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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.

Surprising claims about IceLink in the Financial Times

The Financial Times (FT) has published an interesting article, titled City financier urges UK support for £3.5bn Icelandic power cable – Plan to send geothermal electricity 1,000 miles under the sea to north-east England. The article is written by Andrew Ward, Energy Editor at Financial Times.

edmund-truell-icelink-hvdc-cableAccording to the article, the City financier Edmund Truell has “plans to open a £200m cable factory in the north-east of England if the government backs his project to build a £3.5bn undersea cable connecting the UK to geothermal power from the hot springs of Iceland.”  Actually, the article draws up a somewhat surprising and/or imprecise picture of the project, as explained here:

IceLink is indeed an interesting project. But is doubtful that Mr Truell’s proposal is the “most detailed” plan on the cable to emerge, as stated in FT. So far, the most detailed official document on the project yet, is a recent report by Kvika Bank and Pöyry (the report was published last summer but is in Icelandic only). Numerous of the comments made by Mr. Truell do not align well with this report.

According to Mr. Truell’s comments to the FT, “Iceland could supply 1.2 gigawatts of baseload power”. From this comment it seems that Mr. Truell has somewhat unclear understanding about how the project is seen by the governments of Iceland and UK.

The plan is not really sending “geothermal electricity” to UK. Nor will the cable serve as access to base-load power, but rather be access to a flexible hydro power source. Readers should note that Iceland’s power system is mostly based on hydropower. The idea regarding the cable is mainly to utilize large hydro reservoirs to offer access to highly flexible renewable power source.

Of course part of the power would be from geothermal sources (and also from onshore wind power which is likely to be constructed in Iceland). But the main power source for the cable would/will be the hydropower. In fact Iceland’s main problems in the power sector now relate to too fast construction of geothermal power plants. As was recently explained here on the Icelandic Energy Portal.

Iceland-Europe-HVDC-Interconnector-Landsvirkjun-Map_Askja-Energy-PartnersIt is possible that the cable would have a capacity of 1,2 GW. However, it is somewhat imprecise that the cable would offer a “supply of 1,2 gigawatts”, as Mr. Truell says to the FT. What really matters is how much electricity would be sent through the cable. According to plans introduced in Iceland, the annual amount is likely to be close to 5,000 GWh (5 TWh). This is the important power figure, rather than the capacity of the cable (which has not yet been decided and might be somewhat lower than the claimed 1,200 MW).

The length of the cable might indeed become 1,000 miles, as Mr. Truell is quoted to say in FT. But according to plans presented in Iceland it is more likely that the length would be closer to 750 miles. In the end the length will of course greatly depend on where the cable will/would come on land in Great Britain. No such decision has been taken yet.

According to reports presented in Iceland, the cost of the cable is not expected to be 3.5 billion GBP, as says in the FT article, but rather close to 2.4 billion GBP (central scenario). Total cost of the whole project would of course be a lot higher figure, due to the cost of new power plants and new transmission lines within Iceland. According to the Icelandic ministry of Industries and Innovation the total cost of the whole project would be 5-6 billion GBP (ISK 800 billion).

According to Mr. Truell, UK would get the electricity from Iceland at about 80 GBP/MWh. This figure is probably 25% to low (when having in mind the cost of the transmission from Iceland to UK). According to Pöyry, likely price would probably not be lower than close to 100 GBP/MWh.

urridafoss-vrirkjunIn the article in FT, it says that Iceland has offered “surplus electricity” to aluminium smelters, and Mr Truell says there is “still plenty left for export”. In reality the situation is a bit more complex. Currently, there is very little surplus-electricity in the Icelandic power system. It is expected that IceLink would need close to 1,500 MW of new capacity.  To be able to supply the subsea interconnector with electricity, Iceland would need to build numerous new and quite expensive power plants. Such plants would harness hydro, geothermal and wind. Also Iceland would need to strengthen its transmission system. So the cable would mean huge new investment in the Icelandic power system and the project is only partly based on “surplus” electricity.

An electric subsea HVDC cable between Iceland and the UK is indeed an interesting opportunity, such as to increase the amount of reliable and flexible renewable energy in UK’s power consumption. And it would be wise for the UK to make the project a priority. However, note that Iceland is not at all an endless source of green power. And the people of Iceland will hardly have much interest in such a project unless receiving strong economical gains from it. In addition the project would/will be a major environmental issue in Iceland, due to impacts from constructing new power plants and transmission lines. And to avoid misunderstanding about the project it is extremely important to have the facts right.

