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Posts from the ‘United Kingdom’ Category

Ireland and United Kingdom are best options for electricity exports from Iceland

It would be a positive step for Europe to become connected with Iceland by a subsea electric cable. Compared to other countries in Europe, Iceland has low electricity generation costs. In addition to the attractive electricity price, the Icelandic hydro- and geothermal resources offer very reliable and stable generation.

With this in mind, it is interesting that Iceland’s next door neighbours are electricity markets where the electricity prices are among the highest in Europe. Here we are referring to Ireland and the United Kingdom (UK). What is also important, is the fact that UK and Ireland are much closer to Iceland than for example Denmark, Holland (the Netherlands) or Germany. It is obvious that a subsea electric cable between Iceland and the European mainland would be substantially more expensive than to UK or to Ireland. There fore there are strong arguments for Iceland to consider Ireland or the UK as the best financially feasible options for such a connection.

UK is an excellent option and Ireland even better

UK-Ireland-Electricity-Prices-Industrial-2013_5-3-1

The two graphs (at left and below) show the electricity prices in 2013 in selected European countries, in USA and in Japan. The blue portion of the bars is the cost of electricity including transmission cost. The white bars show the price of the electricity when all the relevant taxes have been added (such as VAT and environmental taxes).

The first graph (chart 5.3.1) shows the electricity price to industries while the second graph (chart 5.5.1 below) is the price to households  (domestic prices), The average price of electricity (excluding tax) to industries in the UK in 2013 was close to 8 pence pr. kWh in 80 GBP/MWh. And the price to households in the UK in 2013 was close to 15 pence pr. kWh (150 GBP/MWh). In Ireland the prices were substantyally higher.

UK-Ireland-Electricity-Prices-domestic-households-2013_5-5-1

In 2013, wholesale electricity prices in the UK were close to 45% of the total price. Thus, the average wholesale electricity cost for industries in the UK in 2013 was close to 35 GBP/MWh, and for households the cost was close to 65 GBP/MWh. This means that the wholesale price of electricity to industries in the UK in 2013 was being close to equivalent of 55 USD/MWh. And the wholesale price to households was close to 100 USD/MWh.

According to Platts, the average wholesale electricity price in the UK in 2013 was close to 45 GBP/MWh, which is more than 70 USD/MWh. In Ireland the average wholesale electricity price in 2013 was higher or close to being equivalent to 80 USD/MWh.

UK-and-Ireland_-Electicity-Prices-Wholesale-2013

For comparison, in Iceland about 80% of all electricity produced is sold to aluminum smelters and other energy intensive industries, at a price close to 25 USD/MWh. If Iceland could sell electricity to UK, the revenues pr. every sold unit of electricity could be close to triple the current price in Iceland. Of course there would be a high transmission cost via subsea cable; probably close 35-40 USD/MWh. Still, the added profits would be substantial – if the electricity would be sold to UK or Ireland at 70-80 USD/MWh . At the same time, the UK or Ireland would get access to reliable renewable energy.

Will the UK be interested in Icelandic CfD’s?

UK-Decc-Energy-Policy-CfD-Strike-Prices-Cover_dec-2013At first glance, one might consider Ireland more interesting market for Icelandic electricity than the UK. It is indeed so that the price of electricity in Ireland would probably justify a submarine cable between Iceland and Ireland. However, the energy policy of the UK makes the UK more attractive for Icelandic electricity suppliers.

The energy policy of the British government involves ensuring new energy projects, by securing a minimum price for the electricity from new generating projects, in special contracts called Contracts for Difference; CfD’s. The minimum electricity price in such contracts (called strike price) is quite high. For electricity from geothermal and hydro power sources the strike prices are equivalent to 155-220 USD/MWh.

UK-Decc-Energy-Policy-CfD-Strike-Prices-Table_dec-2013It is also interesting that the strike price for electricity from new offshore wind farms is equivalent to 220-240 USD/MWh. It is likely that the UK could negotiate with Iceland for a strike price that would be substantially lower, thus saving Uk’s taxpayers money. What the exact price would be would be decided in negotiations between Iceland and the UK, but it could be somewhere between 155-240 USD/MWh. This option should be interesting to both Iceland and the United Kingdom.

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.

IceLink offers high increase in social and economic welfare

ENTSOE-HVDC-Iceland-2014-coverThe European Network of Transmission System Operators for Electricity (ENTSO-E)  has submitted the final draft of the community-wide Ten-Year Network Development Plan (TYNDP) to the Agency for the Cooperation of the Energy Regulators; ACER. Following reception of the ACER opinion, the final TYNDP 2014 will be published by end of December 2014.

