Ørsted A/S – Annual report – 31 December 2020
Industry: utilities, energy
Chairman’s statement (extract)
Enabling the world’s green transformation
The decisions our global society takes today, and in the next few years, determine whether we pass a habitable planet on to future generations. Science recommends that we halve global carbon emissions by 2030 to have a chance of limiting the temperature rise to 1.5˚ C and mitigating the risk of irreversible tipping points in our global ecosystems.
In 2020, we saw progress. Many governments raised their carbon emission reduction targets and further reinforced their build-out plans for renewable energy production capacity. Several large companies also set targets for their decarbonisation and acted firmly to make their business models more sustainable. Targets and actions by both governments and corporations bode well for our planet, but to limit the increase in temperature to 1.5 ˚ C, even more decisive action is needed.
Our target is to become a fully carbon-neutral company by 2025. In 2020, we continued the build-out of our green power generation capacity both onshore and offshore. We also initiated a range of renewable hydrogen projects. Renewable hydrogen will enable sectors like cement, ammonia, heavy road transport, aviation, and shipping to transition to fossil-free energy. Like it was for offshore wind, innovation and industrialisation in renewable hydrogen are required to bring down costs, making the new green fuels competitive.
This year, we divested our downstream retail customer and power distribution businesses, which marks another big step in the renewable energy transformation. Our vision is a world that runs entirely on green energy. Orsted wants to partner with countries and companies, helping them to leave fossil fuels behind, and in 2020, we saw a breakthrough for comprehensive long-term green power purchase agreements.
Management’s review (extract)
A catalyst for change
2020 demonstrated the vulnerability of global society. In the past year, the world was shaken by a global pandemic with more than 80 million cases of COVID-19 and more than 1.8 million lives lost, disrupting all parts of the global economy.
In parallel with the unprecedented pandemic, 2020 ended as another record-breaking year for climate change as it became the joint hottest year on record and by far the warmest year ever recorded in Europe, while the frequency and severity of extreme weather events continued to increase. In February, the Antarctic hit 20 °C for the first time ever, and its ice cap shrank to the second-smallest ever. Record-breaking wildfires raged through Australia and the US West Coast, fuelled by longer dry seasons and extreme events like heatwaves. We saw the most active Atlantic hurricane season on record, and an unusually heavy monsoon flooding in India and in South and East Asia ruined millions of homes.
The unprecedented events of 2020 have clearly reinforced the urgency to change the way humanity treats our planet and accounts for environmental and social risks. Climate change threatens to fundamentally change the conditions for life on our planet. The importance of collective action, decision-making based on facts and guided by science, and decisive reactions are more evident than ever. And while it is of essence that the transition to a global green economy happens in balance with our natural environment and societies, it is critical that we keep momentum. This is a moment for the world to take bold and necessary action. The need to build a more sustainable world has never been stronger.
How to stay below 1.5 °C
The science is clear: We are heading towards an increasingly vulnerable world with complex environmental, health, and economic crises if we do not act now. To meet the 1.5 °C Paris Agreement goals, humanity must at least halve global carbon emissions during the next ten years.
The first important stones have been laid to ensure the right conditions for this to happen. Wind and solar PV are today the cheapest sources of new-built generation in at least two-thirds of the world. Since 2012, the cost of electricity from offshore wind has decreased by 66 % and is now lower than electricity generated by nuclear power, coal, or natural gas. So far, 121 countries have committed to net zero emissions by 2050, along with 454 cities and almost 1,400 businesses. Through the Net-Zero Asset Owner Alliance, 33 of the world’s largest investors with USD 5.1 trillion of assets under management have agreed on portfolio decarbonisation targets to align portfolios with a 1.5 °C scenario. With the Green Deal, the EU has increased its green ambitions towards 2030, which can help drive further deployment of renewable technologies in the EU.
Still, progress is not happening remotely fast enough to reduce emissions at the necessary pace. Although we saw global carbon emissions fall temporarily in 2020 due to COVID-19 lockdowns and the resulting slowdown of the global economy, these reductions were neither systemic nor sustainable. In fact, supply chain disruptions from COVID-19 temporarily delayed the build-out of renewable energy in the EU energy sector.
