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Posts from the ‘Investing and Legal Issues’ Category

Jan 21

Gaining from the European green drivers

Electricity prices in Iceland are substantially lower than anywhere else in Europe. While common wholesale prices for electricity in Iceland are equivalent to 25-30 €/MWh, the wholesale prices in Europe are often double that and even more. This winter, for example, the average wholesale price at the European Power Exchange (EPEX SPOT) has been close to 50 €/MWh.

This means that if Iceland would have an electric cable connection with Europe, electricity could be sold from Iceland at a much higher price than being possible in the small Icelandic market. This  makes the European continent, Scandinavia and the United Kingdom a very interesting market for Icelandic generating firms.

STRONG DRIVERS:

Slide21High electricity prices in Europe are not the only driver, creating more demand for Icelandic electricity. Almost all electricity in Iceland is generated by utilizing renewable sources (hydro- and geothermal power). The European Union (EU) has adopted a binding plan to greatly increase the share of renewable energy. According to EU’s Renewable Energy Directive, the Union is going to reach a  20% renewable energy target for 2020 – more than double the 2010 level of 9.8% – as well as a 10% share of renewable energy in the transport sector. The targets will help to cut greenhouse gas emissions and – what may be even stronger incentive – reduce the EU’s dependence on imported energy.

According to the Directive, the member states have taken on binding national targets for raising the share of renewable energy in their energy consumption by 2020. These targets range from 10% in Malta to 49% in Sweden. The national targets will enable the EU as a whole to reach its 20% renewable energy target for 2020 – more than double the 2010 level of 9.8% – as well as a 10% share of renewable energy in the transport sector.

UK AS EN EXAMPLE:

DECC-2011-Figure-2It is noteworthy that to be able to reach the targets, it is expected that for example the United Kingdom needs to add more than 170 TWh of annual renewable energy  by 2020 (UK needs to go from present less than 60 TWh to approximately 230 TWh by 2020). This is according to the 2011 UK Renewable Energy Roadmap (pdf) and the 2012 Update (pdf).

It is not clear how large share new renewable electricity will be of this total renewable energy addition of 170 TWh. However, from the 2011 UK Renewable Energy Roadmap it can be expected that the goal for 2020 may be somewhere between 104-155 TWh of annual renewable electricity generation (as described in a table marked as figure 2 in the Roadmap; shown here above). The current annual renewable electricity generation in the UK is somewhere between 34-38 TWh. Thus, the goal of 104-155 TWh of total electricity from renewable sources by 2020, will call for a new annual renewable electricity production of 66-121 TWh. Possibly, it would be fair to say that the UK needs to add close to 100 TWh to its annual renewable electricity generation. And this is to happen within seven years from now.

HOW ICELAND CAN PLAY A ROLE:

EU’s plan for increasing renewable energy allows the member states to import renewable energy from other countries. Iceland can offer substantial amount of electricity from renewable sources at very competitive prices (currently, the Icelandic power company Landsvirkjun offers new 12 year contracts at 43 USD/MWH, which equals approximately 32 €/MWh). It may be totally realistic that some of UK’s new renewable electricity will come from Iceland.

Slide22Iceland’s hydro- and geothermal power is less costly than for example new wind farms in the UK. In addition, Icelandic hydro- and geothermal power is a stable base-load power, unlike wind and unlike solar.

An electric cable between Iceland and the UK might be a win-win project. UK would gain access to reliable base-load renewable electricity. Icelandic power companies would increase their profits and could utilize the cable to import electricity from the UK when prices there are low (for example during the night, when demand is minimal).

Such a high voltage direct current (HVDC) cable is currently being seriously considered by a group of Icelandic power companies and other stakeholders. This would be a technically and financially complicated project and probably it will take a couple years until any decision will be taken on the matter. For more information you are welcome to contacts us at Askja Energy directly with your inquiries.

Jan 14

Future growth of the Icelandic energy industry

Slide20Iceland has substantial renewable and economically attractive options to increase its electricity generation. The National Power Company, Landsvirkjun, has introduced a vision for possible upcoming projects, that could increase the total annual generation from the present 17 TWh to 33 TWh by the year of 2025.

Almost all of this additional generation of  16 TWh would come from new geothermal- and hydro power projects, but a small share might come from wind power. Almost doubling the electricity production in Iceland in a period of less than 15 years would call for massive investment. However, this investment could be fairly stable over the period, as most of the suggested power projects would be medium scale (and, for example, not as large as the 690 MW Kárahnjúkar / Fljótsdalsstöð Hydropower Plant, that was constructed in the first years of the 21st century).

Slide17Electricity prices in Iceland have been much lower than, for example, in most of Europe. This price gap has been increasing, offering the Icelandic power industry the possibility to raise the electricity price and still be very competitive.

