By mid-March, the first stage of Ukraine’s newest renewable energy project – 19 turbines with a capacity of 114 megawatts – was completed. None of the workers had been killed or injured, and the turbines began to generate much-needed electricity a few weeks later. During a time of war, when Ukrainian infrastructure everywhere was being turned to scrap by Russian missiles, the achievement was nothing short of heroic. 

For DTEK, the Ukrainian energy company that owns the project, the launch of the wind farm – which officially opened this week – was not just an act of defiance in the second year of the Russian invasion; it was an act of strategic desire and necessity. 

DTEK in particular – and Ukraine in general – wants to play a role in the European Union’s clean-energy drive, whose goal is to achieve net-zero emissions by 2050. The company also wants to clean up its own act, since grubby old coal plants provide the vast bulk of its electricity generation. “I am more than confident that we can be one of the main providers of green energy to Ukraine and the EU,” DTEK chief executive officer Maxim Timchenko said in an interview in April in Rome, where he was trying to drum up financial support from international financial institutions at a Ukraine reconstruction conference. 

DTEK is Ukraine’s biggest privately owned generation company, producing about a quarter of the country’s electricity. It’s owned by Ukraine’s richest man, Rinat Akhmetov, who, like many Ukrainian and Russian oligarchs, made his fortune after the collapse of the Soviet Union by snapping up natural resources and heavy industries on the cheap. Forbes magazine put his worth at US$4.3 billion earlier this year, down from more than US$9 billion before the start of the war in February 2022. Many of his most valuable businesses, including the massive Azovstal steel plant in Mariupol, were seized or demolished in Russian offensives in the spring of 2022.  

The effort to keep the lights on has been cruel to DTEK and Ukrenergo, the government-owned national transmission company. (On one of my Ukraine stints in late 2022, while I was covering the war for The Globe and Mail, the electricity and heat in the Kyiv bureau apartment were off nearly half the time). By the end of last year, relentless Russian attacks, initially on the transmission system, then on the generating stations themselves, including a small DTEK solar plant, had cut Ukraine’s total generating capacity by more than half. 

I am more than confident that we can be one of the main providers of green energy to Ukraine and the EU.  

 

–DTEK CEO Maxim Timchenko 

Much of the lost capacity has been restored, though all six of DTEK’s main generating stations in Ukraine-controlled areas have suffered severe damage, and two others were overrun by Russian forces. In the first 15 months of the war, DTEK lost 173 employees on the front lines. Another 474 were injured, 37 missing and five in captivity. Three of them died at plants that came under Russian attack; one died when he stepped on a landmine while repairing a power line near Kyiv. 

The company’s renewables-and-decarbonization strategy began in earnest in 2009, when only about 3% of the country’s electricity supply came from renewable energy. By 2020, the share had increased to more than 12%, with solar leading the mix, followed by hydro, wind and biomass. A hefty feed-in tariff – a guaranteed above-market price for renewable energy delivered to the grid – propelled the rise of wind and solar, which together supplied almost two-thirds of Ukraine’s renewable energy before the war. Ukraine’s pre-war goal, still very much in place, is to raise the share of electricity from renewables to 25% by 2035. 

The war has set back DTEK’s renewable energy rollout by years – but has not killed it. 

As the Center for Strategic and International Studies, a Washington think tank, pointed out, the highest potential for wind and solar development is in areas that are now under Russian control. Ramping up Ukraine’s renewable energy program depends in good part on recapturing those areas, located in the south and the east of the country. At the same time, private financing for these projects dried up, since investors had no interest in supporting projects that could get destroyed by Russian missiles. That left DTEK begging for loans from the World Bank, the European Bank for Reconstruction and Development and other international financial institutions. “The key problem for us is financing,” says Oleksandr Selishchev, the chief executive officer of DTEK Renewables. 

Additional stress came from the Ukraine Ministry of Energy, which, under pressure from a government on financial war footing, froze most payments to wind and solar operators shortly after the war started. Those payments have since climbed, though are still short of normal, breathing some life into near-dead projects. 

DTEK’s first bit of good news came last November, when the successful Ukrainian counter-offensive liberated Kherson in the country’s south, allowing a 10-megawatt solar plant in the village of Tryfonivka to be returned to Ukrainian hands. At the same time, DTEK was well on its way to completing the Tyligulska wind project to the west, near Odesa. Using turbines supplied by Denmark’s Vestas, the project is one of the biggest of its kind in Europe, with a total cost of US$450 million. The second stage, to be completed in 2024, will take the capacity to 500 megawatts, when 83 turbines are scheduled to be in place. 

Tyligulska has great practical value to DTEK and Ukraine. The turbines will partially compensate for the loss of power in damaged DTEK coal plants and Ukraine’s off-line nuclear plants and should be reliable generators even in times of war. They will be hard to destroy en masse since they are spaced hundreds of metres apart on 200 hectares of land. Well-aimed missiles could take out one or two of the turbines but not the whole project. The symbolic significance is even greater, because it delivered the message to the EU that Ukraine is determined to become a green-energy export power. 

