IN DEPTH: Dong dares offshore

At a time when many leading power companies are complaining that offshore wind is too expensive and too risky to invest in, Denmark’s Dong Energy is ploughing billions into its offshore programme.

Dong is planning a staggering 6.5GW by 2020 — roughly the same amount as the world’s current installed capacity.

But with lingering doubts about the future of support schemes in key markets such as the UK and Germany, why is the utility rushing into the sector with such bravado — risking 50% of its annual spending on gigantic turbines up to 100km from shore? And can Dong, already the world’s leading offshore developer, really afford to pay for it all?

According to Dong chief executive Henrik Poulsen, the company’s goal is “to maintain market leadership [in offshore wind], and help to develop the technology and industry”. It is a strategy being driven by two powerful forces: profit and government policy.

Dong is owned by the Danish state and must do its bidding. And it is no exaggeration to say that the government in Copenhagen has one of the most progre ssive renewables policies on the planet — aiming to source half its electricity from wind by 2020, and all its energy from renewables by 2050.

“It has been largely accepted within the Danish government and population that the turnaround from black [oil] to green energy is an integral part of Dong’s strategy because it is owned by the Danish state,” says Jacob Pedersen, an analyst at Sydbank in Copenhagen.

Dong has seen falling profits since 2010 — its gas business has performed poorly, electricity sales have shrunk due to the economic crisis, and energy prices have often not been high enough for power plants to break even. The utility’s overall net profit fell to DKr430m ($78m) in the first half of 2013, from DKr755m a year earlier.

Yet wind power was one of the few bright spots for the company, with earnings before interest, tax, depreciation and amortisation rising to DKr2.35bn in the first half, up from DKr1.45bn a year earlier.

Dong expects profits to grow as more of its offshore projects come on line. “We will, over the next few years, also see an uplift in our earnings from assets coming on stream,” Poulsen told investors at a conference call in August.

The 630MW London Array and the 400MW Anholt came on line in April and June this year, while the 389MW West of Duddon Sands is due to be commissioned in 2014, followed by the 277MW Borkum Riffgrund 1 and 210MW Westermost Rough in 2015. Dong needs the revenues from these projects, says Pedersen, to help finance its ambitious offshore expansion plan.

“If they don’t improve earnings, they can’t afford to invest at huge scale,” he says. After all, Dong says it needs to spend nearly DKr20bn on offshore wind between 2013 and 2015.

But it’s not as if Dong is trying to fund its offshore portfolio without outside help.

Earlier this year, the utility announced it would seek a direct capital injection of DKr6bn-8bn — and ended up getting far more than that.

Last month, the company announced an DKr11bn agreement with US investment bank Goldman Sachs and two Danish pension funds, ATP and PFA. 

Goldman Sachs alone will spend DKr8bn in exchange for 19% of the company’s shares, while ATP and PFA will buy 5% and 2% of the company, respectively. The deal, which is still pending approval from competition authorities, will reduce the Danish state’s share in the company to about 60%.

The new investors clearly reckon that Dong’s offshore plans will result in rising profits. “We believe this is a great opportunity to generate an attractive long-term return for the benefit of PFA’s customers,” says Henrik Heideby, PFA’s president and group chief executive. “The contribution to Denmark’s green-energy transformation is an added bonus.”

As part of the deal, Dong will seek a stock-exchange listing “when conditions are right”. If no initial public offering takes place by the time Dong releases its 2017 financial statements, the new investors have the option to sell their shares back to the Danish state at a pre-arranged price, a clause that makes the deal very comfortable for Goldman Sachs.

“While the utility’s Exploration and Production [of oil and gas] business is the largest contributor to Dong’s revenues currently, the investment plan is clearly geared towards offshore wind,” says Marianne Boust, associate director at analyst IHS. “It shows that Goldman Sachs is committed to offshore wind, without taking the full risks of buying direct stakes in the offshore wind projects.”

But Dong also has a clearly defined strategy of sharing the risk at individual offshore wind farms with outside investors — a vital ingredient in financing the larger projects.

For example, the utility developed London Array in conjunction with German utility E.ON (which took a 30% stake in the project) and Abu Dhabi state-owned clean-energy venture Masdar (a 20% stake).

And last year, Dong managed to sell 50% of Borkum Riffgrund 1 to two private companies — a first for the German sector — and it is actively seeking other such partners for its next projects. 

Dong strongly believes that offshore wind will become more profitable in the future — that costs will come down as volumes increase.

“We have a big task in reducing the costs of offshore wind over the next few years,” says Poulsen.

“We will do this by increasing the production of energy per turbine, developing new foundations, improving the grids, and building wind farms faster while continuing to streamline operations.

“In brief, we will continue to industrialise and professionalise the entire value chain.”

A glance into Dong’s history shows how far the company has already come.

When it built the world’s first offshore wind farm, the 5MW Vindeby, in 1991, it used 450kW turbines. Machines at its latest completed project, Anholt, are 3.6MW, while the company is now conducting the first offshore tests of Siemens’ new 6MW direct-drive turbines, installing two pre-series units at Gunfleet Sands 3 — having closed a framework agreement last year for a whopping 300 of them.

Dong’s vast knowledge and experience in offshore wind is perhaps its greatest advantage.

“Dong is investing in the UK and in Germany, because they have the expertise. They know how to do it. They can probably erect an offshore wind farm faster than any other player in the market,” says Pedersen, adding that Dong’s know-how probably enables it to make a better return on its offshore investments than many of its competitors.

There may be more heavyweight competitors offshore in the future, and the risks in this fast-moving market are not to be underestimated.

But experts agree that Dong will be a force to be reckoned with for years to come.

As Nordea Markets analyst Patrik Setterberg says: “I believe if there’s someone in this industry who knows how to handle the risks in offshore wind, it’s Dong Energy.”