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Market framework

Government electricity participants

Who are the principal government participants in the electricity sector? What roles do they perform in relation to#160;renewable energy?

The principal government participants in the electricity sector in Denmark are:

  • The Danish Ministry of Energy, Utilities and Climate (the Ministry)is responsible for supervising and regulating the energy industry.
  • The Danish Energy Agency (the DEA) under the Ministry is authorised under the Electricity Supply Act 2016-04-25 No. 418 (the ESA) to issue executive orders and other regulations that specify the provisions of, and supervising the adherence to, the ESA. The DEA also issues licences for electricity production, transmission and distribution.
  • The Danish Energy Regulatory Authority (DERA) supervises prices and terms for the distribution and transmission grid companies.
  • Energinet.dk is the Danish Transmission System Operator (TSO), an independent public entity established in accordance with the Act on Energinet.dk (Act 2011-11-08 No. 1097) and is in effect controlled by the Danish state. The TSO is required to operate, maintain and, if necessary, expand the energy infrastructure in order to uphold the required energy supply in Denmark. The TSO is responsible for securing the supply of both electricity and gas, while ensuring the smooth operation of the respective markets. The TSO’s responsibilities include, inter alia, maintaining the overall security of the short-term and long-term supply of electricity and gas, and developing the Danish electricity and gas transmission infrastructure.

Private electricity participants

Who are the principal private participants in the electricity sector? What roles do they serve in relation to renewable energy?

The principal private market participants in the electricity sector include Ørsted A/S, Vattenfall A/S, SEAS-NVE, SE (previously Syd Energi), NRGi, Energi Fyn, Energi Danmark A/S, Eniig A/S, NEAS Energy A/S, HOFOR A/S, E.ON Danmark A/S and Danske Commodities A/S.

In addition, Danish mortgage institutions also play an important role. None of the major Danish banks has yet been particularly involved in the financing of renewable energy, but Ringkjøbing Landbobank has been very active in the financing of a large number of small-scale projects. ING Bank, Rabobank, KfW and EIB have also financed a handful of Danish renewable energy projects.

Definition of ‘renewable energy’

Is there any legal definition of what constitutes ‘renewable#160;energy’ or ‘clean power’ (or their equivalents)#160;in#160;your jurisdiction?

A definition of what constitutes ‘renewable energy’ appears in the Danish legal framework. The Renewable Energy Act 2018-02-09 No. 119 (the REA) section 2(2) provides: ‘Renewable energy sources shall mean, among other things: wind power, hydropower, biogas, biomass, solar energy, wave and tidal energy, as well as geothermal heating.’ The REA does not govern electricity produced by waste incineration plants; this is governed by the ESA.

The REA refers to Executive Order No. 1323 of 30 November 2010, which defines renewable energy in accordance with article 2a of the Renewable Energy Directive (Directive 2009/28/EC) (ie, as ‘energy from renewable non-fossil sources, namely wind, solar, aerothermal, geothermal, hydrothermal and ocean energy, hydropower, biomass, landfill gas, sewage treatment plant gas and biogases’.

Framework

What is the legal and regulatory framework applicable to developing, financing, operating and selling power and ‘environmental attributes’ from renewable energy projects?

The legal and regulatory framework applicable to developing, financing, operating and selling power and ‘environmental attributes’ from renewable energy projects in Denmark is the REA and the ESA. They implement the Renewable Energy Directive. The REA contains the fundamental regulation for renewable energy sources and provides grants for companies to commence renewable energy projects, explore offshore energy sources and take up grid connection of wind turbines. The REA also covers, inter alia, price supplements for installations producing electricity from renewable energy sources, access to exploiting energy from water and wind offshore, connection and safety requirements for wind turbines, and the regulation of electricity production from large offshore wind turbines subject to a tendering procedure.

The REA and the ESA, together with the executive orders issued thereunder, are the key legislative basis for the renewable energy market.

