Denmark’s Road Map for Fossil Fuel Independence

Lars Plougmann (via Flickr)
Harvest time in Højreby, Denmark.

In Brief

Last year, the Danish Commission on Climate Change Policy found that Denmark can remove fossil fuels entirely from its energy system—including transport—by 2050 without introducing nuclear energy or carbon capture and storage. In response, the Danish government immediately adopted the goal of becoming independent of fossil fuels by 2050. Removal of fossil fuels would bring Denmark in line with the EU policy goal of reducing greenhouse gas emissions by 80–95 percent by 2050. This report represents the first, comprehensive national analysis for achieving independence from fossil fuels. While the report’s recommendations are specific to the current Danish situation, the approach used in the analyses is generic and can be of use to other nations. Perhaps the most striking finding of all is that the overall cost of achieving fossil fuel independence is only marginally more (on the order of 0.5 percent of GDP in 2050) than predicted total energy-related expenditure in a “business-as-usual” scenario. This near equivalence in cost is due primarily to expected increases in the price of fossil fuels.

Key Concepts

  • A commission established by the Danish government and charged with analyzing Denmark’s energy and transport systems has found that the Danish energy system (including transport) can be completely independent of fossil fuels by 2050 without using nuclear energy. While the report’s recommendations are specific to the current Danish situation, the approach used in the analyses is generic and can be of use to other nations.

  • Complete removal of fossil fuels from the energy system would result in a reduction of greenhouse gas emissions on the order of 80 percent, compared to emission levels in 1990. Emissions from agriculture will dominate the profile of the remaining greenhouse gas releases.

  • Wind and biomass are likely to be major contributors to the Danish energy system in 2050 with the proportions depending on the relative prices that themselves depend on worldwide energy and climate policy. Energy costs in 2050 can be minimized through increased import-export of electricity in an expanded North European grid.

  • Where the current energy system is controlled only on the supply side, the future system must also include control on the demand side (“smart grids” and “intelligent” energy use) due to an increased contribution of fluctuating energy sources to the energy system.

  • The cost of using fossil fuels can be expected to increase significantly in coming decades, setting in motion a number of economic adjustments including more efficient use of energy. Against that background, phasing out fossil fuels altogether is estimated to entail an additional cost on the order of only 0.5 percent of GDP in 2050.

The Danish Commission on Climate Change Policy reported in 2010 that Denmark could be independent of fossil fuels by 2050 with a concomitant greenhouse gas emission reduction on the order of 80 percent compared to 1990 emissions. The commission defined independence from fossil fuels as no use of fossil fuels for energy in Denmark. Import of energy based on fossil fuels was allowed but the total amount of renewable energy produced in Denmark must, as a yearly average, be at least equal to Danish energy demands. According to data from 2009, the most recent available, renewable energy sources supply 18 percent of gross energy production in Denmark, with biomass being, by far, the largest contributor.1 Approximately 3 percent of the gross energy supply comes from wind, while approximately 20 percent of the electricity is produced from wind power. Nevertheless, the commission concluded that it is realistic to assume that 100 percent of Denmark’s energy needs in 2050 can be covered by electricity generated from renewable sources, such as wind, solar, geothermal, and wave. The commission’s relatively optimistic assessment is based on an assumption of significant technological development with respect to both electric vehicles and “smart grids” (energy systems that can defer some degree of energy demand to periods when excess energy is produced).

Abundant wind energy resources, particularly offshore, and relatively large per capita biomass resources compared to other EU countries could likely provide the basis of the future, fossil fuel-free energy sector. The role of other energy sources—solar, geothermal, wave—will depend on their possible development to commercial viability. Energy production in the future will largely be based on fluctuating sources, thus requiring a degree of flexibility on the demand side (i.e., “smart grids” and “intelligence” in energy demand).

Considerable investment in new infrastructure will be required and energy will, regardless of its source, become more expensive than it is today. However, infrastructure investment will also be necessary with continued dependence on fossil fuels and fossil fuels will become more expensive over time. Given this, the model calculations carried out for the commission show that the difference between energy costs for Denmark in phasing out fossil fuels, compared to those where present energy forms are continued until 2050, is likely to be less than 1 percent of gross domestic product (GDP), a difference well inside the uncertainty of any 40-year-forward assessment.

