DONG ENERGY'S ROLE IN DENMARK'S ENERGY SECURITY

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SENSITIVE
SIPDIS

STATE FOR EEB/ESC/IEC/EPC, EEB/ESC/IEC/ENR
STATE FOR OES/EGC BENJAMIN ZAITCHIK

E.O. 12958: N/A
TAGS: ECON ENRG KGHG SENV EIND EPET DA
SUBJECT: DONG ENERGY'S ROLE IN DENMARK'S ENERGY SECURITY

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(U) SENSITIVE BUT UNCLASSIFIED; PROTECT ACCORDINGLY. NOT FOR
INTERNET DISTRIBUTION.


1. (SBU) SUMMARY: DONG Energy CEO Anders Eldrup recently
briefed the Ambassador on Denmark's energy security and
DONG Energy Group's activities. As a result of difficulties
stemming from the 1973 OPEC oil embargo,
Denmark set a national priority to end reliance on foreign
energy. The Government achieved this by switching to
coal-fired electricity generation, installing district
heating to increase efficiency of these power plants,
and enacting measures to stimulate development of alternative
energy sources (notably wind and biomass). At
the same time, Denmark discovered oil and natural gas
reserves in its North Sea territory, which enabled it to
supply all local energy demand from domestic sources. Today,
Denmark's North Sea reserves are dwindling and
Danes are demanding more renewable energy. Thus, DONG is
investing heavily in renewable (mostly wind) energy, and
seeking a solution to the electricity-storage problem by
investing in the development of infrastructure to support
electric cars and use the car batteries as storage capacity.
DONG also has ambitious plans to reverse the
ratio of its renewable/fossil-fuel energy mix from 15-85
today to 85-15 by 2040. Denmark is also diversifying
its natural gas supply, but DONG has decided to source no
more than 25% of its supply from GAZPROM through the
Nord Stream pipeline. Eldrup indicated that he does not
foresee DONG making the public stock offering that had
been planned for January 2009 anytime soon. END SUMMARY.


2. (U) The Ambassador met with DONG Energy CEO Anders Eldrup
on November 9, 2009, to receive a briefing on
DONG's activities, the Danish experience with renewable
energy, Denmark's 35-year path to energy self-sufficiency,
and Eldrup's views on energy security. (NOTE: DONG Energy is
a 73% Danish Government-owned, fully integrated
energy holding company. It was formed in 2006 in a six-way
merger that included the Danish Oil and Natural
Gas Company. DONG Energy is now one of northern Europe's
significant energy groups, with divisions engaged in
procuring, producing, distributing, trading and selling
energy (oil, natural gas, and electricity) and related
products across the region. DONG Energy is a highly
innovative company, particularly with regard to renewable
energy. END NOTE)


3. (U) Eldrup began by providing a historical context for
Denmark's current energy outlook. Prior to the 1973
OPEC oil embargo, Denmark was dependent on oil -- almost
exclusively from Saudi Arabia -- for 95% of its energy
needs. Having suffered greatly during the OPEC embargo, the
Danish Government made energy security a national
priority. It pursued a three-pronged energy security
strategy through the second half of the 1970s and the
1980s.


4. (U) First, Denmark switched electricity production almost
entirely to coal-fired plants. The rationale
behind this move was that the supply of coal available to
Denmark was much more diverse than oil and, thus,
less susceptible to interruption. At the time, there was no
domestic debate about the emissions caused by coal
-- debate centered almost exclusively on energy independence.



5. (U) Second, the government embarked on a major
infrastructure project to install district heating
throughout the country. District heating is a system where
the heated water that is a by-product of
electricity generation is distributed via underground
pipelines to residences, businesses, and government
buildings to provide radiant heat during winter months. This
method can be used within a 50 kilometer radius
of a power plant. Today, 60% of households in Denmark are
heated by district heating, producing considerable
energy savings. District heating does not require any
additional energy production to heat the homes, and
greatly increases the efficiency of coal-fired plants. The
energy return (energy expended from burning coal
compared to amount of electricity produced) without district
heating in DONG's most efficient plants is
approximately 47%; when coupled together with district
heating, it is approximately 94%. The Government
viewed this efficiency gain as essential to gaining energy
independence.


