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Posts from the ‘Electricity Market’ Category

Aug 6

Electricity prices in the USA will rise

In a recent article in the Financial Times, it was pointed out that European industrial electricity prices are about twice as high as in the USA (and natural gas prices in Europe are around three times higher than in USA). However, there is one country in Europe that offers even more competitive electricity prices than available in the USA. This European country is Iceland.

Electricity price offered to industrial customers in Iceland: 43 USD/MWh

The largest energy firm in Iceland, Landsvirkjun, offers electricity at a fixed price of 43 USD/MWh. Contracts like that are available for up to 12 years. This price is substantially lower than average wholesale electricity prices on spot markets in the USA. And it seems evident that electricity prices in the USA will rise in the coming years, making Icelandic electricity even more competitive than it is already.

Levelized cost of electricity (LCOE) is rising

In recent months and years the USA has experienced very low electricity prices. In some areas, the wholesale prices for electricity on the spot market in 2012 went down to 23 USD/MWh (in the state of Washington). In Texas they went down to 36 USD/MWh and down to 40-47 USD/MWh in the Northeastern parts of the country However, since then the prices have in general been rising again.

US-Shale-Gas-Break-Even-Prices-2014The low electricity prices experienced in the US lately are mainly due to fast increased supply of natural gas, as a result from the booming shale gas industry, meaning lower wholesale prices for natural gas. In numerous cases the natural gas prices have been below production costs, which is the result of to fast investment and oversupply of gas. The US Energy Information Agency (EIA) is expecting price increases for natural gas, when the market becomes more balanced. This will inevitably make wholesale electricity prices in the USA substantially higher than they have been in the last couple of years.

Higher price for natural gas will also mean higher minimum levelized cost for electricity in the US. Levelized Cost of Electricity/Energy (LCOE) is a calculation of the cost of generating electricity (building, operating and decommissioning a generic plant). LCOE includes initial investment costs (capital cost), cost for operations and maintenance (O&M), performance and fuel costs discounted with a harmonized discount rate

US_EIA-Electricity-Average-Levelized-Cost_2012-dollars-MWh $:MWh-for-plants-entering-service-in-2019-tableThe LCOE tells us what the price for electricity generated from a specific source must be to break even over the lifetime of the energy project. Thus, the LCOE can be said to reflect the necessary minimum long-term wholesale price from a given power plant, for the plant to achieve a certain minimum profit (usually an IRR of 10%). LCOE can also be described as equivalent to the long-run marginal cost of electricity at a given point in time, because it measures the cost of producing one extra unit of electricity with a newly constructed electricity generation plant.

Unless electricity price (wholesale) is expected to achieve the said return (usually an IRR of 10%), new power plants will normally not be constructed. Thus, LCOE in fact gives an estimate of the expected future average price of electricity as traded on a wholesale electricity market within the lifetime of the project.

Minimum levelized cost of electricity (LCOE) in the USA in 2020: 65-76 USD/MWh

US-EIA-Electricity-Cost-Levelized_Sources_2020-2040_2014According to the US Energy Information Agency (EIA), the minimum levelized cost for new power plants operational in 2019 will be 64.4 USD/MWh (for natural gas plants – note that the cost will actually be lower for plants utilizing geothermal energy but they will be on a fairly small scale). Thus, although it is impossible to predict with great accuracy what the electricity prices will be at a certain point in the future in the dynamic markets of the United States, it seems very likely that wholesale electricity prices in the US will rise substantially. The construction of necessary new power plants will hardly happen unless the average wholesale electricity prices will rise towards at least close to 65 USD/MWh.

It is important to keep in mind that for many power plants the LCOE will be somewhat higher than the said 64.3 USD/MWh (in some cases much higher, such as for coal, and nuclear plants). And the EIA specifically states that other institutions and consultancy firms are projecting even higher minimum LCOE for new power plants than the EIA tself does. According to the EIA, there are examples of projections stating 76 USD/MWh as the minimum levelized cost. Thus, the minimum LCOE in the USA in 2020 can be said to be expected within the range of 65-76 USD/MWh.

Possibly the price will Be even higher

The major driver for higher electricity prices in the predictions is the steady (yet moderate) expected increase in natural gas prices. So the minimum LCOE of 65-76 USD/MWh reflects the different projections of LCOE for power plants running on natural gas.