Today, most of the electricity generated in iceland is consumed by the aluminum industry and other energy intensive industries. The long term contracts offer the electricity companies fairly stable revenues, but low profits. The increased price difference between Iceland and Europe may change this situation for the better. Today, Landsvirkjun is offering electricity contracts over a 12 year period, where the price is 43 USD/MWh. This is a very good option for small and medium sized companies, where electricity cost is a substantial share of their production costs.

Several new contacts have already been signed. Two new data-centers are already in operation; Verne Global and Thor Data Center, offering services that run on 100% renewable energy. This growing data-center industry is also enjoying  a major upgrade of the international submarine telecom capacity between Iceland and mainland Europe .

Slide18

Another example of new power contract is an agreement between Landsvirkjun and GMR (Geothermal Metal Recycling), where clean, renewable energy will be supplied to power a new steel and scrap metal recycling plant at Grundartangi in Southwest Iceland. Also, the German industrial holding company PCC and the French construction-materials giant Saint Gobain are considering Iceland as a location for their production.

It is too early to say how fast the Icelandic electricity industry will grow in the forthcoming years. If the electricity prices in Europe will continue to rise, as the consulting and engineering firm Pöyry has been forecasting, Iceland’s competitiveness will increase even further. For more information about these possibilities we recommend a recent analysis by Gam Management; Landsvirkjun’s Renewable Energy Potential and its Impact on Iceland’s Economy.

Dec 17

New low-cost renewable capacity

The main sources of Iceland’s primary energy are hydropower and geothermal power.

Iceland-Electricity-and-Heating-Sources-Hydro-Geothermal86% OF THE TOTAL ENERGY IS GREEN

Presently, the Icelandic hydro- and geothermal resources supply close to 100% of Iceland’s consumption of electricity and approximately 86% of Iceland’s total consumption of primary energy (of that total, 20% comes from hydropower- and 66% from geothermal sources). This is the world’s highest share of renewable energy in any national total energy budget.

Hydropower is the main source of the country’s electricity production, accounting for approximately three-quarters of all electricity generated and consumed. The remaining quarter is generated in geothermal power stations.

GEOTHERMAL DIVERSITY

Although hydropower is the main source for Iceland’s electricity production, geothermal heat is the main energy source in Iceland. As mentioned above, geothermal energy makes up around 66% of all primary energy use in the country.

The principal use of geothermal energy is space heating. Close to 90% of all energy used for house heating comes from geothermal resources, thanks to the country’s geophysical conditions and extensive district heating system. Geothermal energy also plays an important role in fulfilling an increasing electricity demand. Other sectors utilizing geothermal energy directly include swimming pools, snow and ice management, greenhouses, fish farming, and industrial uses.

STRONG GROWTH AHEAD

It is expected that demand for Icelandic renewable electricity will grow quite fast over the next few years. Iceland’s main power company, Landsvirkjun, has introduced plans for increasing its electricity production up to 75% within a decade.

Iceland-New-Green-Energy-Capacity

The fact that Iceland still has numerous very competitive unharnessed hydro- and geothermal options, makes the country an interesting location for all kinds of energy intensive industries and services. This may for example apply to data centers, aluminum foils production, several silicon production facilities etc.

The abundant natural hydro- and high temperature geothermal resources make the Icelandic power industry able to offer electricity at substantially lower prices than for example can be found in any other European country. Even the present low spot-price for electricity in the USA (due to extremely low price of natural gas) are no threat to the Icelandic electricity industry.

Companies that need substantial quantity of electricity and wish to operate within the OECD / Europe, will hardly find better long-term agreements than offered at the Icelandic market (43 USD/MWh in 12 year contracts are being offered by Landsvirkjun).

In addition to attractive electricity contracts, Iceland is a member of the European Economic Area and has a modern business environment based on European standards. For those considering energy-related investments in Iceland, a positive first step is contacting Icelandic professionals on the relevant subjects. At Askja Energy Partners we provide information and access to the most experienced and knowledgeable engineering, legal, tax, and accounting services.

Nov 5

McKinsey on Icelandic energy issues

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

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

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

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

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

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

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

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

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

Oct 29

The Icelandic energy sector is back on track

Construction of the new Búðarháls Hydropower Station in the southern highlands of Iceland is proceeding as scheduled.

Last week the President of Iceland, Mr. Ólafur Ragnar Grímsson, laid the cornerstone to the station’s powerhouse. The construction of this new power plant commenced in late 2010. The station will have two 47.5 MW turbines, with a total power of 95 MW. It will start operation by end of 2013 and by 2014 the station will produce 585 GWh of electricity annually.

The project is part of Landsvirkjun’s expansion following an agreement to provide an aluminum smelter of Rio Tinto Alcan (RTA) with more power. RTA has more than 40 years operating history in Iceland and is currently expanding its aluminum plant at Straumsvík in Southwestern Iceland. This increases RTA’s electricity demand in Iceland by 658 GWh annually.