The commission’s analyses suggest that Denmark has access to wind resources in excess of its projected 2050 energy demands, but that 100 percent reliance on wind power would not be possible without significant technological development in energy storage. Therefore, the only limitation to incorporating wind in the new energy system appears to be the current technical capacity to accommodate a fluctuating energy source such as wind in the system.

Biomass resources in Denmark are, on the other hand, estimated to be insufficient to meet the projected 2050 energy demand. Assuming present levels of food production are maintained, potential domestic biomass resources (including waste) would only cover some 25 percent of present gross energy consumption and, at best, less than 50 percent of the projected 2050 demand. (Unless otherwise stated, energy supply/demand/consumption refers throughout this article to gross energy.) Furthermore, the potential limits on the sustainable production of biomass globally are currently unknown. Therefore, the commission analyzed the consequences for the Danish energy system using different assumptions concerning the amount of biomass available for energy purposes.

Greater energy efficiency is an important part of the strategy for independence from fossil fuels as it is the key to minimizing the costs of transformation. Infrastructure investment comprises the major cost of becoming independent of fossil fuels. These costs are held at a minimum if production of energy is dimensioned to meet that actual energy demand, rather than an artificially high demand. On the basis of existing studies concerning the cost effectiveness of energy efficiency investment and historical trends in efficiency improvement, the commission estimated that an average house in 2050 will use only 40 percent of the energy used today, despite a doubling in demand for energy services. Although the energy use per square meter of house or vehicle will be significantly less, the total energy demand in Denmark is predicted to only fall by 10 to 25 percent because of this demand for new energy services.

The Danish Commission on Climate Change Policy
The Danish energy system in 2050, without the use of fossil fuels.

Cars, buses, and trucks are estimated by the commission to use only 29 percent of the energy they do today in 2050. This improvement in efficiency is largely attributable to the expected increased contribution of electricity in transport as electric engines are far more efficient than combustion engines.2 The commission concludes that a combination of electricity and biofuels will power the transportation sector in 2050. This conclusion is based on the recognition that biomass prices are expected to increase if international policy focuses on reduction in greenhouse gas emissions and that an area comparable to the total present agricultural area in Denmark would be required to meet the country’s future gross transport energy needs, if these needs are met by biofuels alone. The commission recommended that electric vehicles be promoted in the coming years, not least in order to gradually build consumer confidence in the new technology. Introduction of biogas technology in heavy goods transport should also be seen as a priority. The air and sea transport sectors, because they are internationally regulated, were not included in the commission’s assessment.

Assumptions and Methods

Central to the commission’s analyses is the recognition that the energy sector is comprised of both supply and demand sides and that both can be used in the transformation of the energy system as a whole. How much of the adjustment should occur on the supply or demand sides is dictated by the cost. In other words, if it is cheaper to adjust on the demand side through, for example, increased energy efficiency measures than to increase the supply side, then energy efficiency should be enacted rather than an increase in supply and vice versa.

Another important assumption is that the costs of removing fossil fuels from the energy system in Denmark will be influenced by international developments. If, for example, other countries adopt ambitious emissions reduction policies, the price of biomass may be expected to increase and investment in technical development of other alternative energies may reduce the cost of these technologies. On the other hand, if ambitious emissions reduction policies are adopted, then the price of fossil fuels may be expected to rise more slowly than if attempts to further reduce emissions are not enacted. Therefore, the commission considered two scenarios: one where the world embarks on an ambitious climate policy, based on limiting carbon levels in the atmosphere to 450 parts per million, and, another, with an “unambitious” policy scenario, where no increase in current rates of emissions reduction are realized and fossil fuel scarcity would be the main driver of energy prices.

In the ambitious scenario, global policy develops to meet the requirements described by the UN Intergovernmental Panel on Climate Change (IPCC) necessary for restricting human-caused global warming to within 2o C.3 This limit would require industrialized nations to gradually reduce their net greenhouse gas emissions by 80–95 percent relative to 1990 levels by 2050. In this scenario, there are relatively low prices for fossil fuels but high CO2 and biomass prices. Fossil fuel and CO2 prices are taken from the International Energy Agency (IEA), which has developed a future scenario with the same climate objectives.4 The IEA study extends only to 2030. For the period 2030–2050, the commission chose to linearly extend the 2010–2030 trend. Biomass prices are set using a substitution principle, that is, the prices will equal the prices of the fossil fuel they replace plus CO2 costs. It is assumed that biomass prices will develop gradually from today’s level and reach the “substitution level” in 2050.