The wish-list of the Icelandic energy industry

Iceland may offer numerous new renewable energy projects where levelized cost of energy (LCOE) is very low. Or as low as 22.50 USD/MWh.

The weighted average cost (LCOE) for all new projects in Iceland needed to meet increased power demand until 2035, could be as low as 26.93 USD/MWh. This can be seen from a new report published by the Icelandic Energy Industry Association (Samorka). However, to realize such a low LCOE the Icelandic energy industry would have to be able to develop several projects that are currently not classified for development/utilization. When only taking into account projects already classified for utilization, the LCOE is substantially higher or 34.41 USD/MWh. Note that those figures are an estimation by contractors working for the Icelandic Energy Industry Association, and are based on cost-information from the Icelandic National Energy Agency (NEA).

LCOE for Projects in Utilization Category is 34 USD/MWh

The Icelandic government has adopted a special Master Plan for Nature Protection and Energy Utilization, where possible new hydro- and geothermal power projects are classified into three categories. The categories are protection, on-hold, and utilization. Many of the possible new energy projects have not made it into the utilization category.

Iceland-New-Power-Projects-Utilization-Category_Askja-Energy-Partners_August-2016The table at left lists the lowest-cost hydro- and geothermal power projects planned by the Icelandic government to be realized, currently classified in utilization category. Some of these projects have substantial higher LCOE than the lowest-cost projects not categorized for utilization. Note that the list is not absolute; for example the Eldvörp project may be developed before the Gráuhnjúkar project.

As can be seen on the table, the weighted average LCOE for all projects already categorized for utilization, needed to meet increased domestic demand until 2035, is close to 34 USD/MWh. Which probably explains why Icelandic energy companies are now, according to sources within the industry, offering new long-term power contracts where the tariffs are as low as 34-35 USD/MWh (common unofficial starting tariff; the advertised tariff is 43 USD/MWh).

Different Classifications May Offer LCOE as Low as 27 USD/MWh

Being able to offer new power contracts with a starting price close to 34 USD/MWh, may be quite competitive having regard to the international power market. However, Icelandic energy firms are eager to be able to develop projects that have even lower LCOE. Thus, the industry hopes to have several low-cost projects re-classified by the Icelandic parliament (Alþingi).

Iceland-New-Power-Projects-Wish-List_Askja-Energy-Partners_-Twitter-August-2016To reach the lower LCOE of 26.93 USD/MWh, several projects need to be re-classified. Meaning low-cost projects that are now classified as protection or on-hold, would be re-classified as projects in utilization category. This is illustrated on the table at below.

If the energy industry will be able to convince the Icelandic government and parliament to move certain possible projects from the categories of protection and on-hold, to the utilization category, the levelized cost of new generation needed until 2035 may drop from approximately USD 34 USD/MWh to close to only 27 USD/MWh (meaning almost 20% lower cost). So, the projects listed on the table at left can be said to reflect the wish-list of the Icelandic energy industry (the industry hoping to have all these projects listed for utilization).

With IceLink LCOE Could be Somewhere Between 28-37 USD/MWh

The two tables above also illustrate how different selection of projects affect the LCOE when/if the IceLink subsea power cable between Iceland and United Kingdom (UK) will be realized. If power will be exported from Iceland to UK, Icelandic generation naturally needs to increase more than without IceLink (as we have explained earlier here at the Icelandic and Northern Energy Portal). Depending  on which projects will/would be developed with IceLink, the LCOE for new traditional hydro- and geothermal projects could be as low as 28.49 USD/MWh (note that the overall LCOE for all the generation needed for IceLink would be higher, as it is expected that close to 550 MW of wind power would also be developed in Iceland to fulfill the demand of the cable). To reach such a low target for LCOE, 28.49 USD/MWh, the Icelandic energy industry would have to have its wish-list, as shown on the second table, accepted by the Icelandic authorities.

