supply Act (and thereby repeal offsetting for joint production), including the financial consequences, incentives to exploit the potential in joint production, and possible possibilities for subsidies between electricity and wastewater treatment activities. Repealing the regulations for offsetting joint production for wastewater companies would not involve changing municipalities' possibilities to receive funds from a wastewater treatment plant, as this is regulated by the rules for the water area. Irrespective of whether or not it is deemed relevant to amend the legislation for the specific example of wastewater treatment plants with electricity production, the regulations will continue to be relatively complex, and DERA will continue to assist municipalities with guidance about the offsetting regulations, both specifically with regard to wastewater companies with electricity production, and generally. Energitilsynet

45 International work The European Commission has accelerated harmonisation of framework conditions and regional market integration in the EU in order to realise the Council of Ministers' objective of establishing a single European market for electricity and gas by no later than The Nordic Council of Ministers for Business, Energy and Regional Policy strongly supports the establishment of a common Nordic market for end users, if possible by no later than Both these challenges, as well as ever more general mutual dependency between energy systems across European borders, have sharpened focus on the international work at DERA. DERA's international work aims at influencing the European and Nordic framework conditions for the electricity and gas markets and at contributing to efficient market integration between the Nordic and continental European markets. DERA's cooperation with energy regulatory authorities in other European countries takes place within NordREG as well as the CEER and the Agency for the Cooperation of Energy Regulators (ACER). The DERA Secretariat takes part in this work in order to influence Nordic and European frameworks for the energy sectors, under which Danish energy enterprises must also function. Participation in international work is also an opportunity to gain more information and knowledge that DERA can apply and disseminate in its contact with Danish enterprises, organisations and authorities. NordREG is a cooperative body between the Nordic energy regulatory authorities. The need for a special Nordic body arises primarily from the traditional close cooperation on energy between the Nordic countries, as illustrated in the common Nordic wholesale electricity exchange, NordPool. Secondly, Nordic energy ministers support plans on realising one common Nordic energy market; not only in the wholesale market, but also in the retail market. CEER, the Council of European Energy Regulators, is an association established by the European regulatory authorities in the energy area. ACER, the Agency for the Cooperation of Energy Regulators, coordinates regulation by the European regulators, monitors regional collaboration between transmission system operators in the electricity and gas sectors, and monitors the single European markets for gas and electricity. ACER was given legal capacity from 3 March 2011, and the Agency replaces the ERGEG group, which was mentioned in 44 Energitilsynet 2011

46 previous years' editions of Results and Challenges. ACER is headed by a director and a Board of Regulators (BOR). The director of ACER must consult the Board of Regulators before making a decision. ACER will complement work carried out by the individual national regulators, and ACER has more general tasks than the national regulators. CEER/ERGEG In February 2011, the European Council reported that, by the end of 2014, an integrated European market will be established in which electricity and gas can move freely across all borders. For the electricity area, four cross regional roadmaps have been drawn up to chart the way to 2014 in four fundamental areas: the market in the long term, the dayahead market (purchase/sale of electricity for the next 24 hours), the intra-day market (purchase/sale of electricity within the current 24-hour period) as well as capacity calculations and allocation. The roadmaps were drawn up by the regulators and coordinated with the market players. The DERA Secretariat has also been especially involved with the roadmap for the day-ahead market. In this context, the DERA Secretariat and the German regulator, Bundesnetzagentur, have taken over leadership of the price coupling project for north-west Europe. This is the first step towards establishing a common day-ahead market for all of Europe, and implementation is planned for the end of Another important topic in 2011 has been the entry into force on 28 December 2011 of the Regulation on wholesale energy market integrity and transparency (Regulation 1227/ REMIT). The Regulation is to prevent market abuse, specifically in the European energy markets for electricity and gas, and thereby promote fair competition in the wholesale markets to benefit final energy consumers. This means that in 2012, the DERA Secretariat will monitor the wholesale market with a view to preventing and penalising market abuse. Monitoring will be in collaboration with ACER, which will have primary responsibility for gathering trading data and structural market data as well as monitoring trading in wholesale products (electricity and gas) in Europe. If ACER suspects abuse in Denmark, ACER will brief DERA as the national authority, and then DERA will investigate the situation more closely and make any decisions at national level. Furthermore, in 2011 the European regulators have been working on the Framework Guidelines. Framework guidelines are guidelines for the future common energy markets for electricity and gas, and they form the basis for ENTSO the European Network of Transmission System Operators for Electricity in work to Energitilsynet

