Ørsted A/S – Annual report – 31 December 2019
Industry: utilities, energy
Chairman’s statement (extract)
Leading the green transformation
Climate change is the defining challenge of our century. By 2030, global greenhouse gas emissions need to be halved compared to current levels if we are to stay below a global temperature increase of 1.5°C above pre-industrial levels. This is the threshold set by science to limit the risk of irreversible tipping points in our global ecosystems. As energy accounts for 73% of global greenhouse gas emissions, we clearly need to change the way we power the world – and shift from fossil fuel-based to renewable energy.
At Ørsted, our vision is a world that runs entirely on green energy. Just a decade ago, our core business was based on fossil fuels, but we decided to change, and we have changed to green energy faster than any other energy company. In January 2020, we were named the most sustainable company in the world. We are proud of this recognition, and it encourages us to further intensify our efforts to deploy green energy at scale and to contribute to the profound transformation of the energy system required to keep the planet habitable. In continuation of this, we have decided to become carbon neutral in our own operations by 2025 and in our total carbon footprint by 2040.
Management’s review (extract)
The green transformation
The world is facing a climate emergency. Climate change is happening fast and is threatening to destabilise our global ecosystems.
With the 17 UN Sustainable Development Goals (SDGs), the world’s countries have agreed on the most pressing economic, social and environmental challenges that we face globally towards 2030. Climate action is a central goal, as it affects the realisation of many other SDGs where overall progress has proven to be slow or even reversed.
Science has clearly demonstrated the need to limit global warming to 1.5°C to avoid uncontrollable effects of climate change, including more floods, wildfires and droughts, decrease in biodiversity, and many other severe consequences. With the Paris Agreement, a vast majority of the world’s countries agree to take global action to keep the increase in global average temperature well below 2°C and to pursue efforts to limit the increase to 1.5°C compared to pre-industrial levels. Meanwhile, the global
average temperature has already increased by more than 1.1°C and is still on the rise. With current policies, temperatures are expected to reach a 1.5ºC increase as soon as 2030 and 3-4ºC by 2100. To turn the current development around and keep the world below a 1.5ºC temperature increase, global emissions need to be halved in just ten years and reach net-zero by 2050.
Modern society was built on fossil fuels. The burning of coal, oil and gas still account for more than 80% of global energy consumption. Decoupling economic growth and carbon emissions require expanding the green energy transformation significantly and at a global scale.
However, the share of renewables meeting global energy demand has only increased around 0.25 percentage points annually over the past decade and is expected to reach just 12% in 2023. This development falls substantially short of being in line with the 1.5°C trajectory which necessitates profound near-term decarbonisation of the energy supply. The world’s countries must rapidly transform global energy systems away from fossil fuels to becoming entirely based on renewable energy. It is an enormous endeavour which is necessary and, fortunately, also possible.
Through industrialisation, economies of scale and innovation across the value chain, the cost of renewable energy has dropped significantly over the past decade. Thus, the cost of offshore wind has dropped by more than 60% since 2014, and it is now cheaper to build offshore wind farms than coal- or gas-fired power plants. The same applies to solar photovoltaic (PV) and onshore wind that have followed similar developments. Renewables becoming the economic choice has been a breakthrough for the green transformation. It demonstrates that ambitious government targets to deploy green technologies help to effectively bring down the cost of green energy.
Ørsted wants to contribute to a 1.5°C future
At Ørsted, our vision is a world that runs entirely on green energy. We have become the global leader in deploying offshore wind and have activities within onshore wind, solar, storage and bioenergy. Our solutions tackle the climate challenge and help speed up the global transition from fossil-based energy to renewables, which represents our largest societal impact and contribution to the SDGs.
Over the past decade, we have undergone a major transformation. From being a traditional fossil-based energy company ten years ago, we are today ranked #1 in Corporate Knights’ 2020 Global 100 most sustainable corporations in the world. We have demonstrated that a rapid transformation from fossil to renewable energy is both possible and profitable. From a green energy share of 17% in 2006, we are today at 86% and will reach 99% by 2025. Through this transformation, we have reduced our carbon intensity by 86% compared to 2006. We will continue to drive out fossil-based energy generation by phasing out coal by 2023 and expanding our renewable energy capacity across the world. We have installed 7.8GW offshore and onshore wind – enough to power more than 15 million people – and our ambition is to install more than 30GW of renewable capacity by 2030, which will be enough to power more than 55 million people.
For our energy generation and operations (scope 1 and 2 emissions), our target is to become carbon neutral by 2025. To achieve this, we will reduce our carbon intensity to less than 10g CO2e/kWh, which represents at least a 98% reduction compared to 2006. This target includes both generating green energy and sourcing green energy for our own energy use. We continuously work to reduce the remaining 2% of our carbon emissions and will offset any residual emissions from 2025.
