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Serious geothermal troubles for Reykjavík Energy

Few months ago, we wrote about the troubles of Reykjavík Energy regarding its 303 MW Hellisheiði geothermal plant. Now, an Icelandic newspaper has looked into the matter, and it seems that the future generation of the Hellisheiði plant is somewhat uncertain. Following is a rough translation of a story published yesterday in the daily paper Fréttablaðið:

Icelandic energy firm ON, a subsidiary of Orkuveita Reykjavíkur (Reykjavik Energy) has planned a six-year drilling program, costing ISK 13 billion, just to maintain enough steam for the Hellisheiði geothermal plant. The plant was constructed in three phases in the period 2006-2011. If nothing will be done, this fairly new geothermal power plant will experience rapidly falling generation.

Reykjavik Energy has already announced a tender for the drilling of seven new geothermal wells over the next three years. It is not yet known how many new wells in total will be needed to ensure full generation of the plant. But a newly revised plan of ON allows for 15 new wells to be drilled over the coming ten years.

This is somewhat less drilling than ON had anticipated necessary when the power company first introduced its drilling program last autumn (2016). However, the situation has turned out to be more serious than originally thought in 2013, when the company first admitted the problem of falling steam. The fact is, that very soon after the Hellisheiði station was fully constructed it became clear that the plant would also be needing geothermal steam from the nearby Hverahlíð geothermal area.

The geothermal resource at Hverahlíð now supplies Hellisheiði with enough steam for 50 MW of power capacity. The original geothermal area which the Hellisheiði station is utilizing, now only supplies enough steam for 225 MW (but the plant has an installed capacity of 303 MW). In addition to the cost of drilling for more steam, Reykjavík Energy also needs to invest an estimated ISK five billion over the next five years, for re-injecting water into the deep geothermal source.

Already in 2012, the management of Reykjavík Energy had realized that the Hellisheiði geothermal plant was experiencing falling steam, thus not being able to deliver expected sustainable generation. The following year (2013) it was decided to connect the plant with the nearby geothermal area called Hverahlíð. Until then, Reykjavík Energy had been planning a new 90 MW geothermal station at Hverahlíð, to further supply aluminum industry in Iceland.

The new pipeline from Hverahlíð started delivering steam to the Hellisheiði station in early 2016. The cost of the pipeline was more than ISK three billions. If this pipeline-project would not have been realized, Reykjavík Energy would have needed to drill several new geothermal wells, between 2012 and 2014, at an estimated cost of ISK 700 millions for each well. Such drilling project at that time would have been almost impossible, as the company was in critical financial situation.

In 2013, scientists at Reykjavík Energy predicted that due to over-exploitation of the geothermal resource, the performance of Hellisheiði station would decline by an equivalent of seven MW on average annually. By then, the management realised that the time-frame in which the 303 MW power plant had been constructed, had been unrealistically short.

Now it is generally accepted that geothermal resources in Iceland need to be utilized in smaller phases, to ensure enough geothermal steam for the turbines. And the result of each modest step needs to be analyzed before starting on the next phase.

Bjarni Bjarnason, CEO of Reykjavík Energy and Chairman of its subsidiary ON, now says that soon after the Hellisheiði plant came into full operation, it became clear that the geothermal area utilized by the plant was not performing as the company had hoped for.

“After mid-year 2014, it became clear that the area was not delivering as sustainable power as had been expected. The falling generation was equivalent to loosing 20 MW of capacity each year, which was much more than had been expected when the plant was designed and constructed.”

Bjarnason acknowledges that this outcome was a shock. And he adds that last autumn (2016) when the company was deciding on future plans and budget, the scenario was “very dark”. [It should be noted that Bjarnason was not working at Reykjavík Energy when decisions where taken regarding construction of the Hellisheiði plant].

The situation Reykvík Energy was faced with in the autumn of 2016, was to drill up to 26 new geothermal wells, just to maintain the production of the Heillisheiði plant. The total new investment in the coming five years was expected to be ISK 27 billion – just to keep the generation of the plant stable at a satisfactory level.

At that time the company launched a special program to analyze the geothermal resource. This research lead to a conclusion which is more positive than the previous estimate from last autumn. It is now expected that the drilling needed to keep the production stable will have a total cost of ISK 19 billions.

This lower cost reflects the new estimate of the resource, resulting in fewer new wells needed to deliver enough energy for the plant. The new geothermal wells are expected be drilled both in the Hellisheiði and Hverahlíð areas, and are supposed to maintain enough steam for 285 MW.

Asked if the decision to connect the Hellisheiði Plant with the geothermal area in Hverahlíð was a mistake – given the current need to undertake a major drilling for more steam – Bjarnason points out that the pipeline to Hverahlíð was both successful and necessary to save the operation of the Hellisheiði plant.

“ When we look at our decision [to connect the Hellisheiði plant with the Hverahlíð geothermal area] it was absolutely correct. And the project itself was successful; no technical problems nor accidents occurred during the construction of the pipeline, despite the snowy winter that year”.

Bjarnason also points out that the steam from Hverahlíð has given Reykjavík Energy the opportunity to reduce exploitation of older geothermal areas. And he claims that it has already become obvious that the already explored areas have recovered faster than expected.

The total cost of Hellisheiði geothermal plant so far is about ISK 94 billion (close to USD 850 millions or just under USD 3 million pr. each MW). Having regard to this cost, it is clear that the extra cost due to the new geothermal wells (ISK 19 billions) is significant. However, Reykjavík Energy would in any case have needed to drill new wells to keep the production of the Hellisheiði plant stable. If original plans would have been realized, the company would in any case have drilled one new geothermal well every year (on average) to keep the generation stable.

The Hellisheiði plants generates 20% of all revenues of Reykjavík Energy. The profitability (return on investment; ROI) of the plant is considered not to be acceptable. According to the annual report of Reykjavík Energy for 2015, the combined ROI of the two geothermal plants at Hellisheiði and Nesjavellir was 4.8% for hot water production and 4.9% for electricity generation. This is much lower return than the normal target for profitability in competitive energy services, where 7-8% return may be seen as acceptable.

Whether the new geothermal wells will return the generation at the Hellisheiði geothermal plant into balance, and offer a satisfactory ROI, remains to be seen. The success of drilling for geothermal steam is always uncertain.