Dong Energy: Oil, Gas and Now Clean Coal

Dong Energy, the Danish energy market leader, is on the move. The company plans an IPO next year as the Danish government will sell part of its ownership in the company. Now it has revealed that it is exploring the option to construct a coal plant utilizing clean coal technology, or carbon capture and storage (CCS) in Germany. If realized, this would certainly be a move in the right direction.

According to the company, feasibility studies would be carried out to determine the investment potential for the plant by 2007. Once deemed investment grade, the plant is slated to be completed before 2013.

Ironically, less than a fortnight ago the EU Commission stipulated that Germany reduce its excessive C02 pollution credits by 6% from 482 million tonnes to 483 million tonnes. The German energy sector complained that the cuts are too severe and would handicap new power generation.

Dong’s planned investment essentially invalidates that argument. But why would Dong, with its long power and gas net trade requirement and little experience in coal, enter a market that is presently hobbled by low growth? According to Datamonitor analysis, despite these concerns, the choice is a win/win situation for both parties.

Dong has been seeking to expand as its market share in Denmark has been eroding. Entering Germany is a strong, forward looking move, as additional power capacity would be needed to compensate for the shortfall in the country’s planned nuclear phase-out by 2020. Slated to become operational by 2012, the plant will be well poised to enter the market.

With a long position on both gas and power, Dong’s foray into coal is an astute move to diversify from its reliance on oil and gas. Additionally, the potential profitability of a carbon capture plant as measured by its clean spark – dark spread margin should be higher, especially as Germany’s carbon allowances become tighter as the ETS develops.

The CCS plant would be situated in the former East Germany, which would be welcomed as it would alleviate the stigma of environmental damage caused ironically by coal mining and generation. Germany also has the largest coal resources in Europe but is limited by its Kyoto and EU pledges. Therefore, Dong’s plant allows Germany to solve this dilemma without defying its environmental commitments.