The past year will not go down in the history books as an easy one for Dong Energy. In fact, it is likely to go down as one of the company’s most difficult.
Earnings before interest, tax, depreciation and amortisation (Ebitda) in 2012 were DKK8.6 billion (£1 billion), down from DKK13.8 billion in 2011. Meanwhile, it was reported in June 2013 that net debt had grown to DKK41.7 billion.
Dong’s decision to go green across Europe – with a drive to generate more electricity from wind and burn more biomass in its fossil fuel plants in Denmark – saw its prices climb, while in the rest of Europe the big generators, particularly those in Germany, made use of cheap coal prices. So while Dong was investing in green, low-carbon generation, which produces relatively expensive electricity, its rivals in the Nord Pool were able to sell cheap electricity from coal.
To compound matters, Dong Energy’s upstream division was also hit with falling returns from its Danish North Sea oil and gas reserves.
Brent Cheshire, the UK country chairman for Dong Energy, has been with the company since it expanded into the UK in 2004 (he helped establish its first office here and was its first employee in the UK) and is well placed to see how the financial difficulties of Dong Energy could have affected its British investment plans.
He reveals that, without a significant injection of capital into the company, the big offshore wind projects were at risk of not happening.
These plans, and the short-term financial stability of Dong Energy, were given a substantial boost earlier this month when an investment of DKK11 billion was agreed from Goldman Sachs and two Danish pension funds, ATP and PFA.
“If we hadn’t had a mechanism where we brought in those new funds, projects we would have liked to have done in the UK would not have happened,” says Cheshire. “So things will happen in the UK and a lot of those funds will flow into the UK.
“We’ve come from nowhere to £5.5 billion. That is very significant for a company of our size and we’re now becoming a very big part of Dong Energy full stop.”
The UK has certainly become a focal point for Dong Energy and the company has numerous projects here. It owns a 50 per cent stake in the 630MW London Array windfarm, and it is the major stakeholder in the Barrow, Burbo Bank, Gunfleet Sands and Walney offshore windfarms.
Dong Energy also has a minority stake in the 270MW Lincs offshore windfarm, and a 50/50 stake in the 389MW West of Duddon Sands offshore windfarm, which is currently under construction.
Cheshire explains the reason that about half of the group’s capital expenditure in coming years is flowing into the UK is down to Dong Energy realising its big ambitions here.
“What you see in terms of our 2020 strategy is that we currently have 1.7GW installed in terms of wind, but by the end of the decade our plan is to have about 6.5GW.”
The poor financial results for 2012 made the Danish management shake things up and focus on the core priorities of Dong Energy, which has resulted in “non-core assets”, such as Swedish hydro plants, being sold.
“Our focus is very much about being an offshore wind generator,” Cheshire says.
One of the key goals of Dong Energy is to drastically cut the cost of electricity generated by offshore windfarms from their current level of about €160/MWh to below €100/MWh by 2020.
“€100/MWh is not an easy challenge. I think it’s a hell of an ask but our guys believe there is a very good chance we can do that,” says Cheshire. “We think the only way we can do this is by having a cookie-cutter approach, to use an American expression, where we keep this machine moving forward, making incremental changes and incremental developments.
“But we also fund these massive step-changes in technology, in terms of bigger turbines. We originally drove the 3.6MW machines. They wouldn’t have happened without someone like Dong coming in because we signed up to 500 of them before we had the projects, so that allowed Siemens to concentrate on them,” he says.
Cheshire also says the next generation of turbines, the 6MW turbines that will be used for the Round 3 projects in deeper water further offshore, are also being driven forward by Dong Energy.
As for how big the turbines can get, he says he has read comments from some Japanese developers who believe they can develop 100MW machines. “Now, that is difficult to envisage, but who am I to say?”
What is even more difficult for Cheshire to envisage at this moment is Dong Energy branching out into the domestic energy market, despite the company entering the commercial sector with Dong Energy Sales.
The retail arm of the business developed after the takeover of Shell Gas Direct at the start of 2012, which provides energy for customers mainly in Scandinavia and the Netherlands, although Cheshire tells me it is starting in the UK now with about half a dozen customers.
“We’ve just put together an electrical offering along with our gas offering,” he says. “So we’ve just put our toe into the water.”
One of the areas within the retail area that Dong Energy is looking to develop in the UK is a green power offering similar to what it offers customers in Denmark.
“One of the big things we push in Denmark is our climate partnership, so that is something we are beginning to look at in the UK to see if there is anything we can do along those lines,” Cheshire says, although he adds that at the moment there are barriers to achieving this because of how the energy market works in the UK.
Despite this hurdle, Dong Energy is not a natural advocate of change. Indeed, one of the main attractions of the UK is its political stability with regards to energy policy.
That said, the UK has had its wobbles and Cheshire admits that he sometimes has a battle on his hands to reassure senior executives in Denmark that the UK is a stable and sensible place to invest.
“We got a really big scare in the very early days here – not because of wind but because of oil and gas,” he says. “We were developing the Laggan-Tormore oil and gas fields and had to build a huge amount of infrastructure – we got a value allowance, which was a tax allowance.
“We committed to the project but then there was a change in government and they announced an increase to the supplementary corporation tax rate for oil and gas fields that effectively removed the entire value of the value allowance.
“So then our investors – which to a large extent is the Danish government – said ‘are they going to do this for wind?’
“That was an amber warning light as far as we were concerned – so we were working against that,” says Cheshire, before moving into the current political situation and the effect it is having – in particular the long and slow development of Electricity Market Reform (EMR).
“We would have liked it to have been much faster, but it has currently got some issues around it – again to use an American expression, there is still some hair on it.
“But we are broadly comfortable with where it is going.”
Then Cheshire deals with the big political issue at the moment – Ed Miliband’s price freeze promise, or threat, and plans to reform the wholesale energy market and replace Ofgem with a new, tougher regulator.
“There is more and more noise coming out from different political parties, which is making people slightly uneasy about how deliverable that will be and whether people will actually stick to it or not.
“I was over for a meeting with the very senior guys on the main board last week, and as far as they were concerned, that was yet another signal that there could be a lot of uncertainty and posed them the question ‘Do we really want to invest here?’
“I don’t think anybody is helping themselves at the moment. It would be great if the politicians would refrain from quite so many soundbites,” he adds with a wry smile.
Despite these “amber” concerns, and boardroom debates, Cheshire is convinced the UK is a good place for the Danish company to invest – although there is more that government could do to reassure the Scandinavian investors.
“What we would like to see is the decarbonisation target for post-2020. We think that just sets a very good trajectory going forward, and then we can be more confident and people who potentially might want to come here to make things.”
Cheshire also says that this stability is needed to help bring the costs of low-carbon generation – referring directly to offshore wind – in line with the costs of fossil fuel generation.
“We won’t get parity on generation costs unless we bridge for a period of time to allow us to drive down those costs – which we’re trying to do.”
But overall, Dong Energy is “here for the long haul” because “it is a stable place to do business, despite the odd scare”, says Cheshire.
As the interview draws to a close, he says the energy business is at a “fascinating crossroads” because of all the infrastructure and generating capacity that needs to be built and replaced.
Matter-of-factly, Cheshire concludes: “Somebody has to pay for it all. I think it is a dishonest argument to think anybody can get away without paying for it.
“Ultimately it is going to end up being the end user, either through tax or through their energy bill, because nobody is going to invest in a company that is going to be running a business at a loss.”
He laughs, adding: “That is pretty basic really.”