 

The key problem for us is financing.

 

– Oleksandr Selishchev, CEO of DTEK Renewables

 

Ukraine exported electricity to Moldova, Hungary, Slovakia and Poland before the war and recently resumed those sales as it rebuilt its transmission lines and power plants – its grid is now entirely detached from Russia’s and interconnected with Europe’s. The country has obvious competitive advantages to play the green game. Ukraine has ample land, meaning that it is unlikely to see the NIMBY campaigns that have stalled or crippled many wind projects in Europe. Certain parts of the country have high wind speeds, and the permitting process is faster than in Europe. Add in a relatively low cost of labour and energy production, and Ukraine will certainly have a seat at the export table. It also knows that certain European countries are setting themselves up for power shortages. Coal power stations are on their way out, and Germany in April closed the last three survivors of its once vast fleet of nuclear plants. 

To be sure, there are obstacles. Ukraine’s power project will always have a higher cost of capital than those in Europe, and the country needs to institute a robust permitting process that would allow DTEK and other power producers to prove that their renewable energy truly comes from sustainable sources. Then there is the war, which could drag on for years, making it difficult for Ukraine to finance power projects of any kind. 

Still, U.S. Energy Secretary Jennifer Granholm said last year that Ukraine is determined to become “a clean energy powerhouse and energy exporter to the European Union.” The war has slowed Ukraine’s energy revolution. But the completion of the first phase of Tyligulska wind farm and the resumption of electricity exports to Europe, even as the bombs and bullets rained down on the country, showed that Ukraine’s direction is set and carries a distinct shade of green. 

Eric Reguly is the European bureau chief for The Globe and Mail and is based in Rome.  

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Passenger jets have voracious appetites. A Boeing 747 will burn about four litres of fuel every second. Assuming the tanks are topped up, the fuel alone weighs almost as much as the empty plane. A single transatlantic round trip produces the equivalent of one tonne of carbon dioxide per passenger, according to the British oil company BP.

You get the idea. Aviation’s share of global greenhouse gas emissions may seem trivial, at about 2.5%, but the figure will rise as air travel becomes more popular – the industry’s growth has always exceeded its efficiency gains. If airlines are to meet their net-zero commitments by 2050 – a goal set in 2021 by the industry’s trade association, the International Air Transport Association – they will have to find a substitute for fossil fuels fairly quickly.

But how? You cannot fly a large passenger plane on battery power – a 250-seat airborne Tesla seems like a fantasy at this point. Ditto commercial hydrogen-powered planes or those that run on synthetic fuels. While work on these technologies is underway (Rolls-Royce recently made a big to-do of testing a green hydrogen-fuelled jet engine), they may not become commercially viable for decades. “For the foreseeable future, these technologies will not be the solution,” says Fatima da Gloria, vice-president of sustainability at Air France-KLM. “So SAF are very important to us, and we expect them to remain complementary with hydrogen solutions.”

“SAF” stands for “sustainable aviation fuel.” Neste is well aware of the aviation industry’s epic decarbonization difficulties and is gambling much of its future on transportation biofuels.

The oil industry pioneer is now the leading supplier of SAF, which is made from forestry and agricultural waste, used cooking oil and – contentiously – palm oil and animal fats. The company’s SAF is being bought by airlines around the world, including Canada’s WestJet and Air France-KLM, which in October signed an eight-year contract to buy one million tonnes (1.3 billion litres). The French-Dutch airline group is buying another 600,000 tonnes from DG Fuels of the United States, making it the airline industry’s top buyer of biofuels.

Air France-KLM claims that the use of SAF will avoid 4.7 million tonnes of carbon dioxide emissions on a full life-cycle basis. That’s because Neste claims its SAF reduces planet-warming emissions by up to 80% compared to regular fossil fuels. The theory is that the plants used to make biofuels absorb carbon dioxide as they grow. Once the plants are converted to burnable fuel, the carbon dioxide emitted balances out the carbon dioxide absorbed.

SAF sounds like a godsend to airlines. Burning the fuel in jets requires no modifications to their engines. It is just mixed with regular kerosene in the same way that corn-based ethanol is mixed with gasoline in the United States and Canada. SAF does not require unique delivery infrastructure, and the costs, while three to four times higher than regular fuel, will come down as SAF production increases and economies of scale kick in.

So what’s not to like? More than a little, it turns out.

The SAF volumes are small and will remain small, relatively speaking, even as production ramps up. In 2021, total SAF production represented a mere 0.01% of jet fuel consumed worldwide. Air France-KLM’s goal is to see 10% of its fuel made from SAF by 2030 as part of its drive to cut carbon dioxide emissions per passenger per kilometre flown by 30% by 2030 over 2019’s level. “Decarbonization is the biggest challenge the aviation industry has ever faced,” the airline group’s Canadian chief executive, Ben Smith, said in a statement when announcing the Neste purchase.