Holmsa-Axlarfoss

Having regard to projects currently categorized for utilization in the Master Plan, the LCOE will be much higher (with IceLink) than the said 28.49 USD/MWh. The LCOE for new traditional hydro- and geothermal stations currently categorized for utilization and needed for IceLink, is expected to be 37.21 USD/MWh (as can be seen on the first table above). Which is close to 30% more than the low-cost options on the wish-list. Thus the Icelandic government and politicians now face difficult and controversial decisions how to balance the economics and environmental issues, when deciding if changes will be made to the Master Plan. It is expected that a new version of the Master Plan may be adopted by the Parliament (Alþingi) even before the end of this year (2016).

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.

Data centers site selection

Which are the main decision drivers when companies are selecting location for data centers? This was the topic of an interesting presentation given Mr. Phil Schneider in Reykjavík earlier this summer. The event attracted high number of audience, which is not surprising as the date centre service in Iceland has great possibilities for strong growth.

Site selectors guild

Mr. Phil Schneider is the President of Schneider Consulting LLC and Chairman of the Site Selectors Guild. The Guild* is an association of the world’s leading site selection practitioners. Guild members provide location strategy to corporations across the globe and for every industry, sector and function.

Phil-Schneider_President-of-Schneider-Consulting_Chairman-of-the-Site-Selectors-Guild-in-Iceland-Askja-Energy-Partners-2015-2Mr. Schneider divided his presentation into three main parts. Firstly, he discussed the most important general issues that dictates the choice of companies regarding location of their business units. Secondly, Mr. Schneider described how this relates to the location of data centers. And thirdly, he discussed the challenges facing Iceland in attracting more investment in data centers in Iceland.

Strong growth potentials for Iceland

The data centre sector is growing rapidly all around the world. This trend creates interesting opportunities for Iceland in increasing diversity in the Icelandic economy. Due to extensive hydro- and geothermal resources, Iceland is able to offer more competitive long-term electricity contracts for data centers than available anywhere else in the western world (in addition, the Icelandic electricity is 100% green power).

Advania-Green-Data-Centre-IcelandThis is an important incentive for locating data centers in Iceland. Furthermore, Iceland has highly qualified workforce for this sector and a competitive tax system. However, Iceland needs to consider its marketing strategy and must present the necessary information in a way that is easily accessible. clear, and understandable.

Risk factors and misconceptions

Although site selection for data centers aims at being based on a thorough assessment of all the variables that may be relevant, it is quite common that misunderstanding regarding risk factors becomes a a major decision factor.  According to Mr. Schneider, companies often jump to wrong conclusions regarding risk factors. In the case of Iceland, foreigners may for example have the perceived feeling that Icelandic is a risky location due to earthquakes or volcanic eruptions. In fact, natural risks are a less threat to business operations in Iceland than in for example most areas of the USA. In this context, it is tremendously important to present correct and accurate information to avoid wrong assumptions or mistaken image.

The Icelandic energy portal plays an important role

Phil-Schneider_President-of-Schneider-Consulting_Chairman-of-the-Site-Selectors-Guild-in-Iceland-Askja-Energy-Partners-2015-5In his lecture Mr. Schneider emphasized the importance of good access to clear and reliable information about the Icelandic business environment and the energy sector. He especially referred to the Icelandic Energy Portal as such a source, regarding data center site selection. In the coming months we, at the Portal, are going to emphasize even stronger the issue of locating data centers and storing data in Iceland. Note that Mr. Schneider’s presentation can be watched here (starts at 36:22).

* Founded in 2010, the Site Selectors Guild is dedicated to advancing the profession of international corporate site selection by promoting integrity, objectivity, and professional development. Members are peer-nominated, vetted, and must demonstrate a significant amount of location advisory experience. Guild Membership is the highest standard in the site selection industry.

Does Apple not want truly GREEN data centers?

Denmark-Electricity-Sector-Mostly-Coal_March-2015Is there such a color as coal-green? This question comes in mind when reading about Apple’s new data center in Denmark. Apple recently announced it will construct two new large data centers in Europe, both to be “run on 100 percent renewable energy”. According to a press release from Apple, “the new facilities will run entirely on clean, renewable energy sources from day one”. These are interesting statements, having in mind that both data centers will be connected to a grid which mostly delivers electricity from fossil fueled power production. Here we will consider if a data centre located in Denmark can truly be said to run all the time on 100 percent renewable energy.

