The establishment of the Danish windmill industry - was it worthwhile?

The renewed interest for using wind energy commercially is not more than twenty-five years old. From an experimental stage of turning wind energy into electricity in the 1970s, a new industry for producing standardised windmills gained foothold in the beginning of the 1980s and since then it has developed rapidly through the 1980s and the 1990s. The Danish innovators of the new windmill technology have been the pioneers behind this development, and Denmark has succeeded in acquiring a first mover advantage on the world market. This position has been maintained and at present Denmark satisfies more than half of the world market's demand for windmills. There are at least two reasons for this pioneering position of the Danish windmill industry. First, Denmark is by nature very 'abundant' in wind energy due to its geographical position at the nexus between the Gulf Stream and the European continent. The windy climate makes given technologies of windmills more productive. Secondly, the production of electricity from wind power has been subsidised by state aid schemes among which the most important one has been a price guarantee per produced kWh (kilowatt-hours) to the owners of windmill. These subsidies have made production of electricity from windmills profitable for private investors and hence competitive on the market for electricity produced by fossil fuel. Although the public subsidies to produced electricity from wind power in Denmark have been motivated by environmental concerns over the emission of carbon dioxide (CO2) from power plants using fossil fuels, the subsidies have resulted in the development of a new industry with a strong export performance. The development of the windmill industry thus illustrates an infant industry strategy where state aid in the upstart phase results in a build up of an internationally competitive industry in the long run. This is the Mill's test of an infant industry strategy. However, a precondition for a successful outcome of such a strategy is the existence of dynamic economies of scale or learning-by-doing within the industry so that the initial infant costs could be paid back later. This is the Bastable's test of an infant industry strategy. The purpose of this paper is to discuss, analyse and evaluate the welfare effects of the Danish policy measures for the windmill industry in order to conclude whether the intervention passes both the Mill's and the Bastable's tests. The paper is organised as follows. Section 2 introduces the available data on the remarkable development of the Danish windmill industry and presents the evidence of learning-by-doing in this industry. This section is based on the results of a previous analysis of the authors of the technological development in the windmill industry in Denmark. Section 3 gives an evaluation of the costs and benefits in an infant industry perspective and section 4 concludes the paper. (au)