In other words, SAF on its own will never turn air travel fully green. And any biofuel’s green credentials are never as great as advertised. Feeding crops such as corn or palm oil to planes or cars or trucks comes with a lot of environmental and political baggage, all the more so today, when food prices are soaring. Shouldn’t all that land, or at least the land that can be agriculturally productive, be growing food to feed the hungry instead?

But SAF represents nothing less than a revolution – and a profitable one – for Neste. Its remarkable reinvention somewhat resembles that of Ørsted, the Danish power-generation company that once burned obscene amounts of coal, blackening the skies, to keep the country’s lights on.

In 2008, under enlightened management that saw the potential of emissions-free electricity, Ørsted began transforming itself into a renewable energy powerhouse. It replaced its grubby fossil-fuel plants with offshore wind farms that would eventually make it the top player in that industry. Along the way, it became a stock market darling and an inspiration to other companies contemplating a black-to-green transformation.

Neste – “liquid” in Finnish – is on a similar trajectory.

The liquid that gave the company its name is oil. Neste was founded in 1948 as the state petroleum refiner in Espoo, just outside of Helsinki. Neste began tinkering with renewable diesel fuel in 1990s and, by 2010 later, launched the world’s biggest renewable diesel plant, in Singapore. About the same time, it built a renewable fuels plant in Rotterdam, Europe’s largest.

Today, Neste is the top producer of sustainable aviation fuel and renewable diesel, but, unlike Ørsted, hydrocarbons remain at the core of its business. Its Porvoo refinery in Finland transforms more than 200,000 barrels of oil a day into diesel, gasoline and low-sulphur marine bunker fuels. But its future is in renewable fuels. Already, about 90% of its profits come from renewables, even if oil refining remains by far its highest-volume business. “We are clearly looking for growth in renewable and circular solutions,” says CEO Matti Lehmus, who trained as a chemical engineer. “Renewable diesel and SAF are decarbonization solutions that are available today.”

Neste’s transformation may see Porvoo, one of northern Europe’s largest oil refineries, converted into a renewable fuels operation in the middle part of the next decade; Porvoo is undergoing a strategic review. If it ceases to refine fossil fuels, Neste, like Ørsted, will have almost fully buried its hydrocarbon past. Investors appear to like the message. Neste shares have been trending up for years and rose 37% in 2022 (as of November 29), giving the company a market value of €37 billion. Over the past five years, Neste’s stock is up 138% versus 11% for its fossil-fuel-focused benchmark (S&P Europe BMI Energy Index EUR, as of November 29, 2022).

Neste’s rise into a biofuels powerhouse has not been glitch-free. A lot of the time, it has been in the news for reasons that make management cringe. In May 2022, Carlos Calvo Ambel, a senior director of the Transport & Environment environmental campaign group, called the band Coldplay “useful idiots for greenwashing” Neste’s image.

The accusation came after Coldplay signed a deal with Neste to provide SAF and renewable diesel to cut its concert tour emissions by half. A 2020 Profundo research report commissioned by Friends of the Earth Netherlands determined that Neste’s palm oil suppliers were responsible for 10,000 hectares of deforestation between early 2019 and mid-2020. Most of Neste’s palm oil comes from Indonesia and Malaysia.

In response to the Profundo report, Neste said that “we acknowledge the fact that there are sustainability concerns linked to the palm oil industry” but said that it was careful not to buy fuel whose feedstock comes from plantations involved in deforestation. The company says that “claims on Neste’s suppliers being linked to deforestation were proven not to be true in lengthy investigations involving also satellite imaging and third party experts.”

Despite monitoring its supply chain carefully to ensure that orangutans in Indonesia are not being threatened so that SAF can fill aircraft tanks, Neste plans to eliminate palm oil from its mix by the end of 2023. Doing so will not put Neste in distress, since, at last count, palm oil supplied only 7% of the company’s biofuel raw materials.

Neste knows that current SAF solutions will never be able to provide 100% of the fuel for the aviation industry – there simply isn’t enough renewable feedstock on the planet to ensure that. Neste says it’s looking for new solutions to expand its feedstock base and ensure the potential for future growth. It also believes that SAF and renewable diesel can play a crucial bridging role in the long decarbonization process. Lehmus says the company plans to double its renewable fuels capacity by 2026 (in 2021, production was more than three million tonnes) while it tries to develop new technologies. “I see a lot of long-term potential in new technologies,” he says.

In other words, biofuels are a step along the way, not the ultimate solution to rising aviation emissions. Their existence at least proves the airlines know they have to clean up their act.

Eric Reguly is the European bureau chief for The Globe and Mail and is based in Rome.

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Iberdrola of Spain, Enel of Italy, Ørsted of Denmark and America’s NextEra Energy all have market values that are moving into, and sometimes beyond, the oil majors’ territory and have shareholder returns that are absolutely blowing them away. Enel, Europe’s largest utility, had a stock market value equivalent to US$110 billion in the late autumn after a 23% rise in the past year. BP’s value was US$83 billion, after losing about 40% of its value.