For those power plants to be built, the wholesale price of power will have to rise towards at least 65-76 USD/MWh. So rising electricity prices in the US seems inevitable. And actually, this lowest rate will probably only be available to industrial users – the prices will be somewhat higher for most services and homes.

US-Projected-Wholesale-Electricity-Prices-Forecast_2013-2022The least costly electricity source (natural gas) will not meet all the demand for new power sources in the US. At peak periods the electricity prices will be quite a lot higher, as coal plants and hydropower is needed to meet demand for electricity (nuclear- and geothermal plants will sell into the system at all times, adjusting to the price floor set by natural gas plants, and wind- and solar will of course influence spot prices by feeding the system whenever the wind blows and/or whenever the sun offers energy to PV or CSP solar plants).

On average, nuclear plants, geothermal power, wind power and grid-solar will need higher prices than the natural gas plants (because of higher LCOE). Thus, the average wholesale electricity prices in 2020 will need to be somewhat higher than the earlier mentioned 65-76 USD/MWh.

Iceland offers much lower electricity prices than in the USA

Iceland is the worlds’ largest electricity producer (per capita) and also it has numerous low cost hydro- and geothermal power potentials yet to be harnessed. This creates tremendous opportunities – at times when electricity prices in the US are heading towards 65-76 USD/MWh.

Iceland-12-year-electricity-contractsIceland’s renewable natural energy sources offer great potentials to produce green electricity at very competitive prices. That’s why the Icelandic National Power Company (Landsvirkjun) is able to offer up to 12 year contracts at only 43 USD/MWh. Companies in need of substantial amounts of electricity for their production or services (such as data centres or silicon plants) will hardly find as attractive long term deals anywhere else in the traditional free market economies. Therefore Iceland may be the best option.

Apr 30

Feasibility of IceLink (Iceland-UK interconnector)

The Icelandic Energy Portal is cooperating with the University of Iceland and Reykjavik University, as scientific and educational partners. Thus, we sometimes introduce research by university scholars and students. Today, we will focus on the findings in a recent thesis towards MSc in Sustainable Energy at Reykjavik University, by Mr. Randall Morgan Greene.

HR-RU-WelcomeThe title of the thesis is “Iceland-UK Interconnector: Strategy for Macroeconomic and Legal Feasibility”. According to the thesis, the UK must undertake drastic changes in their energy system if they are to achieve energy policy goals of competitive electricity prices, ensuring security of supply, and decarbonization of generation. Interconnection with Iceland, which is dominated by renewable energy, could offer an enticing, cost-competitive alternative to building new low-carbon generation in the UK and carries the potential for positive economic and technical benefits for both countries.

However, the author points out that the structure of EU and UK electricity systems and legislation places some blockades in this project attaining legal and macroeconomic feasibility. While there is some regulatory uncertainty associated with it, there is a potential that the status quo merchant interconnection investment model could be applied to the Iceland-UK in order to attain the aforementioned feasibility – especially if there is a potential for the application of the emerging legal precedent and business model framework in the Imera/ElecLink merchant interconnection exemption request (at this stage the concept of ElecLink seem to be advancing faster).

LV-HVDC-Iceland-UK-London-august-2012-1The macroeconomic feasibility of this framework could potentially be strengthened if there is a possibility to apply the UKs new Feed-in-Tariffs with Contract-for-Difference (FiT CfD) to generators in Iceland. The Imera/ElecLink framework adequately covers investor concerns over stable, long term returns while satisfactorily addressing regulator concerns over competition and third-party access rules for transmission assets. When combined with the FiT CfD program, there is a strong potential that this project can attain macroeconomic feasibility while still being feasible under EU energy legislation.

However, due to the ElecLink exemption not being due till spring 2014 and there being no clear precedent concerning the application of the UKs FiT CfD program to non-UK generators, this potential still requires more in-depth investigation. For more information, this link will take you to the whole text (pdf) of the thesis “Iceland-UK Interconnector: Strategy for Macroeconomic and Legal Feasibility”.

