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The Bitcoin Mines of Iceland

Earlier this month (December 2013), an article in the New York Times told us about the mines of bitcoin that are situated “on the flat lava plain of Reykjanesbær” in Iceland. This article, and several other recent articles in the world’s media about bitcoin, have put a limelight on Iceland’s extremely reliable hydro- and geothermal power. Where companies are offered long time electricity contracts at excellent predictable rates. And the bitcoin mines in Iceland are good example of how Iceland is well situated as a very accessible data storage centre.

Bitcoin-imageBitcoin is of course the decentralized digital currency and payment network, created few years ago by pseudonymous  developer Satoshi Nakamoto. The bitcoin network is based on an open source protocol, which makes use of a public transaction log. A master-list of all bitcoin transactions shows who owns what bitcoins currently and in the past, and is maintained by a decentralized network that verifies and timestamps payments. The operators of this network, known as miners, are rewarded with transaction fees and newly minted bitcoins.

As more Bitcoin are mined, increasingly greater amounts of computing power, and thus electricity, are required. The fastest miners on the market now sell for thousands of dollars, on top of whatever electricity costs you have to pay to keep what amounts to a supercomputer running 24/7. So how do you keep those costs in check? According to Business Insider you of course pool your resources and move to Iceland.

At the data centre facility in Reykjanesbær in Southwest Iceland, where you can find the Bitcoin mines, more than houndred whirring silver computers are the laborers of the virtual mines where Bitcoins are unearthed. To get there, you pass through a fortified gate and enter a featureless yellow building. After checking in with a guard behind bulletproof glass, you face four more security checkpoints, including a so-called man trap that allows passage only after the door behind you has shut.

The custom-built computers, securely locked cabinet and each cooled by blasts of Arctic air shot up from vents in the floor, are running an open-source Bitcoin program. They perform complex algorithms 24 hours a day. If they come up with the right answers before competitors around the world do, they win a block of 25 new Bitcoins from the virtual currency’s decentralized network. The network is programmed to release 21 million coins eventually. A little more than half are already out in the world, but because the system will release Bitcoins at a progressively slower rate, the work of mining could take more than 100 years.

Bitcoin-Iceland-Data-Centre-Emmanuel-Abiodun

“What we have here are money-printing machines,” said Emmanuel Abiodun, 31, founder of the company that built the Iceland installation, shouting above the din of the computers. “We cannot risk that anyone will get to them.”

Mr. Abiodun was a computer programmer at HSBC in London when he decided to invest in specialized computers that would carry out constant Bitcoin mining. He is one of a number of entrepreneurs who have rushed, gold-fever style, into large-scale Bitcoin mining operations in just the last few months. These entrepreneurs or digital miners believe that Bitcoin will turn into a new, cheaper way of sending money around the world, leaving behind its current status as a largely speculative commodity.

The computers that do the work eat up so much energy that electricity costs can be the deciding factor in profitability. There are Bitcoin mining installations in Hong Kong and Washington State, among other places, but Mr. Abiodun chose Iceland, where geothermal and hydroelectric energy are plentiful and cheap. And the arctic air is free and piped in to cool the machines, which often overheat when they are pushed to the outer limits of their computing capacity. And Mr. Abiodun prides himself on using renewable power.

In just a few months, that installation has generated more than $4 million worth of Bitcoins, at the current value, according to the company’s account on the public Bitcoin network. He is also expanding his Icelandic operation, shipping in about 66 machines that have been running for the last few months near their manufacturer in Ukraine. Mr. Abiodun said that by February, he hopes to have about 15 percent of the entire computing power of the Bitcoin network, significantly more than any other operation.

Verne-Global-data-centre-iceland-low-cost-green-powerToday, all of the machines dedicated to mining Bitcoin have a computing power about 4,500 times the capacity of the United States government’s mightiest supercomputer, the IBM Sequoia, according to calculations done by Michael B. Taylor, a professor at the University of California, San Diego. The computing capacity of the Bitcoin network has grown by around 30,000 percent since the beginning of the year.

Inside the Iceland data center, which also hosts servers for large companies like BMW and is guarded and maintained by the company Verne Global, strapping Icelandic men in black outfits were at work recently setting up the racks for the machines coming from Ukraine. Gazing over his creation, Mr. Abiodun had a look that was somewhere between pride and anxiety, and spoke about the virtues of this Icelandic facility where the power has not gone down once. This is no surprise, as it is a known fact that the Icelandic electricity system is one of the most reliable in the world.

