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China and Norway Team Up on Iceland’s Continental Shelf

The Icelandic National Energy Authority (NEA) has finished processing the third application received in the second licensing round in the Dreki Area on the Icelandic Continental Shelf. The license will be awarded to Icelandic firm Eykon Energy, Chinese oil company CNOOC, and Norwegian state company Petoro.


The NEA expects this third license to be formally issued by the end of this year (2013). Before the licence is awarded, Petoro’s decision to take part in the license needs to be approved by Norway’s parliament.

The granting of this third licence by the NEA will conclude the licensing as a result of the second licensing round on the Icelandic continental shelf, which had a deadline for applications in April 2012. In last January (2013), the NEA granted two licences to Faroe Petroleum Norway, Iceland Petroleum and Petoro, and to Valiant Petroleum (now part of Canadian Ithaca Energy), Icelandic Kolvetni and Petoro. The licences were granted on the basis of the Icelandic Hydrocarbons Act (No. 12/2001) on Prospecting, Exploration and Production of Hydrocarbons.

The area covered by the three licenses are shown on the map (above). The new third upcoming license is marked in green (Eykon Energy, CNOOK and Petoro), the other two already issued licenses are the blue area (Ithaca Energy, Kolvetni and Petoro) and the red area (Faroe Petroleum, Iceland Petroleum and Petoro).

Dreki-Area-and-NE-Atlantic_hydrocarbon-licensing_areasThe Dreki Area, which is part of the Jan Mayen Ridge, is thought to have potential for hydrocarbon accumulations because of its geological similarity to hydrocarbon basins which were its next door neighbours prior to the opening of the northeast Atlantic ocean basin. The basins in question are the Jameson Land Basin onshore East Greenland, where oil is known to have been generated and preserved in sandstone bodies, and basins offshore western Norway, Shetland and in the North Sea, where oil and gas has been discovered in commercial quantities.

UK’s Electricity Strike Prices Positive for IceLink

In last October, the Government of the United Kingdom (UK) gave the go-ahead for a new nuclear plant. This will be the first nuclear power station to be be constructed in the UK for numerous decades. The agreement regarding this nuclear plant shows well how competitive Icelandic electricity is, and makes it clear that an electric cable between Iceland and the UK could be very positive for both countries.

The Nuclear Strike Price Will Be 92.50 GBP/MWh (close to 150 USD/MWh)

The above mentioned agreement on the nuclear energy involves an enlargement of the Hinkley Point Nuclear Plant in Somerset (Hinkley Point C). The new reactors are scheduled to be completed ten years from now (2023). The plant will be built and operated by the French energy firm EDF (Électricité de France) in cooperation with Chinese investors.

UK-Hinkley-Point-C-new-Nuclear-Plant-diagramEDF has negotiated a guaranteed fixed price – a strike price – for the nuclear electricity at 92.50 GBP/MWh (equivalent to approximately 150 USD/MWh). This strike price is in 2012 prices. The price will be adjusted according to inflation during the construction period and over a subsequent period of 35 years. According to the BBC, the existing nuclear plant at Hinkley produces about 1 per cent of the UK’s total electricity. This is expected to rise to 7 per cent once the construction of Hinkley Point C will be completed in 2023.

Strike Prices effectively remove price volatility risk for electricity generated from low-carbon sources. This ensures greater certainty to generators and minimizes their risk. The goal is to bring forward investment in affordable low-carbon electricity generation, including renewables and new nuclear. In total, renewable energy is expected to make up more than 30 per cent of the UK’s electricity mix in 2020, helping to significantly decarbonize the power sector by 2030. This means that the UK has very ambitious plans in expanding the production of renewable power.

