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Posts from the ‘Aluminum Industry’ Category

Feb 10

Decreased revenues pr. MWh from smelters in 2015

Last year (2015), the price of aluminum dropped from what it was the previous year (2014). Iceland has three aluminum smelters and Landsvirkjun (the National Power Company) generates great amounts of electricity to these smelters.

One of the three smelters, Rio Tinto Alcan (RTA) in Straumsvik or ÍSAL, pays fixed power price (the tariff is linked to US Consumer Price Index; CPI). This contract between RTA and Landsvirkjun was made in 2010, with additions in 2014. The other two smelters have power contracts based on a different model, where the tariffs are linked to the price of aluminum (as the aluminum price is at the London Metal Exchange). These two contracts are from 1999 and 2003 respectively. The contract from 1999 is with the Norðurál smelter of Century Aluminum at Grundartangi, and the contract from 2003 is with the Fjarðaál smelter of Alcoa on Reyðarfjörður.

Electricity-Tariffs-to-Aluminum-Smelters-in-Iceland_2005-2015-and-likely-price-increase-to-Nordural-Century-2019_Askja-Energy-Partners-2016Because of the two contracts having the tariffs linked to aluminum price, revenues of Landsvirkjun pr. each sold MWh to the smelters in 2015 were lower than in 2014.  The graph at left shows how the power price paid by each of the three smelters developed in the period of 2005-2015. Each bar shows the average price of electricity each year, with regard to each smelter. Note that transmission cost is included in the tariffs (the average transmission cost is close to 6 USD/MWh). Landsvirkjun then forwards the transmission payment to the Icelandic TSO; Landsnet.

As can clearly be seen from the graph, the smelter of Norðurál (Century Aluminum) pays the lowest tariff. The smelter of Fjarpaál (Alcoa) pays a slightly higher tariff than Norðurál. The smelter at Straumsvík (Rio Tinto Alcan) has the most recent contract and is currently paying the highest tariff of all the three smelters.

Aluminum-Smelter-in-Iceland-WinterObviously, Landsvirkjun is taking substantial risk when it agrees on having the tariffs linked to aluminum price. At the same time the low tariffs, linked with aluminum price, make the Icelandic smelters of Alcoa and Century Aluminum almost financially risk-free operations. Century has come close to acknowledging this, by stating that its Grundartangi smelter in Iceland “generates significant free cash flow in virtually all price environments”.

Currently, a new power contract of Landsvirkjun and Century Aluminum is being negotiated (the old contract from 1999 runs out in 2019). It seems likely that Landsvirkjun will offer Century a similar deal as Rio Tinto Alcan got in 2010. Which means that from 2019, we may expect that Century’s Icelandic smelter at Grundartangi in Southwestern Iceland, will be paying close to 34 USD/MWh (in todays value), as marked with a red arrow on the graph above. However, it might be a better deal for Landsvirkjun and its owner (which is the Icelandic State) to sell the power to Europe via HVDC cable. With regard to this, it should be noted that the governments of Britain and Iceland are now in discussions on the possibility of such a cable.

NB: Power tariffs to the three smelters are estimated by Askja Energy Partners, with regard to annual reports of Landsvirkjun and several other information as published by CRU Group, EFTA Surveillance Authority, et al.

Aug 18

Electricity tariffs to aluminum smelters in Iceland

In this article you will find information about the electricity prices which the three aluminum smelters in Iceland paid to the Icelandic power company Landsvirkjun in the period 2005-2014. The information is based on several Icelandic and international reports.

  • The Norðurál smelter (Century Aluminum) pays the lowest tariff.
  • The Fjarðaál smelter (Alcoa) pays a slightly higher price than Norðurál.
  • The tariff to the Straumsvík smelter (Rio Tinto Alcan; RTA) is presently the highest.