Apr 10

UK is looking to Iceland for electricity

In last March (2014), UK’s National Grid published a new paper exploring the potential benefits of greater electricity interconnection. According to the paper, new interconnectors will have positive economic and environmental effects. The benefits include lower energy prices for consumers, enhanced energy security, a cleaner environment and wider macro-economic effects. National Grid believes that a full understanding of the benefits of greater interconnection is important to inform the debate on an appropriate ambition to meet the country’s need, and the timeframe within which it should be achieved

UK_National-Grid-Interconnectors-fig4-march-2014The debate on how the United Kingdom (UK) can best meet its energy needs has intensified over recent months. There is broad agreement that energy should be affordable, greenhouse gas emissions need to be reduced, and energy supplies need to be reliable for businesses and consumers to facilitate the UK’s economic recovery. Despite these benefits, Britain’s 4 GW of existing interconnector capacity is relatively small; representing around 5%of total installed electricity generating capacity. This compares with the benchmark highlighted by the European Commission in January 2014 for all EU Member States to have a level of electricity interconnection equivalent to at least 10% of theirinstalled production capacity to realize the full benefits of the Internal Energy Market.

In order to reach this benchmark Britain would need to double its existing interconnector capacity.Britain is therefore poised to complete the final design elements of the new regulatory regime, enabling developers to secure the considerable capital required to deliver these complex and technically challenging projects. Through continuing to work together, the above stakeholders are now well placed to build on the successful momentum developed to date, to secure the necessary regulatory and investment decisions for a 4-5 GW portfolio of new links in 2014/2015 and unlock the benefits including a GBP 1 billion wholesale electricity price reduction per year by 2020.

UK_National-Grid-Interconnectors-fig3-march-2014As renewable electricity forms an increasing part of the energy mix, interconnection is becoming an important tool in managing the intermittent power flows associated with these sources. Based on the consumer, energy security, environmental and economic benefits which could be accessed, greater GB electricity interconnection is considered a ‘no regrets’ investment by a wide range of informed stakeholders within the UK and beyond. This consensus includes the UK Government, the regulator, consumer organizations, green groups, think tanks, academics and the main European Union institutions.

An interconnector between UK and Iceland (sometimes referred to as the IceLink) could become an important part of the additional interconnection. UK already has four interconnectors to France, Holland, Ireland, and Northern Ireland. These links, with a total capacity of 4 GW, represent around 5% of the existing electricity generation capacity in the UK. However, this level remains low compared to the 10% benchmark proposed by the EU Commission and there is strong consensus that this gap should be filled.

While GB remains a net importer of power, economic benefits are available through greater disposable income from lower domestic electricity prices, and enhanced competitiveness for businesses benefitting from reduced energy input costs. Were a portfolio of new projects to be commissioned, the economy would also benefit from new jobs created in activities such as planning, construction and maintenance. They could also catalyse new domestic manufacturing industries in areas such as sub-sea cabling.

Electric interconnectors allow low carbon electricity to flow between European countries more easily and could enable carbon and renewables targets to be met more cost effectively. Significant volumes of low carbon electricity could, for instance, be imported into UK from hydropower in Norway, wind power in Ireland and Denmark, nuclear in France and hydropower / geothermal energy in Iceland.

Copyright statement regarding the NG Paper: © National Grid Interconnector Holdings Limited 2014, all rights reserved.

Apr 1

New electric interconnector: Sweden-Germany

On March 27th 2014, plans for one more electric cable connecting the European mainland with the Nordic countries were revealed. The plans involve a new high voltage interconnector between Sweden and Germany. The interconnector is called Hansa PowerBridge.

Svenska-kraftnat-logoThis took place at the Annual Stakeholder Meeting of the Swedish National Grid (Svenska kraftnät) in Stockholm. The day after (March 28th 2014), Mr. Mikael Odenberg, CEO of Svenska kraftnät, and Mr. Boris Schucht, CEO the German Transmission System Operator 50Hertz, signed a Memorandum of Understanding (MOU) at the German Embassy in Stockholm. The signing was made in the presence of Mr. Rainer Baake, German State Secretary at the Ministry for Economics and Energy and Mr. Christian Pegel, Minister for Energy in Mecklenburg-Vorpommern.

50hertz-logoAccording to a press release from 50Hertz and Svenska kraftnät, the main objective under the MOU is to examine the feasibility for such a new link between Sweden and Germany. In a joint statement from the companies, such an interconnector is said to be another step towards a better integrated European grid and will allow for increased electricity trade between Germany and Sweden and contribute to the security of supply.