Denmark’s own power mix is dominated by coal

Denmark-Coal-Plant-StudstrupværketDenmark generates substantial amount of green energy. According to the most recent information from the European Union (EU), the renewable’s share of Denmark’s gross electricity consumption in 2012 was close to 40 percent. More recent information from the Danish transmission system operator (TSO), Energinet, tells us that the share of renewable energy in 2013 was somewhat higher than in 2012, but still less than half of the total electricity consumption (47.5 percent).

Denmark’s electricity is mainly generated by coal. The Danish government has plans to decrease the importance of coal, but coal still constitutes for more than half of the fuel consumption of Danish power stations. Most of Denmark’s renewable energy comes from wind, which is of course somewhat a fluctuating and unreliable energy source. In 2013 the share of wind in the electricity consumption was almost one-third (32.7 percent).

Connections to other countries are based on economics rather than green energy

Denmark’s electricity grid is not an island, but connected with its neighbouring countries by several large cables. Therefore, Denmark sometimes exports electricity and sometimes imports electricity. Weather it is exporting or importing electricity depends on the price difference within the larger market area. Normally, Denmark exports electricity during night (because of its large wind power capacity) and imports during the day (when demand goes up and Norwegian and Swedish hydropower stations are utilizing the water in the reservoirs). However, imports and exports of electricity of course always depends very much on how the wind blows in Denmark.

Denmark imports power from coal-, hydro-, and nuclear power stations

When Denmark imports electricity, it comes via cables from Germany, Norway, and/or Sweden. The imported electricity can, for example, be generated by fossil fuels (major coal power in Germany), by nuclear power (nuclear stations in Sweden and Germany), or by hydropower (especially from Norway, but hydropower is also a major source in Swedish power generation).

Denmark-Electricity-Imports-and-Exports-2013

Lately, most of the imported energy has been from Germany (as shown on the diagram at left, which is from the Danish TSO). Coal is the most important source of electricity generation in Germany, accounting for close to half of the generation. In Germany, only ¼ of the generation comes from renewable sources on average. Natural gas and nuclear energy account to close to ¼ of the generation. Thus, electricity imported to Denmark from Germany normally increases the share of fossil fuels and nuclear power in the Danish electricity consumption.

Data centers in Denmark are dependent on fossil fuels and nuclear power

It is highly unlikely that a data centre located in Denmark, connected to the grid.  will be run entirely on clean, renewable energy sources only. For the end-user in Denmark it is impossible to know how the electricity he consumes was generated. Even more important is that Denmark’s electricity mix is dominated by coal power stations.

Denmark-Electricity-Consumption-Mix_1990-2013-and-forecastIn fact every date centre in Denmark can be expected to mostly be run on coal power. Of course companies, including those running data centers, can try to find a generating company that only produces electricity from renewable sources and buy its electricity from that company. But the electricity put into the transmission grid can not be isolated – so to speak – from other electricity on the grid. Therefore, it is of course impossible for the buyer to promise that he is only using or consuming green energy.

It is possible to buy what is 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 or from a nuclear plant. The result is that every data center in Denmark, connected to the grid, will in fact be using electricity from all kinds of power plants, including for example coal power stations.

Iceland is the best option for GREEN data centers

The only way for a major data center being truly able to run on 100 percent renewable energy is to take power from 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 utilizing hydro- and geothermal power (and some wind power).

Norway is in a similar situation, producing almost all the power from hydro resources. But Norway also imports power from other countries, thus distributing coal power and nuclear power to end-users. So Norway is not quite as green option as Iceland is.

Regarding Denmark, it is obviously not a very green option at all. The environmental accounting may tell us that a company there has a very low net carbon footprint, but in reality the electricity is not only from renewable sources at all. If Apple or any other firm in Denmark wants to run 100 percent on renewable energy it would in fact either have to disconnect from the grid – or set up its operation in Iceland.