As we embark on the next phase in our decarbonisation journey, we have also set a target to reach net-zero emissions in our total carbon footprint (scope 1-3) by 2040, a decade faster than required by science. To help achieve this, we target a 50% reduction of the emissions in our energy trading and supply chain (scope 3) by 2032, compared to 2018. We will reach this target by engaging with our suppliers to reduce emissions in our supply chain and by gradually phasing out gas sales.
We have defined our carbon-reduction targets to align our full carbon footprint with what science requires from the energy sector to limit global warming to 1.5°C. The non-profit Science Based Targets initiative (SBTi) has preliminarily concluded that our new targets align with what the 1.5°C pathway requires from energy companies. The SBTi organisation will officially announce this target classification during 2020, once it has released the 1.5°C reduction pathway for energy companies. A visual showing all greenhouse gas emissions in our company and value chain, along with our complete action plan on how to address them, is available in our sustainability report at orsted.com/sustainability2019.
Ørsted has set the course for a carbon neutral future. Just like we have transformed, we want to help transform the world’s energy systems away from fossil fuels towards green energy to limit average global temperature rise to 1.5°C. Reaching such a future requires a bold vision and decisive action by individuals, corporations and governments.
Climate-related financial disclosures
Companies and investors also need to look at how the climate may impact their business. This includes physical factors, such as sea level rising or storms that can affect assets, and transitional factors, such as carbon prices or technology shifts that can affect business strategies. To address such risks and opportunities, it is key to adopt a science-based carbon reduction target and analyse the business’ financial risks and opportunities related to climate change as recommended by the Task Force on Climate-related Financial Disclosures (TCFD).
At Ørsted, we are aware of the actual and potential impacts of climate change on the resilience of our business. By endorsing and aligning our practices and reporting with the TCFD recommendations over the past two years, we have further crystallised our understanding and disclosure of climate-related risks and opportunities. This includes improved reporting on the integration of climate-related issues into our governance mechanisms, such as the Board of Directors’ competences and executive remuneration. We also conducted a climate scenario analysis in 2019, and its overall results are disclosed in the risk section of this report.
Management’s review Governance (extract)
Letter from the Chairman (extract)
The Board believes that good corporate governance is fundamental in meeting Ørsted’s strategic objectives and maintaining the highest standards of integrity.
Our corporate governance model has its offspring in our Danish roots, which builds on a strong tradition for integrity and transparency. As a consequence, we have incorporated and follow all the recommendations prepared by the Danish Committee on Corporate Governance. You can find our statutory corporate governance report on orsted.com/statutory-reports.
Climate change is fundamental to our business strategy, and climate-related issues are an integral part of our board agendas. In the Board, we monitor and oversee progress related to Ørsted’s strategic ambitions, including our ambitious targets for addressing climate-related issues. We seek to integrate considerations for climate protection when setting our strategic direction, reviewing sustainability risks, setting performance objectives, deciding on our capital allocation, and when approving and overseeing major investments, acquisitions and divestments.
In 2019, the Board of Directors discussed and took a number of key business decisions to take further action against climate change and to strengthen our ambition of becoming a global green energy major. The decisions covered, among other things, investments in new offshore and onshore wind and solar projects and an agreement to divest our Danish power distribution, residential customer and city light businesses as well as our LNG business.
The Board decided to update our targets for greenhouse gas emission reductions from our energy generation and other in-house operational activities (scope 1 and 2 emissions) and decided to set an ambitious target for reducing the emissions related to our value chain (scope 3 emissions). Both of these decisions will help us in becoming carbon neutral.
Risk and risk management (extract)
We address climate-related risks and opportunities as an integral part of our daily business, and we report as recommended by the Task Force on Climate-related Financial Disclosures (TCFD). These risks and opportunities are directly linked to our green vision and strategy. We seek to exploit climate-related opportunities through our development and construction of renewable generation capacity and adjacent sustainable activities. At the same time, we seek to reduce both our transitional and physical climate-related risks in the short, medium and long term. We do that by, among other things:
– influencing regulators and other public authorities towards ambitious targets for the build-out of renewable capacity and regulatory frameworks which support this
– continuously working to improve the future competitiveness of green technologies, i.e. lowering the levelised cost of electricity (LCoE)
– assessing acute and chronic weather development; especially wind speeds and patterns, but also the temperature and precipitation levels in general
– taking extreme weather conditions and other relevant factors into account when we design and construct our assets.
In that way, we seek to avoid ending up with stranded assets or assets and activities with a significantly lower value than originally expected.
When we prepare business cases for investments in new assets or activities, we take climate-related risks and opportunities into account by assessing the expected changes in the green technology mix. On this basis, we assess the expected derived impact on input and output prices of energy, including the price development of components and services to be used for the construction of these assets as part of our LCoE analysis.
At this year’s UN Climate Action Summit, Ørsted and 86 other major global companies (incl. Iberdrola, Acciona, Enel, IKEA, HPE and Novo Nordisk) committed to setting ambitious carbon emission reduction targets to limit global warming to 1.5˚C.