47 prepare network codes (instructions for the market). In 2011 guidelines were drawn up for capacity allocation and bottle-neck management, access to the grid, and system operation in the electricity area. In 2012 ACER will work on the guideline dealing with balancing. In the gas area, a guideline was prepared for capacity allocation as well as one for balancing in In the gas area, the DERA Secretariat is taking part in the international collaboration to develop a cohesive European gas market. The Secretariat's primary involvement is in the formal working groups set up by the European energy agency (ACER). The Secretariat is therefore part of the ACER Gas Working Group, which has a clear primary task to coordinate preparation of the new European framework guidelines for the areas designated as central areas for European harmonisation in the Third Liberalisation Package. The working group is also responsible for contact and discussions with various European stakeholder organisations, including in particular the European Network of Transmission System Operators (ENTSO-G), which is responsible for developing harmonising grid rules which are in accordance with the framework guidelines from ACER and which will regulate in detail the future European gas market. NordREG Work at NordREG deals purely with the electricity area and in 2011 the DERA Secretariat held the chairmanship. The NordREG chairmanship alternates between member countries and from 1 January 2012 Finland will take over. Since 2010 NordREG has prioritised work in the retail market area. In 2010 a detailed and ambitious project plan for implementation of a common Nordic enduser market in 2015 was prepared. With a view to following up the project plan, in 2011 the Nordic regulators prepared studies and recommendations for, e.g. future invoicing methods and various other elements of market design etc. In the wholesale area NordREG has addressed the issues of regulating Nord Pool Spot, the Nordic Exchange and optimisation of market conditions in order to reduce very significant peak prices. In 2012 NordREG will also examine the market in the long term and see whether new products can be introduced which can give market players better opportunities to hedge risk. 46 Energitilsynet 2011

48 The work of DERA Adoption of Act no. 466 of 18 May 2011, which among other things implemented the EU's Third Energy Liberalisation Package into Danish legislation and established the DERA Secretariat as an independent institution. The background for this was that, with the Third Energy Liberalisation Package, the European Commission wanted to ensure that regulators were independent of all economic administrative and political interests at European level. The Danish energy regulator has always been an independent authority with Secretariat assistance from a special body in the Danish Competition and Consumer Authority. Establishing the Secretariat as an independent institution has ensured the formal framework for the independence of the Secretariat's work required by the Third Energy Liberalisation Package. DERA's competences and main tasks are laid down in the three energy supply acts - the Electricity Supply Act, the Natural Gas Supply Act and the Heating Supply Act - as well as the Act on Energinet.dk. DERA s decisions are published regularly on its website, and in addition to this, large cases and cases involving matters of principle are mentioned in the newsletter EnergiNyt, which is also available on the website (in Danish). DERA can address an issue or a case at its own initiative or on the basis of an enquiry by an enterprise or consumer etc. DERA will act in such matters if it assesses that the enquiry gives reason to suspect that there has been a violation of the law. If this is the case, the matter will be processed, irrespective of whether or not there is a formal complaint. Decisions made by DERA can be brought before the Energy Board of Appeal by anyone with a significant and individual interest in the decision. Energitilsynet

