From oil and gas to wind

Ørsted is the result of a 2006 merger of six Danish oil and gas companies that went back to as early as 1857, and was called DONG Energy (short for Danish Oil ‘n Gas) after the merger. In 2006, the company in fact had the leading coal technology in Europe.

At the time, the company earned most of its revenues by selling heat and power, with an 85 percent share from coal. In 2009, top management announced a major strategic shift, as the company would now seek to generate 85 percent of heat and power from renewable sources by 2030.

The strategy was to invest aggressively in offshore wind and phase out coal. At the time, this strategy was not completely well-received by their employees, as the vast majority had their key competence in old technologies.

In 2016, after a major business model transformation towards renewable energy with a particular focus on offshore wind parks, DONG Energy had one of the highest valued IPOs in Europe. And in 2018, the company finally decided to change its name to Ørsted to break free from its fossil fuel heritage.

By 2019, Ørsted had already become the world’s largest producer of offshore-wind energy. It had also increased its renewable-generation share to 86 percent, which meant reaching its target from 2009 to generate 85 percent of heat and power from renewable sources by 2030—21 years ahead of schedule.

How could this happen in such a traditional industry, which still today sees so many companies struggling to adapt to a society in change?

Their journey

In researching this company, it is not hard to find articles describing their journey, albeit from slightly different perspectives and with slightly different twists. I have, however, had the privilege of talking to Anders Eldrup, who was the CEO of the company from 2006–2012, and Thomas Ollendorf, who was the CEO of their Swedish subsidiary at about the same time. These dialogues have been particularly interesting because this was the time when the first big shift in their strategy happened. This shift would ultimately lead to the transformation of their whole business and make them one of the world’s most recognized sustainability leaders, with Henrik Paulsen as the CEO who ultimately enabled them to reach their goals.

In short, their transformation was initiated by a visionary leader, a formal strategy process applying future scenarios, and a potential acquisition that led to the difficult decision to explore the opportunities of renewable energy and new business models, rather than investing heavily in old technology.

To understand the context, let us first go back to the inception of DONG Energy. The merger that created DONG Energy in 2006 was a result of the increased competition in the deregulated and liberalized Danish energy sector of 2000-2004. This dramatically changed the rules of the game, opened up for international competitors and led to increasing price pressure in a highly commoditized market. This, in turn, led to an increasing interest among Danish industry players in differentiating their offerings and exploring new opportunities.

Anders Eldrup, the company’s first CEO after the merger, told me that the story of their transformation really started in 2008, the year before the painfully unsuccessful climate conference in Copenhagen. At that point, one of the companies in the merger had already started experimenting with offshore wind. Two smaller parks had already been built with good results and created a lot of interest and good will. Instead of being paralysed by the very mixed political messages of the time, the leadership team sat down to review their strategy and realised that their current portfolio—based on fossil fuels—included some challenges and that off-shore wind parks and renewable energy could actually offer a unique opportunity going forward.

In their analysis, they saw a sinking price and margin on gas, which at the time was an important and considerable part of their portfolio. Listening to stakeholders, they also realised that coal could become more regulated and more taxed in the future. They also realised that there was a large societal resistance to coal itself, as it was already considered harmful to the environment. This led them to question whether coal would be an acceptable energy source in the future, which in turn helped them make the difficult decision to pull back from what would have been their largest investment so far: building a large coal plant in Germany—an investment with a life span of 50 years.

Interestingly, very few energy companies seem to have come to similar conclusions at around the same time, in spite of the available information and in spite of the long return on investments. So, why did Anders Eldrup and his team reach these conclusions and dare to make such controversial decisions at the time?

In our dialogue in 2017, Anders told me:

“The analysis showed us that there was a large societal resistance towards an investment in the German coal plant. And I personally got more and more doubtful as to if it would be defendable to do. Would coal really be an accepted energy technology so far into the future (50 years)? Our conclusion after reviewing the scenarios was that it would be a higher risk to invest in a new coal plant—even if it was a well-established technology—than it would be to invest in off-shore wind, which was at the time still considered a new technology…

“So, we decided to test building new offshore wind parks. We were already in the field—a field that represented high entry barriers to other potential newcomers—and saw a potential to become a leading player… Of course, there was doubt, and we only decided to build one more offshore wind park at the time in some sort of a trial-and-error approach, where we tested and learned one step at a time.”

“The experiences, however, taught us that the risks were relatively small, that the technology worked, that the costs were reasonable and that the facilities operated well from a maintenance point of view. We had also negotiated guaranteed prices on the generated electricity with the relevant states. Everything combined with the “free fuel” (i.e., wind) made this an interesting business case that also attracted investors.”

To be continued… learn more in Better Business Better Future: Decode the Good Practices of Sustainability Trailblazers and Transform Your Corporate Business, by Elisabet Lagerstedt.