Making the case for offshore wind

Q: Tell us a little about DONG Energy.

DONG Energy is one of the leading energy groups in Northern Europe. We are headquartered in Denmark, with over 6,500 employees, and, since formation in 2006, we have transformed from one of the most coal-intensive utilities in Europe to a global leader in renewable energy. We are the world leader in deploying offshore wind, helping to reduce carbon emissions and harvesting Europe's own energy resources. At the same time, we are taking the lead in converting existing coal- and gas-fired power plants to sustainable biomass, to provide heat and power supply, which is both green and flexible. 

Offshore wind is core to DONG Energy. With over 20 years' of experience and a workforce of more than 2,000 dedicated employees, we have built more than one-third of the total offshore wind capacity installed today. This capacity is equivalent to an ability to supply six million Europeans with clean electricity.

Q: What are the main priorities for you as a business at the current time?

Increasing global carbon emissions are a major challenge for the global ecosystems. At DONG Energy, we believe that we as an energy company have a major responsibility to help steer the world in a more sustainable direction. Our vision is to lead the energy transformation which means we want to build and enable green, independent and cost-effective energy systems. We are committed to reduce carbon emissions per produced kilowatt hour (kWh) by 60 percent in 2020 compared to 2006. As of today, we have already achieved a 41 percent reduction.

Our Wind Power division has a strategic goal of achieving 6.5 gigawatts (GW) of installed offshore wind capacity by 2020. As of today, we have installed 2.5GW and another 1.5GW are currently under construction. The offshore wind projects we are currently building include Gode Wind 1+2 and Borkum Riffgrund 1 in Germany as well as Westermost Rough and Burbo Bank Extension in the UK. We have fully secured the pipeline of projects to achieve our 2020 target.

Q: Could you explain the opportunities and challenges inherent in offshore wind development today?     

There is enormous growth potential for offshore wind. The current installed capacity in Europe amounts to approximately 8GW and is predominantly located in the UK, Germany and Denmark. The expectation is that more than 20GW will be installed in Europe by 2020 with significant new capacity being added outside of the current core markets. The offshore wind sector also brings considerable economic opportunities: 58,000 people were employed in the industry in Europe in 2012, a number that is expected to grow significantly in the years ahead.

Offshore wind is recognised as a major contributor to decarbonising Europe's energy supplies and to reinforce its security of supply. There are also material new offshore wind developments ongoing outside of Europe, especially in Asia and the US.

The significant growth of the offshore wind industry is both an opportunity and a challenge. The regulatory frameworks in key markets towards 2020 are in place but there is uncertainty for the years thereafter. The supply chain has significantly developed over the last couple of years but needs to further mature in order to realise the planned build-out in a cost effective way. The European utilities as leading developers have to provide the necessary know-how and  competences as well as their share of the required financing.

Q: What do you look for when teaming up with partners? 

We look for partners with a long-term investment horizon which look to generate attractive and stable future returns. We offer the opportunity to invest alongside an experienced industry leader in high-quality renewable energy infrastructure assets in a high-growth sector.

DONG Energy has successfully attracted institutional investors to support its ambitious growth strategy within offshore wind. Equity partners ranging from pension funds and sovereign wealth funds to large non-utility corporates, have become co-shareholders in DONG Energy's offshore wind projects. This has been achieved by offering a unique partnership model to investors allowing a customised risk/ return profile matching the investment strategy of our partners.

More than €4 billion have been invested by our partners over the last four years and many of our partners have repeatedly done investments with us which proves the success and attractiveness of our partnership model.

Farm down of our ownership shares in wind projects is a central part of our business model. Our strategy is to continuously enter into partnership agreements with institutional investors.

Q: Could you provide a brief example of one or two ground-breaking projects you have been involved in?

In 2010, DONG Energy pioneered the method of bringing pension fund capital into the offshore wind sector, first into operating projects and then into pre-construction projects. This was achieved by developing a unique partnership model which attracts institutional investors, thereby allowing offshore wind developers to recycle capital. 

One of our key projects is London Array, the world's largest offshore wind farm comprising 175 turbines with a combined capacity of 630 megawatts (MW). At the beginning of 2014, DONG Energy divested 50 percent of its shares in London Array to the Canadian pension fund La Caisse, bringing on board for the first time one of the largest North American pension funds. Besides DONG Energy and CDPQ, the consortium behind London Array includes E.ON and Masdar.

Another project to mention is Westermost Rough (WMR). In March 2014, Marubeni and Green Investment Bank (GIB) became co-owners of WMR alongside DONG Energy. The agreement with Marubeni and GIB is a major step, being the first partnership where institutional investors have taken on full multi-contracting construction risk in the first large-scale project deploying a new state-of-the-art turbine technology. Marubeni and GIB also obtained non-recourse construction project finance at WMR holding company level.

This project is a vote of confidence by institutional investors in DONG Energy's ability to manage and execute offshore wind construction projects and marks a significant next step in DONG Energy's efforts to reduce the cost of electricity for offshore wind.

Q: How do you see the years ahead for renewable energy development and investment 
as a whole? 

Renewable energy generation remains a crucial contributor to address the challenges of global climate change. 

Offshore wind already plays an important role in decarbonisation today in Europe and, will going forward, also in other markets outside of Europe. We expect the global offshore wind market to grow significantly towards 2020 and thereby  creating significant investment opportunities for institutional investors.

A key focus area for offshore wind is to reduce the cost of electricity. DONG Energy has a target to reduce the cost of electricity by 35 to 40 percent compared with projects decided in 2012. Although projects continue to grow in size and complexity, we think this target is achievable. Cost reductions will rely on good site selection, standardisation of concepts as well as efficient deployment and development of technology. 

Ole Kjems Sørensen and Martin Neubert are vice presidents,co-heads of commercial transactions & market development, and membersof the executive committee of DONG Energy Wind Power in Copenhagen