Significant slowdown in the conclusion of new grid connection agreements since the parties to the Climate Agreement of June 2020 announced new rules on producers' payment for grid connection from 1 January 2023. The Danish Utility Regulator (Forsyningstilsynet) has now approved a new standard grid connection agreement, but this does not resolve the issue for RE producers, since the new rules from 1 January 2023 remain unknown. Thus RE producers are still caught in a legal vacuum where in reality they cannot conclude grid connection agreements for new projects.
In the Climate Agreement for energy and industry of 22 June 2020 (the "Climate Agreement"), it was announced that from 1 January 2023 RE producers will pay a geographically differentiated connection fee and feed-in-tariffs for the distribution grid as well as the transmission grid.
This abolishes the financial equalisation scheme (Udligningsordningen), which thus far has distributed connection costs among all Danish grid companies, regardless where in the country a RE plant is built.
The background for this is a political wish that, going forward, RE producers must pay a larger share of the costs related to grid connection. This is meant to strengthen RE producers' incentive to connect to the grid in the geographical areas where this leads to the fewest costs for grid expansion and reinforcement.
Transitional scheme in 2022
The Climate Agreement includes a transitional scheme, which ensures that the state reimburses the grid companies for costs incurred for grid connection in 2022 (the "Transitional Scheme"). The reason for this is that the financial equalisation scheme (as a result of the abolishment of the PSO system) is abolished from 1 January 2022, whereas the new rules on producers' payment do not take effect until 1 January 2023.
The Danish Energy Agency (Energistyrelsen) has presented an expected model for the period for the Transitional Scheme (conditioned on adoption of the relevant acts and executive orders):
- On behalf of the electricity customers, the grid companies may apply to the Energy Agency for reimbursement of grid connection costs.
- The grid companies must document that the costs without reimbursement would have been charged to the electricity customers in accordance with applicable tariffs.
- Costs will be reimbursed to the grid companies through an account expected to be accorded with the 2022 budget.
Under the Transitional Scheme, RE builders will (as prior to 1 January 2022) pay the costs only up to the point of connection.
The Transitional Scheme applies only to grid connection agreements for which the costs of grid connection have been paid before 1 November 2022 and connection to the grid is completed no later than 31 December 2022.
From 1 January 2023
If a project cannot be connected until after 1 January 2023, the producer must pay a connection fee to the grid company. The price is unknown until the statutory basis and its implementation are in place.
The Energy Agency has presented an implementation plan, from which it appears that the Minister for Climate, Energy and Utilities is expected to introduce the required bills to the Danish parliament in October 2021 for the parliament’s adoption.
However, these bills are merely amendments to the framework legislation, including the Danish Electricity Supply Act (Elforsyningsloven) and the Danish Act on the Promotion of Renewable Energy (VE-loven). It is then up to the industry – in practice Dansk Energi and Energinet - to develop the new tariff method that will include the grid connection fee.
The tariff method will then need approval by the Danish Utility Regulator. The industry has informed the Energy Agency that the tariff model is expected to be completed in 2022 so that the new tariff method may be applied by the grid companies from 1 January 2023.
Current possibilities of concluding new grid connection agreements
The terms and conditions applied by the grid companies must be approved by the Danish Utility Regulator. Since Dansk Energi's standardised guidelines for grid connection agreements are applied as the industry's market standard, they also must be approved by the Danish Utility Regulator under s. 73b of the Act on Electricity Supply.
On 24 March 2021, the Danish Utility Regulator approved Dansk Energi's new standard grid connection agreement, which includes a new clause, stating that the parties to the agreement agree that the agreement will be amended when the Danish parliament has adopted the required legislation and the Danish Utility Regulator has approved the new tariff method, so that the agreement must implement the new connection fee.
The Danish Utility Regulator's approval of the grid connection agreement expires on 1 January 2023. Then a new grid connection agreement that implements the new rules must be submitted by Dansk Energi and approved by the Regulator.
The future size of the connection fee
The Climate Agreement of June 2020 was concluded on the basis of a tariff analysis of June 2020 drafted by the Danish Ministry of Climate, Energy and Utilities, which recommended the introduction of differentiated connection fees and feed-in-tariffs.
The connection fee is a one-off payment that the RE producers must pay to the grid companies, whereas the feed-in-tariff is a recurring cost calculated as a DKK rate per kWh.
