Skip to content

Posts from the ‘Electricity Market’ Category

Rising power prices in Iceland

Electricity demand in Iceland is growing and most of the low-cost options in the geothermal- and hydropower sectors have already been harnessed. Thus, it is not surprising that wholesale electricity prices on the Icelandic power market have been rising. What is no less important for the Icelandic power sector, are the rising tariffs in special contracts with heavy industries in Iceland.

Heavy industries, like aluminum smelting, ferrosilicon production etc., consume close to 80% of all electricity generated in Iceland. The older power contracts with heavy industries offer the industrial companies the electricity at very low price. The chart at left shows the industrial tariffs in Iceland in 2016 (average tariff through the year). Note that the tariffs shown include transmission cost. The most recent contract is of course the one with the RTA smelter, while the oldest contracts with Elkem and Century Aluminum where negotiated two decades ago.

It is likely that the average general industrial tariff in Iceland will rise in the coming years. Icelandic power firms are already in the process of increasing price of electricity to industries in Iceland. The contract between the national power company Landsvirkjun and the RTA smelter at Straumsvík in 2010 was the first real step in this development. In 2010, the tariff to RTA increased substantially and is no longer linked to price development of aluminum. Instead it aligns with the US Consumer Price Index (CPI).

Another important step in increasing revenues from electricity sales to heavy industries in Iceland was taken in 2016, with a new power contract of Landsvirkjun and the Norðurál smelter of Century Aluminum. This new contract will become effective in 2019. From then, the tariff to Norðurál will become aligned with spot price on the Nordic power market (Elspot on Nord Pool Spot). Landsvirkjun is also re-negotiating the power tariff with the ferrosilicon plant of Elkem, which has been paying very low price for the electricity. The expected power price Century and Elkem will be paying according to the new contracts are shown by the arrows on the graph below. However, note that negotiations between Landsvirkjun and Elkem are still ongoing and it is of course possible no agreement will be reached (and then Landsvirkjun would probably be selling the power to other interested companies).

More steps towards rising average power price in Iceland will be taken after 2020, when several old contracts with heavy industries will run out. This applies to a couple of contracts Reykjavík Energy and HS Orka have with the Norðurál smelter (owned by Century Aluminum). This development towards higher power tariffs will probably also affect a very large power contract Landsvirkjun has with the Alcoa aluminum smelter of Fjarðaál, where the tariff is to be re-negotiated no later than 2028 (as can be seen highlighted on the graph at left).

Due to the new contract with RTA in 2010 and some other recent contracts with other smaller power intensive firms in Iceland, the average power tariff in new contracts with heavy industries in Iceland is already rising. This development can be expected to continue, resulting in a general power price to heavy industries in Iceland moving towards approximately 30-35 USD/MWh when transmission cost not included; close to 35-40 USD with the transmission cost. This is shown by the lower green limit on the graph above. Other large customers, i.e. less power-intensive industries and services such as large data centers, will also be experiencing rising tariffs; probably around 40 USD/MWh when transmission cost is not included and close to 45 USD/MWh with transmission cost, as shown by the higher green limit on the graph above.

The development so far is already a clear sign of rising power prices in Iceland. The rising tariffs reflect the necessity to increase return on capital invested in Icelandic power production, which so far has in general been very low, as explained in a recent report by Copenhagen Economics (the slide at left is from a presentation by Copenhagen Economics). Also, rising levelized cost of energy (LCOE) for new power plants in Iceland will push the electricity tariffs up. So rising power prices in Iceland can in fact be explained with simple economics.

Power tariffs to the Century smelter at Grundartangi

The Norðurál smelter of Century Aluminum, at Grundartangi in Southwest Iceland, enjoys the lowest electricity tariff to aluminum smelters in Iceland. The only company in Iceland paying lower electricity tariff, is the ferrosilicon plant of Elkem, also located at Grundartangi.