Interesting Development in UK Electricity Strike Prices

Earlier this month (December 2013), the British Department of Energy and Climate Change (DECC) introduced the strike prices that will be on offer to energy developers in the coming years.

UK_DECC_Final_Document_-_Investing_in_renewable_technologies_-_CfD_contract_terms_and_strike_prices_UPDATED_6_DEC-coverThis new regime especially focuses on increasing investment in new renewable energy projects. According to Ed Davey, UK’s Energy and Climate Change Secretary, the new levels of support are designed to provide certainty to investors and will ensure the UK meets its 30 percent renewable electricity target in 2020 (doubling the current percentage of electricity generated from renewable sources, which now is 15 percent). The package will deliver record levels of investment in green energy by the end of the decade (GBP 40 billion) and is expected to attract investors from around the world so Britain can replace its ageing power stations, ensure access to sufficient electricity, reduce greenhouse gas emissions, and create green jobs.

The geothermal industry is  likely to welcome the plan by the UK Government to increase geothermal strike price by extra 20 GBP/MWh each year, meaning geothermal developers can expect at least 140-145 GBP/MWh in the coming years. It is also interesting, that hydropower schemes have been allocated a boost of extra 5 GBP/MWh, with strike prices to be 100 GBP/MWh. However, most of the new green electricity will come from offshore wind power, where the strike prices will be 140-155 GBP/MWh.

Iceland-Electricity-HVDC-Cable-to-Europe-at-competitive-prices-McKinsey-2012It is worth having in mind that Iceland could most likely offer the UK base-load green electricity (from geothermal- and hydropower sources) at substantially lower prices than the average strike prices. A recent independent report by the well known management and consulting firm  McKinsey, introduced a positive view towards constructing an interconnector (HVCD cable) between Iceland and Europe. According to McKinsey, such an interconnector could offer substantial cost savings for the buyer of the Icelandic electricity.

McKinsey puts forward the idea that price for the Icelandic electricity might be somewhere between 50-95 GBP/MWh (60-115 EUR/MWh). This is a much lower price than the UK strike price for offshore wind power.  By sharing the benefits, offered by the cheaper Icelandic electricity, between Iceland and the UK the strike price for the Icelandic electricity could possibly be as low as 75 GBP/MWh (which is equivalent to 90 EUR/MWh and approximately 125 USD/MWh). And even if the strike price for the Icelandic electricity would be close to 95-100 GBP/MWh (115 EUR/MWh or 155 USD/MWh), this would be lower than the British strike price for geothermal-, hydro- and wind power.  Therefore it is quite clear that an electric interconnector between Iceland and UK is a very interesting business opportunity.

The Nordic Energy Infrastructure is Gaining Interest

Public ownership is widespread in the energy sector of the Nordic countries. This especially applies to the transmission system operators (TSO’s). Strong state ownership is also the norm regarding all the main electricity producing companies and oil exploration companies in the Nordic countries. However, private investment has been increasing in the Nordic energy sector, especially in energy infrastructure projects and renewable energy production.

Nordic-Energy-Perspectives-CoverThe Norwegian electricity company Statkraft and the Norwegian TSO Statnett are both 100% owned by the Norwegian state. Norwegian oil giant Statoil is 70.9% owned by the Norwegian state.

The Swedish electricity company Vattenfall is 100% owned by the Swedish state and so is the Swedish TSO Svenska Kraftnät. Finnish electricity company Fortum is 50.76% owned by the Finnish state. And the Finnish TSO Fingrid is 53.1 % owned by the Finnish state.

Icelandic electricity company Landsvirkjun is 100% owned by the Icelandic state. And the Icelandic state owns  87.24% in the Icelandic TSO Landsnet (through 100% state owned Landsvirkjun and Rarik). In Denmark, the Danish state has owned 76,49% in the energy company Dong Energy. And the Danish TSO Energinet.dk is 100% owned by the Danish state.

Thus, all the major Nordic electricity companies and the TSO’s are controlled by the relevant Nordic state, and also the main Nordic oil exploration companies. Although this ownership structure of the Nordic energy sector will probably not change much in the near future, we may be experiencing increased private investments in certain parts of the Nordic energy sector. This seems especially to apply to infrastructure and renewable energy.