Strike Price for Renewable Power Will Be Even Higher

Earlier this year (2013), the British Government introduced the strike price which renewable energy technologies can expect in the coming years (2014-2019). The proposals are expected to become legislation in early 2014. According to a publication by the UK Department of Energy and Climate Change (DECC) the new regime will make the UK market one of the most attractive for developers of most renewables technologies, whilst minimising the costs to consumers. The proposed renewable electricity technologies eligible for the strike prices for example include hydro, geothermal, onshore and offshore wind, tidal and solar projects.

UK-Renewable-Energy-Strike-Price_2014-2019-The strike price for geothermal power will be 120-125 GBP/MWh (approximately 190-200 USD/MWh) and strike price for hydro will be 95 GBP/MWh (approximately 150 USD/MWh). The lowest strike price is for sewage gas; 85 GBP/MWh (close to 135 USD/MWh).

However, what is probably most important and interesting is the strike price for wind power. The British Government expects the overwhelming majority of the new renewable-capacity will be new wind farms, both onshore and offshore. This is understandable, because the utilization of wind power for electricity production is a well known and mature technology. In fact the strike price for wind power can be said to be the base price for new renewable generation. And the strike price introduced for onshore and offshore wind is 95-100 GBP/MWh and 135-155 GBP/MWh, respectively.  This is equivalent to approximately for 150-180 USD/MWh for onshore wind, and 215-250 USD/MWh for offshore wind.

IceLink Could Be an Important Part of the Solution

In comparison, Iceland could most likely offer the UK electricity from renewable sources at prices similar or even substantially lower than the strike price for new offshore- or even onshore wind capacity in the UK. And actually the Icelandic electricity can be seen as a better product and thus a better option than massive wind power in the UK. Both hydro- and geothermal power offer stable base load electricity, which is very different from the unstable wind power.

Iceland-UK-BICC-meeting-Nov-2013-Landsvrkjun-Hordur-Arnarson-slide-7With an electric cable between Britain and Iceland (IceLink), the Icelandic energy sector could provide the UK with stable and reliable power from the Icelandic hydro- and geothermal power plants, at very competitive prices. Iceland could also import some of the unstable wind power from the UK; especially during the night. This would give an option to “store” even more of the controllable hydro power in the dams in Iceland during the night. When demand in UK rises during the day this power can then be transferred through the cable to the electricity markets in UK.

The UK wants to be able to move away from fossil fuels towards low-carbon power. What is even more important for the UK is to gain more energy independence and be able to rely on energy from politically stable neighbours (rather than for example importing more LNG from Algeria). Both the nuclear plant at Hinkley Point and plans for more renewable energy in the UK’s energy mix, are important in this context. In addition, a fifth of Britains’ aging power plants are due to close over the coming decade (with further closures in the 2020’s). Thus, the UK needs not only huge investment in energy production and -infrastructure, but also need to secure it self access to numerous reliable energy sources. Therefore the IceLink is a project that undoubtedly will interest the British energy sector and investors.

Iceland Offers Unique Renewable Opportunities

Iceland and Norway are the world’s largest electricity producers (per capita). The reason for this huge electricity production is simple. Compared to the low population, both countries are rich in natural renewable resources that offer good opportunities to produce green electricity at a very competitive price.


Well-Known Business Concept

Like Norway, Iceland has extensive renewable hydropower. Iceland’s geothermal sources are also harnessed for electricity production. In addition, the windy conditions in Iceland may offer interesting possibilities to generate electricity at substantially lower costs than at wind-farms in other European countries.

Norway has numerous electric cable connections with other countries and is a net-exporter of electricity. An important part of the business concept of the cable connections is to be able to use the flexibility of the hydropower to maximize revenues. The Norwegian power companies have the possibility to  “save” the hydropower in the dams during night (when electricity prices tend to be low) and produce electricity at full capacity when prices are high (normally during the day).

This not only maximizes the revenues of the Norwegian hydropower firms, but also opens up the possibility for European power companies to export electricity to Norway during the night. Such exports are especially interesting for European power plants that have high fixed cost and low flexible cost, like wind farms (and nuclear power stations that are operated at a stable capacity).


