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Jul 22

UK-Iceland power cable needs 1,459 MW of new capacity

A subsea HVDC power cable between Iceland and the United Kingdom (UK) would call for proportionally extreme increase in Iceland’s generation capacity. According to a new report by Kvika Bank and Pöyry, Iceland needs to build new power capacity of 2,137 MW to supply both the cable and the domestic demand. The figure for the necessary new capacity for the cable only is expected to be 1.459 MW (as shown on the table below). The rest of the new capacity is to meet expected increase in domestic demand for electricity (until 2035).

IceLink-Kvika-Poyry_New-Capacity_Askja-Energy-Partners-Twitter_July-2016The cable is normally referred to as IceLink. The report by Kvika and Pöyry (available in Icelandic only) claims that high proportion of the needed new capacity for IceLink can be met with wind power (today Iceland has very small wind power industry, as new geothermal- and hydropower projects have been the least costly way to generate electricity in Iceland). The authors of the report expect that 550 MW of new wind power would be constructed to meet demand by the cable.

The second largest increase in Icelandic power capacity would be in the form of hydropower refurbishments (which would probably mostly be new turbines in current hydropower stations). This figure is expected to be 448 MW. However, the report does not explain in a clear manner how these refurbishments would be carried out. From the report it is also somewhat unclear why it is believed that 550 MW of new wind power will be a good opportunity for the business case – instead of for example somewhat less wind power and somewhat more hydropower.

Iceland-Small-Hydro-Power-Bruarvirkjun-Project_9-MWSubstantial part of the expected new Icelandic capacity until 2035 would come from new small hydropower stations. Such new small hydropower stations, each with a capacity less than 10 MW, would in total be close to 150 MW. This would probably mean dozens of new small running-river hydropower projects in Iceland. Such projects tend to be more costly than the traditional large Icelandic hydropower projects. However, high strike price for the electricity make such expensive projects financially viable, according to the report.

According to the report, 276 MW of new traditional hydro- and geothermal power will be needed to meet demand from the cable. Most of this capacity will be in geothermal (245 MW).

IceLink-Kvika-Poyry_New-Capacity-and-Generation_Askja-Energy-Partners-Twitter-_July-2016-2When also taking increased domestic power demand into account, the total new traditional hydro- and geothermal capacity needed by 2035 is expected to be 954 MW; 124 MW in traditional large hydropower and 830 MW in traditional geothermal power. Today, Iceland has 665 MW of geothermal power (and 1,986 MW of hydropower). So the expected increase in utilization of Icelandic geothermal power is quite enormous. It should be noted that figures on traditional hydro- and geothermal power projects in the report are based on the Icelandic Master Plan for Nature Protection and Energy Utilization.

According to the report, considerable part of the new Icelandic power capacity to be developed is to meet expected increased demand from heavy industries in Iceland. Today, heavy industries in Iceland (which are mostly aluminum smelters) consume close to 80% of all electricity generated in the country. According to the report by Kvika Bank and Pöyry on IceLink, all the three aluminum smelters in Iceland will continue their operations in the coming years and decades. And the authors of the report expect that in the coming years and decades power demand of heavy industries in Iceland will increase. It is noteworthy that such assumptions could change dramatically, if for example one of the aluminum smelters in Iceland would close down.

Iceland-Geothermal-Theistareykir-areaFinally we should mention that if/when IceLink will be constructed, it is expected that the total increased power capacity in Iceland will be around 77% (increase from beginning of 2016). The increase in generation will be somewhat more or close to 68%. According to the above mentioned report, all the projects to meet this increase will be developed in the next 15-20 years. We will soon be revisiting this subject, explaining in more details what power projects will be needed to meet this high increase. Obviously such an increase will/would make Iceland’s position as the world’s largest electricity producer even more pronounced.

Jul 17

Cost of IceLink power cable: 2.8 billion EUR

According to a new report by Kvika Bank and Pöyry, prepared for the Icelandic Ministry of industries and Innovation, a subsea power cable between Iceland and the United Kingdom (UK) will cost EUR 2.8 billion (USD 3.1 billion).

HVDC-Icelink_Cost_Feb-2016-3This central cost scenario includes the 1,200 km long cable with a capacity of 1,000 MW, and the converter stations at both ends of the cable. When adding the onshore transmission installations needed in Iceland for connecting the cable to the power system, the total cost (central scenario) will be close to EUR 3.5 billion (USD 3.9 billion).

The report and additional material on the IceLink-interconnector can be downloaded from the Ministry’s website (the report is in Icelandic only). Note that all cost figures quoted in this article refer to the report’s central export scenario (there are several other scenarios, including a smaller cable of 800 MW).

To realize the project, it will be necessary for the British government to make a commitment of a minimum strike price of approximately 96-99 GBP/MWh (close to 130 USD/MWh).

HVDC-Icelink_strike-prices_Feb-2016-2Such a strike price would be quite similar to the strike price for new nuclear energy in the UK (as explained on the website of the UK government). And it would be substantially lower than recently agreed strike prices for new offshore wind power.

Now it has to be seen if the UK government wishes to pay GBP 115-120 for megawatt-hour of offshore wind power generated in British waters, or pay GBP 96-99 GBP for Icelandic renewable energy.

It should be noted that most of Iceland’s generation is and will be produced by hydropower and geothermal power (wind power in Iceland will increase but still be fairly small share of the total generation). This offers IceLink the possibility of much more flexibility than new British offshore wind power does. We, here at Askja Energy Partners, will soon be explaining further how the Icelandic power for IceLink will be generated.  Stay tuned!