The Danish Natural Gas Supply Act (the NGA) incorporates the New Gas Directive (Directive 2009/73/EC) and, together with the executive orders issued thereunder, it forms the key legislative basis for the natural gas market. It also applies to biogas, gas from biomass, to the extent that these gases may be technically and safely injected into and transported through the natural gas system. However, currently the Danish natural gas system only injects natural gas.

Stripping attributes

Can environmental attributes be stripped and sold separately?

Environmental attributes can be stripped and sold separately in Denmark. Executive order No. 1323 of 30 November 2010 implements article 15 of the Renewable Energy Directive regarding guarantees of origin of renewable electricity. According to section 1(1) of the executive order, a guarantee of origin of renewable energy is an electronic document issued to the end user to document a certain amount of energy originates from a renewable energy source. The TSO issues the guarantees to the supplier of renewable energy following its application. The guarantees of origin of renewable energy are the subject of trading (ie, the supplier of renewable energy can sell the guarantees on the free market).

Government incentives

Does the government offer incentives to promote the development of renewable energy projects? In addition, has the government established policies that also promote renewable energy?

The Danish government offers various incentives to promote the development of renewable energy projects in Denmark.

As electricity produced by renewable plants has historically been unable to compete financially with electricity produced by fossil-powered plants, owners of renewable energy plants have historically received (and still receive) a subsidy in addition to the market price. The REA and the ESA, with the executive orders issued under their title, provide price supplements for wind turbines, biogas, biomass, decentral power planted heat and waste-based power planted heat, solar PV, wave power and hydropower producing electricity by use of renewable energy. Hence, the REA and the ESA contain detailed feed-in tariffs and other forms of subsidies for the production of electricity from renewable resources. The size of the subsidy depends on a number of parameters, including the type of electricity plant in question, the point in time the project was grid connected, and the production capacity of energy production.

In general, price supplements to installations producing electricity from renewable energy sources can be awarded in four different ways:

  • Price increments: fixed rates granted as a supplement to the market price. The subsidy may either be awarded with or without a price cap. If a cap applies, the size of the subsidy will decrease if the market price reaches a certain level and be repealed if the price cap is reached. This model is currently being used for (among others) solar PV and wind projects and is generally known as the ‘25-cent scheme’.
  • Fixed settlement price: the supplier is guaranteed a certain settlement price. The subsidy amount is the market price deducted from the fixed settlement price.
  • For offshore wind turbines subject to a tendering procedure, the subsidy is a ‘contract for difference’. This means that the suppliers are obliged to sell the electricity to the market and the subsidy amount makes up the gap between the tendered price and the spot price.
  • Basic amount: the subsidy amount is a fixed yearly amount.

In addition to the above described price supplements, economical support to the construction of renewable energy plants is available. The subsidy is awarded as a certain percentage of the construction costs.

The TSO charges a public service obligation tariff (PSO), which covers the costs related to the public service obligations of the TSO and the grid. The tariff is paid by the suppliers to the TSO (and ultimately by the end users) based on the amount of electricity consumed in their area of delivery. In November 2016, a political agreement was reached by a majority in the Danish parliament. According to the agreement, the PSO will be phased out and integrated into the national budget instead.

It is noted that the parliament is currently negotiating amendments to the REA, and there seems to be a general consensus that new renewable energy initiatives are needed to further promote investments in renewable energy (this will probably entail lifting some of the current hindrances as opposed to implementing new support schemes). It is thus the general assumption that amendments can be expected to be agreed around November 2018. Based on the latest discussions and comments from the ministry, it seems likely that such amendments will (among others) seek to promote geothermal energy projects in order to also promote other renewable energy sources than the traditional peak-based sources (wind and solar) and biomass.

Are renewable energy policies and incentives generally established at the national level, or are they established by states or other political subdivisions?

Renewable energy policies and incentives are generally established at the national level. To a large extent, they originate from the implementation of EU regulation.

Purchasing mechanisms

What mechanisms are available to facilitate the purchase of renewable power by private companies?

There are a number of mechanisms available to facilitate the purchase of renewable power by private companies.

The TSO owns the transmission system in Denmark. However, private ownership of the distribution facilities is allowed and widely prevalent.