6. (U) Third, realizing that Denmark possesses limited energy

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resources, the Government sought to stimulate
development in energy sources that are abundant locally.
Wind and biomass were the two areas that received
the most government support. For biomass, the government
support took the form of a mandate that DONG purchase
excess straw from farmers and burn it in coal power plants to
decrease the amount of coal imports. For wind,
the support took the form of heavy subsidies to help develop
and deploy wind technology. Though the goal was to
increase energy security, Eldrup credited these initiatives
with kick-starting the Danish environmental
industries that Denmark is so proud of today.


7. (U) At the same time as these measures were being
implemented, Denmark discovered oil and gas reserves in its
North Sea territorial waters. The finds were substantial
enough that Denmark was eventually able to gain energy
independence, though this required substantial investment in
infrastructure. Initial economic analyses indicated
that Denmark stood to profit more from selling the gas to
Germany, which already possessed the necessary
infrastructure. However, the Danish Government made a
political decision to retain the oil and gas for domestic
use to move toward the goal of supplying all Danish energy
needs locally. Danish Oil and Natural Gas (DONG) was
established during this period to be the distributor of oil
and natural gas in Denmark.


8. (U) According to Eldrup, after having ended reliance on
foreign oil and gas (Denmark is a net exporter of
energy),Denmark today is demanding sustainable energy. In
response, DONG Energy is moving toward a greener
energy supply, while also maintaining the goal of Danish
energy independence. The company is no longer
constructing coal power plants and is closing some existing
plants. The company has set an internal
goal to go from an energy production mix of 15% renewable and
85% fossil fuel, as it has today, to a mix of 85%
renewable and 15% fossil fuel by 2040. To do this, DONG
projects it will need to increase the share of wind-
produced electricity consumed in Denmark from the current 20%
to 40%. Thus, the company's investments in the
near term are heavily weighted toward developing its wind
capacity, including electricity storage. The backbone
of the storage effort is a joint venture with U.S. firm
Better Place to develop an electric car network in
Denmark where not-in-use car batteries could store
electricity generated by wind that could then be drawn on
during peak demand periods. Eldrup returned often to the
theme that much of Denmark's export-led growth comes
from the early steps it took to move to renewable energy and
the industry that spawned, and he sees electric cars
as again presenting that possibility.


9. (SBU) Eldrup also touched on the future supply of natural
gas for Denmark. DONG plans to move from the
status quo of 100% Danish sourcing and to diversify its
supply through four channels: 1) one quarter from Danish
North Sea reserves (Eldrup said that production levels will
drop in the medium-term, but this will be a gradual
decline over the next 30 years),2) one quarter from other
North Sea suppliers (Norway and Great Britain),3) one
quarter from Russian gas company GAZPROM, primarily via the
Nord Stream pipeline, and 4) one quarter from
liquefied natural gas (LNG) shipped in via the LNG terminal
in Rotterdam where DONG has become a partner. DONG
may change that mix somewhat over the coming years, but has
made a decision to not increase the share it
purchases from GAZPROM to more than 25% of the total mix.


10. (SBU) Eldrup ended with a few comments on DONG's planned
public stock offering that was scheduled for
January 2009, which he said was stopped by a political
decision just "a couple of hours from happening." The
stock offering would have resulted in DONG going from 73%
state ownership to just over 50%, not a complete
privatization. Eldrup said that the planned public offering
stemmed from the move in the 1990s to privatize
state assets, which he now perceives is waning in Denmark.
Though the delay was originally taken because of
stock market volatility, he indicated that he does not
believe the offering will take place in the foreseeable
future. Eldrup, who is a former civil servant who made his
career in the Finance Ministry, seemed to regard this
as a positive development. He went to lengths to emphasize
that the DONG Energy Board of Directors maintains an
arm's-length distance between government political decisions
and DONG business decisions. Nonetheless, he

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pointed out the key role played by government support for and
subsidizing of new technology in the 1980s.
Denmark gained a first mover advantage in many areas,
particularly wind energy, at that time, but Eldrup sees
the terrain as being different today because of the intense
competition in energy technologies coming from firms
in China.


11. (U) COMMENT: DONG Energy and its antecedents played a
key role in creating and achieving the "Danish Model" of
energy self-sufficiency. The firm seems more than willing to
support the Danish Government's political priorities of
shedding fossil fuels like coal-generated power in favor of
sustainable greener energy sources in the future, provided
the government ensures its bottom-line profitability through
continued subsidies and mandates to go green.
MCCULLEY