Energy: IEEFA: Orsted’s transition provides key insights for India’s public utilities and renewable energy companies
- Sep 17, 2021 2:55 pm GMT
Orsted transitioned from a coal intensive utility to a global renewable energy leader creating immense shareholder wealth
“During Orsted’s transition journey of more than a decade, it has created immense shareholder wealth, as its market capitalisation zoomed by 314% since its listing in 2016,” says the report’s author, IEEFA energy finance analyst,
“This feat can be attributed to its successfully planned transition strategy, along with transparent sustainability-related disclosures. This is an example where an enterprise has been able to fulfil its goal of dramatic shareholder wealth creation while radically transforming its business model, something which many energy companies around the world are trying to emulate.”
The Indian government has embarked upon one of the most extensive clean energy drives in the world, with commitments to have 450 gigawatts (GW) of renewable energy capacity by the end of this decade.
During Orsted’s transition journey, its market capitalisation zoomed by 314% since its listing in 2016
“The Indian public utility sector, along with its private counterparts, will have a huge role to play in realising this massive goal,” says Srivastava.
“Major utilities like
“Into the future, the ability of Indian companies to walk the talk and undertake a profitable transition or growth journey will be paramount to attract capital and grow shareholder wealth.”
Major utilities like
NTPC Limitedand Tata Powerhave already committed to a green transition
Orsted, which has already championed the green energy transition journey, provides valuable lessons for Indian companies, which may face several of the same challenges and opportunities.
Orsted’s journey to becoming one of the leading renewable companies in the world can be attributed to both internal and external factors. Internally, the company’s leadership made sound strategic decisions throughout its transition journey. Externally, the favourable new industry development and subsidy regime in
Orsted’s journey to becoming one of the leading renewable companies in the world can be attributed to five major internal strategic decisions:
1. Committing to energy transition through long-term strategy realignment. Orsted set tangible long-term goals for itself when it came to the addition of renewable energy and phasing out thermal power.
2. Using non-conventional sources of funding through the “farm down” model, divestment of non-core assets and hybrid capital. The company’s funding strategy for its offshore wind projects relied on recycled capital from de-risked operational wind assets, proceeds through sale of non-core assets which did not fit in the long-term strategy of the company and using hybrid capital. The limited use of debt gave the company financial flexibility and confidence to handle the operational risks of expanding rapidly into a new field.
Orsted was an early mover in the offshore wind industry
3. Gradual de-risking and restructuring of legacy businesses. A major component of the growth strategy was to restructure legacy businesses to support the growth of the offshore wind business. Cash flows from these legacy businesses were used to fund wind farm constructions, and simultaneously de-risked by adding value-added services and operational efficiencies.
4. Using economies of scale to establish cost leadership. Orsted was an early mover in the offshore wind industry. Since its inception, it has made several advancements in establishing technological prowess across the value chain through partnerships and strategic investments. Investments in offshore wind were made at a size sufficient to capitalise on economies of scale. Having a presence across development, construction and operation stages gave the company full control over the project’s entire life cycle.
Renewable energy is making inroads as the energy source of the future
5. Focus on sustainability-related disclosures. The company was a frontrunner in sustainability-related disclosures. Though Danish law mandated corporate sustainability disclosures since 2009, the company was already a member of the
“Energy markets around the globe are undergoing an unprecedented transformation, with renewable energy making inroads as the energy source of the future, and climate action gaining more steam to wade out fossil-fuel based generation,” says Srivastava.
“This renewed focus on advancing clean energy technologies has clouded the future of conventional utilities, which have no option but to transition or face the wrath of financial markets and regulators.”
Read the report: From Dong to Orsted: A Leading Utility’s Green Energy Transition
*Author is available for media interviews and background briefings*
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