49 New legislation The most important changes in energy legislation in 2010 with significance for the work and tasks of DERA are: The electricity area Amendments to the Electricity Supply Act and the Natural Gas Supply Act, Act no. 466 of 18 May 2011 Act no. 466 entered into force in May. The Act implements the EU Third Energy Liberalisation Package in the Electricity Supply Act and the Natural Gas Supply Act. The Bill is described in detail in Results and Challenges 2010, and the Act adopted in May 2011 is more or less identical to the Bill. Further to the adoption of the Act, a number of Executive Orders have been issued that also implement a series of provisions from the Third Energy Liberalisation Package. Executive Order on deadlines for DERA s processing of certain appeals, Executive Order no of 15 December 2011 This Executive Order stipulates the type of appeals on which DERA must make a decision no later than two months after having received the appeal (this period can be extended). The Executive Order only implements the provisions in the Directives on deadlines for appeals, cf. Article 37(11) of the Electricity Directive and Article 41(11) of the Natural Gas Directive. These provisions require status as a party. Thus the Executive Order requires that the claimant has a significant and individual interest in DERA s decision regarding the appeal. The Executive Order does not change the existing division of competences relating to appeals between DERA and the Energy Supplies Complaint Board. DERA does not deal with complaints relating to civil court disputes. Executive Order on a programme for internal monitoring of grid and transmission companies and Energinet.dk in accordance with the Energy Supply Act, Executive Order no. 980 of 6 October 2011 and Executive Order on a programme for internal monitoring of distribution and storage companies and Energinet.dk in accordance with the Natural Gas Supply Act, Executive Order no. 979 of 6 October These Executive Orders implement the amendments made to section 20a of the Electricity Supply Act and to section 11a of the Natural Gas Supply Act. A provision has been added that stipulates that companies covered by the programme 48 Energitilsynet 2011

50 must describe how they ensure compliance with the requirement that the person responsible for monitoring within the company be independent. Furthermore the provisions laid down in section 20b of the Electricity Supply Act and in section 11b of the Natural Gas Supply Act concerning the grid company s independent identity were incorporated in the Executive Order. This means that in future distribution companies must describe in the programme how they will ensure compliance with the requirement for independence with regard to the company s communication with its customers. Executive Order on rules concerning notification of prices and terms for supply of electricity, as well as terms and conditions for use of the transmission and distribution grid, including tariffs, Executive Order no 930 of 17 August 2011 The Executive Order on rules concerning notification of prices and terms for supply of electricity, as well as terms and conditions for use of the transmission and distribution grid, including tariffs has been adjusted as part of updating the Executive Order in accordance with the new deadlines for notification laid down in other regulations. Executive Order on system operators and use of the electricity transmission grid etc., Executive Order no. 891 of 17 August 2011 The Executive Order includes provisions that implement parts of the Electricity Directive, Directive 2009/72/EC of European Parliament and of the Council of 13 July 2009 concerning common rules on the internal market in electricity. The provisions include exchange of information between Energinet.dk and foreign system operators, publication of information of significance to the market, use of the transmission grid, drawing up rules and regulations etc., criteria for reliability, planning etc. Executive Order on metering electricity in end consumption, Executive Order no. 783 of 29 June 2011 The Executive Order includes provisions that aim at supporting the spread of intelligent and time-flexible electricity consumption patterns and electricity savings. Intelligent and flexible electricity consumption is required in order to incorporate more wind power and electric cars into the electricity system. Requirements concern the information, the meter is to measure and record, as well as the consumption data that is to be communicated to the consumer. At first, meter requirements will apply to meters that can measure consumption at short time intervals, can be read remotely, and that the grid companies decide to replace Energitilsynet

51 at their own initiative. Thus these requirements do not apply to existing meters or in situations where the grid company decides to replace an existing meter with an electricity meter that can only measure the accumulated consumption. Executive Order on revenue caps for grid companies and regional transmission companies covered by the Electricity Supply Act, Executive Order no. 335 of 15 April The Executive Order on revenue caps for electricity grid companies and the regional transmission companies has been revised. Most important are the new rules for calculating the grid companies profit margin. Before the changes, the rules meant that a company s excess liquidity was also included in the company s profit margin, even though this excess liquidity must be paid back to consumers in subsequent years. Thereby companies risk both having to pay penal interest for excess liquidity and risk having their revenue cap lowered as a consequence of having too high profits. The new rules do not include excess liquidity that has to be paid back to consumers. Executive Order on Consumer Protection pursuant to the Electricity Supply Act, Executive Order no. 161 of 23 February 2011 and Executive Order on Consumer Protection pursuant to the Natural Gas Supply Act, Executive Order no. 162 of 23 February 2011 The Executive Orders on consumer protection have been revised, in particular to stipulate that electricity grid companies and natural gas distribution companies are now also obligated. Furthermore rules have been laid down concerning a three-month notice period for consumers in the event of significant changes to tariffs and terms. Finally, the new rules also stipulate that when a consumer wishes to change supplier, the current electricity company/distribution company must bring this request into effect no later than three weeks after receiving the request. The natural gas area Executive Order on DERA s monitoring of the internal market (single market) for electricity and natural gas etc., Executive Order no of 20 October 2010 With this Executive Order, DERA has been made responsible for carrying out a number of monitoring tasks. These tasks include monitoring market opening and competition in the Danish electricity and natural gas markets. DERA is to monitor the markets and competition conditions in general as well as specific indicators such as prices and customer mobility. The Executive Order also includes provisions that stipulate that DERA is to monitor whether the players in the market observe their obligations in accordance 50 Energitilsynet 2011

