Dong banks on "high-growth, competitive" technology

Dong earned €335m from Anholt, spent €670m on London Array

Almost 30% of Dong Energy’s group EBITDA for 2012 was generated by its wind power business unit. The only business unit to contribute more profit to Dong’s bottom line was its oil and gas exploration and production division.

The company's new chief executive, Henrik Poulsen, today drew attention to the success of its offshore-dominated wind power division while discussing Dong Energy's 2012 financial results. "We believe in offshore wind. We see it as a high-growth and competitive renewable technology, which offers us a significant value creation opportunity," said Poulsen.

With Dong’s wind power EBITDA totalling DKK2.5bn (€336m) in 2012, the division’s earnings have grown more than four-fold since 2009. Wind power was also the company’s second-most profitable division on an EBITDA basis, contributing DKK7.8bn (€1.0bn), or 11.6%, of group revenue.

During a year when Dong posted a €539m group-wide loss - largely due to "very challenging gas markets" - offshore wind offered the company essential support. Total wind and hydro power electricity generation (no offshore-specific data is available) increased by 4.5%, largely thanks to additional output from Walney 1 and 2 offshore wind farms.

Meanwhile, Dong earned €335m from construction of the 400MW Anholt project on behalf of its co-investors. It also boosted its bottom line through the sale of a 50% stake in its Borkum Riffgrund 1 project, planned for the German North Sea.

Investing in transformation

If offshore wind generated substantial earnings for Dong in 2012, it was also responsible for the vast majority – 87.0% – of the company’s net investments. This is in line with Dong’s strategy of transforming itself from a "legacy" business to one that will be at the heart of "future energy," said Poulsen. Choosing not to invest in offshore wind and other viable renewables, such as biomass-powered heat, would result in the energy company "slowly dwindling", he added.

The world’s largest offshore wind farm to date, London Array, accounted for Dong’s biggest single investment in 2012, swallowing €670m. Smaller amounts were invested in Walney 2 (€241m), Anholt (€161m) and Lincs (€134m). Three of these projects – London Array, Anholt and Lincs – are due to be fully commissioned this year, and should increase Dong’s owned asset base by 583MW.

Other offshore wind-related costs during 2012 included €67m on the purchase of Gode Wind 1, 2 and 3 and €80.4m on the construction of A2Sea’s new jack-up vessels, Sea Installer 1 and 2.

Dong is also financially committed to moving ahead with three other offshore wind farms, West of Duddon Sands, Borkum Riffgrund 1 and Westermost Rough. Combined, these will add just over 900MW in owned capacity. The company fully owns the 210MW Westermost Rough project but could choose to reduce its stake in future.

At the end of 2012, Dong owned 1.2GW of operational offshore wind capacity and counted itself as having installed a further 500MW. Recent reports suggest it is considering a partial sale of its 50% stake in London Array to a Québecois pension fund.

As previously reported, Dong aims to have installed 3.5GW in offshore wind capacity by the end of 2016 and 6.5GW by 2020. It has not announced targets for the capacity it seeks to maintain under its ownership by either date.

Cost reduction target

Dong has publicly adopted an "ambitious" goal to reduce its offshore wind cost of energy to €100/MW by 2020. "We are pioneers in this area and we have been a driving force in the industrialisation of offshore wind construction," explained Poulsen.

The company has created a team dedicated to offshore wind cost reduction and it will seek to achieve savings through the use of "technology roadmaps" developed in collaboration with its industrial partners. Industrialisation of both the construction and operations and maintenance phases is a priority, as is much greater efficiency in project management and logistics.

Underlining its focus on efficiency, Dong notes that offshore wind farms under its operations achieved an average load factor of 41% last year. This was higher than the 37% load factor cited for 2011 by the UK Department of Energy and Climate Change. Even better, the Horns Rev 2 offshore wind farm last year achieved "the highest load factor measured in the world for a wind farm using Siemens turbines", at 52%.

Looking ahead, Dong is focused on securing a cash injection from private institutional investors and its existing shareholder base. It will implement a two-year financial action plan designed to cut debt and overheads while maintaining significant investment levels in offshore wind and oil and gas exploration and production.

About 50% of total investment to 2020 is earmarked for offshore wind projects, with most of this planned development in three countries: Denmark, the UK and Germany. It has not yet decided whether it will invest in the three French projects it is developing jointly with EDF, said Poulsen.

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