Italy’s ERG is also catching the new-energy wave, proving that high growth and value creation are not limited to the biggest names in the industry. Like some of its big-name rivals, the Italian company embarked on a black-to-green transformation out of necessity, not out of the goodness of its heart, but soon learned that cleaning up its act could produce compelling shareholder returns.

ERG began life as an oil refining and oil products company just before the Second World War and stayed that way until 2008, when it started to push its carbon assets out the door and moved into wind power, as Ørsted did when it shed its oil and coal businesses on its way to becoming the world’s top offshore wind-power company. Since then, ERG’s shares have gone from €7 to €25. “Now I’m fighting against climate change, and it’s paying off well,” says Luca Bettonte, the dapper accountant and auditor who became ERG’s chief executive officer in 2012.

ERG knows it will never be a “new energy major.” Its market value is €3.8 billion and it has only a small following on the Italian stock exchange in Milan because the Garrone family – the “G” in ERG – owns almost two-thirds of the shares and is giving no signs that it would relinquish control. But the company is ambitious. It’s already the top wind-power company in Italy and recently broke into the top 10 in Europe, where its expansion plans are focused.

Reaching the top five is not out of the question, and if President Joe Biden makes good on his commitment to propel the United States into clean energy, trans-Atlantic investments “might be an opportunity,” Bettonte says.
Until 2017, ERG and the French oil giant Total jointly owned TotalErg, the fourth-largest fuel marketer in Italy, with some 2,600 service stations. The collection had made ERG a brand name among motorists. Today, ERG has no retail presence – it’s a B2B company – and most Italians have no idea what it does to make money.

ERG was one of the family-owned companies that helped Italy get back into business after the Second World War, and it thrived when the country’s “economic miracle” was in full swing in the 1950s and 1960s, the era when Italy scrambled up the value chain to become an industrial and design powerhouse that would produce some of the world’s best-known brands, including Ferrari, Vespa, Alfa Romeo and Maserati.

Edoardo Garrone, ERG’s founder, was an industrialist at heart and a product of his home city, Genoa, the gritty seaport, oil terminal and transportation hub on Italy’s northwest coast. Best-known as the birthplace of Christopher Columbus, Genoa would emerge as a key player in Italy’s industrial revolution. Garrone realized that petroleum was necessary to lubricate Italy’s wealth-creation machine and launched a small oil, tar and chemicals business in 1938 but made little progress before the war started a year later. After the war, which left much of Genoa in ruins, he opened a brick factory to help Italy’s reconstruction effort. In 1947, when demand for oil products was taking off, he built the San Quirico refinery in Genoa.

In the early 1950s, he created a fuel distribution and retail business under the ERG name, which stood for Edoardo Raffinerie Garrone – “raffinerie” is Italian for refinery. BP, then British Petroleum, became the refinery’s main oil supplier in 1958 and would become a minority investor in ERG. Five years later, Edoardo died of a heart attack on a fishing trip in Norway at age 57. His son Riccardo was pushed into action, becoming chairman at age 27. The young man expanded the company, and ERG joined an investment group, called ISAB, that built an enormous refinery in southeast Sicily in the early 1970s (ERG would take control of the refinery in 1985).

When the ISAB refinery opened in 1975, the energy markets were in crisis. The 1973/74 Arab oil embargo had sent crude oil prices up fourfold, and oil-importing countries went into recession. Demand for oil products sank, and price volatility became the norm – a fatal recipe for low-margin European refineries. In Italy, a dozen refineries, including ERG’s original plant in Genoa, closed between 1975 and 1989, by which time the Garrone family had realized there was no future in being a one-trick company; ERG had to diversify to survive.

The first diversification move came in 1993, when ISAB built an electricity plant next to its Sicilian refinery. The power was generated by burning the gases extracted from the refinery’s heavy-oil products. The plant opened in 2000, and the technology proved to be a great success. At that point, it was still unthinkable for the Garrones that ERG would be anything but a hydrocarbon company – old habits die hard. But the first decade of the 2000s rocked the company yet again, and new thinking emerged.

Bettonte, who joined the company in 2007 as chief financial officer, says the Garrones were slowly taking the view that their precious Sicilian refinery was becoming uncompetitive and that the industry’s rather violent price swings eliminated any hope of financial stability.

Demand growth for refined products was shifting to soaring Asian economies. The Saudis were building dazzling new refineries, as were Asian nations, with superior technology. At the same time, the world was realizing that the science behind climate change was real. In 2004, ERG made an opportunistic move into Italian wind energy, through a partnership with a Spanish company. Two years later, it made a big wind investment through the purchase of Milan-listed EnerTAD. A year after that, EnerTAD entered the French wind market. ERG’s black-to-green transformation was in full swing.

In one of the best-timed deals of the decade, ERG sold 49% of the Sicilian refinery to Russian oil giant Lukoil just before the 2008 financial crisis. Suddenly, ERG was swimming in cash and had to decide where to invest it. On cue, the investment bankers came knocking. One of them suggested that ERG pump its new fortune into healthcare; another suggested shipping. But ERG by then was smitten with clean energy. “We had a huge amount of money and had identified a fast-growing business – renewables,” Bettonte says.