All the three largest power companies in Iceland supply the Grundartangi aluminum smelter with electricity. The pricing arrangements in all the contracts are quite similar. All the contracts have the power tariff aligned to the price of aluminum on the London Metal Exchange (LME). In 2016, all the three power companies selling electricity to the Norðurál smelter where receiving an average price close to 20 USD/MWh (as shown on the graph at left). Note that transmission cost is included in the price shown on this graph.

For comparison, the graph also shows the power price from Landsvirkjun (LV) to the ÍSAL smelter of Rio Tinto Alcan (RTA) at Straumsvík in Southwestern Iceland. Of all the three aluminum smelters in Iceland, the Straumsvík smelter pays the highest electricity tariff. Which is not surprising, as the Straumsvík smelter has the most recent power contract. More information about recent power contracts with aluminum smelters can be seen here.

Most of the power consumed by the Norðurál smelter is generated by Reykjavík Energy, utilizing geothermal sources  (unfortunately Reykjavík Energy has been faced with major difficulties in sustaining its geothermal power production). Reykjavík Energy is called Orka náttúrunnar (ON) in Icelandic. It is a subsidiary of Orkuveita Reykjavíkur (OR), which is mostly owned by the city of Reykjavík.

The second largest power supplier to the Norðurál smelter is the national power company Landsvirkjun. Landsvirkjun generates most of its electricity in hydropower stations. In 2016, the company concluded a new agreement with Norðurál/Century, which will change the pricing method (the new agreement goes into force in 2019).

The third company selling power to the Norðurál smelter is the privately owned HS Orka, where Canadian Alterra Power is the major shareholder. Like Reykjavík Energy, HS Orka mostly relies on geothermal sources for its power generation.

As mentioned above, the cost of transmission is included in the power prices on the graph above. Each of the three power companies has to pay the transmission cost forward to the Icelandic Transmission System Operator (TSO), which is Landsnet. The graph at left should make it more clear what amount (price) the power companies are receiving for each megawatt-hour (MWh) of electricity sold. On this graph, we highlight the part of the tariff that is the transmission cost (the grey part of the columns). Finally, note that readers should presume a confidence interval (uncertainty limits) of 5% regarding the Landsvirkjun-tariffs presented, and a 10% confidence interval regarding tariffs from Reykjavík Energy and HS Orka.

Power revenues from smelters declined in 2016

The average price of aluminum in 2016 was lower than the previous year (2015), resulting in lower average revenues per sold MWh for the Icelandic power firms selling electricity to the aluminum industry. In this article we present updated information on the power tariffs paid by each of the three aluminum smelters located in Iceland. Note that readers should presume a confidence interval (uncertainty limits) of 5% regarding all the tariffs presented.

One of the three smelters, the ISAL / Rio Tinto Alcan (RTA) in Straumsvík, pays a fixed base-tariff which is linked to the US Consumer Price Index (CPI). The RTA smelter in Straumsvík (green column on the graph below) receives all its electricity from the national power company Landsvirkjun. The power contract of RTA and Landsvirkjun is from 2010, with additions in 2014. Before the new agreement in 2010, the RTA-smelter at Sraumsvík was paying very low tariff, which was linked to the price of aluminum. The power contract from 2010 was extremely important for Landsvirkjun, having very positive effects on its revenues and return. This contract reflects a start of Landsvirkjun’s new pricing policy, moving away from the risky price-connection with aluminum.

electricity-price-tariffs-to-aluminum-smelters-in-iceland_2007-2016_draft-feb-2017The other two smelters in Iceland – the Norðurál smelter of Century Aluminum at Grundartangi (red on the graph) and the Fjarðaál smelter of Alcoa at Reyðarfjörður (black on the graph) – have power contracts based on the old pricing-model. Both of these two smelters have contracts with Landsvirkjun, where the power tariffs are linked to the price of aluminum at the London Metal Exchange (LME). Thus, the power tariffs of Norðurál (Century) and Fjarðaál (Alcoa) fluctuate with the price of aluminum, As the price of aluminum has been low during the last few years, the power tariffs of Norðurál and Fjarðaál have also been on the downside, as can clearly be seen on the graph at left.