Such a new interconnector between Germany and Sweden is believed to make sense both from a commercial and from an environmental point of view. It links directly the huge storage potentials in Sweden to the wind electricity production centres in Northeastern Germany, thus creating value for both partners. The new interconnector is intended to be put into operation within the next decade. This is one more interesting project to have in mind, regarding the possible interconnector between Iceland and Europe.

Mar 10

Study on cost of IceLink: 2.7 billion USD

The cost of a 1,200 MW HVDC electric submarine cable between Iceland and the United Kingdom (UK) is likely to be GBP 1.58-1.68 billion (USD 2.63-2.80 billion). This includes the cable (with a capacity of 1,200 MW), converters, cable mobilization, and installation. These cost-figures are presented in a research paper from 2010; Proposed Iceland / UK (Peterhead) 1.2 GW HVDC Cable. The authors are three engineers; Thomas J. Hammons from University of Glasgow in Scotland, Egill Benedikt Hreinsson from University of Iceland, and Piotr Kacejko from Lublin University of Technology in Poland.

LV-HVDC-Iceland-UK-London-august-2012-2The subject of the paper is a 1,200 MW connector from Iceland to a landing point at Peterhead Scotland (a distance of 1,170km). The paper addresses market considerations with cost of electricity in UK (from new offshore and inland wind power, gas, coal, and nuclear), investments for the development of hydro resources in Iceland, investments for submarine cables and converter plant, and overall capacity of the link. Also reviewed by the authors, is the exploration of deep unconventional geothermal resources in Iceland that could be harnessed in future and developed for the IceLink. The economics, availability, and reliability of geothermal plants are reviewed. [The slide above is from a recent presentation by the Icelandic power company Landsvirkjun}

According to the paper, there should be no major difficulties in the manufacture and laying of submarine cables of length and type necessary for the IceLink connector. What is no less interesting is the finding that the cost of delivered energy would be very competitive with offshore and onshore wind, and of new coal/gas and nuclear plant. Also, the connection would offer high reliability; at least equal to that of new coal/gas and nuclear plant in the UK.

The main conclusions are as follows:

  1. Cost of electricity delivered would be very competitive with that from new wind-farms, nuclear, modern gas/coal fired plant, and tidal barrage / tidal stream power.
  2. Availability of the connection should at least equal that from nuclear, and gas/coal fired plant.
  3. No major difficulties are anticipated in manufacturing, laying and repairing the submarine cables or in construction of hydro schemes for the Link.
  4. Expected life for hydro developments is at least 60 years, submarine cables 50 years, and rectifier/inverter stations 30-40 years.
  5. The link could be considerably expanded in future to utilize deep-well geothermal power when the technology is proven.
  6. The contribution would make a significant contribution towards UK and European targets for renewable energy. The development would benefit the Icelandic economy, rather than demanding huge amounts out of a heavily damaged economy without supporting necessary recovery.
  7. The Icelandic hydroelectric system is likely to be a perfect match for interacting with the UK/North sea wind energy resources in a similar way as the Norwegian hydroelectric power system.
  8. The HVOC UK-Iceland link can serve partly as a one­ way exporter of hydroelectric or geothermal energy from Iceland to the UK or it can be considered as a short term bilateral medium for hourly interaction of hydro with marketslwind based on market signals or short term shadow prices. This dual role should be further defined in a negotiation process between the respective national authorities.

IceLink-Study-University-of-Iceland-2010The study can be downloaded here (pdf) from the website of University of Iceland.

Feb 25

Icelandic electricity would be competitive in the UK

In a recent study, Bloomberg New Energy Finance (BNEF) assessed the political, technological and economic feasibility of an 1,100 km interconnector to bring green Icelandic electricity to the United Kingdom (the project is called IceLink).

BNEF-logoAccording to BNEF, the prospects for implementation of such a project seem quite positive. All the technological and economic barriers regarding the IceLink are believed to be surmountable.

Regarding the economics , BNEF claims that the project is competitive in relation to other zero-carbon options. This for example applies to new offshore wind-farms in the UK and also to the recently agreed Hinkley Point C nuclear project. Electricity produced in Iceland and delivered in the UK, could be lower priced than the confirmed contract-for-difference (CfD) strike prices that have been confirmed for new renewable electricity projects in the UK (as announced by the UK Department of Energy and Climate Change; DECC).