Jul 9

Iceland is the greenest energy country in Europe

EU-EFTA-Renewable-Share-in-Gross-Energy-Consmuption_Askja-Energy-Partners-2016Probably not many of our readers are aware of the interesting fact that apart from the Scandinavian countries, Latvia is the greenest energy country in the European Union (EU). Only Sweden and Finland have a larger share of green energy in their gross energy consumption. However, the two greenest energy countries in Europe are Iceland and Norway (who are not members of the EU, but members of the European Free Trade Association; EFTA).

On the graph above you can see the share of renewable energy (percentage) in gross final energy consumption of each country within the EU and EFTA (the bars show the top-20 countries).

Iceland and Norway are clearly the leaders, with 77% and 69% renewable energy share respectively (in gross energy consumption). Having in  mind that no country in the world generates as much green power per capita as Iceland, it is not surprising that Iceland has the highest share of renewable energy in the gross energy consumption of all the states within EU and EFTA (with regard to energy consumption, Iceland is actually the greenest of all countries in the world).

Have in mind that the average share of renewable energy in the gross energy consumption of all the countries within the EU is currently close to 16%. And EU has the official and binding goal of increasing this share to 20% no later than 2020.

Europe-Renewable-Share-in-Gross-Energy-Consmuption_Askja-Energy-Partners-2016It is also worth noting that there are European countries outside of EU and EFTA that have very high share of renewable energy in their gross consumption mix (as can be seen on the graph at left). This especially applies to Albania (31%) and Montenegro (37%), which puts these countries in 6th and 8th place respectively (on the European list).

It is also interesting how extremely low the share of renewable energy is in Russia’s gross energy consumption (even hough Russia is the world’s fifth largest hydropower producing country). Also note how low the share of renewable energy is in countries like the UK and Holland. They need to do much better! Finally, note that not all European countries are included on the graph (countries that are not included in the data published by Eurostat, apart from Russia).

Main sources:
Eurostat – Information about consumption of energy
Eurostat – Share of renewable energy in gross final energy consumption
Eurostat – Energy from renewable sources (table 1).

European countries not included on the list above:
Andorra, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Georgia, Kazakhstan, Lichtenstein, Moldova, Monaco, San Marino, Ukraine, and the Vatican.

Jul 2

Oil prices must rise… some day

In last February we published an article explaining that the then very low oil price (31-32 USD/barrel) were not sustainable. In the article we focused on why oil prices will soon need to be approaching 60 USD/barrel and then head towards approximately 80-90 USD/barrel.

Oil-Supply-Demand-IEA__2016-2017_June-2016Now, only five months later, the price of oil is close to 50 USD/barrel. This does not mean that higher oil price is here to stay, nor does it mean that a price close to 80-90 USD/barrel is just around the corner. The world is still experiencing quite higher crude oil supply than consumption (demand), which can also be described as over-supply of crude oil. This means that oil price may stay quite low for some time (and even become lower than it currently is). But looking a bit further ahead, the price of oil will need to be approaching 60 USD/barrel and then head towards 80-90 USD/barrel. Else, there will not be enough oil for the world.

The graph above is from IEA’s June report, predicting that oil supply and demand is heading fast towards balance, supply to be outstripped by demand in the second half of 2017. Although this prediction by the IEA may be somewhat optimistic, i.e. it may take longer time for reaching balance in the oil market, it is obvious that in the long run the over-supply will vain. And then we will eventually again experience substantially higher price for crude oil than we have today.

Oil_Global-Liquids-Supply-Cost-Curve-Explained_Askja-Energy-Partners_June-2016To explain this further, we have updated our chart (at left) explaining the cost of future’s oil production. The graph shows where the world’s oil will come from in 2025 and at what cost.

In 2025 very substantial amount of the world’s oil will come from currently producing oil fields. However, due to decline in those oil fields and due to growing oil consumption, we will also need oil from new fields (which have already been discovered and are being developed). And to be able to bring those fields in production, we will need quite high oil price.

Large share of the oil consumed in 2025 will be coming to the market even if the oil price will only be in the range of 60-80 USD/barrel. But if we are hoping to avoid oil supply crisis, the oil price needs to become even higher. Like close to 90 USD.

To ensure all this oil will be brought up from the ground, we will need substantially higher oil price than we have today. Thus, it is likely that within the next decade we will see the price of oil approach 90 USD/barrel (in present USD value).

Bogle-Vanguard-Nobody-knows-nothingOf course the oil price may in some periods become higher and sometimes it will be lower. And keep in mind that it is impossible to predict with any precision how oil consumption (oil demand) will develop in the world (the same applies to prediction for renewable energy growth). No one knows what the price of the black gold will be at a certain point of time in the future (remember the wise advice Jack Bogle received early in his carrier!). However, if the world economy is going to keep on growing, like we are used to, we will need crude oil.  And a lot of it. A decade from now it is unlikely we will have all that oil unless we are willing and able to cover a production cost of at least approximately 90 USD/barrel.

The unknowns are many and the oil markets are extremely sensitive to all kinds of events. We don’t know how the economy in Asia will grow in the coming decade. And we don’t know if we are soon to experience enormous growth in new types of vehicles, using electricity instead of fossil fuels.

BNEF-EV-Sales-Prediction-2016If the 2020’s will be the decade of the electric car, as Bloomberg New Energy Finance (BNEF) now predicts, oil demand may become a lot slower than the oil companies are assuming. Which could result in continued over-supply of oil. So it is to be seen how growing production – and lower costs – of EV’s, will affect investment decisions by the oil companies. Stay tuned!