Landsvirkjun’s power contract with Fjarðaál (Alcoa) is the original contract signed in 2003. The current contract Landsvirkjun has with Norðurál (Century) is a re-negotiated contract from 1999 (original contract was from 1997). As we explained in a recent article, Landsvirkjun and Norðurál have reached an agreement on new power tariff for the period 2019-2023. The new tariff will be aligned to the Elspot tariff on the Nordic power market (Nord Pool Spot; NPS), replacing the current price-link with aluminium price.

This new contract with Norðurál was concluded in 2016 and becomes effective in 2019. The contract is likely to be an important step in bringing the Icelandic power market more in line with the power market in the other Nordic countries. The next step in this development is likely to be a new contract Landsvirkjun is currently negotiating with the Chinese owned Elkem, which owns and operates a ferro-silicon plant in Southwestern Iceland. The current power contract with Elkem, where the tariff is based on price development of ferro-silicon and the exchange rate of the Norwegian krona (NOK), runs out in 2019. In recent years, the power price for the Elkem-plant in Iceland has been extremely low (lower than the power price paid by the Norðurál smelter). Probably Landsvirkjun wants a major change in the pricing methodology, developing the tariff to Elkem towards the Nordic market spot pricing model.

century-aluminum_nordural-smelter-grundartangi-icelandFinally, note that the graph above only includes power contracts the aluminum smelters have with Landsvirkjun. Two other Icelandic power firms also generate and sell electricity to the aluminum industry in Iceland. These two firms are HS Orka and Orka náttúrunnar (Orka náttúrunnar is normally referred to as ON or Reykjavík Energy). ON is in public ownership, while HS Orka is privately owned. Both companies – ON and HS Orka – mostly rely on harnessing geothermal energy for their power generation. And both have long-term power contracts with the Norðurál smelter, where the tariff is linked to aluminum price on LME. The average power tariff in these contracts is slightly higher than the tariff in Norðurál’s contract with Landsvirkjun from 1997/1999  (the red column on the graph above). The Icelandic Energy Portal will soon be introducing more information about the power tariffs in the contracts Norðurál has with ON and HS Orka.

New power tariffs to Aluminum smelters

As we explained in a recent article, the Icelandic national power company Landsvirkjun has signed a new contract with the Century Aluminum smelter in Iceland (Norðurál). In this article we will compare the power tariff in this new contract with three other recent power agreements with smelters in Iceland and Canada.

aluminerie-alouette_sept-iles-smelter_quebec-canadaIn our comparison we analysed information about four recent power contracts. They are, in addition to the new Norðurál-contract, a contract between Landsvirkjun and ISAL/RTA regarding the smelter at Straumsvík in Southwestern Iceland, a contract between Hydro Québec and Alcoa/RTA regarding the Bécancour smelter in Québec in Canada, and finally a contract between Hydro Québec and Aluminerie Alouette regarding the Sept-Iles smelter, also in Québec. These four contracts were concluded in the period 2010-2016 and they came / will come into force in the period 2010-2019 (as shown on the graph below).

Each of the four contracts are different from the others. Both of the Canadian contracts are long-term and the price of the electricity in both of them is linked to the price-development of aluminum at the London Metal Exchange (LME). However, these two Canadian contracts are based on different prerequisites, as one of them (the Aluminerie Alouette contract) involves an obligation for conducting an engineering study for a potential later expansion of the smelter.

The two Icelandic contracts do not include any price-link with aluminum. The contract with ISAL/RTA from 2010 has a fixed starting tariff, linked to US consumer price index (CPI). The tariff in the more recent contract with Century’s Norðurál is linked to power price at the Nordic power market (Elspot on Nord Pool Spot; NPS).