The problem was selling the idea to ERG’s managers and employees, many of whom had spent decades building an oil company. “There was a lot of resistance from their side,” he says. “They were worried because they didn’t know about the renewable-energy business. They thought we would transform the company into a financial holding company that would invest in infrastructure. They thought we would cease being an industrial company.”
But the Garrone family – by then control had passed to Edoardo’s grandson and his older brother Edoardo, who is now chairman – backed the transformation, as did the other shareholders. ERG would be a renewable-energy company, dominated by wind power, with a strong presence in hydro and solar power too. And it would not act merely as passive investor in portfolios of clean energy – it would build. “I can’t say we made the decision because we wanted to save the world,” Bettonte says. “But the idea to go green played a part in it.”

ERG’s transformation has been remarkable. In 2013, the year it sold its final piece of equity in the refinery to Lukoil, the company emerged as Italy’s biggest wind-power player with the purchase of GDF Suez’s Italian wind farms. A rapid-fire series of acquisitions saw its onshore wind business blow across Europe, where it now has a presence in the U.K., Germany, France, Poland, Romania and Bulgaria. At last count, ERG had almost 2,000 megawatts of wind capacity in Italy and elsewhere in Europe, with another 280 megawatts under construction (as a rule of thumb, 1 megawatt can power 650 homes). It also had a big hydropower business in Italy, is pushing into solar power and has an enormous electricity plant in Sicily fuelled by natural gas. It’s the last vestige of its hydrocarbon heritage but one that, for now, is essential to ERG’s diversification strategy.

In 2008, only 3% of its earnings before interest, taxes, depreciation and amortization (EBITDA, essentially operating earnings) came from renewable power. By 2014, the figure was 73%. In 2019, 87% of its reported €496 million in EBITDA came from renewables. Investors have cheered the overhaul. From the end of 2007 through September 2020, ERG’s total shareholder return, including dividends, was 250%, greatly outpacing the FTSE Italia All-Share Index. Of the nine analysts who follow the company, there is only one “sell” rating, from Citigroup, which fears that the relatively high exposure to “short-lived” electricity subsidies makes ERG shares vulnerable.

Bettonte says ERG’s goal is to be the “bigger among the smallers.” More growth in Italy will be difficult, though the company is “repowering” its wind sites – replacing old turbines with much bigger and more efficient ones, an exercise that will produce four times as much electricity from half the number of machines. The growth will come elsewhere in Europe, and even that may be difficult, since overall electricity demand is not rising and coal-burning electricity plants are hanging on longer than expected in Germany, Poland and other countries. Getting permits for new renewable-energy projects is also a hassle. “Hydrocarbon plants are like car plants – they are hard to shut down,” he says.

But ERG knows it made the right decision to go green and also knows that renewable energy’s rise is irreversible as climate change is factored into every energy decision. “We are strongly committed to grow in this industry,” Bettonte says. “I am proud that we have become a climate-change fighter.”

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But Denmark had a dirty little secret that was soon uncovered by the army of foreign journalists at the UN event (I was one of them): It had one of the most carbon-intensive electricity-generation systems in Europe, and the world. And the company largely responsible for the literal black cloud over Denmark – Dong Energy – was controlled by the state. How ironic: The host of the conference whose goal was to lay out a plan to wean the world off fossil fuels was itself utterly shackled to the grubby old world of oil, natural gas and coal.

Dong, which stood for Danish Oil and Natural Gas, emitted fully one-third of the country’s carbon dioxide emissions. Something was indeed rotten in the state of Denmark.

What we journalists couldn’t be bothered to find out at the time was that, by then, Dong and its owners were as repulsed by the company’s black image as the environmentalists were. By 2009, Dong, rather quietly so, was launching a campaign to completely reinvent itself as a top-to-bottom renewable energy company.

“Dong formulated the 85/15 vision,” says Jakob Askou Bøss, the senior vice president of corporate strategy for Ørsted, as Dong has been known since its name change in 2017. “At the time, 85% of our power and heat production was black and 15% was green. Our CEO, Anders Eldrup, said that within a generation, Dong would flip that ratio around, so that 85% would be green and 15% black.”

Eldrup’s definition of “generation” was about 30 years, according to Bøss. In other words, Dong’s reinvention was going to be a slow burn – fossil fuels would darken the company for some time. Instead, the transformation was accomplished more than 20 years faster. By 2018, Ørsted’s green energy output was 75% of total output and the company had reduced its CO2 emissions intensity per kilowatt hour by 72%. By 2025, two years after the last of Ørsted’s coal plants are to be shut, green energy is set to account for 99% of the company’s output while CO2 emissions intensity is to fall by 98% of 2009’s level.

The transformation didn’t end there. In 2009, Ørsted was largely a domestic Danish company. Today, it is the leader in offshore wind power, with control of 30% of the global market. Ørsted has more than two dozen offshore farms in Denmark, Britain, Germany, Netherlands and Taiwan, and has several in development off the U.S. east coast. By 2025, the company says it will generate enough green energy to supply 30 million people, up from 12 million today. The profitable transformation has propelled the company’s stock market value of about US$30 billion, making it one of Europe’s most valuable energy companies.