Build, own or operate data centers in Iceland

The Icelandic national power company Landsvirkjun has published a new video, explaining how data center operators in Iceland are using clean, renewable energy to power some of the world’s lowest total-cost-of-ownership (TCO) data centers. Landsvirkjun is Iceland’s  largest electricity generator, processing around 75 percent of all electricity used in Iceland. Iceland-data-centers-well-connected-by-optical-fiber-cablesAccording to a report by BroadGroup Consulting, Iceland is a highly attractive place to locate data centers. BroadGroup‘s, analysis show that on the key issue of power (encompassing everything from costs to quality to regulation) Iceland scores higher than leading global data centre locations such as the US, UK, Sweden, Singapore and Hong Kong. The report states that  power costs for data centers in Iceland can be half of those in Scandinavia, and significantly more competitive than other European countries. And what is even more important, Iceland’s power costs remain very likely to stay much lower than other countries. It is particularly important that data centers constructed in Iceland have the opportunity to cap the prices for ten years or even longer for greenfield projects. Opera-Software-logo-Data-Centre-IcelandIn addition to the low prices, it is an important fact that the power in Iceland is 100 percent from renewable sources. Iceland produces electricity using exclusively hydropower, geothermal energy and onshore wind. These are sustainable, environmentally green resources with zero carbon trade-offs. This makes Iceland an ideal location for addressing corporate responsibility considerations. On telecoms, existing connectivity (Greenland Connect, FARICE and DANICE) are being substantially upgraded. Significant new capacity is planned to be added over the next several years. The telecoms pricing attractiveness and strong telecom connections are well illustrated by existing users in Iceland, such as Opera Software. You are welcome to contact us at the Icelandic Energy Portal for more information on building, owning and/or operating data centers in Iceland.

Thorsil secures sales contract with Dow Corning

Thorsil-Silcon-Helguvik-IcelandPlans for the new Thorsil silicon plant in Helguvík in Southwestern Iceland are moving well ahead.

Thorsil has already entered into contracts for the sale of 85 percent of the production from the plant which is being constructed in Helguvík. According to the Icelandic business media Viðskiptablaðið, the two sale contracts amounts to a total of 1.3 billion USD over the contract period. The newspaper Mogunblaðið reports that one of the two contracting parties is Dow Corning, which is the largest silicone product producer in the world. The two contracts are said to be for a period of 8 years and 10 years, respectively.

Dow-Corning-Slicon-Production-Thorsil-IcelandWhen in full production in 2017, the Thorsil plant is expected to produce up to 54 thousand tons of silicon metal, as well as 26 thousand tons of silica powder. The plant will utilize close to 85 MW of power capacity, all from Icelandic renewable energy sources. The decision to locate this new silicon plant in Iceland is based on many factors, including very competitive electricity prices and positive tax environment in Iceland.

UK-Iceland cable on the Global Infrastructure 100 List

A global panel of independent industry experts has identified a subsea electric cable between Iceland and the United Kingdom (UK) as one of the hundred most inspirational and innovative infrastructure projects in the world – many of which are expected to transform the way the world’s populations interact with their cities, governments and environment. This is the first time that an infrastructure project in Iceland is on this list, which is published by KPMG (download the report as pdf here).

KPMG-Global-Infrastructure-100-2014-coverKPMG International’s ‘Infrastructure 100: World Markets Report highlights key trends driving infrastructure investment around the world. In the report, a global panel of industry experts identifies 100 of the world’s most innovative, impactful infrastructure projects. Furthermore, the panel demonstrates how governments are coming together with the private sector to overcome funding constraints in order to finance and build projects that can improve quality of life – both solving immediate needs and planning for future societal demands.

The 2014 report focuses on key trends driving infrastructure investment in four key markets, one of the categories being smaller established markets, which are strong domestic markets open to private finance in infrastructure.

The subsea electric cable between Iceland and the UK is one of 25 projects falling under this market-category. The report describes the project, called IceLink, as an ambitious attempt to connect the power grids of Iceland and the UK. Iceland produces all of its electrical power by the means of renewable energy, such as hydro, geothermal and wind, and has potential well beyond local consumption.

According to KPMG, the total investment in the cable and related production and grid infrastructure in Iceland has been assessed in the range of USD 5 billion. When completed, this clean-tech venture would be the world’s longest subsea power cable, delivering as much as 5 TWh a year of renewable electricity to the UK – at a cost lower than offshore wind in UK territories. KPMG says that UK-based ventures have shown interest in funding the interconnector, while Icelandic power companies will build the power-generating facilities and onshore infrastructure in Iceland

KPMG-Global-Infrastructure-100-2014-enregy-and-resources-list-smallOf all the 100 projects listed in the 2014 KPMG-report, 27 projects are in the sector of energy and natural resources. Besides the IceLink, these projects are for example the Alaska LNG Project, the UK Hinkley Point C Nuclear Power Station, and Russia-China Gas Pipeline.

