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Nov 29

Electricity tariff to Elkem could double

With close to 1,100 GWh annually, the ferro-silicon plant of Elkem in Iceland is the 4th largest power consumer in the country. The power is supplied by the state-owned power firm Landsvirkjun. Elkem is a Norwegian firm, owned by China National Bluestar Group.

Current power contract of Landsvirkjun and Elkem was agreed two decades ago, at times when heavy industries were offered very low tariffs when locating in Iceland (as for example advertised in a brochure from the Icelandic government in 1995; note cover at left). The power contract is valid until 2019. Elkem and Landsvirkjun have still been unable to reach a new agreement, so it is not certain if Elkem will continue its Icelandic operations after 2019.

The most likely scenario seems to be a new contract where the power price will align with the market price on the Nordic electricity market (Elspot on NordPool Spot), as was the result in recent negotiations regarding the Norðurál aluminum smelter owned by Century Aluminum. According to current prices, this would result in approximately doubling of the electricity tariff paid by Elkem in Iceland.

Elkem buys 8% of the energy, but pays only 5% of the revenues

Most of the revenues from the electricity sales of Landsvirkjun are derived from the aluminum smelter of Rio Tinto (ÍSAL) in Straumsvík, which supplies Landsvirkjun with close to 1/3rd of it revenues although the smelter purchases only 1/4th of Landsvirkjun’s production.

The second most important customer of Landsvirkjun is the aluminum smelter of Alcoa, as can be seen on the table at left. When taken together, the other power firms in Iceland and the TSO Landsnet are Landsvirkjun’s third most important customer.

The sales to Elkem alone amount to about 8% of Landsvirkjun’s electricity sales, ie. when based on the amount of electricity. Although this is not a very high percentage of the total electricity generated by Landsvirkjun, it is of course important for the power firm to obtain increased revenues from Elkem, as Elkem now only returns about 5% of the income of the company. Actually the percentage for the net-income is even lower, as the power tariffs to heavy industries include the transmission cost (this part of Landsvirkjun’s revenues is forwarded to the TSO).

Power tariffs not to be lower than in Norway or Canada

Elkem has been paying the lowest electricity price of all the industrial companies in Iceland. The CEO of Landsvirkjun has previously said that the current tariff Elkem pays reflects very different economic environment from now, indicating that a sharp increase in the power price would be absolutely normal. Earlier this month (November 2017), the CEO also pointed out that now “there is no reason why the price of electricity should be lower in Iceland than in the markets of [Canada and Norway].” This is a very clear statement, expressing that Elkem may be able to get a new contract where the power price will be aligned to the market price in Norway or Canada, but not lower tariff than that.

Landsvirkjun probably wants more than 100% price increase

In 2016, Elkem paid Landsvirkjun close to USD 18 million for the electricity (estimates by Askja Energy Partners). In a new contract that would come into effect in 2019, Landsvirkjun is probably aiming for a tariff that would mean extra USD 20 millions added to Elkem’s power bill. The total annual power cost of Elkem would then rise to approximately USD 38 millions (those figures include the transmission cost).

As it is possible and even likely that Elkem’s new tariff will be linked or aligned to the Elspot price on the Nordic power market, the power price would of course fluctuate. The given figure of USD 38 millions assumes that the Elspot price will be close to 30 EUR/MWh. If/when the price will become higher, the tariff of Elkem would rise. Probably the only option for Elkem to receive a more positive tariff for the company in Iceland after 2019, is to expand its operations in the country. For example it will be interesting to see if Elkem offers Landsvirkjun and the Icelandic government to move some of its solar-silicon production from Norway to Iceland.

NB: All figures on revenues in the table above are approximate / rounded. More precise figures are available only to customers of Askja Energy Partners. 

Nov 23

Electricity statistics update 2016

The Icelandic National Energy Authority (NEA) has published statistics regarding the electricity industry in 2016. You can access the publication in English on NEA’s website (link to the pdf-file). Here are some of the key numbers:

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TOTAL ELECTRICITY GENERATION:          18,549 GWh (2016)

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ELECTRICITY GENERATION SHARE BY SOURCE:

Hydro Power 13,470 GWh          73%
Geothermal Power     5,067 GWh         27%
Other 11 GWh            0%
Total 18,549 GWh        100%

NB: 2016 is the fourth year the NEA publishes data for generated wind power in Iceland. Electricity generated by wind power (9 GWh) and fossil fuels (3 GWh) was to small amount to be measured as a percentage on the scale of the table above. The combined wind- and fossil fuels generation amounted to 12 GWh, which was less than 0.001% of all electricity generated in Iceland in 2016.

