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Interview

with Samuel Leupold, Executive Vice President Wind Power, Dong Energy Wind Power

14.05.2013 / Energyboardroom

You have been recently appointed at the head of Dong Energy Wind Power, the world’s market leader in offshore wind, responsible for building 38% of European capacity. Could you start by introducing yourself and outline the synergies between you and Dong Wind Power?

I am the new Executive Vice President of Dong Energy Wind Power, and a member of group management. I am a Swiss citizen, not a country best known for wind power- rather for hydro and nuclear, but my background has consistently been in the energy industry, starting with my education – I have a Master’s Degree in Mechanical Engineering, focused on energy from the Swiss Federal Institute of Technology.

I spent the first six years of my life in ABB Power Generation, a turnkey supplier for all sorts of power plants. I was in the gas fire power plant division of the company in various divisions from working on site as a commissioning engineering, up to sales in that period.

Later on, I joined McKinsey & Co. as a consultant. Again, given my background I was mostly working for utilities and energy companies.

I also joined Swiss utility BKW, where I had various positions, among others Executive Vice President responsible for the international part of the company and the trading.

Talking about the synergies I have a strong background in the energy and utility field. I built up the onshore part of the BKW in Italy and Germany, and this involved an onshore wind portfolio as well.

I have a good understanding through the value chain of the company because I have been in charge of generation, trading, and the downstream part of the business. Now I am back into offshore wind, I still feel I benefit from these experiences enormously.

Denmark’s 2012 Energy Agreement prescribes that Denmark’s energy supply has to fully consist of renewables by 2050. How will Dong ensure that Denmark can make this target?

Dong Energy is the key player in offshore wind, and therefore we are also dedicated to play our role in the Danish development.

We were the first company to put offshore wind farms in Danish waters, starting more than ten years ago, and at this moment we are in the finalization phase of what is the largest Danish wind park near Anholt.

It is great seeing Dong’s agenda materializing in such a concrete case and on such a large scale.

How challenging will it be to meet the rapidly growing demand?

Given that we have accumulated deep know-how all along value the chain, satisfying demand is not a problem. We have probably the biggest portfolio in the industry on well-structured projects of different sizes, in different locations, and under different regulatory schemes that go with it. So we have the portfolio and all the skills to bring this to life.

From a technical point of view, there are not too many challenges. The challenges are more about the willingness of the European politicians to continue on the green agenda. Is the 20-20-20 target still on their minds, or are they starting to deviate from it?

Of course we all agree, and Dong Energy in particular, that the cost of offshore wind must be brought down. Dong Energy recently announced that, by 2020, we need to have taken the cost down to 100 euros per megawatt hour for a decision for investment in 2020.

The big challenge is there: willingness to follow the green agenda, at a cost that is acceptable to society, and to ensure we can deliver at that cost.

Dong Energy is now leading the way in finding an answer to how we will bring cost down to that level. But we cannot face that challenge by ourselves; we need the help of all the players in the industry to go down that same road and share the effort with us. We need our key suppliers to follow us on that journey.

Suppliers need to understand that, if offshore wind wants to maintain this long-term perspective, we need to make sure that it remains within the cost frame that is acceptable for society in the long term. We must be able to compete, in some form, with other alternatives, for power generation, and that is why I say that our suppliers must understand that it is in their best interest that they help us be creative, come up with new concepts, industrialize those concepts, develop the value and supply chain to such a degree that the cost really come down to the level we have indicated.

I do not only think about the suppliers, I also think it is important that other players, or competitors if you will, go down the same road. We have a common interest to develop the industry and the supply chain goes with it. Dong Energy alone cannot do it.

It is good for the whole value chain, but what does Dong Energy Wind Power as a partner offer in return for your suppliers?

If it does not happen, we all jeopardize our industrial future. It is not specifically what Dong Energy offers them in return; it is a key to opening up the next phase in industrial development in offshore. Dong Energy in particular offers a stable and long-term partnership to suppliers who work with us in the right spirit. Part of the growth story stems from the fact that Dong Energy has been teaming up with strategic partners in a very successful way. I think that story could continue for sure in the future.

One thing that is particularly important for me when talking about the cost of electricity is; do we compare it in the right way. Currently a lot of people are looking at the German wholesale electricity price, which is at a historic low of 42 euro per Megawatt Hour, and at the same time people look at the current level of subsidies being paid for offshore wind and then they draw a conclusion. I believe that is wrong.

We have to look at the system in a different way. We see at least parts of Europe where capacity must be added to the grid. This is for sure very true for the UK. For the next years a lot of additional generation capacity must go online, and we must understand that current wholesale prices will not be sufficient to attract any new capacity in any technology.

You may be well aware, as an example, that in the UK there is a discussion about nuclear energy, and everybody following that discussion understands that nuclear power comes at a cost to attract investment that is at least at or maybe even higher than the 100 euro per Megawatt hour that we have communicated for offshore wind.

The same is true if you want to add any other form of conventional energy, regardless of whether you go for combined cycle or coal; the current wholesale prices just do not suffice to attract investment.

Either we allow wholesale prices to go up to reflect scarcity, and then we will see that the difference between wholesale price and current support level for offshore diminish, or, and I could very well imagine, we will start to see subsidy schemes evolve to make sure that additional capacity will be added to the grid.

So yes, it is very important to bring down cost, but on the other hand we need some fairness in the way we compare this, and currently we have a tendency to compare this to the wrong figures.

Reports have said that Dong Energy is responsible for constructing 60 percent of the world’s wind turbines. Would more competition be a good thing?

