The Danish Electricity Reform — Success or Failure?

Abstract

The European market directive from 1996 was only reluctantly implemented in Denmark in 1999. This is not different from a number of other member countries. However, the approach to liberalisation was more radical than in other reluctant countries. We address three tenets in standard market implementation: market power, restructuring, and regulation of the network monopoly. Even if the Danish market reform gets very good marks in the EU benchmarking, there have been major problems in all three areas. As for market power, the Danish Competition Authority has accused two large generators of abuse. Restructuring of the sector has been prevented by lengthy discussions on ownership. The most spectacular problem arose in the implementation of new incentive regulation of the distribution system operators. A combination of income caps and benchmarking was obviously mal-functioning and had to be abandoned in 2004. In the article we furthermore address the remedies recently introduced to cure the malaises.