The contract with ISAL, which was concluded and came into force in 2010, is a long-term contract of 25 years. The contract with Norðurál, agreed in 2016, will come into force in 2019 and only has a duration of four years. The contracting parties, Landsvirkjun and Norðurál, have offered no explanation about why the time-period of the new contract is so short, but an obvious reason is the new tariff being strongly aligned with spot market price of electricity on NPS (as explained in our last post).

electricity-price-tariffs-to-aluminum-smelters-in-iceland-and-canada_new-contracts_aep-2017The graph at left shows a.o. the approximate average tariff to the Straumsvík smelter of ISAL/RTA in 2016 (the tariff can be expected to rise steadily, as it is linked to the US CPI). The power price paid by Bécancour and Alouette depend on the development of aluminum price, and the blue columns reflect the average base-tariff for these two Canadian smelters in 2016 (when average aluminum price was close to 1,600 USD/ton). The light-blue part of the tariff shows how the Canadian tariff will rise if/when aluminum price becomes 1,900 USD/ton, as recently happened.

We should add that when there is a premium paid for aluminum, as has been the norm most of the time in recent years, the Canadian tariffs will increase, according to a certain formula in the two contracts. Note that the Canadian tariffs shown on the graph are as when the premium is zero. If/when there will be a premium, the power tariffs to the said Canadian smelters will be somewhat higher.

Due to limited information, it is still not possible to claim with precision what is the new base-tariff for the Norðurál smelter at Grundartangi in Iceland (which goes into force in 2019). We do, however, know that the new tariff will be linked or aligned to the electricity price on NPS. EFTA Surveillance Authority (ESA) has stated that “Norðurál’s payments to Landsvirkjun for the electricity each month will be tied to the market price for power in the Nordpool Elspot power market (Elspot System Price reference used)“. ESA also says that “pricing mechanism and the risk associated with using the Nordpool Elspot power prices is […] in line with standard commercial practices of competing power companies in the Nordic countries”, and that the “alignment […] with the Nordpool power prices, allows Landsvirkjun to sell power at the same prices as competing companies in the Nordic countries.”

grundartangi-nordural-century-aluminum-elkem-winterWith regard to the above mentioned statements by ESA, we can assume that the new tariff to the Norðurál smelter will be similar or even the same as the tariff paid by industries in the Nordic market. Furthermore, the statements by ESA strongly imply that the new base-tariff to Norðurál is actually the same as the spot price for electricity on NPS (or at least very close to the spot price). Thus, the new tariff to Norðurál shown on the graph above is the same as the average spot price on NPS in 2016 (Elspot) – with certain part of the transmission cost added (the part of the transmission cost which is not included in the Elspot-price).

Of course it is possible that the new base-tariff for Norðurál from 2019 may be somewhat lower than the full Elspot-price, as power companies on the Nordic power market may sometimes offer its largest customers a discount from the spot-price on NPS. However, when having regard to the statements of ESA, and with regard to Landsvirkjun’s tariffs to ISAL/RTA, it seems unlikely that the new contract will be offering Norðurál large discount from the Elspot-price.

Finally, note that the assumed new tariff to Norðurál shown on the graph(s) includes the transmission cost that the aluminum firm has to pay to the Icelandic TSO; Landsnet. And note also that Norðurál will continue to pay its current very low tariff to Landsvirkjun until 2019 (when the new power contract enters into force).

electricity-price-tariffs-to-aluminum-smelters-in-iceland-and-canada_new-contracts-and-current-tariff-to-nordural_aep-2017The power tariff Norðurál is currently paying Landsvirkjun happens to be one of the lowest electricity price enjoyed by any of the world’s two hundred-plus aluminum smelters (Norðurál also buys substantial amount of electricity from two other Icelandic power firms, where the average price is only slightly higher than the tariff it pays to Landsvirkjun). Last year (2016), the average price Norðurál paid for the electricity from Landsvirkjun was well below 20 USD/MWh (transmission cost included), as shown on the graph at left (the red column). So it is obvious that the new contract, coming into force in 2019, will increase Landsvirkjun’s revenues substantially – unless we will experience extremely low prices for electricity on the Nordic Elspot power market during 2019-2023.