Under Danish law, private customers are permitted to enter into direct power purchase contracts without a utility party. However, in such case the customer must also enter into a separate contract with an electricity trader.

In December 2016, the Ministry and a large number of Danish distribution companies entered into an agreement whereby the distribution companies obliged themselves to implement energy savings on 10.1 PJ per annum between 2017 and 2020. This has resulted in the ‘energy saving subventions’ whereby private companies and other private persons can obtain subventions from a distribution company for expenses to consultancy on energy-saving initiatives, energy-saving renovation of a building or an energy-friendly replacement of a heating source in a building. The private company has the freedom of choice between all the distribution companies bound by the agreement.

The REA provides the opportunity for owners of wind turbines and solar PVs connected on-site to an installation for consumption by the owner to obtain permission from the REA to set off electricity sold and purchased within the same hour. Hence, tax will be imposed only on the net purchase of the electricity.

In 2012, the Danish parliament signed a cross-party settlement - the Energy Settlement - concerning a plan for a green transition in Denmark until 2020. As part of the agreement, the parliament aimed to support a phase-out of oil burner installations in buildings. This strategy is implemented in the REA by way of the subsidies to renewable energy sources as described in question 6. Hence, the subsidies to renewable energy plants are based on a political agreement. Denmark has a very strong tradition of abiding by political agreements and it is extremely rare for legislation to apply retroactively.

Legislative proposals

Describe any notable pending or anticipated legislative proposals regarding renewable energy in your jurisdiction.

As set out in question 6, some amendments to the REA are expected later this year. However, the general consensus is that the goal of such amendments will be to further promote renewable energy investments rather than to roll back any of the existing programmes.

The Danish state has tendered licences for both near-shore and offshore wind projects, support schemes for biogas has created new interest in both small-scale and larger-scale biogas facilities and a number of solar projects have been established. Whereas no further offshore wind tenders have been scheduled, the Danish government, in cooperation with the Belgium and German governments, has announced that it supports the establishment of an additional 20GW of offshore wind during the 2020s.

On 30 November 2016, the EU Commission presented the Winter Package, containing eight new legislative proposals concerning the energy sector in the EU. The purpose of the Winter Package is to define a way to reach the EU’s stated objective that 27 per cent of all energy consumption in 2030 shall originate from renewable energy sources. Accordingly, the Winter Package provides a starting point for improving energy markets, increasing shares of renewable energy, empowering energy consumers and reducing energy consumption. The upcoming new EU legislation - including the anticipated revised Renewable Energy Directive - will affect the Danish legislation on renewable energy and, accordingly, a number of legislative proposals are anticipated in order to implement the Winter Package into Danish legislation.

The government has in its ‘Platform for the Government of 2016’ (the Platform) pursued a climate plan for Denmark that was originally presented in the previous platform for the government of 2015. The plan aims to realise the following goals:

  • the overall climate target is a total reduction in Danish greenhouse gas emissions of 40 per cent by 2020 in comparison to 1990 levels;
  • all of Denmark’s energy supply shall be based on renewable energy by 2050; and
  • the government will present a strategy to comply with the above-mentioned EU goal for 2030. The strategy shall be presented before the end of 2017 and it shall, among other things, contain a promotion of heat pumps and utilisation of surplus heat and proposals to develop further Denmark’s leading position in the production of wind energy.

Further, the Danish government is still bound by the Energy Settlement (as described under question 8) to agree on the implementation of a 2020 Plan. The current Platform states that in autumn 2017 the government will present a proposal for a new energy agreement concerning the time after 2020, to be entered into between a broad range of parties in the Danish parliament.

In 2014, the parliament passed the Danish Climate Change Act. The purpose of the law is to ensure a stable direction and framework around Danish climate policies. The act outlines a goal to transform the Danish economy into a low-emission economy by 2050 and it obliges the Energy, Utilities and Climate Minister to present proposals for new national climate targets to parliament at least every fifth year.

By complying with the national climate goals including the goals set out in the Platform and the Climate Change Act, Denmark will also comply with the Nationally Determined Contributions under the Paris Agreement from December 2015. On 27 October 2016, the Danish parliament passed a motion for a resolution to ratify the Paris Agreement.

