Picture taken on February 1, 2017 shows a general view of the DONG Energy power station in Hvidovre near Copenhagen

As climate change has risen steadily up the list of global concerns, fossil-fuel companies around the world have lined up to support action to curb it.

ExxonMobil, the largest listed oil group, says the 2016 Paris climate agreement, which aims to limit global warming, is an “important step forward”. Coal miner Anglo American wants to cut its carbon emissions. Saudi Aramco, the largest crude exporter, backs a $1bn industry plan to fund low-carbon technologies.

Yet few have done anything as radical as Denmark’s Dong Energy. While Dong may be a minnow compared with the likes of Exxon, its roots lie in fossil fuels. As does its name, which stands for Danish Oil and Natural Gas.

The Danish state set up the company 45 years ago and it became a regional player in the North Sea before expanding into the European electricity-generating market. Over the past decade, however, it has gradually turned its back on oil, gas and coal to become a champion of green energy.

It is now the world’s largest offshore wind farm company, having built more than a quarter of the capacity in operation globally — it installed its 1,000th sea-based wind turbine last year.

Meanwhile, it is preparing to sell off its oil and gas business this year after floating on the Copenhagen stock exchange in 2016. From 16 per cent in 2007, the proportion of its capital tied up in wind farms had jumped to 75 per cent in 2015.

Dong is also backing pioneering technology that turns household rubbish into electricity and has been converting coal power stations in its utility subsidiary to burn wood. In February, it announced its power stations would stop using coal altogether by 2023.

“It’s an astonishing transformation,” says Jens Houe Thomsen, an analyst at Denmark’s Jyske Bank. “It is hard to think of many other oil and gas companies that have made as big a shift as Dong has away from fossil fuels towards renewable energy.”

The transition has made some analysts nervous, however. Moody’s, the US rating agency, has had Dong on negative watch because of worries about its business model, which involves taking on the construction risk of developing a wind farm in the expectation of selling stakes later on.

Henrik Poulsen, CEO of Dong Energy, speaks to media on May 26, 2016 in Copenhagen during the company's entrance at the stock market.
Henrik Poulsen says Dong’s positive cash flows help vindicate its transition from such fossil fuels like coal to wind, where it has exploited its power generation expertise © AFP

Henrik Poulsen, Dong’s chief executive, plays down such concerns. He points to the positive cash flows Dong generated last year, despite extensive offshore wind investments. “Our net debt has been reduced to the lowest level ever and our rating metrics are as high as they’ve ever been,” he says.

Now, Poulsen is about to raise the stakes on Dong’s offshore wind strategy considerably: the company plans to install more capacity between 2016 and 2020 than it did in the preceding 25 years.

It already has a share in the world’s largest operating offshore wind farm, London Array in the outer Thames estuary. Other huge schemes in which it is involved are due to come on stream between 2018 and 2020.

The company is starting to spread beyond its European home into, for example, Taiwan and the US. In the latter, President Donald Trump may prove problematic, with his ambitions to revive coal and kill off climate change rules. Trump has railed against what he has called “horrible, horrible” wind turbines, especially an array (not a Dong project) planned for the sea off Scotland, which he has said would wreck views from his Aberdeenshire golf resort.

Poulsen thinks the US administration is unlikely to damage Dong’s business. “I’m cautiously optimistic that they will not stop the build-out of renewables,” he says. “Renewables have been a major job creator in the US.”

Even if the president relinquishes US leadership on global climate change action, Poulsen thinks other countries, cities, investors and companies such as Dong will “push the green transformation forward across the planet”.

Dong’s 6,500 employees must hope he is right. “We’ve bet the ranch on offshore wind,” notes Brent Cheshire, the company’s UK country chairman.

Cheshire, who also works on developing new wind markets for Dong in other countries, personifies the company’s greenward shift. A petroleum engineer, he entered the oil industry 40 years ago and has worked in areas from the Middle East to Texas and the North Sea.

He joined Dong in 2004, when the company decided to set up in the UK and expand its North Sea oil and gas business. Cheshire was its first employee in Britain, where head office was initially his shed in West Sussex in the south-east of the country.

He soon discovered that his new employer was about to make an important shift. Its state owners were keen to cut Denmark’s reliance on imported fossil fuels, boost local wind turbine makers and reduce greenhouse gas emissions. He says that within a short time, Dong’s then chief executive, Anders Eldrup, decided: “Right, we’re going into offshore wind.”

The company had certain advantages: it was able to exploit its existing knowledge, thanks to its utility division, of how to run a power station, and it had a government owner happy for it to plough money into a very new type of energy generation.

“You didn’t have to worry about balance sheet risk,” says Cheshire. Having proved it could build offshore wind farms in Denmark, Dong began to look for other places it could deploy what Cheshire calls “our mousetrap”: its offshore wind know-how.

Dong Energy illustration
© Scott Chambers/Synergy

The UK was in the throes of encouraging renewable energy with subsidies. Dong pounced. Today, the UK is the world’s biggest offshore wind market and home to 880 Dong employees. The company fully or partly owns eight projects, with four more under construction.

Dong’s success in the UK has not been free of controversy. In 2014, it won contracts for three wind farms that guaranteed power prices of up £150 per megawatt hour — nearly three times today’s wholesale electricity prices. The move was designed to prevent a pause in renewable power development as the government bedded down sweeping energy market reforms. Poulsen says Dong took risks that no rival company was willing to make on what looked like a highly speculative investment.

The UK government’s National Audit Office questioned the step, however, in a 2014 report that said the contracts offered prices that “may provide higher returns than needed to secure investment”. The following year, a more competitive system of awarding offshore wind contracts produced prices for other UK projects of just under £120 per MWh.

Wind turbines and coal

Last year, Dong won a bid for two wind farms off the coast of the Netherlands in a deal with a contract price of just €72.70 per MWh. The company says the agreement is not directly comparable with the British ones, because it does not include the cost of equipment linking the project to onshore power networks.

It is still cheaper, although the UK offshore wind industry has reported that its costs have fallen much faster than expected, tumbling by nearly a third in four years to an average of £97 per MWh in 2015-16. That means the industry is four years ahead of a target it set with the UK government in 2012 to cut costs to £100 per MWh by 2020.

Dong says its early, riskier investments have helped drive down these costs. Cheshire points to a 2009 deal the company signed with Siemens, the German engineering group, to buy up to 500 wind turbines — more than it needed at the time. He says he thought when the agreement was struck, “You can’t afford this. This is crazy!” But company executives allayed his fears: the projects would come and the move would allow Siemens to develop a bigger, more efficient turbine.

They were right, he says. The turbine Siemens developed became an industry workhorse that “drove the costs down by a significant amount”. Dong did a similar deal in 2012, agreeing to buy another 300 turbines from Siemens.

Dong’s transition makes sense to those who think all fossil-fuel businesses should be alert to the threats posed by falling costs of renewable energy that have grown out of policies to combat climate change.

“As the costs of wind and solar have fallen dramatically, it has morphed into a technology risk for incumbent fossil-fuel producers,” says Mark Lewis, head of European utilities research at Barclays Capital, the investment bank.

Dong may end up proving to have been ahead of the curve, though it may gain one more problem: should it change its name now that it is no longer an oil and gas company? Cheshire thinks not: “It’s a strong brand, it’s one that’s recognised and it all seems to work.”

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