Landsvirkjun and Century Aluminum agree on new power tariff

new power contract between Landsvirkjun and the Norðurál smelter of Century Aluminum at Grundartangi in Iceland, was negotiated in 2016. Landsvirkjun describes this contract as an extension of the original contract from 1997. That original contract was amended in 1999, extending the validity of the original power contract to 2019.

lv-nordural-ceo-new-power-contract-2016The new extension, concluded in May 2016, changes the terms of the older contract and will enter into force in 2019. This is a fairly short-time contract/extension, expiring already in 2023. This short time frame of the contract is interesting, as all the earlier Icelandic power contracts with aluminum smelters in Iceland have applied for much longer periods (usually from 20 to 40 years).

The new contract-terms include a major change of the pricing method for energy delivered to Norðurál. From 2019, the tariff will be linked to the market price for power in the Nordic power market (Nord Pool Spot; NPS). This replaces the previous price-link to aluminum prices at the London Metal Exchange (LME), which is used in the current power contract  from 1997/1999.

According to the EFTA Surveillance Authority (ESA), the electricity tariff in the new contract is “tied” to the monthly “market price for power in the Nordpool Elspot power market”. This clear reference to Elspot may not necessarily mean that the new price will be exactly the same as the spot market power price on NPS. However, it is clear that this new pricing method, replacing the previous/current price-link to aluminium price, will make the revenues of Landsvirkjun more aligned with power prices on the Nordic and European power markets. What is also new, is that this being the first power contract with an aluminum smelter in Iceland not having the transmission cost included. Norðurál will need to pay the transmission cost directly to the Icelandic TSO; Landsnet.

nordural-century-aluminum-smelter-grundartangi-iceland-in-winterLinking the power tariff to electricity prices abroad is a new approach in the pricing of Icelandic electricity to aluminum smelters.  This new approach is a clear sign of important changes in the Icelandic power market, moving towards the development on nearby power markets in NW-Europe. The result will probably be a doubling of the current power tariff to the Norðurál smelter, when the new extension comes into effect in 2019 (depending on price development in the Nordic power market).

The new pricing method may explain why the contract was only made for a four-year period (2019-2023). When negotiations between Landsvirkjun and Norðurál were ongoing, in 2015 and early 2016, the Elspot power price at NPS was very low (close to 21 EUR/MWh on average in 2015). The management of Norðurál most likely pushed for aligning the power tariff to the then current low electricity price in NW-Europe and/or N-America, in the hope of avoiding a higher tariff, like Landsvirkjun agreed with the ISAL smelter in 2010. The ISAL smelter in Straumsvík, owned by Rio Tinto, is now paying more than 30 EUR/MWh and a little under 30 EUR when transmission cost is excluded.

Although NPS did experience very low power price in 2015, it is quite possible that the spot price on the Nordic power market will rise in the coming years. Already in 2016, the average Elspot price on NPS was close to 27 EUR/MWh (up from 21 EUR/MWh the year before). So it was obviously quite risky for Norðurál to make a long-term contract based on the Elspot price; thus agreeing on a four year contract only.

Icelink-HVDC-UK-NG-nov-2013-4Landsvirkjun may also have wanted to avoid a new long-term contract, as the necessary power capacity is already available (no new investment in power generation is needed to deliver the power to the Norðurál smelter). The main reason for such a strategy of Landsvirkjun – going for a short-term contract – is the possible construction of an electric HVDC cable between Iceland and Britain (often referred to as IceLink).

If such a subsea interconnector will be developed in the near future, it might become operational around 2025 or few years later. Such an interconnector would offer Landsvirkjun the opportunity to sell power into the high priced electricity market on the UK.  Thus, a short time power contracts makes sense for Landsvirkjun, at this point, rather than making long-term commitments regarding electricity sales to aluminum smelters. This reflects the current strategy of the Norwegian power company Statkraft, which also is focusing on the spot market development rather than making new long-term power contracts.