Very low tariffs to Norðurál (Century Aluminum) and Straumsvík (Alcoa) are the reason for extremely low average price of electricity to aluminum smelters in Iceland. With regard to the low tariffs, it is not surprising that Century Aluminum has stated, that its Grundartangi smelter in Iceland “generates significant free cash flow in virtually all price environments”. The same situation is likely to apply to Alcoa’s Fjarðaál smelter, as it pays on average only approximately 10% higher price for the electricity than Norðurál (Century) does.

Since late 2010, the Straumsvík smelter of RTA has paid a substantially higher price for the electricity than the other two smelters. Before 2010, RTA enjoyed the lowest electricity tariff of all the aluminum smelters in Iceland. With the new contract between Landsvirkjun and RTA in 2010, the base price increased and the power tariff was no longer linked to the price of aluminum.

So far, the new contract between Landsvirkjun and RTA is the only energy contract with aluminum smelters in Iceland where the electricity tariff is not linked to aluminium price. Instead, the price in this new contract is adjusted according to US Consumer Price Index (CPI).

Although the tariff to RTA is much higher than to Alcoa and Century Aluminum, the price to RTA is quite modest. For example, it is much lower than the average price of electricity to aluminum smelters in the United States (USA). And the said tariff is similar or even lower than the average power tariff to aluminum smelters in Africa.

Aluminum-Electricity-Tariffs-to-Smelters-in-Iceland_2005-2014_and-World-Comparison_Askja-Energy-Partners-2015The graph shows the average annual electricity price paid by each of the three aluminum smelters in Iceland to Landsvirkjun, in the period 2005-2014. All prices on the graph include transmission. The red columns are the electricity price to Norðurál at Grundartangi (Century Aluminum), the green columns are the electricity price paid by the aluminum plant at Straumsvík (Rio Tinto Alcan; RTA), and the light blue columns are the tariffs to Fjarðaál in Reyðarfjörður (Alcoa). Note that readers should presume a confidence interval of 5%.

The tariff to Straumsvík (RTA) is currently approaching 35 USD/MWh. In 2014, the smelter in Straumsvík paid almost 45% higher power tariff than Fjarðaál (Alcoa), and close to 60% higher price than the aluminum smelter at Grundartangi (Century).

Landsvirkjun’s average price to the aluminum smelters in 2014 was slightly above 26 USD. Same price for aluminum smelters in Africa that year was about 30% higher, and comparable prices to smelters in the USA and Europe were close to 45% higher. For more information about average power tariffs to aluminum smelters in the world in 2014, we refer to our earlier post; Electricity Tariffs to Aluminum Smelters.

Historically, all electricity sales by Landsvirkjun to the aluminum industry has been linked to aluminum prices (until 2010). Therefore, the tariffs and Landsvirkjun’s revenues have often fluctuated dramatically – according to changes in price of aluminum on the London Metal Exchange (LME). Such fluctuation can clearly be seen on the graph above, especially with regard to the period 2008-2010. Note also that in 2006-08 the price of aluminum was exceptionally high, hence the power tariffs to the smelters in Iceland were unusually high in that period.

From 2019, more contracts with the aluminum smelters in Iceland will be expiring. With regard to the electricity price in the recent contract between Landsvirkjun and Straumsvík (RTA) and other new contracts with smelters in the world, it can be expected that the minmum tariff in renewed contracts with the smelters will not be under 35 USD/MWh (in 2014 prices), and possibly somewhat higher. We at Askja Energy Partners will be presenting frequent news and update on this interesting subject.

Aug 11

Electricity tariffs to world’s aluminum smelters

The graph below shows the average price of electricity to aluminum smelters in different regions of the world (in 2014). The graph both illustrates  the relative amount of aluminum production in the major aluminum production areas/countries, and the electricity tariffs. All prices on this graph include both electricity and transmission cost

Aluminum-Electricity-Tariffs-World-and-Iceland-Landsvirkjun-2014China has become the world’s largest aluminum producer. This is an interesting fact, not least when having in mind that the smelters in China pay on average much higher electricity tariffs than smelters elsewhere in the world.

