Introduction
In August 2016 McKinsey & Company delivered a report that analysed the optimisation potential in the energy supply sector. The report was ordered by the Ministry of Finance together with the Ministry of Energy, Utilities and Climate and is another recent contribution to the government's anticipated energy supply strategy, which will be presented this autumn.
In order to plan potential synergies, the report analyses:
- district heating;
- waste incineration;
- electricity distribution;
- gas distribution; and
- water supply.
The report concludes that there is potential for optimisation of between Dkr5.9 to 7 billion annually across the abovementioned sectors. This figure is derived from the potential optimisation of a list of parameters, including:
- liberalisation in certain parts of the sector;
- securing sufficient incentives for optimisation and consolidation through contract-based regulation for the sector's largest companies;
- the adjustment of benchmarking standards; and
- the introduction of a weighted average cost of capital regulation on newly acquired assets.
The report recommends the removal of barriers to optimisation and consolidation in the sector (eg, by making it easier and more attractive to merge energy supply companies or relaxing the strict set-off regulations, thus allowing municipal owners to take home premiums from divestments). Further, the consolidation of qualifications at a management level through the introduction of competency standards for board members is presented as a means to improve efficiency in the sector.
Critique of optimisation potential
The report's conclusions have sparked political disagreement, as some can be viewed as encouraging the partial privatisation of the energy supply sector, while others are described as being unrealistic or undocumented. The latter critique primarily comes from the Danish District Heating Association (DDHA), as the report is particularly critical of its members. The DDHA is concerned that the report does not consider the green conversion that the sector is undergoing.
The Danish Waste Association (DWA) has also expressed concern that the report is merely an ideological attempt to optimise the waste sector, which according to the DWA is world-leading in terms of its operation. The Danish Water and Waste Water Association (DANVA) also voiced its concern, fearing that the report, together with other contributions to the anticipated energy supply strategy, will muddy the waters, as the report's conclusions do not consider environmental, climate and technological development issues.
The DANVA recently commented that the report's data regarding the energy sector's vast optimisation potential appear to have been overstated.
Rumours of the energy supply sector's privatisation have been circulating since the report was commissioned; however, Lars Christian Lilleholt, the minister for energy, utilities and climate, recently confirmed that the government has no plans to privatise the sector or address the ownership of energy and utility companies operated and owned by Danish municipalities. Nonetheless, the minister is committed to addressing the report's suggestions.
Although some energy sector stakeholders disagree with the report's data, its overall reception has been predominantly positive.
Local Government Denmark (LGD), the association and advocacy group of Denmark's 98 municipalities, welcomed the potential move towards privatisation, commenting that the report's conclusions would entail an increase in municipal freedom if followed.
The LGD rejected that this would inevitably result in energy companies being sold off. The Confederation of Danish Industry and the Danish Energy Association also welcomed the report's aims and outlook for the energy supply sector's development.
The report's reception among potential investors has also been largely positive. Major Danish labour market pension funds have conveyed an interest in the sector as a new investment option. Naturally, their interest is contingent on the extent to which the report's suggestions and ideas will be implemented, so as to facilitate attractive investments for the sector and investors.
Should municipalities and prospective investors display the requisite interest in a privatisation process within certain areas of the energy supply sector, it could put pressure on the government to reconsider its immediate wish not to privatise the sector or directly address the ownership of energy and utility companies.
Regulatory initiatives are needed at a government level to realise the possibilities set out in the report, and the government's impending energy supply strategy will undoubtedly highlight how transformative it could be to the energy supply sector.
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.
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