In January, Corporate Knights named Ørsted as the world’s “most sustainable” energy company and the company’s overhaul has won admirers far and wide. Politicians and energy executives from the United States, Japan, China, France, Poland, India and Taiwan have visited Ørsted’s headquarters, just north of central Copenhagen, to learn how an infamous polluter turned into a global green-energy leader.

“The transformation of Ørsted was really impressive,” says Torben Möger Pedersen, CEO of PensionDanmark, the big labour-market pension fund that has emerged as one of the world’s most aggressive investors in offshore wind projects. “They made the right decision to become a wind-power company.”

The corporate overhaul was not as easy as it appeared. In 2012, just as Dong was spending fortunes on renewable power, it was battered by financial crisis. Even before then, the company was essentially at war with itself as the old guard fought to keep fossil fuels, especially coal, in the energy mix. Among engineers, Dong had a fine reputation as the builder of the world’s most efficient coal plants, and renewable energy alone could not possibly supply Denmark’s energy demands, or so the argument went. But Eldrup, his successor, Henrik Poulsen, and Bøss, who joined the company in 2004 and has been instrumental in Dong’s radical change in direction, were convinced the company could, and would, be painted a pleasing shade of green.

THE TRANSFORMATION of Dong into Ørsted is visible to anyone who lives in Copenhagen. Not only is the sky over the capital city cleaner, but the very symbols of the Dong era are getting a remake.

As you travel north from downtown Copenhagen to the suburb of Gentofte, where Ørsted’s offices are located, you pass the Svanemølle Power Station, facing the Strait of Øresund, which separates Denmark from Sweden. The enormous and oddly handsome, boxy red-brick building, with its distinctive triple white chimneys, was finished in 1953 and burned vast quantities of coal until the mid-1980s, when it cleaned itself up a bit by converting to natural gas.

Today it supplies both electricity and district heating – the system to distribute heat generated as a by-product to homes and businesses – to Copenhagen. But as Ørsted gets out of the fossil fuels game, the idea is to turn the plant into the new home of the Danish Museum of Science and Technology. In some countries, fossil fuel plants are becoming relics of the past, like steam locomotives. But unless thousands more of these plants give up the ghost, the effort agreed at the 2015 Paris climate summit to prevent global warming from exceeding 2 C above pre-industrial levels is doomed.
It was Dong’s desire to bring down Denmark’s embarrassingly high CO2 emissions that triggered the company’s revolution. What Dong didn’t know at the onset of its adventure was that transforming itself into Ørsted – named after Danish physicist Hans Christian Ørsted, who discovered electromagnetism in 1820 – would come with impressive shareholder returns.

Dong was founded in 1972 as a state-owned energy company called Dansk Naturgas. Its mission was to find oil and gas in the Danish sector of the North Sea, whose riches would soon put Britain and Norway on the global energy map (the company was renamed Dong a few years later). At the time, the Danish energy supply was almost entirely based on oil – there was no such thing as offshore wind generation back then – the vast majority of which was imported from Saudi Arabia. Dong’s owners hoped the company’s North Sea production would reduce Denmark’s reliance on Saudi oil. Later, the company would develop a domestic energy transmission network.

Denmark’s reliance on cheap oil was rudely interrupted by the 1974 OPEC oil embargo, which sent prices up 400% virtually overnight. Suddenly, Denmark’s energy bill was crippling and the country moved fast to convert its oil-burning generating plants (none of which was owned by Dong at the time) to coal, which was less expensive and less prone to geopolitical disruption. Coal, the dirtiest fuel, became Denmark’s mainstay.

Over the decades, Dong built up its North Sea oil and gas portfolio. In the middle part of the last decade, it moved into electricity. In 2006, Dong merged with five other domestic electricity companies, two of them producers and the other three distributors, exposing it to coal for the first time. By then, the dangers of global warming had been drilled into the public consciousness. Yet Dong’s strategy, incredibly, was to keep expanding in coal. It was developing the enormous Greifswald coal-fired power station in northeast Germany. “Coal was our core competence,” says Bøss. “We were one of the most coal-intensive energy companies in Europe.”

Not long after the merger, Greifswald became the object of sustained anti-coal protests and by 2008, the year before the Copenhagen climate summit, Dong was having second thoughts not just about Greifswald but about its entire fossil fuel strategy.

“The whole topic of climate change was coming on the agenda,” Bøss says. “Al Gore had published his Inconvenient Truth, which had a big impact, and the EU launched the 2020 [CO2-reduction] goals. At the same time, we were running into resistance at local debates. I can remember talking to our CEO at the time. He said we can invest in offshore wind farms, which will have a bright future and it’s the way society is going, or we can invest in this coal-fired power plant that is fundamentally not the right thing to do. We would be burning coal for 40 to 50 years when we should be converting to green.”