When the financial crises hit Iceland in late 2008, a period of economical difficulties followed and foreign investment became minimal. Iceland’s credit rating was downgraded and as the power company Landsvirkjun is state owned this downgrading was negative for the company.

However, the Icelandic economy soon started to show positive signs. In early 2011 Landsvirkjun secured full funding for the Búðarháls Project. This includes two loans from the Nordic Investment Bank (NIB) and the European Investment Bank (EIB), respectively. Each of the loans is 70 million USD. In addition, Landsvirkjun successfully issued bonds for 100 million USD through an Icelandic bank. It certainly seems that Landsvirkjun is back on the track.

Oct 15

BMW and Icelandic energy in the media

Recently, there has been a lot of international media coverage about Icelandic energy issues.

This includes numerous news-stories about the decision of the flash German car maker BMW to move its high performance computing to a data centre in Iceland, powered by renewable energy. This will save around 3,600 tonnes of carbon emissions per year.

According to the news, BMW  is moving ten of its high performance computing clusters, consuming 6.31 GWh of energy each year annually, from Germany over to the Verne Global Data Centre in Southwest Iceland. The data centre uses electricity from 100 percent renewable sources – Iceland’s geothermal and hydroelectric generators.

Besides the carbon free renewable energy, Icelandic electricity is much cheaper than in any other OECD-country. Thus, BMW will save around 80 percent of the power costs of running calculations including crash test and aerodynamics simulations, as well as computer aided design and engineering calculations.

For more news about Icelandic energy issues, please go to our media-page.

Sep 24

Incentives for investing in Iceland

According to Icelandic law and regulations, businesses and industries are generally open to foreign investment. Because of Iceland’s strong legal relationship with Europe, the legal framework of the Icelandic energy industry is very similar to what applies in the European Union (EU). All individuals and other legal residents of Iceland or other member states of the European Economic Area (EEA),  European Union (EU), and European Free Trade Association (EFTA) are permitted to own enterprises which produce or distribute energy, and own energy exploitation rights with regards to water and geothermal energy.

The Icelandic Parliament has adopted a general act on incentives for initial investment in Iceland (law no. 99/2010). Governmental authorities are permitted to grant both general and regional incentives for new investments in Iceland up to a defined ceiling, in line with EU legislation. In addition to certain derogations from taxes and charges, incentives can also come in the form of direct cash grants, training aid and lease of land. Industrial sites are available around Iceland at competitive cost and local communities may offer certain extra incentives.

As a member of the EEA, Iceland has access to research funds of the EU for research and development programs and joint ventures undertaken with companies from at least one other EEA country (including all the countries within the EU). In addition, EU’s energy policy is a strong driver for the Icelandic energy sector. Close to 85% of Iceland’s consumption of primary energy is renewable energy, while renewable energy sources now account for only 12% of the final consumption of energy within the EU (this refers to energy used as electricity, heating, cooling, and transportation). The European Union has a target to increase the share of renewable energy sources in its gross final consumption of energy from 12% to 20% by 2020.

This policy by the EU not only calls for major investment in renewable energy production, but creates great possibilities for countries with unharnessed green energy sources available. With this in mind, it is interesting that only a portion of Iceland’s renewable hydro- and geothermal energy resources have been harnessed (approx. 20–25% of the total and probably around 40-50% when environmental concerns have been taken into account). Iceland may also offer interesting possibilities for large-scale wind power generation. In a nutshell, it is likely that EU’s energy policy will create substantial more interest in Iceland’s green energy industry and more demand for Iceland’s renewable energy sources.

Sep 3

Icelandic energy attracts foreign investment

Although Iceland is an independent country with its own currency, the country has a very close economic relationship with its Nordic neighbors as well as the European Union (EU). In this regard, Iceland’s membership in the European Economic Area (EEA) is of special importance.

The EU has adopted an ambitious and binding renewable energy policy, generally referred to as the 20/20/20. The policy requires:

  • a reduction in EU greenhouse gas emissions (by 2020) of at least 20% below 1990 levels,
  • 20% of EU energy consumption to come from renewable resources,
  • and finally a 20% reduction in primary energy use compared with projected levels, to be achieved by improving energy efficiency.

These climate and energy targets will result in a highly increased demand for renewable energy, a demand where Iceland is well-suited to contribute. No less important for the green Icelandic energy sector is the upward-pressure this policy will put on electricity prices. In a nutshell, the EU’s legally binding energy and environmental legislation is making Iceland’s renewable energy more competitive than ever before.