In the “unambitious” scenario, international climate policies are essentially unchanged from those of today and demand for and prices of fossil fuels continue to increase. In this scenario, only moderate prices for biomass and CO2 are assumed. Prices for CO2 and fossil fuels are taken from IEA’s Reference Scenario in World Energy Outlook 2009.4 Prices for biomass are taken from the Danish Energy Agency’s forecast.5 As for the ambitious scenario, prices are increased by linear extension of the 2010–2030 trend for the period 2030–2050. In the analysis, it is assumed that some form of international CO2 quota trading system will be in operation in 2050 and, consequently, that users of fossil fuels will have to pay not only for the fuel, but also for emitting CO2.

The commission’s analysis suggests that Danish gross energy demand in 2050 will, as a result of the deployment of cost-effective energy efficiency initiatives, be slightly less than it is today. The models used in the analyses choose the most cost-effective energy source at a given time. Thus, they indicate that if biomass prices remain relatively low compared to other energy sources, biomass will provide over 50 percent of Danish energy needs. In this case, considerable import of biomass would likely take place. Given the uncertainty regarding future biomass availability, the commission based its analyses on two different scenarios with respect to biomass availability.

  1. The amount of biomass that can be utilized in the energy system in 2050 is equivalent to the amount that the commission estimates can be produced in the country under the assumption of the same food production and some sustainability considerations, i.e., total amount of area used for agriculture, as today. Note, this does not mean that only Danish-produced biomass can be used, only that the amount used is equivalent to the projected biomass production in Denmark.
  2. The incorporation of biomass is limited only by its price competitiveness compared to other renewable energy sources.
The Danish Commission on Climate Change Policy and Richard Morin/Solutions
Denmark’s renewable energy production (in PJ/year) in 2008 and total estimated resource potential. Total amount of biomass and waste includes 20 PJ of fossil waste.

The four future scenarios are all calculated so that they meet the predicted energy needs of Denmark in 2050, i.e., between 600 and 700 petajoule (PJ) per year, depending on which permutation is used. The analyses indicate that, if biomass prices are high due to an ambitious global policy, less biomass will be used than the estimated Danish production—approximately 230 PJ per year. Thus, the modeled energy system for three of the four scenario permutations is similar and, for the further detailed analysis, these three scenarios were treated as one. The exception was the permutation with low biomass price and no restriction on biomass in the energy system. For all four permutations, wind and biomass play important roles in the modeled energy system. Only in the case of low biomass prices and no restriction on biomass use did biomass become the dominant energy source.

The first step in the commission’s analyses was to estimate the potential availability of renewable energy resources in Denmark. This was done in consultation with relevant actors in the energy sector, including the industry and research communities. The theoretical potential of some technologies (e.g., wind and solar) is almost unlimited. For these, the potential is limited by the marginal production costs. For offshore wind, a conservative estimate of 1,500 PJ/year is employed. With heat pumps, it is, in principle, possible to utilize unlimited amounts of heat energy from the earth, water, and air. Therefore, no upper limit for this energy source is identified. The commission’s projections indicate that the country has the resources to potentially meet considerably greater energy demand than that projected for 2050.

The commission modeled energy systems under the different scenarios using a combination of methods. STREAM is a spreadsheet based on one year of national energy consumption that has been used in several projects both internationally and in Denmark.6-8 The advantage of this model is that it considers the whole energy system so that a total energy and emission balance can be developed. It also includes modules to calculate the yearly cost of running the energy system. STREAM models energy consumption for four sectors: households, tertiary (i.e, public and administrative buildings and services), industry, and transport. The demand for electricity and heat from these sectors is then met by production from power and heat plants and local heat supply. The technology and fuel mix for meeting this demand is largely provided by another model, Balmorel, an optimization model that includes the Scandinavian and German power and heat markets.9

The Danish Commission on Climate Change Policy and Richard Morin/Solutions
Danish greenhouse gas emissions (in millions of tonnes of CO2 equivalent) in 1990, 2008, and without fossil fuels (and with improved energy efficiencies) in 2050.