Bøss says “the moment of truth” came in early 2008 when he and Eldrup, the CEO, pretty much committed to the black-to-green transformation. Morally, it was the right strategy and they thought that, financially, they could pull it off, even if the company faced a hefty bill to construct offshore wind farms and dismantle coal plants. The threat of hefty carbon taxes made the transformation all the more alluring. They pushed ahead with their plan without getting a second opinion from outside consultants.

In September of that year, Eldrup used a lengthy op-ed piece in Denmark’s Politiken newspaper to reveal the new strategy to the public. “We must create a completely different energy system, where the majority of the world’s energy comes from the infinite amounts of naturally occurring energy sources, such as wind and sun,” he wrote.

At the same time, he stressed that transformation would not be quick – coal would be around for some time as demands for reliable, cheap energy rose. The message: Dong would clean up its act, but don’t expect an overnight miracle.

What Eldrup didn’t mention is that he and Bøss were facing massive internal pressure to keep Dong as black as possible. To them, the resistance was expected because Dong had spent three decades building itself up as a traditional fossil fuel company. “When you are an oil and gas and coal company and someone comes along and says those are no longer the future, there would be resistance,” Bøss says. “Fossil fuels were seen as our core competence, where we had our growth strategy. Our employees said we are the best in the world in coal-fired power plants – we are the benchmark. There was quite broad and profound skepticism about the plan.”

The Danish government was skeptical too, remembers Fritz Schur, the former SAS airline chairman who was chairman of Dong from 2005 to 2014. “Some politicians were afraid that we were investing too little in the secure parts of the company – oil and gas,” he says, noting that even the prime minister requested his presence to explain Dong’s black-to-green strategy. “For the politicians, it was unthinkable that we would trade oil and gas for renewable energy. They saw it as too risky.”

Pedersen, the PensionDanmark boss who watched Dong’s remake and recruited some of its top wind-power executives to start the pension fund’s own renewable energy partnership, says the internal battle came to a head in 2012, when Schur fired Eldrup, the CEO. Pedersen said Schur “disagreed with Eldrup’s plan to turn Dong into a wind-based renewable energy company.”

Bøss disagrees that a clash over strategic visions cost Eldrup his job in 2012. He insists that the dispute instead was over pay, specifically about “unusual compensation terms unknown to him [Schur]” of four senior wind executives who reported to Eldrup. “The board lost confidence in Eldrup,” Bøss says. Schur agrees, saying that whistle blowing over excessive executive pay among the wind executives was behind their ouster (Eldrup could not be reached for comment).

Dong had other things to worry about that year besides rogue executives. The company’s gas business – which included power production, trading, storage and liquefied natural gas – and those of its European gas rivals got slaughtered that year because of plummeting gas prices in the United States. American coal suddenly became less competitive and vast amounts of surplus coal landed in Europe, where it became the preferred fuel for power generation at the expense of gas.

Dong’s enormous gas business lost money in 2012 just as the company’s debt was soaring to pay for the wind rollout.
When Standard & Poor’s downgraded Dong’s debt, the company went into crisis mode which, oddly, accelerated the move into the ever more profitable wind business. To save precious capital, it ditched eight businesses, including all the gas businesses, hydro and the waste-fired power plants. “They were forced to focus,” says Jens Houe Thomsen, senior bond analyst at Denmark’s Jyske Bank. “They had been betting on everything you could bet on. When the crisis came, they put almost everything up for sale and set ambitious targets to take down the cost of producing energy.”

The main survivors were offshore wind and oil and gas. To shore up the balance sheet, Goldman Sachs injected US$1.2 billion into the company, giving it a 17.9% stake (Goldman sold the last of its stake in 2017 for a hefty profit). By 2014, Dong was saved. In 2016, as wind-power earnings were climbing, partly because the technology and installation costs were plummeting, Dong joined the stock market through Denmark’s biggest initial public offering, and the second-biggest IPO worldwide of the year. In 2017, Dong sold its North Sea oil and gas business and changed its name to Ørsted to reflect its near complete transformation from fossil fuels to renewable energy. Ørsted now bills itself as “the greenest energy company in Europe.”

The final proof of Dong’s seemingly miraculous transformation into Ørsted can be measured by its stock market performance. The IPO price was 235 Danish kroner per share. In mid-February, the price was 480 kroner. In the last year alone, the shares have climbed more than 30%. Ørsted has handily outperformed its peer group and the major European stock market indices. Not bad for a company that has evolved into a wind-power utility that was supposed to produce predictable and pedestrian utility returns.

“Denmark can be very proud of what was done at Dong,” says Schur. “It went from having no renewable energy to being one of the biggest renewable energy companies in the world.”

Eric Reguly is the European bureau chief for The Globe and Mail.

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Alberta is not cursed; it was just greedy and decided that a drunken, blow-out dance party today was better than a string of candle-lit dinner parties down the road. Norway took the opposite approach, at the risk of being boring. It decided that saving for the future would keep the good times rolling through good economic times and bad.