Norway-Gassco-PipesSubstantial private investment is already to be found in Statoil (oil & gas), Fortum (electricity), Fingrid (TSO), and in Dong Energy (oil, gas, heating & electricity). In addition, the Norwegian state has sold large share of the natural gas transportation infrastructure system that links the gas resources of the Norwegian continental shelf with the neighbouring countries. Today, the Norwegian state owns only 45.8% stake in Gassled (through the state owned oil license investing company Petoro), plus its stake through Statoil, which owns 5% in Gassled. The major private investors in Gassled are Abu Dhabi Investment AuthorityCanada Pension Plan Investment Board, and the German insurance and financial services group Allianz (together they own 24.75% in Gassled).

The most recent private investment in the typically state owned Nordic energy sector took place earlier this year (2013). When two funds (managed by Goldman Sachs) and two Danish pension funds (Arbejdsmarkedets Tillægspension; ATP, and Pension Forsikringsaktieselskab; PFA) agreed to buy 26% stake in the Danish Dong Energy. When this 2 billion USD deal will be finalized (probably within a few weeks) it is expected that Goldman Sachs will own approximately 19% in Dong Energy, ATP approximately 5% and PFA approximately 2%. The Danish state will still be owner of more than half of the shares in the company.

It is expected that this deal will allow Dong to strengthen its balance sheet (hit by falling electricity demand due to the economic crisis and competition from coal) and to pursue its ambition to become a leading player in offshore wind energy. Thus, the deal has a strong renewable energy aspect. Dong Energy is already European market leader with almost 2 GW of offshore wind power installed in Denmark, Britain and Germany. And the company wants to more than triple that to 6.5 GW by 2020.

UK-Electric-Subsea-Cables-MapThe investments by the Goldman Sachs funds, Abu Dhabi Investment Authority, the Canadian pension fund, and Allianz are good examples of increased interest in the Nordic energy infrastructure and renewable energy. This may be a positive development, having regard to financing of the IceLink (an electric cable between Iceland and the UK). Financing projects like that could be perfect fit for large pension funds and investment vehicles.

Upcoming New World Record Subsea Electric Cables

An electric subsea cable between Iceland and Europe is currently being considered.

HVDC-Euroasia-Interconnector-map-2The cable, sometimes referred to as IceLink, will be approximately twice as long as the longest subsea electric cable today, which is the NorNed cable between Holland and Norway (NorNed is 580 km, with a capacity of 700 MW). It seems likely that we will soon see a substantially longer cable than the NorNed, which will be a new cable between Norway and the United Kingdom (this new cable will be more than 700 km long, with a capacity of 1,400 MW). However, an even more ambitious project is being planned in the Mediterranean; the EuroAsia Interconnector.

The EuroAsia Interconnector project aims to link the power grids of Cyprus, Greece (including both Crete and the Greek mainland) and Israel. The total length of the cable will probably be between 1,000 and 1,500 km, and have a capacity of 2,000 MW. It will travel through an enormous depth of more than 2,500 m.

HVDC-Euroasia-Interconnector-2Firstly, a 330 km cable will link Israel with Cyprus. Further, Cyprus will be connected with the Greek island of Crete via an 880 km long cable. From there Crete will be connected to Greece via a 310 km long cable, providing a connection to the pan-European electricity grid.

In March 2012, Cyprus and Israel initiated a feasibility study to explore the possibility of the EuroAsia Interconector connecting the grids of the two countries. The project is expected to be completed in 36 months from the start of construction. The interconnector will be funded and developed by DEH Quantum Energy, a joint venture consisting of Greece’s DEH and Cyprus’ Quantum Energy, with the Bank of Cyprus as a minority shareholder.

HVDC-Euroasia-Interconnector-1In comparison with the EuroAsia Interconnector, the IceLink between Iceland and Europe seems to be a very positive and even a simple project. While the EuroAsia Interconnector will mainly transfer electricity generated by burning natural gas, the IceLink is based on renewable hydro- and geothermal power. The IceLink is likely to be close to 1,200 km (if connecting Iceland and UK) and the maximum depth of the route is close to 1,000 m. As the depth is one of the main challenges for subsea electric cables, it is interesting that the EuroAsia Interconnector will be at more than twice as much depth as the IceLink.

The EuroAsia project has recently been added to the European Commission’s list of Projects of Common Interest (PCI). This recent list of 248 key energy infrastructure projects was adopted by the European Commission on 14 October 2013. These projects will benefit from faster and more efficient permit granting procedures and improved regulatory treatment, and may also have access to financial support from the Connecting Europe Facility (CEF). The CEF has a budget of EUR 5.85 billion that has been allocated to trans-European energy infrastructure for the period 2014-20. The current plan is to have the EuroAsia Interconnector up and running as soon as 2017.