Geothermal energy has long been used for district heating in Denmark, but lately political and industry interest therein has been on the rise. This has resulted in an increase in applications to explore for and produce geothermal energy. Since 2017, five new exploration licences have been granted and five additional licences are currently being assessed by the Danish Energy Agency (DEA).
Geothermal energy in Denmark can be used only for district heating and not to produce electricity, due to the low temperature of the saline water reservoirs in the Danish subsoil. Only three geothermal plants are in operation, but this may soon change. Geothermal energy will help to fulfil the political goal of a carbon-neutral Denmark by 2050.
The production of geothermal energy is governed by the Subsoil Act and a licence is required for both the exploration for and production of geothermal energy.
Licences are provided through a tender by the DEA. Licences are usually awarded as a sole concession for the applied-for area. The DEA emphasises the importance of applicants' technical and financial capacity and the production method that they intend to use in the area for which they have applied.
Exploration licences last for six years but can be extended for 10 years. If production is commenced, the licence will have a duration of 30 years but will be limited to the area from which the geothermal energy is extracted and will not cover the entire area for which it was initially applied. This frees up the surrounding area for other applicants and ensures that as much geothermal energy as possible can be produced in the area.
The use of geothermal energy for district heating is governed by the Heat Supply Act, which sets out the legal framework for matters such as pricing.
Difficulties in allocating risk
Due to the conditions in Denmark relating to geothermal energy, exploration for usable saline water reservoirs is expensive and the chance of success is limited. Companies that want to invest in geothermal energy must often cooperate with the local municipalities when setting up endeavours. This has resulted in different solutions having to be used in order to mitigate the risk that would have otherwise been carried by the private company in its entirety.
However, even though municipalities are interested in using geothermal energy in their area as an endless resource for district heating, they are seldom prepared to assume the risks of exploration. Municipalities have been known to treat geothermal plants as turnkey projects in which they carry none of the risk of a failed exploration or at least demand that the private licensee carry all of the risks of exploration and operation of the geothermal plant, combined with a pricing agreement ensuring that the private investor has an acceptable return on investment.
This has caused some projects to collapse at an advanced stage, simply because the private investor was unwilling to give in to the municipality's demands. However, it is clear why local municipalities do not want to assume the risks from exploration and production. In 2009 a small municipality in Jutland started exploring the subsoil for geothermal energy. The original budget for the project was €1.6 million, but the final costs were €21.5 million. The project failed in its entirety – the budget was exceeded and the production was abandoned.
At present, three geothermal plants are in operation, six additional licences for exploration and production of geothermal energy have been granted and applications for five additional areas are being assessed by the DEA. The current geothermal projects that have attracted the most interest are those in Aalborg and Aarhus.
In Aalborg, the first steps of the project were developed in cooperation with a private investor, but the municipality wished to conduct the project as a turnkey project with a 'no cure, no pay' term in the contract. This would result in the municipality assuming no risks and the private investor having no security for its return on investment or even just some of the costs. The partnership was discontinued. The project is now being offered in procurement as a turnkey project with the no cure, no pay term intact. The previous private investor holds the licence for the exploration for and production of geothermal energy in the area, but has promised to transfer the licence to a future investor without any costs.
In Aarhus, the municipality and the private investor have entered into an agreement in which the private investor carries the risk of exploration and operation of the geothermal plant, but is partly ensured a return on investment through a pricing agreement if the plant becomes operational.
For further information on this topic please contact Nicolaj Kleist at Bruun & Hjejle by telephone (+45 33 34 50 00) or email ([email protected]). The Bruun & Hjejle website can be accessed at www.bruunhjejle.com.