The commission used Balmorel to find the most cost-efficient configuration of the power and heating system between now and 2050. First, the model was run for the year 2050 and did not allow investment in fossil fuel–based technologies. This run produced the economically optimal configuration of a fossil-free power and heating system in 2050. Feeding the model with this end-target (no fossil fuels) and adding other restrictions throughout the period from 2010 to 2050 (i.e., EU’s renewable-energy targets and CO2 targets), Balmorel was run in five-year increments from 2010 to 2050. The result gave, in five-year steps, a detailed description of the investments required in the power and heating sectors to achieve fossil fuel independence.

This version of Balmorel includes the power and district-heating sectors in Norway, Finland, Sweden, Germany, and Denmark. Moreover, for Denmark, it also includes individual heating. The surrounding countries are necessary to include in order to model their common power market and, thereby, exchange of electricity between the countries and to calculate the production price of electricity. Balmorel has been widely used in the last ten years for modeling energy systems in the Nordic countries as well as countries surrounding the Baltic Sea.10,11

To model the effects of the transition on the Danish economy, the commission used a macroeconomic model, ADAM, which is a well-established econometric model.12 ADAM is developed and maintained by Statistics Denmark and is used by the Ministry of Finance for short- and long-term projections of the Danish economy and by Statistic Denmark and others for different economic studies.13 ADAM operates with 20 sectors, including households. The equations in the model are estimated based on national accounting data collected since 1974. It is a demand-driven, Keynesian model that includes crowding out via salaries, foreign markets, and rates. Each sector has five production factors that, to some extent, can substitute for one another: labor, machines, buildings, materials, and energy. The trade between sectors is dealt with by an input-output table.

When the results from the energy system models are returned to ADAM, they influence investments in machinery, buildings, and energy efficiency. This impacts the demand for production factors: some sectors will gain from the changes and some will lose. ADAM then identifies what the changes mean for the different sectors and for the competitiveness of Danish industries and, finally, how the new energy-related decision influences GDP.

The other macroeconomic model was developed specifically for the analyses conducted for the commission by the DREAM-group.14 The DREAM-group is an independent institution, which uses its model to assess future trade balances, tax distortion effects, demands in the labor market, and demand for energy services.15

Results and Discussion

The commission concludes that the key for making Denmark independent of fossil fuels lies in increasing wind turbine capacity, mainly offshore. The commission estimates that, in 2050, Denmark will require megawatt capacity between 11,000 (in the case of inexpensive biomass imports) and 18,500 (under the ambitious scenario and when biomass use is limited to Denmark’s own potential for production). By comparison, Denmark had in 2008 a wind turbine capacity of about 3,150 megawatts. Wind may come to represent around 45 percent of the gross energy supply in Denmark.

Biomass and waste will also be important in Denmark’s future energy production. The commission estimates that, in the ambitious world scenario, these sources will supply about 34 percent of the energy supply in 2050. In the unambitious scenario, biomass and waste may comprise about 72 percent of the energy supply.

The commission estimates that, in 2050, 44-63 percent of the energy used to heat buildings and for district heating will come from electric heat pumps that use heat from earth, water, or air. A number of cities that employ district heating are found in regions with geothermal resources, however, often at too low a temperature to be used directly, thus needing a heat pump boost. Finally, large solar installations are expected to be able to competitively deliver heat for district heating. All together, heat pumps, geothermal sources, and solar heat are estimated to provide approximately 23 percent of Denmark’s future energy needs in the ambitious world scenario.

Photovoltaics and wave energy are technologies that are not competitive at the present time and it is unknown if or when these technologies will be able to compete with other renewable energies. On that basis, the models used by the commission do not see these technologies as playing an important role in the energy system in 2050. Nevertheless, that situation may change over time. Thus, it is important not to take the commission’s results as a prognosis of the energy system’s composition in 2050. The commission’s analyses show, however, that it would be possible and economically feasible to become independent of fossil fuels using technologies available today.