We at the Icelandic and Northern Energy Portal will soon be analysing this new contract/extension of Landsvirkjun and Norðurál in more details, putting the new tariff into context with other new power contracts in Iceland and Canada. Stay tuned.

Earlham Institute in partnership with Verne Global

The Earlham Institute (EI) as selected Verne Global’s data centre campus in Iceland to investigate the efficiencies of distributing large-scale genomics and computational biology data analysis.

verne-global-data-centre-icelandEI, through Verne Global, will have access to one of the world’s most reliable power grids, delivering close to  100% geothermal and hydroelectric renewable energy. According to a story on Yahoo Finance, Verne Global “will enable the EI to save up to 70% in energy costs […] and with no additional power for cooling, significantly benefiting the organisation in their advanced genomics and bioinformatics research of living systems.” The power cost for EI in Iceland is said to be 40 GBP/MWh, which at current exchange rate is close to 50 USD/MWh.

One of EI’s goals is to understand crop genomes so new varieties can be developed to secure food supply in the face of a growing population and environmental change. In an announcement, Dr Tim Stitt, Head of Scientific Computing at EI, says that modern bioinformatics is driven by the generation of ever increasing volumes of genomic data requiring large and collaborative computing resources to help process it quickly and at scale. “At EI, we have some of the largest computational platforms for the Life Sciences in Europe and the demand for our computing capability is only increasing, putting pressure on the capacity and operational costs of our existing data centres.”

tim_stitt_earlham-instituteIn a video posted on EI’s website (also available on Vimeo), Dr Stitt further describes why moving their High-Performance Computing  (HPC) workload to Iceland made economic sense. To tackle the big data requirements of EI’s genomics and bioinformatics research in decoding living systems, EI wanted to explore the benefits of remotely managing its HPC resources. Mr Stitt explains that the Verne Global Icelandic campus provides an economical solution by protecting against energy price inflation over the next 10-20 years, with their environmentally friendly and fully sustainable power supply. In addition, the cooling is free and optimised design infrastructure is to reduce the total costs of EI’s scientific computing infrastructure.

This is obviously a very positive development for the Icelandic data centre industry. Which can be expected to experience rapid growth in the coming years.

Does Facebook not want truly GREEN data centers?

facebook-zuckerberg-datacentre_screen-shot-2017-01-22-at-18-14-02Two years ago, we where wondering if Apple does not want truly green data centers. Now we might ask if this also applies to Facebook. Because it seems that Facebook is in fact not to keen on truly green data centers.

According to an announcement published in last January (2017), Facebook is going to build a new data centre in the Danish city of Odense, on the island of Funen (Fyn) west of Copenhagen. At a press conference with local authorities, the California-based tech company said this data centre to be the companies third such facility outside of USA.

And Facebook’s director of data center operations, Niall McEntegart, was quoted saying that “the Odense data centre will be one of the most advanced, energy-efficient data centers in the world”. It was also stated by Facebook management that the Odense data centre will be powered exclusively by renewable energy.

This is going to be an investment of more than USD 100 millions, and will provide 150 jobs when operational (in 2020). But in fact this new data centre will hardly be powered by 100% renewable energy.

denmark-gross-electricity-consumption_1990-2015-with-forecast-to-2025_table-from-energinet-denmark_sept-2016Surely Denmark generates substantial amount of its electricity by utilising renewable sources (mostly wind). Also, Denmark has interconnectors with major hydro power countries, like Sweden and Norway. However, the fact is that very large share of the electricity people and businesses in Denmark consume, is generated by burning fossil fuels (mostly coal).