The Icelandic energy and business sectors have been attracting numerous new types of foreign companies to the country in recent years, such as the data-center of Verne Global (a recent benchmarking study by PricewaterhouseCoopers (PwC) in Belgium described Iceland as the most competitive location for the operation of data centers). The latest large energy project in the country is the ongoing construction of the 95 MW Búðarháls Hydropower Station. Several other power projects are being considered and planned, with a total capacity of several hundred MW.

The Icelandic energy industry itself has also gained interest from foreign investors. Recently, Iceland’s third major electricity company (HS Orka) was bought by a Canadian energy investment firm, lead by geologist and resource company entrepreneur Ross Beaty, CEO of American Silver Corp. The electricity industry in Iceland is open to direct investment by all legal entities registered within the European Union (EU) and the European Economic Area (EEA). You can read more about this in our section about Foreign Investment.

Jul 23

Strong Icelandic electricity growth

The recent growth in electricity generation and transmission in Iceland has been impressive.

Between 2005 and 2010 the Icelandic electricity generation doubled. It is important to keep in mind that all this increase was in low cost renewable generation (mostly hydropower). And remember that almost 100% of all electricity generated in Iceland comes from renewable sources (hydro- and geothermal power).

This rapid increase in Iceland’s green electricity generation is shown on the histogram at left / above. Most of the increased production is supplied to new industries and services. One of the main explanation behind this growth is the competitive electricity price Iceland offers.

The abundant natural hydro- and high temperature geothermal resources make the Icelandic power industry able to offer electricity at substantially lower prices than for example can be found in any other European country. Even the present low spot-price for electricity in the USA (due to extremely low price of natural gas) are no threat to the Icelandic electricity industry. Companies that need substantial quantity of electricity and wish to operate within the OECD, will hardly find better long-term agreements than offered at the Icelandic market (43 USD/MWh in 12 year contracts are being offered by the Icelandic power company Landsvirkjun).

It is expected that demand for Icelandic renewable electricity will grow quite fast over the next few years. The fact that Iceland still has numerous very competitive unharnessed hydro- and geothermal options, makes the country an interesting location for all kinds of energy intensive industries and services. This may for example apply to data centers, aluminum foils production, several silicon production facilities etc.

When having in mind the probable high growth in Icelandic electricity generation in the forthcoming years, it is not surprising that Landsnet (the Icelandic Transmission System Operator; TSO) is considering major investments in the electricity transmission system. The diagram at left is from Landsnet. It is interesting that even the major increase in transmission investments during 2005-2010 is fairly small compared to what may be expected in the next 10-15 years.

This plan for new transmission projects is not final yet. But it gives a clear view of the opportunities Iceland has regarding new and competitive green energy projects. No other western country enjoys similar economic possibilities based on 100% renewable energy.

Jul 16

Búðarháls power station

The glacial river system of Þjórsá and Tungnaá rivers in South Iceland is a major source for Icelandic hydropower.

Current capacity of the five power stations in those two rivers is 840 MW, with an annual generation of more than 5,000 GWh. The sixth power station in Þjórsá-Tungnaá, Búðarháls Station, will start operating in late 2013. It will have an installed power capacity of 95 MW and every year it will be generating 585 GWh. Then, the total annual generation in Þjorsá-Tungnaá will be close to 5,600 GWh.

All these six hydropower stations are owned and operated by Iceland’s largest power company; Landsvirkjun. In addition, Landsvirkjun is considering to construct three more power stations in Þjórsá river. Those three stations would have a combined capacity of 265 MW, adding more than 2,000 GWh of power generation per annum.

The Búðarháls Power Station received a positive assessment of environmental impact already in 2001 and construction commenced in November 2010. The electricity from the Búðarháls Station has already been sold to the aluminum smelter of Rio Tinto Alcan in Straumsvík in Southwest Iceland. The smelter in Straumsvík has 40 years successful operating history and the electricity from Búðarháls Station will be used for substantial increase in its aluminum production.

The project at Búðarháls includes a new 6 km² intake reservoir, Sporðöldulón, created with a 2.1 km long dam just below the Hrauneyjarfoss Power Station. A 7 km long 220 kW transmission line will be erected from the new power station to the Hrauneyjafoss line to connect Búðarháls Station with the National Grid.

It is worth having in mind that besides the three additional power stations Landsvirkjun is preparing in Þjórsá, as mentioned above, the company is considering several other attractive hydro- and geothermal power projects. Currently, Landsvirkjun is offering new power contracts that probably are the best offer available in all Europe. The company is offering a fixed real rate of $43/MWh in 12 year contracts.

In addition to the very competitive price, all the electricity Landsvirkjun produces comes from harnessing renewable power sources. No less important is the fact that all the Icelandic power stations are known for their excellent reliability – and the same applies to the Icelandic transmission system. This has been confirmed in numerous international reports, where Iceland’s electricity supply is ranked among world’s most secure (see for example IMD’s and WEF’s World Competitiveness reports).

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