The commission argues that the use of economic instruments will be crucial in reaching the goal of fossil fuel independence. A gradual phasing in of a tax on the use of fossil fuels is a key instrument for the gradual phasing out of fossil fuel consumption. Energy infrastructure is relatively long lived. Thus, it is important to provide incentives not to invest in new fossil fuel infrastructure. Therefore, one of the commission’s most important recommendations is that the government should establish long-term framework conditions, including the recommended increase in fossil fuel taxes. This would provide a disincentive to invest in new fossil fuel infrastructure and, at the same time, encourage energy efficiency improvements.

The commission identified several mechanisms to ensure a match between the fluctuating electricity supply and demand in 2050:

  1. Biomass, biogas, and waste provide a back-up when fluctuating sources like wind cannot deliver.
  2. Intelligence can be built into the system so that electricity can be used or stored when it is generated for those energy services where it is feasible and cost effective.
  3. International electricity transmission capacity to and from Denmark can be increased in order to exploit the synergy between Danish wind power and energy production in the rest of the region, including hydropower production in other Nordic countries.
  4. The potential economic gain with increased electricity trade across country borders will, in many cases, be able to justify the establishment of the increased transmission capacity.

District heating cogeneration plants using biomass will also be able to provide some electricity production in periods where there is a need for extra production. In addition, “quick start” power production facilities (based on biomass or biogas) will be necessary to ensure that the electricity demand can be met at all times. These facilities should have a large production capacity (over 6,000 megawatts) but are only expected to run a limited number of hours per year.

The Danish Commission on Climate Change Policy and Richard Morin/Solutions
Total gross energy consumption (in PJ/year) in Denmark today and in 2050 under different possible energy scenarios. The “future scenarios” represent the total elimination of fossil fuel use in Denmark, in the context of ambitious or unambitious international climate policy. The “reference scenarios” represent Denmark’s energy consumption with the continued use of fossil fuels in both ambitious and unambitious worlds. Values are rounded to the nearest integer. (Note: the “ambitious” future scenario actually represents three different modeled conditions: ambitious international emissions goals with and without limitation of the biomass contribution to the energy system and unambitious international emissions goals with an upper limit on the amount of biomass that can be used in the energy system.)

In terms of transportation, the most likely alternatives to gasoline and diesel for transport energy are electricity and biofuels. Biofuels are commercially available, but with a number of drawbacks, including modest CO2 reduction and energy losses in conversion in inefficient combustion engines. Electric vehicles, on the other hand, have not yet been developed to the point of offering a competitive alternative to conventional cars, mainly due to problems with sufficient energy storage (batteries) on board and slow recharging. In addition, the development and widespread implementation of electric vehicles requires a not yet developed intelligent charging infrastructure. Plug-in-hybrids offer a possibility to replace part of the gasoline or diesel consumption without sacrificing the flexibility of conventional cars, but both plug-in-hybrids and fully electric vehicles are still much more expensive than combustion engine vehicles, partly due to niche production cost, partly to high battery cost. The commission has assumed that electric drive technology will become the dominant mode of transport for passenger cars in the coming years.

To assess the overall economic impact of the transition, two different types of macroeconomic models were employed. Both models determined that the long-term additional costs of becoming fossil fuel independent are on the order of 0.5 percent of Denmark’s GDP in 2050, when including the derived effects on the Danish economy. That two quite different models arrive at the same conclusion increases confidence in the results. The results are an expression of the additional costs that are imposed on society in the scenario of the future without fossil fuels, relative to the reference scenario with continued use of fossil fuels. The additional costs must be understood in the context of considerable anticipated economic growth. The official growth prognosis of the Danish Finance Ministry leads to the prediction that GDP will roughly double by 2050. In addition, it should be noted that the reference scenarios employed here also involve considerable investment in the energy system and in continued emissions reduction. So the costs identified here should not be understood as the total costs involved in the transition, but the cost difference between the reference scenarios with fossil fuels and the future scenarios where fossil fuels are removed.

The result is valid for both the scenario with ambitious global climate and energy policies and the scenario assuming unambitious climate policy. In both scenarios, energy prices, including the price of CO2, are expected to be considerably higher in 2050 than they are today. This means that the overall socioeconomic effect in Denmark will not vary substantially between the two scenarios.