Drivers of change

What are the biggest drivers of change in the renewable energy markets in your jurisdiction?

With regard to the biggest drivers of change in the renewable energy markets in Denmark, it is the ambition to transform the Danish economy into a low-emission economy by 2050 in order to reduce CO2 emissions. Hence, Denmark aims to be independent from energy produced by fossil fuels by way of coal, oil and natural gas. Instead, renewable energy sources shall produce the total energy consumption in Denmark. In addition, one of the fundamental objectives behind the Danish politics for renewable energy is to secure the stability of energy supply in Denmark as the natural resources of oil and gas are limited. A transition to a low-emission economy will imply that energy production will take place locally and regionally, whereby the need to import fossil fuels allegedly will be reduced.

Disputes framework

Describe the legal framework applicable to disputes between renewable power market participants, related to pricing or otherwise.

Special authorities in the energy sector in Denmark have been established to handle disputes between renewable power market participants.

The appeal body for decisions made by DERA and the DEA is the Danish Energy Board of Appeal, an independent board under the Ministry.

The Energy Supplies Complaint Board (the Board) handles legal complaints and disputes between private household consumers and the energy companies regarding the purchase and supply of electricity, gas and heat. The Board also considers cases concerning other related goods or services.

Disputes between private market participants are subject to the general dispute resolution options including Danish courts and arbitration.

Utility-scale renewable projects

Project types and sizes

Describe the primary types and sizes of existing and planned utility-scale renewable energy projects in your jurisdiction.

Wind projects are the primary type of utility-scale renewable energy projects in Denmark. The wind projects include offshore, near-shore and onshore wind farms. Currently, Denmark has a total capacity of 5,722MW (March 2018) from on-shore, and near-shore wind turbines, of which 1,294MW is wind capacity. By 2020, the two offshore wind projects Horns Rev 3 and Kriegers Flak plan to commence operation, whereupon an additional 1,000MW will be added to the existing 1,294MW. Moreover, near-shore wind farms in the North Sea with a total capacity of 350MW have obtained construction permission.

The latest statistics on energy in Denmark published by the DEA show that in recent years over 40 per cent of the total Danish electricity consumption has been supplied from wind energy resources. In 2017, the share was 43.4 per cent. This share is likely to reach 50 per cent with the already planned and permitted new capacity of wind energy. Alternative renewable energy sources will thus be needed to ensure an optimal balance in the grid, which seems to be the primary motivation for the expected amendments to the REA.

A number of smaller biomass and biogas projects are currently under development, but are running up against a current deadline in 2021 (depending on possible extensions). Further (MW scale) solar PV capacity has been announced based on the above mentioned 25-cent scheme, and APM Holding recently announced that it aims to invest over €1 billion in geothermal capacity (to feed into the central heating system) in the coming years.

Development issues

What types of issues restrain the development of utility-scale renewable energy projects?

The utility-scale renewable projects in Denmark do not suffer from certain types of issues related to the energy sector such as unclear processes for the procurement of the power purchase agreements, lack of long-term credit on the part of potential offtakers, etc. The TSO is obliged to purchase produced renewable energy to a fixed price, if the electricity has not been purchased by another offtaker.

The project issues are rather related to general project challenges, such as collecting sufficient waste-to-waste generation plants.

Hydropower

Primary types of project

Describe the primary types of hydropower projects that are prevalent.

As evident from the schedule in question 12, hydropower constituted only 0.04 per cent of the total renewable energy production in Denmark in 2015. Hence, it currently has no significance in the Danish production of renewable energy and it is not likely to ever be a significant technology, as Denmark is rather flat.

Currently (mid-2018), the DEA has granted permission to seven hydropower projects in Denmark, including three test projects.

What legal considerations are relevant for hydroelectric generation in your jurisdiction?

No specific legal considerations apply to hydroelectric generation in Denmark, and it is governed by the legal framework described under question 4.

Distributed generation

Prevalence

Describe the prevalence of on-site, distributed generation projects.