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ELECTRICITY POWER CAPACITY:  

Hydro Power  1,988 MW
Geothermal Power     665 MW
Wind Power         3 MW
Fossil Fuels     117 MW
Total Power Capacity 2,773 MW

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ELECTRICITY CONSUMPTION SHARE:

Energy Intensive Industries 77%
General Consumption     18%
Other (losses)     5%
Total 100%

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You will find more Icelandic energy data in our special data-section.

Nov 21

Icelandic wind power becoming highly interesting

So far, less than a handful of modern wind turbines have been constructed in Iceland. It has simply been more economical to harness geothermal- and hydro resources for power generation. This situation may be changing, as it is becoming economically interesting to harness Icelandic wind energy. In this article we take a look at some hydropower projects that are currently being considered in Iceland, comparing them to the cost of utilising wind energy. It turns out that harnessing the Icelandic wind may indeed becoming a very interesting investment.

Astonishing cost decline of wind power

Hreyfiafl-wind-power-cost-development_2009-2017_Lazard-LCOE-version-11

LCOE for onshore wind. Analysis by Lazard.

It has been called “the fastest and most astonishing turnarounds in the history of energy“: In some areas, building and running new renewable energy has become cheaper than just running existing coal and nuclear plants.

As Iceland is or at least has been quite special, by generating all its electricity through harnessing fairly low-cost geothermal- and hydropower sources, one might wonder if the declining cost of wind and solar will have any consequences for the Icelandic power sector? The answer is not very complicated. Due to Iceland’s northerly location, solar power is not becoming a real competitive option in generating electricity in Iceland. On the other hand, Iceland offers numerous locations with very high wind capacity factor. Thus, the declining cost in the wind power industry may soon drive important changes in the Icelandic power sector, where wind farms will become a lucrative business.

Several small [expensive] hydropower plants being prepared

Several small hydroelectric projects (with a capacity below 10 MW) are currently being prepared in Iceland. These include 9.9 MW Brúará hydropower station in South Iceland, 9.8 MW Svartá hydropower station in Northern Iceland, 9.3 MW hydroelectric plant in glacial river Hverfsfljóti in Southwest Iceland, and 5.5 MW Hólsvirkjun hydropower station in Northern Iceland. The combined capacity of these four stations would be close to 35 MW. With an estimated cost well above 3 million USD pr. each megawatt, all those projects will be quite costly and probably more costly than harnessing Icelandic wind energy.

Somewhat larger project is the 55 MW Hvalá River hydropower station, to be constructed in the faraway Northwestern part of Iceland (Vestfirðir or West Fjords). This power plant will be quite costly and the transmission cost will be high, as the project is far away from the current transmission system. However, due to the high reliability of the Hvalá station with its mountain reservoirs, the project can be seen as quite sensible. On the other hand, wind farms may also offer quite strong reliability, such as if constructing three 30-40 MW of wind power in different locations in or close to the West Fjords. By locating the wind farms adjacent or close to the current transmission lines, such a project might be less costly than the somewhat expensive Hvalá hydroelectric station with its high transmission cost.

Icelandic wind power becoming competitive

According to a recent study published by the federation of energy and utility companies in Iceland (Samorka), the levelized cost of energy (LCOE) for upcoming Hvalá River hydropower station is expected to be 49.70 USD/MWh (and then the transmission cost is not included). In comparison, in its most recent “levelized cost of energy analysis” 
(LCOE), financial advisory and asset management firm Lazard now estimates the LCOE for wind farms in good locations in the USA as low as 30 USD/MWh (as explained on the slide at top of the article).

Slide by IIT Comillas and MIT.

It is also interesting that according to a new study by the universities IIT Comillas in Madrid and MIT in Boston, wind farms in Iceland could generate electricity at LCOE close to or even below 35 USD/MWh. This low cost beats all planned geothermal projects in Iceland and is lower cost than most of the hydropower projects under consideration, making the development of wind farms in Iceland highly interesting.

However, it is still interesting to invest in new geothermal- and hydropower plants in Iceland, as they in general offer very reliable power production. Iceland is an isolated power market with no interconnectors to other countries, and thus the country has to rely on domestic access to spare capacity when the wind would not be blowing well enough.