The electricity from the IceLink would have a levelized cost of 86 GBP/MWh (close to 145 USD/MWh) as central estimate by BNEF. This number is based on BNEF’s analysis of the costs of high voltage direct current (HVDC) cable development and geothermal build-out in Iceland. In comparison, DECC’s announced strike price for electricity produced in the UK by hydropower is 100 GBP/MWh (165 USD/MWh), and 140-145 GBP/MWh (235 USD/MWh) for geothermal power.

BNEF-summit-2014What is even more interesting, regarding the competitiveness of the green Icelandic electricity, is the UK strike price for electricity from wind power; 140-155 GBP/MWh (approximately 250 USD/MWh). Wind power is the UK’s major source for increasing renewable electricity. However, this technology is substantially more costly than buying electricity from Iceland via subsea cable. In addition, the wind power is very unstable, while the Icelandic hydro- and geothermal power is a very stable power source. Thus, the cable could be excellent business for the UK. At the same time it could create strong new export revenues for Iceland.

Feb 3

UK will import more power from neighbouring countries in the future

LV-HVDC-Iceland-UK-London-august-2012-1According to the UK National Grid, the UK will import more power from neighbouring countries in the future as the country’s electricity margin continues to tighten. The Financial Times recently wrote about how one of the new subsea electric cables to be constructed is likely to be a cable between UK and Iceland (sometimes referred to as the IceLink):

Swiss engineering group ABB last year commissioned a 262 km interconnector to link Ireland’s grid to the UK’s. National Grid is also working on interconnector projects with Belgium, Denmark, Norway and Iceland. About 5-7 GW of additional capacity could flow from the new interconnectors over the next decade or so, said Mr Bonfield. However, some of the interconnector projects are more feasible than others. A link between UK and Iceland may be the best economic option.

LV-HVDC-Iceland-UK-London-august-2012-2Net electricity imports cost the UK about GBP 365 millions in the past six months of 2013, two and a half times more than two years previously, according to data supplied by ICIS, the price reporting agency. Electricity imports can be cheaper than those produced by UK suppliers and are a small but growing part of the country’s overall power supply. Power is produced in France and the Netherlands and imported via subsea interconnectors. Electricity flows both ways but the UK currently buys more than it sells. And there will be a rise in Uk’s power imports, says Andrew Bonfield, National Grid’s chief finance officer .“[This is] because there is a pricing differential which we believe will be beneficial to the country, and ultimately customers.”

National Grid will invest about GBP 3.5 billion this year, most of which will go towards reinforcing its UK transmission infrastructure. Power imports should help National Grid level out peaks and troughs from renewable energy production and deal with the UK’s diminishing electricity margin, which represents the safety cushion of spare power generating capacity (National Grid previously said that the electricity margin during peak demand in cold weather will be 5 per cent, down from more than 15 per cent in the winter of 2011-12). IceLink could become an important part of this strategy, opening access to Iceland’s 100% renewable power geothermal- and hydro power generation.

The two illustrations above are from a presentation by Mr. Hörður Arnarson, CEO of the Icelandic Power Company Landsvirkjun, presented in August 2012.

Jan 6

UK National Grid showing interest in IceLink

According to news from Norwegian energy information provider Montel, the cost of electric power from the potential subsea interconnector linking the UK with Iceland  will be around GBP 100/MWh (164 USD/MWh). This new subsea cable, which is sometimes referred to as the IceLink, would thus offer electric power at substantiall lower prices than for example from offshore wind.

Icelink-HVDC-UK-NG-nov-2013-5The IceLink would be a high voltage direct current (HVDC) cable, with a power capacacity of 700-1,000 MW.  It would be 1,000-1,500 km long, making it qute a bit longer than any existing subsea cable of this kind today. The longest subsea electric cable is currently the 580 km NorNed cable between Holland and Norway. Longer cables of this type are being planned, such as a cable between Norway and the United Kingdom that will be more than 700  km long, and even longer cables in the Mediterranean.

Mr Hörður Arnarsson, CEO of the Icelandic  state owned power company Landsvirkjun has expressed that the Icelink cable could add “very valuable” flexibility to offset intermittent renewables production in the UK. Landsvirkjun generates 75% of all electricity used in Iceland.