Wind turbines and solar PVs connected to installations for consumption by the owners is relatively prevalent in Denmark. The REA provides special price supplements to wind turbines with an installed output of 25kW or less, which are connected to an installation for consumption by the owner; and solar PVs with a total effect of 6kW or less per household. However, the user may instead choose to sell the electricity to the TSO to set off electricity that is sold and purchased within the same hour, as described in question 8. The vast majority of generation projects are connected to the distribution system.

Types

Describe the primary types of distributed generation projects that are common in your jurisdiction.

The primary type of distributed generation projects that are common in Denmark are wind farms. Hence, Denmark has a leading position in energy produced by wind turbines. The TSO is required to purchase the renewable energy produced at a fixed fee. The transmission system is owned by the TSO, and the distribution system can be privately owned. In Denmark, it is common for mortgage institutions to own shares in a distributed generation project.

Regulation

Have any legislative or regulatory efforts been undertaken to promote the development of microgrids? What are the most significant legal obstacles to the development of microgrids?

No legislative or regulatory efforts have yet been undertaken to promote the development of microgrids in Denmark. However, as described in question 9, legislation is anticipated to be adopted in Denmark to implement the Winter Package. Such legislation might contain a promotion of the development of microgrids.

Other considerations

What additional legal considerations are relevant for distributed generation?

Renewable energy has had top priority in Denmark for many years and is widely recognised. With the experience of a significant share of peak power in the system for many years, the Danish TSO is used to handle the peak capacity and has for years had the opportunity to sell excess production into the Nord pool (an electricity exchange between Denmark, Norway and Sweden), and will soon have additional grid capacity for the sale of excess electricity to Germany and England.

Energy storage

Framework

What storage technologies are used and what legal framework is generally applicable to them?

Currently, renewable energy is not stored in Denmark due to the limited technological development and inefficiencies related to the current technology available. Accordingly, although storage of renewable energy is theoretically possible, no economically sound solution has yet been developed.

The storage of renewable energy is, however, an area of priority in Denmark. According to the Platform for the Danish government for 2016, the government aims to analyse the barriers to electricity storage. In addition, new storage projects for renewable energy are under development in Denmark. For instance, the Danish company European Energy has filed for a patent for a new storage technique named GigaStorage.

The existing Danish Subsoil Act addresses the use of the subsoil for storage purposes, including the storage of CO2. The Carbon Capture and Storage Directive (CCS Directive) contains a system for the allocation of exploration and storage licences in connection with the development of carbon capture and storage. It also contains a number of rules regarding the stored CO2, such as monitoring. However, it is still up to the individual member states to decide if they want to use CCS technology and, if so, to determine the location of such projects. The CCS directive has been incorporated into Danish law in the form of an amendment to the Danish Subsoil Act.

Development

Are there any significant hurdles to the development of energy storage projects?

No profitable technology exists, yet. Reference is made to question 20.

Foreign investment

Ownership restrictions

May foreign investors invest in renewable energy projects? Are there restrictions on foreign ownership relevant to renewable energy projects?

Foreign investors are allowed to invest in renewable energy projects in Denmark. The general legislation for corporate entities applies. If trading is also financial, notification or licensing requirements may apply under the Danish Financial Business Act. Consequently, it is recommended that these issues be carefully examined if trading activities in Denmark are planned.

Trading in the Danish electricity market requires familiarity with the market players and structure of the market. Hence, a number of markets make up the wholesale electricity market in Denmark and on those markets a variety of players play different roles. When the players (including the TSO) trade in physical electricity, they trade on the following markets:

  • the day-ahead market;
  • the intraday market;
  • the regulating power market; and
  • the balancing power market.

The electricity market in Denmark is a part of the Nordic market model and an integral part of a number of other markets. Trading at the day-ahead market is an auction where the day before the electricity is consumed, Nord Pool finds a market price for the various price areas by matching purchase and sale bids.

The intraday and regulating power (purchased by the TSO) are the markets which handle deviations and imbalances that occur after the day-ahead market (spot market) is closed.