For wind farms to be competitive in Iceland, they need to be cheap enough to make it an interesting option to increasing the output from the robust system of the Icelandic hydro reservoirs (such process of adding new turbines to conventional hydropower stations has already started in Iceland). By such methodology it will be possible to add substantial capacity in the power system without constructing expensive new hydropower reservoirs or geothermal stations. Also, low-cost Icelandic wind power could be harnessed to save water in the current reservoirs, and/or work as pumped hydroelectric storage. Due to such interesting possibilities, it is likely that wind farms will soon be constructed in Iceland even without any connection with foreign power markets. Of course an interconnector like IceLink would make Icelandic wind power even more interesting to harness.

One wind farm instead of four hydroelectric plants?

Earlier we mentioned the four fairly small hydroelectric projects (each below 10 MW) currently being prepared in Iceland. When comparing how much wind power would be needed to offer equal generation as the four hydropower stations, it seems quite clear that harnessing the Icelandic wind would be less costly and have less negative environmental impacts.

The total power capacity of the said four hydropower stations (Brúará, Svartá, Hverfisfljót and Hólsvirkjun) will/would amount to approximately 35 MW. Some of them would have the advantage of offering quite stable generation all year around, while a project like the 9.3 MW Hverfisfljót hydropower station would be harnessing glacial water where the flow in winter is very low. This means that the yearly capacity-factor of the Hverfisfljót station will probably be quite low; even under 50%.

Of course a wind farm would deliver more fluctuating production than the combined four hydropower stations, thus needing more backup power. And in the long run, hydropower is probably almost always the lowest cost option (due to very long life time), at least if the environmental damage by dams and head-race canals of the hydro projects are not taken into account.

It is not simple to estimate how much Icelandic wind power would be needed to generate a similar amount of electricity as the four hydropower stations. Probably a well-located Icelandic wind farm(s) with a capacity of approximately 70-80 MW could generate as much electricity annually as the four hydropower stations of totally 35 MW. The cost of the hydroelectric stations would most likely be close to USD 120 million. The cost of 70-80 MW wind farm in Iceland could be substantially lower; probably below USD 100 million.

When also having regard to the environmental impact, the option of wind power in Iceland becomes even more attractive. Besides the wind farm(s) of 70-80 MW being less costly than the four hydropower stations of 35 MW, the wind farm offers the chance of avoiding severe environmental damages to some of Iceland’s wild and free running rivers. For example in the case of the Hverfisfljót hydropower project, the waterfalls in the river-canyon would become close to dry substantial part of the year. However, the key issue for harnessing Icelandic wind power is the declining cost in wind energy technology. Which now is making wind power a real option in the Icelandic energy sector.

NB: Icelandic wind power development firm Hreyfiafl has same ownership as Askja Energy Partners. Hreyfiafl aims to have its first wind farm in Iceland in operation within five years from now. Icelanders can follow the process through the Twitter-account of Hreyfiafl.

Nov 18

Þeistareykir geothermal station in operation

Iceland’s newest power plant is the 45 MW Þeistareykjavirkjun in Northeast Iceland. The owner and operator of the plant is the Icelandic national power company Landsvirkjun.

The silicon-metal plant of PCC.

The construction of this first phase of the power plant started in the spring of 2015. Most of the generation will be transmitted to a silicon metal plant of PCC. The PCC silicon plant will utilize a total of 52 MW in the start. According to the power contract with Landsvirkjun, PCC will gradually increase its power demand up to 58 MW. Annual energy delivery is expected to start at 456 GWh and then gradually increase to 508 GWh per annum within the next 4 years (article 3 of the power contract).

As the 45 MW phase of the Þeistareykir plant will only generate 360-370 GWh annually, Landsvirkjun must also deliver power from other power plants to PCC. However, Landsvirkjun is already constructing next phase of Þeistareykir, adding another 45 MW. This second phase of the geothermal plant is scheduled to become operational in next April (2018), making the total capacity 90 MW. At this stage, the additional capacity can only be utilised by power consumers in the Northeastern part of Iceland, as the national transmission grid has several bottlenecks.

Þeistareykir geothermal plant.

This most recent geothermal project is believed to be the most economical of all the upcoming geothermal power projects in Iceland. According to information from Landsvirkjun, the cost of this first 45 MW phase is close to USD 200 millions, which accounts for approximately USD 4.5 millions pr. MW. With a second phase, the total cost for the 90 MW plant is expected to be close to USD 330 millions. Then the cost of each MW will be close to USD 3.7 millions.