Icelink-HVDC-UK-NG-nov-2013-4In May 2012, Icelandic and UK ministers signed a memorandum of understanding over a new interconnector between the countries. The UK TSO National Grid has been showing interest in the Icelink, focusing on issues such as supply diversification, and gaining access to the reliable hydro- and geothermal energy resources of Iceland.

In the last few months,Mr. Paul Johnson, Project Director and Head of Cables at National Grid, has at numerous occasions expressed that the need for such an interconnector between Iceland and the UK has come to the fore. According to Mr. Johnson, the IceLink is a realizable goal and there is political will for the connector. Mr. Charles Hendry, MP and former UK Energy Minister has been of the same opinion, as the IceLink project offers low-risk, predictable returns attractive to investors, such as pension and infrastructure funds.

Icelink-HVDC-UK-NG-nov-2013-7

According to Montel, the costs of the IceLink are estimated at GBP 4 billion, with it being possibly completed by 2022. The project could supply up to 5 TWh of power annually to Britain from hydro, geothermal and wind sources in Iceland.

While Icelanders still need to engage in national discussions about the costs and benefits of a subsea power cable to the UK, policy makers in the UK seems to agree on the project. In addition, the President of Iceland, Mr. Ólafur Ragnar Grímsson, has addressed leaders and people in the energy business, expressing his view that the Icelanders and the Brits should jointly examine the options of an interconnector.

Iceland-UK-BICC-meeting-Nov-2013-ORG-2At an energy conference in London in last November (2013), Mr. Grímsson said the proposed IceLink should be hard-headed analysis driven by engineers and energy specialists. “We should listen to the government in Britain…then in two to three years we can come back to the table and make the real decision.”

Grimsson said popular support was necessary before a project to bring geothermal power from Iceland to the UK could get off the ground. “As we move forward we need to bring all segments of Icelandic society into this discussion,” he said. “Then we will take a decision based not only on the business sense and the technical feasibility [of the project] but on the national will,” Grimsson said, adding that unless “there is a broad national will behind this, you will never get the necessary players on board”.

The three slides above are from a presentation given by Mr. Paul Johnson from UK National Grid, at the Bloomberg Icelandic Energy Summit. It took place in London on November 1st 2013.

Dec 18

Interesting development in UK electricity strike prices

Earlier this month (December 2013), the British Department of Energy and Climate Change (DECC) introduced the strike prices that will be on offer to energy developers in the coming years.

UK_DECC_Final_Document_-_Investing_in_renewable_technologies_-_CfD_contract_terms_and_strike_prices_UPDATED_6_DEC-coverThis new regime especially focuses on increasing investment in new renewable energy projects. According to Ed Davey, UK’s Energy and Climate Change Secretary, the new levels of support are designed to provide certainty to investors and will ensure the UK meets its 30 percent renewable electricity target in 2020 (doubling the current percentage of electricity generated from renewable sources, which now is 15 percent). The package will deliver record levels of investment in green energy by the end of the decade (GBP 40 billion) and is expected to attract investors from around the world so Britain can replace its ageing power stations, ensure access to sufficient electricity, reduce greenhouse gas emissions, and create green jobs.

The geothermal industry is  likely to welcome the plan by the UK Government to increase geothermal strike price by extra 20 GBP/MWh each year, meaning geothermal developers can expect at least 140-145 GBP/MWh in the coming years. It is also interesting, that hydropower schemes have been allocated a boost of extra 5 GBP/MWh, with strike prices to be 100 GBP/MWh. However, most of the new green electricity will come from offshore wind power, where the strike prices will be 140-155 GBP/MWh.

Iceland-Electricity-HVDC-Cable-to-Europe-at-competitive-prices-McKinsey-2012It is worth having in mind that Iceland could most likely offer the UK base-load green electricity (from geothermal- and hydropower sources) at substantially lower prices than the average strike prices. A recent independent report by the well known management and consulting firm  McKinsey, introduced a positive view towards constructing an interconnector (HVCD cable) between Iceland and Europe. According to McKinsey, such an interconnector could offer substantial cost savings for the buyer of the Icelandic electricity.