A total of 25 projects are classified as being in smaller established markets. The IceLink is one of these projects – other projects in this category are for example the Facebook Rapid Deployment Data Center in Luleå in Sweden, the Scandinavian 8 Million City High Speed Rail Link between the capitals of Norway, Sweden and Denmark, and the Rail Baltica, linking Finland, Estonia, Latvia and Lithuania with 960 km of railway track. Although many of the projects in this category face challenges regarding scale and investment, KPMG believes there are good possibilities to realize all the projects with increased access of private investment. With IceLink in mind, a perfect and realistic business model might be a private ownership of the cable, while the Icelandic TSO and the main Icelandic power firms would probably be in majority governmental ownership, possibly with private investors as co-owners.

UK energy investors looking towards Iceland

Over the next few years billions of pounds are expected to be invested in new energy projects in the United Kingdom (UK). One of the projects may be a HVDC electric cable between UK and Iceland.

First step: 12 billion GBP for wind and biomass projects

Earlier this year (2014), the UK government made Contracts for Difference (CfD) with eight renewable energy projects, with a total capacity of more than 4,500 MW. Five of these projects are large wind farms (more than 3,100 MW in total capacity) and the three others are biomass projects (close to 1,400 MW).

The list of participants e.g. includes the Danish energy firm Dong, Spanish Repsol, Scottish SSE, and Norwegian Statkraft and Statoil. The eight projects are expected to contribute around 15 TWh annually, which will be 14% of the expected renewable electricity to be added to the British electricity generation by 2020.

Together, these contracts open the door for a private investment of 12 billion GBP in the British renewable energy sector. However, this is only the start of a much larger energy investments in the British energy system. In total, these investments are estimated to be about 110 billion GBP by the year 2020, including 40 billion GBP in renewable electricity generation projects.

Groundbreaking policy and legislation

The investments mentioned above are possible due to the recently approved energy policy and electricity market reform of the UK. The recently adopted Energy Act calls for higher proportion of renewable energy and the strengthening of energy security of the UK by increased access to more diversified energy production.

DECC-cfd-strike-prices-december-2013-cover

This is a very interesting step by the UK. The new energy policy introduces special Contracts for Difference (CfD) to replace earlier system of incentives. The CfD sets certain strike prices for electricity, which is a pre-defined long-term price. This system will substantially limit the risk of new power projects and be an important driver for projects giving access to more reliable power.

This may offer a variety of opportunities, such as for Icelandic engineering firms with geothermal expertise. Even more interesting, may be the possibility of a submarine electric cable between Iceland and Great Britain.

Nordic companies among the first to benefit

The new British energy policy and electricity market reform is already being implemented. It is an interesting fact that energy firms from the Nordic countries are the main players in four of the first eight projects involving CfD’s. These are the Danish Dong Energy and the Norwegian Statoil and Statkraft (the latter company is wholly owned by the Norwegian state).

All of the four “Nordic projects” are new offshore wind power parks, with a total capacity of close to 2,600 MW (CfD has also been awarded to a fifth wind park – Beatrice – with a capacity of 664 MW). The projects have gained authorization by the EU Commission, thus fully in consistency with competition and state aid rules. And the fixed strike price is 140-155 GBP/MWh (equivalent to approximately 220-250 USD/MWh).

New power plants and new submarine cables

The new investments, according to UK’s energy policy, will primarily be in new power plants and development of electricity transmission and distribution systems. In the coming months, the policy will be further developed and the UK Department of Energy & Climate Change (DECC) will continue to prioritize projects.

IceLink-HVDC-Disruptive-Capital-Atlantic-Superconnector-Map

The CfD-system applies to energy projects in Britain. However, the British energy policy also focuses on special arrangements to increase UK’s access to energy and electricity from abroad. This will e.g. happen with new cable connections (submarine electric cables) between the UK and its neighboring countries.

For the UK it will be especially important to gain access to flexible hydropower, to balance the electricity system. A HVDC cable between Iceland and UK could be an important part of such balancing and create high value to both countries. Such a project would also attract the interest of private investors, as already can be seen on the website of Disruptive Capital.