Market players can handle imbalances themselves until one hour before actual consumption and production. However, in order to ensure a sustainable physical balance in the electricity system, the TSO buys regulating power (ie, production capacity or consumption offered by certain players to the TSO during the actual day of operation to eliminate imbalances in the system).

The TSO calculates and settles the imbalances of each player on the balancing power market.

No licence is required to enter the electricity market as a trader and there is no requirement that market entrants need to have a presence or a local subsidiary in order to participate in the local energy market. Even though the ESA does not prescribe any licensing requirements for new traders entering the Danish market, approval from the TSO is required in order to be admitted as a balance responsible trader.

The Danish electricity supply market is fully liberalised in line with EU legislation. This implies that all electricity consumers have the right to choose their electricity supplier. Third party access to the grid is controlled through regulated and published tariffs. Suppliers are not charged an entry fee but, in order to gain access, they must sign a contract with the relevant distribution company (a standard contract, based on a template prepared by the Danish Energy Association) and may be required to provide a bank guarantee.

Physical power can be traded either bilaterally or via Nord Pool Spot, which organises the physical trade of power. There are no requirements that physical power trading be conducted under a specific corporate regime. If a permanent presence in Denmark is established, a subsidiary or branch must be established and registered with the Danish Business Authority and capital requirements or a parent company guarantee may apply.

Equipment restrictions

What restrictions are in place with respect to the import of foreign manufactured equipment?

No restrictions with a special view to manufactured renewable energy equipment are in place in Denmark. Accordingly, only common trade restrictions (such as trade embargoes) apply.

Projects

General government authorisation

What government authorisations must investors or owners obtain prior to constructing or directly or indirectly transferring or acquiring a renewable energy project?

The government authorisations required for renewable energy projects depend on the type of project. In general, establishment of an electricity production plant which exploits wind and water may only be carried out following prior permission from the DEA.

Offshore and near-shore wind projects require three permissions from the DEA:

  • First, permission for preliminary investigations and subsequent exploitation of energy must be obtained. Typically, the permission is valid for one year. When permission has been granted, the applicant must submit a preliminary investigation report to the DEA, which contains an assessment of the environmental impacts of the project.
  • Second, permission to establish the electricity production plant is#160;required.
  • The final permission is for the allowance to put the wind turbines into operation. The permission is usually granted for a period of 25 years and may be extended on request.

The permissions may be made conditional on compliance with certain technical and financial requirements for the project. In addition, they may contain inspection obligations as well as a duty to report certain aspects to the DEA. The permissions may only be transferred by prior approval from the DEA.

Establishment of a new electricity production plants other than plants exploiting wind and water, and any significant alterations to existing plants may only be carried out after prior permission from the DEA. If the electricity plant’s capacity is in excess of 25MW, production from the plant may only be carried out by companies that have received a licence from the DEA. The licence will be awarded for a minimum of 20 years.

The permission or licence described above can be accompanied by conditions to the effect that the owner:

  • commits him or herself to changing the scope of production as decided by the TSO when the latter finds this necessary in order to maintain efficient utilisation of the grid, security of supply or the quality in the coherent supply grid;
  • provides security for the decommissioning of plants;
  • in the case of power plant heat plants, takes on a supply commitment for district heating in a specified supply area; and
  • commits itself to notifying the TSO of the supply area at least one year in advance if a decision is made to shut down the plant or remove it from operation so that it is not at disposal for a lengthy period.

Offtake arrangements

What type of offtake arrangements are available and typically used for utility-scale renewables projects?

With respect to the types of offtake arrangements that are available and typically used for utility-scale renewables projects in Denmark, Energinet.dk/the TSO functions as offtaker of electricity produced by renewable energy sources in Denmark. However, the energy supplier is free to enter into power purchase agreements with other parties. Income and expenses related to the TSO’s offtaker obligation shall be kept separate for accounting purposes from the other tasks of the TSO.

Procurement of offtaker agreements

How are long-term power purchase agreements procured by the offtakers in your jurisdiction? Are they the subject of feed-in tariffs, the subject of multi-project competitive tenders, or are they typically developed through the submission of unsolicited tenders?

