Dong confident German projects can 'create value'

DENMARK: Speaking after Dong Energy reported a 53% fall in earnings, CFO Marianne Wiinholt is confident the developer's zero-subsidy German offshore projects will "create value".

Dong Energy completed the Burbo Bank Extension project earlier this year (pic: MHI Vestas)
Dong Energy completed the Burbo Bank Extension project earlier this year (pic: MHI Vestas)

On 13 April, Dong won the licences to three offshore wind projects in Germany's auction, totalling 590MW. Two of those projects, OWP West and Borkum Riffgrund West 2, each 240MW, will be built without subsidies.

German firm EnBW also secured a subsidy-free licence, for the 900MW He Dreiht site, while Dong also won a €60/MWh contract for Gode Wind 3.

"The zero-subsidy projects represent a historic breakthrough for offshore wind," Wiinholt said.

"We have applied a higher cost of capital than we have done for previous projects."

"The economic drivers in the two projects will deliver costs below our forecasts for wholesale prices, and we believe we will be able to create value without subsidy," Wiinholt explained.

"We definitely believe we can create value from these two German projects. We see that the costs to construct these offshore wind farms is going down significantly, driven very much by the fact that [they] will be built in 2024.

"At that time, we will be able to use the next-generation wind turbines, and they are expected to be as large as 13-15MW," said Wiinholt.

Currently the largest turbine publically and commercially available is the MHI Vestas V164 9MW machine.

Dong Energy was the first developer to install the predecessor turbine, MHI Vestas' 8MW at the Burbo Bank Extension in the Irish Sea.

The developer is also installing the V164 8.4MW version at its Walney Extension West site, whilst utilising Siemens' 7MW machine at the Walney Extension East site.

Speaking after the German auction results earlier in April, Dong CEO Henrik Poulsen said the company was in talks with its suppliers over future technology.

"We don't go specifically into the relationship of the commitments we have made with the supply chain.

"I will just say we feel comfortable with the technical levers we have applied, including our assumptions on the turbine and size of the turbines, we are obviously working closely with suppliers on the next generations of turbines, but above and beyond that we are bound by confidentiality in our relationship with the major turbine manufacturers," Poulsen said.

Project pricing

Wiinholt added that Dong is not yet fully committed to building the project, should assumptions about energy prices not match expectations.

"We have much more merchant risk now that we depend on the wholesale prices, and therefore we also see this win as an option," the CFO explained.

"If we see that the power prices will not pick up as we expect due to higher CO2 prices, we will be able to drop the project.

"When we predict the power prices, we of course look at external benchmarks. When we look at our projections, they are conservative compared to most of external benchmarks we see in the market.

"The main reason for that is that we really don't believe it is the CO2 price that in itself that will be able to drive the transformation to green energy.

"We believe that after 2020, after the EU emissions trading system period ends, that we will see a pick up in the CO2 price, but not to the level that many analysts foresee.

"Many [analysts] foresee a CO2 price of €30-40. That's not where we are, we are significantly lower. But we believe that CO2 price will be higher than today's level of around €5. [There will be] a pick-up after 2020 but not a significant one," Wiinholt said.


Dong recorded earnings before interest, tax, depreciation and amortisation (Ebitda) of DKK 3.29 billion (€442 million) in its 2017 Q1, just under half the total from the same period a year earlier.

Wiinholt said the developer's earnings were in line with expectations as the first quarter of 2016 had been particularly high.

The fall was as a result of "lower partnership gains" Wiinholt explained.

In Q1 2016, Dong Energy had sold a share of the Burbo Bank Extension project in the UK's Irish Sea to Danish pension fund PKA and investment firm Kirkbi.

Wiinholt said no such sale had occurred this year so far, although Dong is expected to complete divestment of a portion of the 660MW Walney Extension project later in 2017.

The lower earnings down to "a matter of timing", Wiinholt said.

Dong's operating offshore wind farms produced 2.1TWh of electricity in Q1, hampered by lower wind speeds in January, but still a record quarterly production total.

Earnings from the operating projects was up 21%, according to Dong.

The Burbo Bank Extension site was commissioned earlier this month, and a further five offshore projects are under construction.

Dong reconfirmed its expectations for 2017, with Ebitda reaching DKK 15-17 billion.

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