Interview with Lars Aagaard, Minister for Climate, Energy and Utilities

28 Nov Interview with Lars Aagaard, Minister for Climate, Energy and Utilities

What are the key reasons for Denmark’s economic resiliency in the past decade, and what measures has the government put in place to balance the economy despite challenges?

Both now and in 2024, Denmark will continue with some exports of oil and gas, which have significantly contributed to our economy. However, it is anticipated that these exports will decline rapidly in the coming years. Fortunately, we have successfully established a framework for our industries, fostering remarkable energy efficiency. In the face of global energy shocks, the cost burden is mitigated for those with higher energy efficiency, and this has been a contributing factor to the commendable performance of the Danish industrial sector in the past.

As a small, open economy, the flexibility of our labor market is of utmost importance. This agility not only facilitates smooth operations but allows for an influx of skilled workers from other European countries. This inflow is instrumental in sustaining our economy without exerting a negative impact on wages or disrupting the functionality of the labor market.

Denmark prides itself on being a country where companies can place their trust in the political system and the prevailing framework conditions. We are known for avoiding unpleasant surprises, providing a stable and reliable environment for investment. Opting to invest in production facilities here not only ensures operational efficiency but instills confidence in investors. These factors collectively serve as key elements in attracting foreign direct investment, further supporting companies that are already established in Denmark.

What role does the oil and gas sector currently play within Denmark’s larger economy, and what steps are being taken to slowly phase out oil and gas production?

As one of the few countries globally endowed with oil and gas reserves, Denmark has a parliamentary agreement that established a final phase-out date of fossil extraction by 2050. The agreement also canceled all future licensing rounds marking an end to fossil exploration by state invitation. Existing companies with approved fields are permitted to exploit them, but this allowance ceases by 2050 including access to two other licensing schemes with limited scope. The Danish government, effective immediately, refrains from state initiated licensing rounds, marking a bold move for an oil and gas-rich country.  Based on the agreement, the Beyond Oil and Gas Alliance was launched at COP26 in Glasgow working for a managed phase-out of oil and gas production.

Denmark aims to take advantage of the depletion of accessible resources in the Danish North Sea and the strategic advantages of the country’s offshore location to phase out fossil fuels and help neighboring countries to do the same. With shallow waters and abundant wind, proximity to Europe’s electricity-demanding industrial cluster in northern Germany, Belgium, the Netherlands and northern France is pivotal. Denmark seeks to harness its renewable resources and cater to future customers beyond its borders, emphasizing a shift towards the aforementioned countries and similar regions.

In the realm of energy production, specifically electricity and hydrogen, Denmark positions itself as a key contributor. The country boasts the potential to generate substantial green electricity, attracting companies seeking affordable electricity rates within Europe. This, in turn, makes green hydrogen production an attractive investment prospect. Although Denmark currently has modest hydrogen demand, Germany’s future demand makes it a strategic market.

Furthermore, the North Sea has emerged as a potential site for CO₂ storage. Denmark aims to develop both offshore and onshore CO₂ storage facilities. Emphasizing a commercial approach, Denmark welcomes discussions with partners seeking CO₂ storage solutions, viewing it as a valuable resource for Europe’s green transition. The capacity extends way beyond Denmark’s needs, emphasizing the contribution of available space to the broader European green transition.

Turning to the energy sector, Denmark offers appealing incentives for investors. The nation is on track to achieve a fully green electricity system shortly, ensuring that products manufactured using electricity are environmentally friendly. The security of supply in our electricity system surpasses global standards, providing a stable foundation for industries like data centers, automated production, and biotech. Denmark is committed to going green, anticipating low electricity prices, and ensuring a high level of security of supply. Investors seeking these attributes should consider Denmark as an attractive destination for investments.

What flagship projects are we currently seeing in the local renewables sector, and how is the government supporting such initiatives through legislation to incentivize investment?

Before the summer break, I had the privilege of securing the largest agreement with multiple parliamentary parties for offshore wind tenders. Denmark is currently executing its most extensive tendering program to date, potentially expanding up to 14 GW of offshore wind if commercial interest persists. If this full potential is realized, it would be several times greater than the current offshore capacity, constituting an enormous and groundbreaking tender. The anticipated electricity production from this endeavor alone could be equivalent to more than the annual consumption of 14 million European households.

Combined with a plan to quadruple onshore renewable energy, our green electricity production would total more than the consumption of 25 million households, significantly exceeding Denmark’s roughly three and a half million households This expansion is a key part of our strategy, adhering to European regulations necessitating thorough checks on the suitability of companies involved.

This substantial volume in offshore wind projects not only enhances supply-side security for wind turbine producers but also necessitates infrastructure preparation at ports for transportation and the production of related components, including blades. The strategy aims to facilitate private sector scaling by culminating in a comprehensive tender. Simultaneously, neighboring European countries are undergoing their tendering processes, contributing to the exceptionally high investment potential for offshore wind in the North Sea – an overarching priority.

Another milestone is the finalization of an agreement to support CO₂ capture and storage, with the tender set to open in the summer of 2024. This initiative has garnered international interest, particularly from American companies eyeing investment opportunities in storage facilities linked to entities responsible for CO₂ capture, such as refineries, cement factories, power plants, and waste incineration. Collaborations through Memoranda of Understanding (MoUs) with the Netherlands and Belgium, and soon with France, aim to establish a secure path to CO₂ transportation, facilitating industry scaling.