According to the most recent information from the European Union, (see table here), the renewable’s share of Denmark’s gross electricity consumption in 2014 was close to 45 percent. More recent information from the Danish transmission system operator (TSO), Energinet, tells us that the share of renewable energy in net generation of 2015 was close to 67%. And according to Energinet, even in 2025 fossil fuels will be an important part of Denmark’s power mix (as explained on the graph at left).

facebook-data-centre_odense-denmark-electricity-supply-mapHaving regard to the facts, it is hardly correct to say that a data centre located in Denmark, connected to the grid.  will be run entirely on renewable energy sources only. Obviously Facebook intends to buy so-called Green Certificates, which are a tradable commodity proving that certain amount of electricity is generated using renewable energy sources only. However, this does not mean that the electricity being consumed by the buyer of the certificate is from renewable sources – it might as well be from a coal power station in Denmark or from a nuclear plant in Sweden.

The result is that every data centre in Denmark, connected to the grid, will in fact be using electricity from all kinds of power plants, including for example coal power stations. If Facebook truly wants to run its data centre on 100% renewable energy, the company should connect the data centre to a grid that only delivers electricity from renewable sources. In Europe probably no grid comes as close to this as in Iceland.

Iceland produces close to 99.9 percent of its electricity by utilising hydro- and geothermal power (and some wind power). So instead of claiming its data centre in Denmark being powered by 100% renewable energy, Facebook should consider Iceland as the location for its next data centre in Europe.

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!

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.

The Icelandic electricity market is ON

The Icelandic power market has been experiencing important changes in the last few years. Most important is the increased demand for Icelandic electricity. Which is no surprise, as Icelandic power firms have started offering interesting new type of long-term contracts, were base-load green electricity is made available at very competitive prices.

New contract by ON and Silicor Materials

Silicor-Materials-Plant-at-Grundartangi-IcelandA good example of the recent trend in Iceland’s power market, is the new contract between Orka náttúrunnar (ON), owned by Reykjavík Energy (OR), and the California based Silicor Materials. It was in last September that ON and Silicor signed a power purchase agreement (PPA) for an equivalent of 40 MW of power. The electricity will be utilized at Silicor’s new solar-grade silicon plant, which is being constructed at Grundartangi in SW-Iceland. The contract is for a period of 15 years, with possibility of extension. Power delivery will be starting in 2018.

Moving away from low smelter-tariffs

According to a press release from ON and Silicor, the new PPA raises the price of ON’s renewable energy significantly. What is also very important, is that the power tariff is not linked to the price of the product’s buyer. Thus, this contract is quite different from  ON’s current sales with regard to power-intensive industries. Until now, the said 40 MW have produced power sold to the Icelandic power company Landsvirkjun, which has sold the power to the aluminum industry in Iceland. There, the power tariff has been linked to aluminum price at London Metal Exchange (LME). This kind of risk-factor is not to be found in the new PPA of ON and Silicor.

The tariff is close to 43 USD/MWh

According to the press statement, mentioned above, the wholesale price in the PPA is “approaching the retail price” which households in Iceland pay for electricity. This means that the wholesale tariff Silicor Materials will pay for the power is close to 43 USD/MWh. According to analysis by Askja Energy Partners, this means that ON will receive somewhere between three to four times higher price for the electricity sold to Silicor than it is receiving today (from Landsvirkjun).

The new reality on the Icelandic power market

In recent years, the average price of electricity to energy-intensive industries (without transmission cost) in Iceland, have been close to 20 USD/MWh. Thus, it is obviously very important for the Icelandic power industry that new electricity contracts with energy-intensive customers are based on a price that is approaching 43 USD/MWh.

ON-Power-Reykjavik-IcelandHowever, this is not a surprising development. New energy intensive facilities locating in Western Europe or in Northern America have very little chance of getting as positive long-term power contracts as in Iceland. In addition, the Icelandic electricity is 100% generated from renewable sources. And the transmission system in Iceland is renowned for being one of the best and most reliable in the world.

Therefore, it can be expected that in the coming years we will see numerous firms wanting to locate their new production facilities in Iceland. Silcor Materials is only one example; there are already several other examples of both new silicon projects and new data centers in Iceland. Such companies and Icelandic power seem to be a perfect fit.