52 with the Regulation on the conditions for grid access in connection with crossborder electricity generation and the Regulation on the conditions for access to the natural gas transmission grid. DERA is also obligated to cooperate with the European Agency for the Cooperation of Energy Regulators as well as other European regulatory authorities. Executive Order on the use of the natural gas supply grid and plans for the future need for gas transmission capacity, Executive Order no of 4 November This Executive Order imposes an obligation on the players in the market to exchange information. Furthermore the Executive Order obligates Energinet.dk to draw up ten-year grid development plans, and to report these plans to the Danish Energy Agency and DERA. In connection with this, DERA is to assess whether these ten-year plans for grid development comply with the European grid development plans. The district heating area Amendments to the Heating Supply Act, Act no. 466 of 18 May 2011 A provision on self-assessment has been added to the Heating Supply Act, see section 23b(9). This Act authorises the Minister for Climate, Energy and Building to require that district heating companies conduct self-assessments on their compliance with the provisions in the Heating Supply Act on pricing and consumer influence. This information is intended for supervision. The Minister for Climate, Energy and Building can also lay down rules stipulating that self-assessment must include an auditor s statement by an external auditor other than the enterprise s regular auditor, who has not done any other work for the enterprise in the period during which the self-assessment is being carried out, or prior to this, and who can document experience with working with financial statements based on the Heating Supply Act. Energitilsynet

53 Members of DERA DERA was established in 2000 as a regulator acting without instruction from the Minister and independent of sector interests and authorities. DERA comprises a chairman, six members, and two deputies appointed by the Minister for Climate, Energy and Building for a period of five years. The members represent expertise in legal, economic, technical, environmental, business and consumer matters. DERA held nine meetings in Strategy and theme seminars have also been held for DERA s members, including visits to enterprises that are covered by the regulations and legislation administered by DERA. Finally, DERA also hosted Energiforum with enterprises and organisations from the sector taking part. On 1 January 2012, the Minister for Climate, Energy and Building appointed new members of DERA. On the same date Mr Anders Larsen, MSc (Econ); Mr Jens Sejer Sørensen, director; Prof. Ulla Neergaard; Mr Jens Roesgaard, operations manager; and Mr Torben Rieber, director, resigned as members of DERA. Members of DERA as at 1 January 2012 Uffe Bundgaard-Jørgensen, MSc (Econ.), Ph.D., director Chairman Anita Rønne Associate Professor in energy law Member Jacob Erik Holmblad MSc (Econ.), director Vice-Chairman Lis Holst Bachelor of Science (economics) Member Mogens Arndt, BSc (Engineering), director Member Jørgen G. Jørgensen Executive Officer Member Ella Maria Bisschop-Larsen, MSc, president Member Peter Skak-Iversen Executive Officer Deputy Niels Erik Andersen MSc, PhD Deputy 52 Energitilsynet 2011

54 Uffe Bundgaard-Jørgensen Jacob Erik Holmblad Mogens Arndt Chairman Vice-Chairman Member Ella Maria Bisschop-Larsen Anita Rønne Lis Holst Member Member Member Jørgen G. Jørgensen Peter Skak-Iversen Niels Erik Andersen Member Deputy Deputy Energitilsynet