Norway’s approach looks like the winning strategy. The country has one of the few triple-A credit ratings left on the planet. Its economy is expected to grow 2 per cent this year, when most of Europe is in recession, and it is running a budget surplus of 12.5 per cent of gross domestic product – a figure that looks like a misprint given the horrendous deficits elsewhere. Its sovereign wealth fund, at last count, was valued at $664 billion, making it the biggest of its kind in the world. It’s expected to reach $1 trillion within this decade.

And Alberta, the low-tax utopia and allegedly unstoppable wealth-creation machine? Its economy is still expanding, but it ran a shockingly high budget deficit of $3.9 billion in the 2012-13 fiscal year, more than four times greater than the province had estimated. Its sovereign wealth fund – the Alberta Heritage Savings Trust Fund – has only $14.8 billion in the kitty. That’s getting close to where it was at in 1987. Given that Norway’s population is only about one million more than Alberta’s, and that Alberta’s oil output (if not natural gas output) is expanding, the deficit and Heritage Fund figures are embarrassing.

Alberta is blaming the “bitumen bubble,” a catchy, if somewhat misleading, term apparently designed to cast the blame on factors beyond the provincial government’s control. It refers to the gaping spread between Alberta crude and the benchmark Brent (North Sea) and West Texas Intermediate (WTI) prices as pipeline capacity constraints keep the Alberta product from reaching potential customers. This year, Western Canada Select has been between $20 and $30 a barrel below the WTI price.

The term is misleading because low prices for Alberta crude explain only part of the problem. Alberta is as much a natural gas as an oil pumper, and natural gas prices and exports to the United States have been plummeting, thanks to the American shale gas bonanza.

Alberta might not have been in this trap if it had borrowed a few tips from Norway. Norway’s approach to energy development is the polar opposite of Alberta’s. Norway does not slap royalties on its North Sea production; it taxes the production profits at a 78 per cent marginal rate. And all the tax revenue collected is funnelled into the country’s sovereign wealth fund that pays out 4 per cent a year to fund current spending on public services.

As part of a mandate to invest ethically, a good deal of the income is invested in clean energy and other environmental initiatives. The fund has invested $3.1 billion in clean technology companies in emerging economies, such as China and India, and has been a large investor in World Bank Green Bonds. Domestically, offshore wind farm developments are receiving much-needed capital, while companies focused on energy efficiency, water technology, waste management, carbon capture and storage, and pollution reduction have become a target of investment. Good things to fall back on when the oil stops flowing.

Alberta uses a combination of royalties and taxes to earn resources income. Both rates are low and should be higher (at one point, the royalty rate on new oil sands developments was close to zero). It then puts piddling amounts in the Heritage Fund, or nothing at all in some years, even though Alberta has until now been debt free and theoretically could have filled it up.

Before he died in 2012, Peter Lougheed, the former Alberta premier who launched the Heritage Fund in the mid-1970s, said the fund would now be worth $100 billion if his original fund contributions plan had been kept intact. Writing in the Calgary Herald newspaper, Lougheed said that “when a real resources revenue disaster strikes, Albertans will not have the fund as a shield.” Nor will it have invested in any significant way in a future beyond oil.

There are some crucial geological reasons why the Alberta and Norway energy development systems differ so greatly. In the North Sea, the reserves tend to be in isolated fields with high discovery and development costs. Norway’s goal is to keep these fields alive and, if possible, expanding, hence the peculiar government revenue structure. But, at the same time, 78 per cent of the capital deployed on the North Sea projects is refunded, greatly reducing the operators’ risks. In Alberta, the risks are low because the location and size of the oils sands are no secret. The Alberta government’s goal is to maximize drilling and pumping activity through fairly low tax and royalties.

Alberta’s mistake, other than not imposing higher royalty rates, was treating the Heritage Fund as an afterthought. Lougheed was right – the fund’s value is so low that the province has little financial cushion. Disaster has not hit, but there is no doubt that Alberta’s finances will be strained as the United States uses its own shale gas and oil reserves to emerge as an energy superpower.

Norway faces problems, too. The North Sea is in a slow-motion suicide (though oil prices have held up better than natural gas prices, and the North Sea is mostly about oil). But its wealth fund is so enormous, and so well invested in equities, bonds and property around the world, that it has a cushion that Lougheed could only have dreamt about. The investments are also helping Norway transition to a low-carbon future as its own oil bounty declines – a more balanced path by any measure.

As well as protecting it from potentially murderous cyclical economic swings, the Norwegian system gives the country a financial discipline that Alberta lacks, since all of its energy revenues go into its wealth fund. The fund cannot be starved or raided by governments to finance cyclical spending binges.

Prices for Alberta crude will eventually recover. When they do, the province should fatten up the Heritage Fund. Will it happen? Don’t count on it.

In its 2013 budget, released on March 7, the government of Premier Alison Redford announced it will run a deficit in its 2013-14 fiscal year as well, to the tune of about $2 billion. But it also said that in 2015-16 it will stop spending revenue generated through its Heritage Fund. It plans to reinvest it instead.

Don’t count on that, either. The cowboy province has never been big on delayed gratification.

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