While the transition to a fossil fuel-free energy system need not be associated with less economic growth or less social welfare measured over the next 40 years, there may be periods in the transition when Danish energy prices are comparatively higher than in other countries. This difference may result in a loss of competitiveness for some sectors of the Danish economy. However, as there are relatively few energy-intensive industries in the Danish economy, the need for measures to counteract loss of competitiveness will likely be manageable.

Initially, it may seem surprising that total phase out of the use of oil, gas, and coal will not involve large costs for society in the long term. However, there are several reasons for this conclusion: First, the transition of the energy system will take place gradually over a long period of time, so that existing capital stock (infrastructure) will be exploited. Second, over this time period, an increased global demand for energy will make the alternative to renewable energy still more expensive. At the same time, technological development will gradually make many renewable energy sources more competitive and emission reduction targets will have a cost if Denmark continues to use fossil fuels. Finally, the total expenditure on energy services constitutes only a minor share of GDP in 2050 in all scenarios (5–6 percent). Thus, although the total expenditure on energy services increases by approximately 5 percent due to the transition to fossil fuel independence, the cost measured as a percentage of GDP decreases in significance. In general, the calculations do not include the administrative costs of the instruments necessary to realize a future without fossil fuels, as it is impossible to identify today the exact instruments that will have to be used over the entire transition period.

The pathway for conversion to a renewable energy future has been pioneered by Denmark and a few other visionary nations. But a global transition to renewable energy requires a focus on the developing world, where 80–90 percent of the growth in energy demand will occur in coming decades.1 To meet global deadlines on emissions reduction, achieving a renewable energy future will also require an accelerated diffusion strategy.

A complete conversion of the Danish energy system to independence from fossil fuels will require substantial investment. This applies both to the overall infrastructure and the many new energy technologies from heat pumps to electric cars and energy-efficient equipment. Increasing energy prices will make it attractive to move costs of providing energy services from fuels to capital investments and, in a fossil fuel-independent future, investment costs for energy technology will dominate, while fuel costs will be limited.

The largest investments are expected to be (1) conversion to electric cars in the transport area, (2) expansion of offshore wind turbine capacity, (3) heat pumps for both individual heating solutions and district heating, (4) energy renovation of buildings, and (5) expansion of the electricity infrastructure. Increased infrastructure investment costs are, however, compensated for by lower expenditure on fossil fuels and CO2 reductions.

A 100 percent removal of fossil fuels from the energy system in Denmark would result in an estimated reduction of Danish greenhouse gas emissions on the order of 80 percent, relative to 1990, with the largest remaining source being the non-CO2 greenhouse gases from agriculture. Thus, the commission’s analyses indicate that, if a further reduction of Danish emissions is desired, it will be necessary to focus on the agricultural sector and to develop new technologies for this sector.16 The projected emissions after removing fossil fuels from the energy sector in 2050 would amount to less than two tons per capita per year.

The commission’s report has been generally well received by the political parties represented in Parliament as well as by industry and local governments. At the opening of Parliament in October 2010, the prime minister announced that it was now the government’s goal to make Denmark independent of fossil fuels by 2050. The opposition parties are also generally supportive. In February 2011, the government presented a proposal of initiatives to begin the transition to independence from fossil fuels including concrete goals for a reduction of fossil fuels in the energy system in 2020. At the time of writing, the parliamentary parties are still negotiating this proposal.

Fossil fuels represent a finite global resource. No one knows exactly when these resources will no longer be readily available or how their prices will develop. Ultimately, however, it will be necessary for societies to find alternative energy sources. Both ensuring future energy security and reducing greenhouse gas emissions are used as arguments for beginning the transition of the energy system in Denmark now. In addition, some argue that there may be economic benefits to being a first mover in establishing an energy system without fossil fuels. At present, about 12 percent of Danish exports are comprised of green energy or energy efficiency technology. Given the projected increase in global energy demand and the uncertainty regarding continued access to fossil fuels, there may be a potentially large international market in the future for new energy technologies. A national focus on establishing an energy system independent of fossil fuels may help Danish companies gain access to a part of such a market.