Limiting global warming to 1.5 °C will require a structural change of the global energy system as 73 % of global greenhouse gas emissions come from the use of energy, mainly due to the burning of fossil fuels. The 1.5 °C pathway requires a significant increase in electrification, acceleration of green energy build-out, phasing out of fossil fuels, and increased energy efficiency. The share of electricity in overall energy consumption must increase from about 20 % today to at least 50 % by 2050. The projected rate of the green energy build-out must be more than doubled towards 2030, and coal-fired power generation needs to be phased-out at least three times faster than the projected rate of retirement.
By a wide margin, climate change is humanity’s greatest challenge. Although renewable energy build-out has the risk of impacting land-use and biodiversity, it is critical we keep momentum. The global energy industry has the technologies and capabilities needed to undertake the transformation. Now, it is time to act. It is time to deliver on commitments, to deploy and scale technologies at hand, and to accelerate the transformation to a sustainable society.
Ørsted wants to be a catalyst for change
Our vision is a world that runs entirely on green energy. Every day, we act as a catalyst for the change needed to build a sustainable energy supply. Over the past decade, we have transformed our business fundamentally, from being one of the most carbon-intensive utilities in Europe to becoming a renewable energy major and one of the most sustainable companies in the world. We are committed to taking a leading role in the global green energy transformation, and we have set ambitious targets for reducing our carbon footprint.
By 2025, we aim to be a carbon-neutral company (emission scopes 1 – 2), which we plan to achieve by at least a 98 % reduction in carbon emissions from our energy generation and operations compared to 2006. The remaining less than 2 % will be either eliminated or covered by certified carbon offsets. By 2040, we aim to reach net-zero emissions across our entire value chain (scopes 1 – 3), having a midway target to reduce our scope 3 emissions by 50 % by 2032. Our carbon reduction targets are confirmed by the Science Based Targets initiative to be consistent with the reductions required by energy companies to keep global warming below 1.5 °C and are the most ambitious science-based targets in our sector.
In 2020, we made significant progress towards these targets with green energy build-out and scaling-up of new technologies, including renewable hydrogen. During the year, we added 1.4 GW of installed renewable energy capacity in onshore and offshore wind, adding up to our total of 11.3 GW. Our carbon emissions intensity (scopes 1 and 2) decreased in 2020 by 11 %. However, 2020 showed an increase in Orsted’s absolute carbon emissions due to a temporary increase in our use of coal of 13 % at our Danish power plants. Our service obligations in Denmark require us to provide ancillary services that help grid operators maintain a reliable electricity system. This sometimes requires the use of coal to ensure a stable supply of energy. Our commitment to end our use of coal by 2023 remains unchanged, and we are on track towards this goal. Until then, however, we may see fluctuations in coal consumption, driven by market and weather conditions.
The next frontier in our journey towards net-zero emissions in our total carbon footprint by 2040 is to gradually phase out our supply of gas from long-term gas contracts and to decarbonise our supply chain. Therefore, we allow existing long-term gas contracts to expire gradually and do not enter into new contracts. Across our supply chain, we are committed to reaching beyond our own emissions and to working with our suppliers to gradually remove carbon emissions. Thus, we encourage our strategic suppliers to: 1) disclose their emissions and set science-based targets aligned with a 1.5 °C scenario, 2) use 100 % green electricity in the manufacturing of wind turbines, foundations, cables, and substations by 2025, 3) optimise their vessel fleets and develop a roadmap towards powering vessels with renewable energy.
We launched our supply chain decarbonisation programme a year ago. During this first year, we have focused on building the foundation and management structure to drive our programme and have begun to engage with our strategic offshore wind suppliers on the decarbonisation journey ahead. The offshore wind supply chain today includes carbon intensive activities, particularly the use of energy-intensive construction materials, such as steel, aluminium, and copper, as well as fuel for offshore construction vessels. As part of our dialogue with our top strategic suppliers, including wind turbine, foundation, and cable manufacturers, we support them in building solid and uniform carbon accounting policies and data capture by utilising the CDP reporting framework. Based on this solid foundation, we will work with our suppliers over the coming years to establish emission reduction roadmaps and targets supporting our overall strategic targets.
Management’s review Governance (extract)
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:
- encouraging regulators and other public authorities to set 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 investment 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.
A description of the most significant sustainability risks can be found in our sustainability report.
In 2019, we concluded a climate scenario analysis, assessing the resilience of our offshore business in two potential scenarios of climate change: a 1.5-2 °C and 3-4 °C temperature rise by 2100, respectively. The study was conducted through research, interviews, and workshops and concluded that our offshore business is well positioned to manage climate-related risks of both transitional and physical nature. Please refer to our CDP climate change disclosure for detailed descriptions here.