Iceland is represented by red color on the graph. Note that the column for Iceland includes only the power sold to smelters from the National Power Company (Landsvirkjun). Two other power firms in Iceland also sell power to one of the aluminum smelters in Iceland (there are three smelters in Iceland, owned by Alcoa, Century Aluminum, and Rio Tinto Alcan). However, Landsvirkjun is by far the main electricity provider for the smelters in Iceland. Thus, the average electricity price to the aluminum smelters in Iceland is very close to the average price the smelters pay to Landsvirkjun. Which was just above 26 USD/MWh in 2014.

Aluminum production in Iceland is relatively unimportant in the global context (about 0.8 million tons of the total of close to 54 million tons in 2014). What is more interesting, is the fact that the electricity price the smelters pay Landsvirkjun (the average price) is one of the lowest in the world. In 2014, it was close to being exactly the same as the average price to smelters in the Middle East (which are mostly smelters in the Persian Gulf States, taking advantage of very cheap electricity from natural gas power stations). And the average price to smelters in Iceland is only slightly higher than the average price to aluminum smelters in Canada, and much lower than the tariffs to smelters in the USA.

However, the average price to aluminum smelters in Iceland is likely to increase substantially in the coming years – when major contracts are up for renegotiation.  Next such power contract is a contract between Landsvirkjun and Century Aluminum, regarding the Norðurál Smelter at Grundartangi. The present contract expires in 2019.

May 27

Aluminum and Icelandic GDP

According to recent research at the University of Iceland, direct contribution of the aluminum industry in Iceland has been around 2.9 percent of gross domestic production (GDP). This is the average percentage for the period 2007-2010. In this period, the contribution reached its maximum in the year of 2010, when it was 4.6% of GDP.

Anna-Gudrun-Ragnardottir

In her theses towards a MS degree in Economics at the University, Ms. Anna Guðrún Ragnarsdóttir describes how the aluminium industry has had a major influence on Iceland’s economy. The author explains how the aluminum industry can be divided into three different categories, regarding its contribution to the Icelandic GDP; direct contribution, indirect contribution and demand effects. The industry’s total contribution to the Icelandic GDP was calculated as the sum of direct and indirect contribution. The demand effects were not estimated in the thesis.

The direct contribution of the aluminum industry is estimated using a data set from Statistics Iceland. Estimating the industry’s indirect contribution was more complex. The aluminum sector now consumes almost 75 per cent of electricity generated in Iceland. When taking this part of the Icelandic energy industry into account, the total contribution of the aluminum industry to the Icelandic GDP is somewhat larger than the direct contribution, and the total contribution can be said to be 5.4-6.3 per cent annually (on average in the period 2007-2010). In 2010 this number was approximately 7.7-8.6 per cent.

Straumsvik-nature-aluminumum-smelter

In her thesis, Ms. Ragnarsdóttir explains how aluminum production first began in Iceland in the year 1969, with an output of barely 11 thousand tons annually. In the early 1990s the rate of production grew rapidly and today it is around 820 thousand tons annually. Two of the largest hydroelectric power stations in Iceland were constructed mainly to serve the aluminium industry. According to the thesis, the industry generates in total around 4,000 jobs in the country. However, almost all the aluminum products manufactured in Iceland are exported. Today, the aluminum products have approximately a 40 percent  share in the total export of goods from Iceland (which is more or less the same proportion as that of fish products).

Jan 7

The largest consumers of electricity in Iceland

Iceland-12-year-electricity-contractsVery few countries in the world offer as competitively priced electricity as Iceland does. Companies that need substantial quantity of electricity (or hot water) and wish to operate within Europe, North America or elsewhere in the OECD, will hardly find better business environment as available in Icelandic. For example, the Icelandic power company Landsvirkjun offers 12 year contracts where the electricity is priced at 43 USD/MWh.