In general, there is no specific Danish legislation regarding long-term power purchase agreements. Currently, only larger offshore and near-shore projects have been developed through the submission of tenders. The Danish state has the exclusive right to exploit energy from water and wind in Danish territorial waters and in the Exclusive Economic Zone for which reason the Danish state puts out the tender. The size of the subsidies and other conditions related to the project are contractually settled between the Danish state and the winner of the tender. The offtaker price is fixed within the frames of the REA and subsequently implemented in the act. Accordingly, the REA provides the frame rules on statutory subsidies for electricity produced at offshore wind farms subject to tendering procedures, including the particular subsidies to specific projects. With respect to non-tendered projects, the REA also provides detailed rules on statutory subsidies. Reference is made to question 6.

Operational authorisation

What government authorisations are required to operate a renewable energy project and sell electricity from renewable energy projects?

Regarding the question whether any government authorisations are required to operate a renewable energy project and sell electricity (and environmental attributes, if applicable) from renewable energy projects, reference is made to question 24. No additional licences or permissions are required to operate and sell electricity from renewable energy projects in. Environmental attributes in the form of guarantees of origin of renewable electricity are registered and monitored by the TSO.

Decommissioning

Are there legal requirements for the decommissioning of renewable energy projects? Must these requirements be funded by a sinking fund or through other credit enhancements during the operational phase of a renewable energy project?

As described in the answer to question 24, licences and permissions to renewable energy projects might be accompanied by conditions to the effect that the owner provides security for the decommissioning of plants and to notify the TSO of the supply area at least one year in advance if a decision is made to shut down the plant or remove it from operation. The security for decommissioning is usually provided by way of a bank guarantee from an acceptable bank. The security must be provided prior to the construction phase. There are no further legal requirements for the decommissioning of renewable energy projects.

Transaction structures

Construction financing

What are the primary structures for financing the construction of renewable energy projects in your jurisdiction?

Financing of offshore wind in Denmark is not much different from financing offshore wind in other north-western European countries except that one large wind farm project (Rødsand 2 as put out to tender on 7 February 2008) was mortgage financed, which has not been seen elsewhere. However, so far none of the existing Danish offshore wind farms have been financed on the basis of a traditional non-recourse project financing, but instead on the basis of a full or partial recourse, as they are fully or partially owned by utility companies.

The 25-cent scheme, as described in question 6, further poses a challenge to several foreign financiers, as they find it difficult to assess the inherent merchant risk, despite the 25-cent floor price protection.

A potential challenge in relation to the upcoming near-shore wind farms is a sale obligation prescribed in the REA. Thus, the REA provides a duty for any person that erects one or more wind turbines of at least 25 metres to offer a minimum of 20 per cent of the equity interests for sale to persons who, at the time of the offer for sale, are aged at least 18 years and, according to the Danish Central Person Register, has his or her permanent residence at a distance of no more than 4.5km from the site of installation. This entails that the finance parties will potentially have to deal with a relatively large group of minority shareholders.

The permissions and licences further carry transfer restrictions as described in question 24. This means that approval must be adopted from the DEA prior to a sale or transfer of a Danish offshore wind farm. The transfer restrictions generally relate to financial means and wind energy experience and is generally considered to be a formality. However, a financier will have to take a view on such formal restrictions in relation to the security position.

On the positive side, we have Danish mortgage finance institutions opening up for mortgage financing of wind turbines, including offshore turbines. Hence, there is potential for very attractive long-term financing of offshore wind farms if they qualify for mortgage financing, which as a general rule they do.

Operational financing

What are the primary structures for financing operating renewable energy projects in your jurisdiction?

The structure for the financing of operational renewable energy generation assets is basically no different from the structures seen in other Western countries (ie, a non-recourse and fully ring-fenced project finance structure). However, if mortgage financing is used, the mortgage finance institution will require a first priority mortgage in the assets. This security position will not be shared with other lenders. The use of mortgage financing is thus a cheap long-term financing, but the use of mortgage financing also entails some structural challenges, if it is to be combined with other levels of financing (from other senior financiers).