The third strategic focus involves a partnership with Germany to build a hydrogen infrastructure connecting producers in Denmark with consumers in Germany. Denmark possesses the potential to produce surplus green hydrogen, by far surpassing domestic consumption. Recognizing Germany’s substantial hydrogen demand and commitment to green hydrogen, Denmark emerges as a key partner in Germany’s import-dependent strategy, as affirmed by the Danish and German governments.

Is there anything else you would like to highlight about the ongoing creation of a thriving Carbon Capture and Storage (CCS) sector in Denmark?

When starting with the construction of something new and substantial, there must be a commitment from the government to assist with necessary approvals and the myriad practical aspects involved. This remains a key focus for us.

Looking ahead, our discussions with European partners delve into how we can shape initiatives like the European Emissions Trading System. This is particularly pertinent when considering its potential to add value to negative emissions, especially when capturing biogenic CO₂. A crucial aspect under consideration is how captured CO₂should be integrated into the broader emissions trading system. If executed correctly, we envision a scenario where the entire investment in CCS becomes market-driven, influenced by the price signals it generates.

How has Denmark positioned itself as a world leader in green technologies and what kind of opportunities are available for it to partner with international markets such as the US to help with the global green transition?

Denmark and its companies are globally recognized as leaders in the wind industry, with prominence not only in wind turbine and technology production but also in construction and efficient financing, exemplified by companies like Orsted. Wind constitutes a significant industry in Denmark.

While less frequently highlighted, a substantial percentage of our heating demand is met by district heating systems. In Copenhagen, nearly all flats and houses rely on district heating, presenting investment opportunities in the US. Companies with strong footing in energy efficiency, such as Danfoss and Grundfos, are making direct investments in the US, eyeing it as a potentially lucrative market. Similarly, advanced electrolyzer companies are exploring investment prospects in the US, although their current volume in our economy is not extensive.

My perspective on the Inflation Reduction Act (IRA) is primarily that any US initiative aimed at reducing emissions and advancing the green transition is commendable. It not only benefits the US but also contributes positively to the global environment and the future prosperity of the American economy. A robust American economy is crucial for Denmark, as the US is our largest trading partner, and a thriving economy there results in increased purchases from Denmark, creating a potential win-win situation.

Furthermore, the current influx of investments into the US can influence world prices and redirect investments to the US market. While this may present challenges, it also prompts us to elevate our efforts.

In the energy sector, some products have a global market price, while others maintain a more unique pricing structure. Despite the potential for the US to scale up, Denmark remains an attractive place for green business in the transition. Opportunities abound, offering benefits for global climate goals and the long-term competitiveness of the American economy – a positive outcome for all. Any remaining challenges in the trade relationship between Europe and the US should be met with proactive measures, focusing on the alignment of regulations rather than complaints about US actions.

What are your top personal goals and long-term vision for Denmark’s energy industry?

I operate in two key areas: climate and energy. Our climate targets are set for 2025 and 2030, progressing toward this government’s goal of climate neutrality by 2045, advancing the goal set in the Danish Climate Act. One key focus is achieving emission reduction targets.

By 2030, Denmark’s energy sector will produce heat and power practically without fossil fuels. Our gas production will yield more green methane than we consume, making us a net exporter. Traditional energy production will be entirely green, eliminating the use of fossil fuels.

Large chimneys will likely feature carbon capture, addressing emissions from select hard-to-abate industries, possibly using biomass or limited fossil fuels.

The remaining emissions stem mainly from two sectors. In transportation, electric vehicles will dominate, bolstered by Denmark’s enthusiasm for electric cars. Predictions consistently exceed expectations, and charging infrastructure is improving, facilitating cross-border travel. In heavy-duty transportation, industry leaders anticipate a technology shift in the future.

For aviation, we will have a small tax on each seat to fund green fuels, ensuring domestic flights become environmentally friendly.

The agricultural sector remains a challenge, with plans to negotiate a CO₂ regime in 2024. A proposed CO₂ tax aims to incentivize shifts toward sustainability.

Looking ahead, energy predictions for the market include lower prices, increased efficiency, independence from fossil fuel imports, and becoming a net exporter of electricity and hydrogen. We may import CO₂ for use in hydrogen production for new P2X fuels. Denmark envisions a greener, industrially stronger nation, even for its size.

My experiences transitioning from industry to minister shape my approach. While climate discussions are non-negotiable, I actively seek ways to make impactful changes on an industrial scale in the energy sector.

What is your final message to our readers?

For a considerable time, the notion prevailed that going green equated to higher costs. However, that narrative is reaching its conclusion, as it will not hold true in the future. Electric cars, for instance, outshine their fossil fuel counterparts in terms of lifespan and cost-effectiveness. Though the initial investment may be slightly higher, the savings from not purchasing gas make them the most economical choice, a trend expected to strengthen in the coming years.

In the realm of electricity, solar and wind power prices continue to decrease. While these sources cannot stand alone and require complementary technologies, the global surge in solar power investment attests to its status as the most cost-effective means of electricity production.

Failing to adopt green practices in the future risks subjecting industries to an inefficient system. While political interventions, such as subsidies, can be attempted, a crucial shift in mindset is the recognition that green initiatives can actually bolster and create a robust economy. If the business case aligns, the US is poised to seize tremendous opportunities.

An observation that consistently surprises me during my visits to the US is the considerable room for improvement in energy efficiency. Despite competing priorities on management boards, there are noteworthy opportunities on the horizon for energy efficiency that should garner higher placement on the priority lists of many US companies and property owners. These represent easily achievable gains for the US economy.