Win-Win Situation

Iceland has no electrical cable connection with markets outside of Iceland. The country is a closed electric system, but with abundant hydro- and geothermal sources. Thus, heavy industries like aluminum smelters, have been able to access very low priced electricity in Iceland. If Iceland would be connected to a European electricity market, by an electric cable, this would offer European markets access to new sources of reliable renewable energy. At the same time the cable (sometimes referred to as the IceLink) would offer Iceland access to  a market willing to pay substantially higher price for the electricity than the heavy industries are. Thus, an electric cable between Iceland and Europe would create a win-win situation.

Actually, the heavy industries in Iceland would not necessarily close down if there came an electric cable between Iceland and Europe. First of all they have long-term energy contracts (up to 40 years). Secondly, there are numerous unharnessed hydro- and geothermal power options in Iceland. An electric cable to Europe would be like adding a new large consumer that is willing to pay higher price but can only receive a fixed amount of electricity (the capacity of IceLink would possibly be close to 1,000 MW).


The IceLink would mean that new hydro- and geothermal power stations in Iceland would be more profitable than they would be today (by selling the electricity to heavy industries). At the same time the green Icelandic electricity could be offered in Europe at prices that are very competitive. Even despite the long transmission, the Icelandic green  electricity could be a better choice (economically) for the European markets than offshore wind, biomass, coal and/or nuclear. In a nutshell, Iceland is in the position to be the best economic option for other European countries to access more renewable energy.

The illustrations above are from a presentation by Mr. Hörður Arnarson, CEO of Landsvirkjun, presented at the Iceland Energy Summit in London on November 1, 2013.

Successful Energy Summit in London

The Iceland Energy Summit was held in London on November 1, 2013. The event was organized by the British-Icelandic Chamber of Commerce (BICC) and hosted by Bloomberg.

Iceland-UK-BICC-meeting-Nov-2013-CHThe event provided insight into Iceland’s renewable energy resources, the birth and growth of the data storage industry in the country, as well as the search for offshore oil on the Icelandic continental shelf. Strong focus was on a plan for an undersea power cable to connect the British and Icelandic grids. This plan or proposal is attracting strong investor interest, according to Mr. Charles Hendry, the former Energy Minister of the United Kingdom and current Member of Parliament.

Mr. Hendry, who promoted the project, said that there’s “no doubt that in Britain the political will is there, so if there is a political will in Iceland, we want to work together”. According to Mr. Hendry the project offers low-risk, predictable returns attractive to institutional investors including pension funds. The UK is preparing to change policies needed for the cable, Mr. Hendry said.

In May last year (2012), Mr. Hendry helped spur an agreement between Iceland and the UK to explore proposals regarding the cable (sometimes referred to as the IceLink). The cost of the link is still not clear, but if it will go ahead it could probably be completed within 7-10 years.. It would extend more than 1,000 kilometers,  thus be longer than any of the subsea electrical cables currently in operation.

Iceland-UK-BICC-meeting-Nov-2013-Landsvrkjun-Hordur-Arnarson-slide-7Electric cables like that already connect the grids of Norway and Britain to the Netherlands. The Dutch grid operator (TenneT) is planning links between Germany and Norway and the Netherlands and Denmark. There are already connections of this type between Britain and France, between Vancouver island and Canada, between Sardinia and Italy, and between Tasmania and Australia, to name a few well known examples .

According to Bloomberg, Mr. Andrew Perkins, a partner in energy and environmental finance at Ernst & Young, stresses that these assets are attractive to financiers, suggesting that the capital costs to build the IceLink should be financed by the private sector. As close to 100 percent of all electricity generated in Iceland comes from natural renewable sources, and several promising renewable energy options are still unharnessed, the IceLink offers great opportunity for the UK to access substantial green power at a very competitive cost.

Here, at the Icelandic Energy Portal, we will soon be covering the Energy Summit in more details. Note that the slides (and videos) from the event can be downloaded from the website of the BICC.