Recently, I had an opportunity to ask a few questions about flexible demand in Denmark to Claus Krog Ekman. He is the climate and energy attaché at the Danish consulate in Palo Alto. The conversation is presented below.
- Why did Denmark decide to reform its electricity industry?
The reforms where implemented as a result of new EU-regulation aiming for an efficient, transnational European energy market. The purpose of the liberalization of the power sector was to create better conditions for competition, and thus to improve utilization of production resources as well as to provide gains from improved efficiency in the operation of networks.
- When did it take place?
The process of liberalization started in 1996 and the main reforms were implemented over the following decade.
- What were the highlights of restructuring?
Highlights include the unbundling of generation and retail from the natural monopolies of transmission and distribution services and the creation of the digital platform, DATAHUB, which ensure a smooth function of the market and easy access of new innovative agents on the market.
- When were smart meters introduced?
Smart meters were rolled out 2016-2020 to 3.4 million customers.
- Why was flexible demand introduced? What specifically is meant by flexible demand?
Flexible demand arises from varying (hourly) prices for electricity consumers. Consumers are willing to (either manually or automatic) move their electricity demand so they can save money. In Denmark, the difference in prices across the hours provides customers an opportunity to save money by shifting demand from expensive hours to inexpensive hours.
- What does the typical electric bill for residential consumers look like?
The bill has five elements:
- Cost of power (most costumers get the hourly price defined by the day-ahead spot market, but consumers can also choose to get a fixed price or to get the hourly price with a price cap).
- Cost of distribution. These tariffs typically feature time-of-day variation. Typical tariffs have three levels depending on season (example below from Radius operating the distribution grid in the Copenhagen area, Tariffer og netabonnement - Radius (radiuselnet.dk))
- Summer: Off-peak (9pm-6am) 12.15øre/kWh =1.9c/kWh, Normal (6am-7pm) 18.22øre/kWh=2.8c/kWh, Peak (5-9pm) 47.38øre/kWh=7.2c/kWh.
- Winter: Off-peak (9pm-6am) 12.15øre/kWh =1.9c/kWh, Normal (6am-7pm) 36.45øre/kWh=6.5/kWh , Peak (5-9pm) 109.34øre/kWh=16.8c/kWh.
- On top of the volumetric charge Radius has a fixed charge of 537kr=83$ per year.
- Cost of transmission. As per 2023, it’s a flat rate of 11.2øre/kWh (approx. 1.7 c/kWh).
- Taxes. In Denmark, there is a fiscal energy tax (69.7øre/kWh=10.7c/kWh in 2023 planned to decrease gradually to 56.10øre/kWh=8.6c/kWh by 2030) and a VAT (25% of the total bill including the tax).
- Subscription charge. Distribution companies add a charge for the meter (around $100/year), while retailers may also, in some cases, add a fixed charge depending on the customer’s tariff plan (typically around $4-6 /month)
The bill is paid to the retail company who then subsequently pay the Distribution System Operator and the Transmission System Operator.
- Is there a fixed charge in the bill? What does it cover?
Yes, the distribution companies add a fixed charge of around $100/year. The charge is specified on the bill under the distribution cost. Depending on the customer’s retailer, they you may also apply a fixed subscription charge. It is really up to the retail company how they want to run their business. Some charge a fixed charge per month while other add a charge per kWh. The retail market is competitive and consumers have 30-40 retail companies to choose from (and each of these typically offer 2-4 electricity products). Some customers prefer a fixed charge while others prefer a slightly higher energy price per kWh. Consumers can choose whatever product they want to choose.
- How are transmission and distribution costs recovered? Who provides these services?
The TSO is a state-owned entity. They recover their cost through an energy charge expressed in $ per kWh. The DSO’s are commercial entities, either cooperatives or investor owned. They are economically separated from the other parts of the supply chain. Their revenues are benchmarked and capped. They recover the costs through a per kWh charge that varies by time of day (for households there are typically three price levels) and through a fixed “meter” charge.
- How are generation (or energy) costs recovered? Who provides this service?
The power is typically sold on the Nordic power spot market, but some producers also buy power through a purchased power agreement. PPA’s. The spot market price is determined through the interaction of supply and demand. It is a highly competitive market with thousands of generators.
- Does the typical residential consumer have a choice of retail provider?
Yes (see answer to question 7 above). It is very easy to change suppliers.
- What pricing designs are offered by retailers?
There are more than 100 different power products to choose from. Most of them have either a fixed price or hourly (spot market) prices, while a few (new) products have hourly prices with a cap.
- How many consumers are on time-varying rates?
About 70% of the consumers are on hourly prices.
- What portion of their bill varies with time and what portion does not?
The power price element (if the consumer is on hourly prices) and the distribution element.
- What is the share of taxes in the bill?
Denmark has historically had substantial taxes on power consumption. The power tax is today around 10c/kWh for households. It is set to the EU minimum level (0.06c/kWh) for industry.
- Have households changed their load shapes in response to the time-varying rates?
Yes, the figure below shows the average hourly consumption in percentage of the daily consumption for the three first months of the year in single family houses, row and chain houses (without electric heating). The figure shows a clear development from 2020 to 2023 with a significant drop in the peak consumption and an increase in consumption during night.
- What is likely to happen in the future?
It is anticipated that automation and addition electric demands which can be shifted (e.g. EV’s, power-to-X and heat pumps) will boost flexible demand in the future resulting in a significant cost reduction due to better utilization of grid infrastructure. The automation of demand shifts will increase grid reliability and pave the way for additional renewable energy integration in the grid.
It’s worth noting that Denmark has the best grid reliability in Europe with power outages averaging less than 25 minutes per year. Also, the production of wind power in Denmark corresponds to more than 50% of the consumption which is the highest wind power penetration in the world.