It appears from the tariff analysis that the feed-in-tariff must be calculated so as to cover the costs of "ongoing grid loss as well as operation and maintenance".
The connection fee must be calculated so as to cover the capacity costs resulting from the grid connection. According to the tariff analysis, this includes costs for "the required capacity of the underlying grid", but the specific costs are not set out in detail.
In general, the tariff analysis suggests a cost-genuine connection fee, but it also mentions that the connection fee may, for instance, be arranged in the same way as the existing connection fee for consumers at DSO level connected to the 50 kV and 10 kV grid, so that it will not necessarily reflect 1:1 the actual costs of the underlying grid extensions. This reduces the problem of one new connection possibly causing a large grid extension and thus resulting in a high connection fee.
Based on this, one interpretation of the tariff analysis could be that the connection fee might be calculated on the basis of a economic model that includes the average cost of establishing the relevant grid and the specific load on the grid caused by the RE producer. The tariff analysis recommends geographical differentiation of the connection fee, allowing, for instance, the establishment of different tariff zones that make it possible to introduce an increased feed-in-tariff combined with a connection fee in areas with large excess production of electricity and a low or no feed-in-tariff combined with a low or no connection fee in areas without large excess production of electricity.
According to the analysis, this is expected to result in low payment in the areas where production of the RE electricity does not determine the dimension of the grid. As a result, the financial consequences will be limited for plants placed appropriately geographically.
As previously, RE producers must also pay direct connection costs, i.e. the costs of the internal grid up to a point of connection on the DSO/TSO grid.
Rambøll has prepared a report for Wind Denmark, according to which the proposal will result in a cost increase of at least 150% for RE plants being connected to the distribution grid. However, the calculation involves significant uncertainties; for instance, it is presumed that 60% of new solar and on-shore wind projects will be connected to the distribution grid, while 40% will be connected to the transmission grid.
Dansk Energi is preparing an economic model for the connection fee in an attempt to create transparency as to expected pricing. However, this model is of course subject to the reservation that the required legislation is not in place.
Comments by Bech-Bruun
Grid connection is a significant part of the budget for the total costs of RE projects in Denmark.
The Transitional Scheme has provided clarity for projects for which the costs are paid prior to 1 November 2022 and grid connection is completed no later than 31 December 2022.
However, for RE projects with grid connection after 1 January 2023, the financial and contractual terms are still unsettled.
The approval from the Danish Utility Regulator did not provide further clarity for RE producers. With the approval, grid companies can now formally conclude grid connection agreements with RE producers for the period after the Transitional Scheme. However, the new grid connection agreements do not solve the problem for RE producers, as it is merely agreed to amend the agreement and implement the new connection fee, the size of which is unknown.
The only possibility for RE producers to conclude grid connection agreements with financial certainty is thus for projects where they can be certain that grid connection is completed no later than 31 December 2022.
Consequently, RE producers know the financial and contractual terms of grid connection only for new projects that are connected to the grid no later than 31 December 2022.
This is an untenable situation in light of the lengthy time frame for development of this type of projects. RE producers usually have a time frame of 3-5 years for development projects and thus require regulatory transparency for at least that time frame. Many of the projects being developed now will not be ready for grid connection until 2023 or later, and hence the RE producers do not know what grid connection will cost. In practice, this makes it impossible to calculate the economy of future RE projects.
Several RE producers have already announced that they expect the new rules to cause RE projects to be cancelled or postponed, and it should also be expected that RE producers will refrain from concluding new grid connection agreements until the financial and contractual basis is clarified.
As such the high uncertainty must also be expected to impact RE producers' involvement in the two technology neutral tenders in 2021, where RE producers are forced to bid without knowing the financial terms for grid connection under which the projects will be realised.
The time frame for clarification of these issues is also troubling. Clarification cannot be expected with the framework legislation in October 2021, but only when the industry adopts a new tariff model, which the Energy Agency expects to happen in 2022. Then the new tariff model needs approval by the Danish Utility Regulator, which for complicated issues may have a processing time of more than nine months.
Thus RE producers are faced with a time frame where the connection fee most likely will not be settled until some time in 2022, and – realistically – not until close to 1 January 2023 when the new rules take effect.