McKinsey puts forward the idea that price for the Icelandic electricity might be somewhere between 50-95 GBP/MWh (60-115 EUR/MWh). This is a much lower price than the UK strike price for offshore wind power.  By sharing the benefits, offered by the cheaper Icelandic electricity, between Iceland and the UK the strike price for the Icelandic electricity could possibly be as low as 75 GBP/MWh (which is equivalent to 90 EUR/MWh and approximately 125 USD/MWh). And even if the strike price for the Icelandic electricity would be close to 95-100 GBP/MWh (115 EUR/MWh or 155 USD/MWh), this would be lower than the British strike price for geothermal-, hydro- and wind power.  Therefore it is quite clear that an electric interconnector between Iceland and UK is a very interesting business opportunity.

Dec 9

The Nordic energy infrastructure is gaining interest

Public ownership is widespread in the energy sector of the Nordic countries. This especially applies to the transmission system operators (TSO’s). Strong state ownership is also the norm regarding all the main electricity producing companies and oil exploration companies in the Nordic countries. However, private investment has been increasing in the Nordic energy sector, especially in energy infrastructure projects and renewable energy production.

Nordic-Energy-Perspectives-CoverThe Norwegian electricity company Statkraft and the Norwegian TSO Statnett are both 100% owned by the Norwegian state. Norwegian oil giant Statoil is 70.9% owned by the Norwegian state.

The Swedish electricity company Vattenfall is 100% owned by the Swedish state and so is the Swedish TSO Svenska Kraftnät. Finnish electricity company Fortum is 50.76% owned by the Finnish state. And the Finnish TSO Fingrid is 53.1 % owned by the Finnish state.

Icelandic electricity company Landsvirkjun is 100% owned by the Icelandic state. And the Icelandic state owns  87.24% in the Icelandic TSO Landsnet (through 100% state owned Landsvirkjun and Rarik). In Denmark, the Danish state has owned 76,49% in the energy company Dong Energy. And the Danish TSO Energinet.dk is 100% owned by the Danish state.

Thus, all the major Nordic electricity companies and the TSO’s are controlled by the relevant Nordic state, and also the main Nordic oil exploration companies. Although this ownership structure of the Nordic energy sector will probably not change much in the near future, we may be experiencing increased private investments in certain parts of the Nordic energy sector. This seems especially to apply to infrastructure and renewable energy.

Norway-Gassco-PipesSubstantial private investment is already to be found in Statoil (oil & gas), Fortum (electricity), Fingrid (TSO), and in Dong Energy (oil, gas, heating & electricity). In addition, the Norwegian state has sold large share of the natural gas transportation infrastructure system that links the gas resources of the Norwegian continental shelf with the neighbouring countries. Today, the Norwegian state owns only 45.8% stake in Gassled (through the state owned oil license investing company Petoro), plus its stake through Statoil, which owns 5% in Gassled. The major private investors in Gassled are Abu Dhabi Investment Authority, Canada Pension Plan Investment Board, and the German insurance and financial services group Allianz (together they own 24.75% in Gassled).

The most recent private investment in the typically state owned Nordic energy sector took place earlier this year (2013). When two funds (managed by Goldman Sachs) and two Danish pension funds (Arbejdsmarkedets Tillægspension; ATP, and Pension Forsikringsaktieselskab; PFA) agreed to buy 26% stake in the Danish Dong Energy. When this 2 billion USD deal will be finalized (probably within a few weeks) it is expected that Goldman Sachs will own approximately 19% in Dong Energy, ATP approximately 5% and PFA approximately 2%. The Danish state will still be owner of more than half of the shares in the company.

It is expected that this deal will allow Dong to strengthen its balance sheet (hit by falling electricity demand due to the economic crisis and competition from coal) and to pursue its ambition to become a leading player in offshore wind energy. Thus, the deal has a strong renewable energy aspect. Dong Energy is already European market leader with almost 2 GW of offshore wind power installed in Denmark, Britain and Germany. And the company wants to more than triple that to 6.5 GW by 2020.

UK-Electric-Subsea-Cables-MapThe investments by the Goldman Sachs funds, Abu Dhabi Investment Authority, the Canadian pension fund, and Allianz are good examples of increased interest in the Nordic energy infrastructure and renewable energy. This may be a positive development, having regard to financing of the IceLink (an electric cable between Iceland and the UK). Financing projects like that could be perfect fit for large pension funds and investment vehicles.

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