We have certainly a lot of other players that are highly professional in this field. There is competition. On the other hand, the competition among the players of the industry is just one side. The competition is more on the common interest: can we bring down cost to a degree that is viable and acceptable for our political stakeholders.

I would rather focus on that part of the challenge than on whether we can outsmart the others. I guess the others are running at the same pace. We are actually happy that it is a pack and not us running ahead, because it is important that the industry as a whole develops, and the industry will only develop and the value chain will only get mature if there is more than only Dong Energy pulling. I am happy that Vattenfall, E-On and Rwe are there, and they are also contributing to maturing and developing the industry.

How successful is Dong Energy in attracting investment to bring down cost?

Dong Energy was extremely successful early on in getting non-industrial and also industrial investors into the project. If there is one player that has consistently demonstrated that it is capable of attracting third-party financing, it is Dong Energy in the field of wind power.

This is certainly to continue. We still see that a lot of institutional investors are highly interested in renewables, offering distinctive qualities, regulated or partly regulated and therefore to a certain extent de-risked revenues.

It is also key to realize that Dong Energy is not just developing and constructing but also operating these wind farms. That is perhaps a difference with what other players in the industry can offer. I think we are extremely strong on the operation part of the business, and that gives a lot of confidence to co-investors. They see that we have this track record and have the right incentives to go for the highest availability in our wind parks. Looking at last year’s figures, we had the world record in one of our wind farms for capacity factor in offshore: at 52 percent. That is a very important element when it comes to building trust and giving third parties the trust that this investment is going to pay off.

To which extent can the offshore wind industry still draw from the decades of experience of the offshore oil & gas industry to speed up its development?

I think we can. We are currently looking into technical concepts from the oil & gas industry that we believe might offer solutions in the future at lower cost for the offshore wind industry as well.

The installation vessels that our suppliers use clearly come from the oil & gas industry. Now we start to build these vessels for purpose for the wind energy industry, but the concept was copied from the oil & gas industry.

I personally believe that, apart from the cost, there is a lot that we can learn from oil & gas in health & safety. The safety culture in oil & gas is probably among the best you can find in any industry. In wind power we still have a long way to go.

Dong Energy offers a great advantage for the different industries to share insights and be able to benefit from each other as our company unites Dong Energy Wind Power and Dong Energy E&P.

I regularly have meetings with my colleagues in oil & gas, especially on the health & safety topic.

Do you feel there is a special responsibility for Dong Energy WindPower to put Denmark on the international energy map?

Certainly. Most of our wind power assets are outside of Denmark now and this is going to increase. In the UK we see a lot of added capacity. We are exporting Danish know-how.

We have to balance this however; other countries do not just want to see infrastructure being put up or supplied by Danish manufacturers and Danish manpower going into it. We must be aware that, while this was a unique experience built up by this Danish company, if we want to be successful in other countries, we have to make sure that they get their share of this as well.

We are keen to develop local supply chains and increase the local content to a level that is giving the opportunity to those countries to contribute to their own infrastructure. That is very understandable; it is good corporate citizenship to try to create your footprint wherever you are and create an industrial development that will benefit the local community. It is important also for the political acceptance that, apart from converting the infrastructure of these countries to more green, we basically invite them to contribute on a long-term scale and to have an industrial development in that field.

How do you wish Dong Wind Power to be perceived by industry?

Before I joined I knew Dong Energy both as a player in the traditional coal sector, but also from trading. I recall that we saw them as a very professional and dynamic player.

For instance in trading it was amazing to see in which markets and with what products they were present.

Dong Energy has a unique position, not in the huge utility range but mid-size and developing into a Northern European energy group, big enough to run on a large variety of activities and simultaneously be at the top of certain activities such as wind power, and big enough not just to follow but actually to lead in selective parts, also when it comes to biomass conversions. These are fields where we are top-notch.

On the other hand we are not too big and therefore there is a certain dynamic and entrepreneurship that is still alive. That is a unique mix.

What will you bring to keep this entrepreneurial spirit alive in the company?

I will bring sound decision making as we go forward so that we do not lose our position as the market leader and on the other side, as the industry as a whole is maturing we go along with that and build this as a stable cornerstone of the Dong history. It is not a start-up any more. We have to change the way we manage it and change how you do business.

It has been a very rapid transition and that is one of the challenges we certainly face; the whole wind industry made that transition in only a very limited amount of years, and that is putting a lot of challenges on the organization from a managerial point of view, from a procedural and best practice point of view. I think that is where I can add value, because I understand where this start-up environment has to be changed into a more stable industrial set-up and how we have to manage that.

I have had exposure to large cap-ex projects from nuclear to hydro and wind, and I think that is what the next couple of years, obviously we talk about very large cap-ex projects, and they involve naturally a lot of risk.

That is an area to which we have to pay a lot of attention, not forgetting at the same time, and that is what I really like, we are an operator of these assets. That is what a utility is essentially about. We should not forget that. It is an emphasis that I would like to underline: we are owned in the end by the Danish public. They can expect from us to produce Kilowatt hours: reliable, sustainable, and at sustainable cost.

That is extremely important: what we do here is, in the end, going as Kilowatt hours to customers be it in Denmark, the UK, or Germany.

Therefore we are developing and constructing these big projects and operating them. I take a lot of pride that we are going so deep in the operations, because it gives us that extra upside on the financial side, it really helps us to improve those business cases, but on the other hand it gives us a lot of credibility. Wherever you put up infrastructure people may not like it entirely because you have an impact, but I think in all you have to be legitimate in that sense, it is important because in the end electricity makes the good life for people and we bring that electricity to homes. That is what gives a lot of meaning to what we do. We are not just a developer; that is important to remember. We are a utility, majority-owned by the Danish state, and we continue to be an operator.

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