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Dec 23

Ireland and United Kingdom are best options for electricity exports from Iceland

It would be a positive step for Europe to become connected with Iceland by a subsea electric cable. Compared to other countries in Europe, Iceland has low electricity generation costs. In addition to the attractive electricity price, the Icelandic hydro- and geothermal resources offer very reliable and stable generation.

With this in mind, it is interesting that Iceland’s next door neighbours are electricity markets where the electricity prices are among the highest in Europe. Here we are referring to Ireland and the United Kingdom (UK). What is also important, is the fact that UK and Ireland are much closer to Iceland than for example Denmark, Holland (the Netherlands) or Germany. It is obvious that a subsea electric cable between Iceland and the European mainland would be substantially more expensive than to UK or to Ireland. There fore there are strong arguments for Iceland to consider Ireland or the UK as the best financially feasible options for such a connection.

UK is an excellent option and Ireland even better

UK-Ireland-Electricity-Prices-Industrial-2013_5-3-1

The two graphs (at left and below) show the electricity prices in 2013 in selected European countries, in USA and in Japan. The blue portion of the bars is the cost of electricity including transmission cost. The white bars show the price of the electricity when all the relevant taxes have been added (such as VAT and environmental taxes).

The first graph (chart 5.3.1) shows the electricity price to industries while the second graph (chart 5.5.1 below) is the price to households  (domestic prices), The average price of electricity (excluding tax) to industries in the UK in 2013 was close to 8 pence pr. kWh in 80 GBP/MWh. And the price to households in the UK in 2013 was close to 15 pence pr. kWh (150 GBP/MWh). In Ireland the prices were substantyally higher.

UK-Ireland-Electricity-Prices-domestic-households-2013_5-5-1

In 2013, wholesale electricity prices in the UK were close to 45% of the total price. Thus, the average wholesale electricity cost for industries in the UK in 2013 was close to 35 GBP/MWh, and for households the cost was close to 65 GBP/MWh. This means that the wholesale price of electricity to industries in the UK in 2013 was being close to equivalent of 55 USD/MWh. And the wholesale price to households was close to 100 USD/MWh.

According to Platts, the average wholesale electricity price in the UK in 2013 was close to 45 GBP/MWh, which is more than 70 USD/MWh. In Ireland the average wholesale electricity price in 2013 was higher or close to being equivalent to 80 USD/MWh.

UK-and-Ireland_-Electicity-Prices-Wholesale-2013

For comparison, in Iceland about 80% of all electricity produced is sold to aluminum smelters and other energy intensive industries, at a price close to 25 USD/MWh. If Iceland could sell electricity to UK, the revenues pr. every sold unit of electricity could be close to triple the current price in Iceland. Of course there would be a high transmission cost via subsea cable; probably close 35-40 USD/MWh. Still, the added profits would be substantial – if the electricity would be sold to UK or Ireland at 70-80 USD/MWh . At the same time, the UK or Ireland would get access to reliable renewable energy.

Will the UK be interested in Icelandic CfD’s?

UK-Decc-Energy-Policy-CfD-Strike-Prices-Cover_dec-2013At first glance, one might consider Ireland more interesting market for Icelandic electricity than the UK. It is indeed so that the price of electricity in Ireland would probably justify a submarine cable between Iceland and Ireland. However, the energy policy of the UK makes the UK more attractive for Icelandic electricity suppliers.

The energy policy of the British government involves ensuring new energy projects, by securing a minimum price for the electricity from new generating projects, in special contracts called Contracts for Difference; CfD’s. The minimum electricity price in such contracts (called strike price) is quite high. For electricity from geothermal and hydro power sources the strike prices are equivalent to 155-220 USD/MWh.

UK-Decc-Energy-Policy-CfD-Strike-Prices-Table_dec-2013It is also interesting that the strike price for electricity from new offshore wind farms is equivalent to 220-240 USD/MWh. It is likely that the UK could negotiate with Iceland for a strike price that would be substantially lower, thus saving Uk’s taxpayers money. What the exact price would be would be decided in negotiations between Iceland and the UK, but it could be somewhere between 155-240 USD/MWh. This option should be interesting to both Iceland and the United Kingdom.

Dec 2

UK-Iceland cable on the Global Infrastructure 100 List

A global panel of independent industry experts has identified a subsea electric cable between Iceland and the United Kingdom (UK) as one of the hundred most inspirational and innovative infrastructure projects in the world – many of which are expected to transform the way the world’s populations interact with their cities, governments and environment. This is the first time that an infrastructure project in Iceland is on this list, which is published by KPMG (download the report as pdf here).

KPMG-Global-Infrastructure-100-2014-coverKPMG International’s ‘Infrastructure 100: World Markets Report highlights key trends driving infrastructure investment around the world. In the report, a global panel of industry experts identifies 100 of the world’s most innovative, impactful infrastructure projects. Furthermore, the panel demonstrates how governments are coming together with the private sector to overcome funding constraints in order to finance and build projects that can improve quality of life – both solving immediate needs and planning for future societal demands.

The 2014 report focuses on key trends driving infrastructure investment in four key markets, one of the categories being smaller established markets, which are strong domestic markets open to private finance in infrastructure.

The subsea electric cable between Iceland and the UK is one of 25 projects falling under this market-category. The report describes the project, called IceLink, as an ambitious attempt to connect the power grids of Iceland and the UK. Iceland produces all of its electrical power by the means of renewable energy, such as hydro, geothermal and wind, and has potential well beyond local consumption.

According to KPMG, the total investment in the cable and related production and grid infrastructure in Iceland has been assessed in the range of USD 5 billion. When completed, this clean-tech venture would be the world’s longest subsea power cable, delivering as much as 5 TWh a year of renewable electricity to the UK – at a cost lower than offshore wind in UK territories. KPMG says that UK-based ventures have shown interest in funding the interconnector, while Icelandic power companies will build the power-generating facilities and onshore infrastructure in Iceland

KPMG-Global-Infrastructure-100-2014-enregy-and-resources-list-smallOf all the 100 projects listed in the 2014 KPMG-report, 27 projects are in the sector of energy and natural resources. Besides the IceLink, these projects are for example the Alaska LNG Project, the UK Hinkley Point C Nuclear Power Station, and Russia-China Gas Pipeline.

A total of 25 projects are classified as being in smaller established markets. The IceLink is one of these projects – other projects in this category are for example the Facebook Rapid Deployment Data Center in Luleå in Sweden, the Scandinavian 8 Million City High Speed Rail Link between the capitals of Norway, Sweden and Denmark, and the Rail Baltica, linking Finland, Estonia, Latvia and Lithuania with 960 km of railway track. Although many of the projects in this category face challenges regarding scale and investment, KPMG believes there are good possibilities to realize all the projects with increased access of private investment. With IceLink in mind, a perfect and realistic business model might be a private ownership of the cable, while the Icelandic TSO and the main Icelandic power firms would probably be in majority governmental ownership, possibly with private investors as co-owners.