Another fact that makes Icelandic electricity a very attractive option, is that almost 100% of all electricity generated in Iceland comes from renewable sources (hydro- and geothermal power). In addition, the Icelandic power stations and transmission system rank among the world’s best in terms of secure and reliable electricity supply.

The low-cost and reliable Icelandic electricity has led to a strong power-intensive industry in Iceland. Industrial manufacturing products have become the largest part of Icelandic exports, accounting for close to 55% of the total exports (in fob-value). The largest proportion of these exports is aluminum (40% of total exports), which is produced in large smelters by harnessing Icelandic renewable energy.

Slide15

Today, the aluminum industry and other power intensive industries consume approximately 80% of all the electricity in Iceland. Although the aluminum industry is a dominating consumer of Icelandic electricity, new energy related industries and services have started to see Iceland as an attractive location. Examples are foils production for electrolytic capacitors and data centers.

This new interest is understandable, especially when having in mind the high electricity prices in many European countries. And Iceland’s cool weather, good capacity in overseas telecom cable connections, and very competitive electricity prices make the country an ideal location for data storage services. Another example of a new industry is aquaculture, utilizing warm wastewater from the Icelandic geothermal stations. This, and other new upcoming projects harnessing Icelandic energy, will be further described here at the Icelandic Energy Portal in next week.

Nov 5

McKinsey on Icelandic energy issues

The management and consulting firm McKinsey & Company recently published an independent report on the current state of the Icelandic economy and its future priorities. The title of the report is “Charting a Growth Path for Iceland”.

According to the report, the Icelandic power industry has provided the foundation for a strong export-based heavy industry sector. However, McKinsey also points out that capital productivity in the Icelandic energy sector is the lowest across all sectors of the Icelandic economy:

“With 25-30% of the capital stock directly or indirectly invested in the energy sector, this is a serious matter for resolution. We identify several important themes to this end, e.g. diversification of the industrial buyer market and systematic enablement of the most profitable expansion projects based on their ability to pay. Additionally, the opportunity to connect the Icelandic electricity market to Europe via a physical interconnector is an attractive option that should be explored in detail.”

McKinsey then goes on making some suggestions on how to increase value capture from the energy sector. According to the report, the keyword for higher capital productivity is increased integration with other markets. Since the Icelandic power system is an island-system there is, according to McKinsey, a “significant slack in the system to ensure that sufficient margins are in place to meet domestic demand.”

McKinsey argues that the isolated market is “reflected in the design of hydro plants where investments have been optimized accordingly, i.e. with relatively small reservoirs allowing surplus water to bypass generation as there are no alternative markets available.”  Hence, nearly 15 per cent of the energy available for electricity production is wasted each year (on average).

McKinsey emphasizes that these factors will have to be taken into consideration during the next growth phase to maximize the value captured. In this regard, McKinsey seems ecpecially positive towards constructing an interconnector between Iceland and Europe:

“The economic rationale for an interconnector is based on the opportunity of supplying the receiving market with green energy and thus contributing to decarbonization more efficiently than through other means e.g. offshore wind power. Iceland could share the benefit of such cost savings with the partner. Taking into account generation costs in Iceland, the cost of the interconnector itself and the anticipated cost of offshore wind power in 2020, cost savings of around EUR 60/Mwh could be shared.”

What makes the business model of an interconnector especially interesting, is the fact that so far Iceland has only harnessed  20-25 percent of its theoretically available hydro and geothermal energy. With environmental considerations and the economic feasibility of the investments taken into account, new projects could probably almost double current production (from 17 TWh to approximately 34 TWh annually). This is a substantially less costly renewable energy option than for example wind power in the United Kingdom.

The report concludes with strong future prospects. McKinsey is of the opinion that “Iceland is in the privileged position of having multiple growth levers that can greatly improve average production in the economy. The country therefore has good reason to be optimistic, provided policymakers utilize the opportunities available.” To access the report follow this link.

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