DONG (Danish Oil and Natural Gas), a Danish firm, was one of the most coal-intensive energy companies in Europe. It was well-recognised and was considered as one of the eminent developers of coal-fired power plants in Europe. With such feathers on its cap, it decided to take a major turn by undergoing one of the most radical transformations the business world has ever seen. A firm that started off as an oil and gas producer rebuilt itself strategically into an offshore wind farm and got itself a new name “Ørsted”. This article takes you through a firm’s dramatic transformation from being a disruptor in the global ecosystems to a pure play renewable energy company; from fossils to renewables.
DONG was founded in 1972 to manage gas and oil resources in Denmark. In the beginning of the 2000s, DONG began to expand itself into the electricity market by occupying strategic positions in electricity companies. It acquired multiple Danish electricity distribution companies and this led to the creation of DONG Energy. However, by 2006, it set about developing offshore wind farms – the first stage of its transformation from fossils to renewables. It raised funds by selling shares of its offshore wind farms to institutional investors and did not rely on exploration and production activities to fund new business.
DONG decided to transform in 2008, a time when there was an increasing awareness of climate change in society. DONG believed that, in today’s world, climate change is on the agenda and to succeed, in the long term, the firm would need to change its energy mix from fossils to renewables. Therefore, it closed and sold-off its coal-fired plants and reinvested billions of pounds in offshore wind farm technology.
In 2017, DONG sold its upstream oil and gas business and rechristened itself as “Ørsted”. It decided to phase-out the use of coal for power generation to fulfil its transition from fossils to renewables. A firm that produces 85% of its energy from fossil fuels and 15% from renewable energy nearly a decade ago reversed these proportions. The fact that fossil fuels were neither environmentally nor financially sustainable to serve as a base for its energy production made Ørsted shift its focus from fossils to renewables. As Ørsted puts it: “Running the company just for profit doesn’t make sense, but running it just for a bigger purpose is also not sustainable in the long term. Doing good and doing well must go together.”
Aiming at gradually dismantling the core of a business and transforming an energy firm, that too the size of Ørsted was not an easy task. They had to convince people that the future business could be as successful as the old one and it takes some time for firms that have a core business around fossil fuels to transform. While their journey was challenging at the operational level as many people had left when they divested, they were confident of heading in the right direction. Moreover, the strategic transformation was made possible because 80% of Ørsted’s ownership was concentrated with the Danish state, enabling it to take a long-term view on the development, an important supportive factor in the transformation of any major firm.
Since its transformation, Ørsted has been successful in divesting its black assets and allocating all of its investments to renewable energies. Seeing a commercial opportunity in renewable energy and challenges ahead for fossil fuels, it took a major turn from “black” to “green” power. Ørsted envisioned a transformation that would take 30 years, thereby allowing black assets to retire while installing renewables to meet new demand. Governed by its vision and alignment with the Paris Climate Agreement, Ørsted set an ambitious target of generating 99% green energy by 2025.
Not only has Ørsted transformed from fossils to renewables, it has also seen increased earnings. It has developed at a rate faster than the one thought possible. Since its initial public offering in 2016, the firm’s market capitalization has ascended and the firm is now Europe’s de-facto leading offshore wind developer. Also, the profitability of the renewable investments they made was higher than their oil and gas business. And when compared with oil and gas investments, renewable investments also fared well in the risk arena.
Post its green transformation, Ørsted managed to reduce its carbon emissions by 86% and is expected to achieve a carbon neutral footprint in its energy generation and operations by 2040. At the time Ørsted set out to change a decade ago, it expected its transformation to green energy to complete by 2040. But it seems that the 2040 target might be achieved by 2025, 15 years earlier than what was originally envisioned.
Ørsted’s business transformation has lifted the offshore wind industry from a niche to a rapidly growing industry, with the potential to deliver cleaner energy to millions of people. Also, the company can justifiably claim to have played a key role in turning offshore wind from an expensive, unviable but interesting technology to a dominant part of the mainstream energy mix. Its transition from fossils to renewables was accompanied by a target to reduce costs for offshore wind to 40% by 2020. But this ambitious target was achieved in 2016, 4 years ahead of its set deadline because the costs fell much faster than expected. Through innovation and large-scale deployment of offshore-wind technology, Ørsted has helped bring down the cost of offshore wind farms.
Ørsted owns power production facilities and projects internationally as well. It has entered into countries by replicating its European strategy of acquiring sites for offshore wind farms. Being the world’s most sustainable company, it has become a significant part of the future green-energy system. Today, it develops offshore wind, onshore wind, solar energy, and storage solutions. Though offshore wind farms are the flag-bearers of its new identity, biomass conversions and acquisitions also play a major part. To date, it has installed a third of the world’s offshore wind turbines, more than any other firm. All in all, this makes Ørsted not just the largest offshore wind player in Europe but also a leader globally, with a market share of 16%.
Such strategic business transformations, both in terms of the radical nature and the sheer scale and speed (considering the fact that Ørsted did all this in a decade), can help face the challenges we face as a global community. It is not just a transformation of a business, but a significant contribution to the broader green energy transformation. Probably, it is the shift on the demand side that drives such fundamental transformation of business models. However, Ørsted’s transformation proves that the biggest driver for change towards renewable energy will be the economic argument, and the key drivers in this race would be the business firms. The trend has only grown in the present times and should be a major consideration for all the energy and tech companies to make possible the changes that the world currently needs.
Lessons Learned From an Energy Company’s Green Transformation dated 15.04.2019
Get The Connectere directly in your E-mail inbox !
Currently pursuing Economics (Hons.) from SRCC, Simran is an avid reader and is always on a lookout for some ‘real’ knowledge. She is a proud member of BTS Army and has an innate obsession for Sundays. She often finds herself stuck in the rat race and struggles to have a consensus between her heart and mind.