The TYNDP 2014 explores the evolution of the electricity system until 2030 in order to identify potential system development issues and to be able to address these proactively. The objectives of the TYNDP are to ensure transparency regarding the electricity transmission network and to support decision-making processes at the regional and European level.

IceLink would result in highly increased social and economic welfare

The report from ENTSO-E includes analysis and evaluation of numerous possibilities for new electric cables interconnecting different electricity markets in Europe. One of the possible cables is a submarine HVDC cable (High Voltage Direct Current) between Iceland and the United Kingdom (UK); sometimes referred to as IceLink. The cable is expected to have a capacity somewhere between 800-1,200 MW, and be close to 1,000 km long.

ENTSOE-HVDC-Iceland-2014-mapAccording to ENTSO-E the IceLink could offer an increase in social economic welfare of up to 470 million EUR annually. This is higher SEW than most other of the interconnectors evaluated by ENTSOE-E in the new report. The social and economic welfare (SEW) is characterized by the ability of a power system to reduce congestion and thus provide an adequate transmission capacity so that electricity markets can trade power in an economically efficient manner. In addition, the IceLink offers much more flexibility or steerability than for example the numerous large scale wind power projects, evaluated in the report.

ENTSO-E presents four different scenarios

The 2014 version of the TYNDP covers four scenarios, known as the 2030 Visions. The visions were developed by ENTSO-E in collaboration with stakeholders through the Long-Term Network Development Stakeholder Group, multiple workshops and public consultations. The four visions are contrasted in order to cover every possible development foreseen by stakeholders. The visions are less forecasts of the future than selected possible extremes of the future so that the pathway realized in the future falls with a high level of certainty in the range described by the visions. The span of the four visions is large and meets the various expectations of stakeholders. The four visions for IceLink have a span of 290-470 million EUR annually in increased social and economic welfare.

Top-down, open and constantly improving process

The first Ten-Year Network Development Plan was published by ENTSO-E on a voluntary basis in 2010. The 2012 release built on this experience and the feedback received from stakeholders, proposing the first draft of a systematic cost benefit analysis. In the last two years, ENTSO-E has organized exchanges with stakeholders to ensure transparency as much as possible.

ENTSOE-HVDC-Iceland-2014-1For the 2014 release, ENTSO-E launched a large project, where the expertise of the members of ENTSO-E; the Transmission System Operators (TSO’s). This included the Icelandic TSO; Landsnet. Having regard to the high SEW of IceLink and its highly flexible power production, it can be expected that the project will attract strong political interest and positive financing.

IceLink offers flexibility rather than base-load power

In a recent publication, Getting Interconnected – How can interconnectors compete to help lower bills and cut carbon?, the British think tank Policy Exchange encourages the government of the United Kingdom (UK) to use subsidies to open up new electricity capacity market to power stations outside of UK. The electricity would then supply the British market via subsea high voltage direct current (HVDC) power cables, often referred to as interconnectors.

Policy Exchange sees Icelandic hydro- and geothermal power as base-load power source for UK

On its website, Policy Exchange is described as “an independent, non-partisan educational charity seeking free market and localist solutions to public policy questions”. Furthermore, Policy Exchange is said to be “an educational charity with the mission to develop and promote new policy ideas, which deliver better public services, a stronger society and a more dynamic economy”. Its research is supposed to be “evidence-based and strictly empirical”.

HVDC-Interconnectors-Report-Policy-Exchange-UK-2014-1

Unfortunately, it seems that the think tank has somewhat misunderstood the facts, advantages and possibilities of the Icelandic energy resources. In its report mentioned above, Policy Exchange claims that an “interconnector to Iceland would […] be an import-only connection, which would bring base-load Icelandic hydro and geothermal power to the GB market.” According to the report, such an “interconnector, like that to Iceland, which is expected to provide zero-carbon base-load power supply in one direction (i.e. from Iceland to the UK) is most directly in competition with other base-load power sources, such as nuclear power.”

This assumption by Policy Exchange is somewhat inaccurate. It ignores the fact that Iceland’s main source of electricity is hydropower, based on large reservoirs. Although it is true that Iceland’s geothermal- and hydropower resources can be good options for base-load energy, hydropower offers much more valuable characteristics. Here we will explain why an interconnector between UK and Iceland would have considerable better economical (and political) foundations if it is utilized as access to highly flexible renewable power source, rather than base-load energy.

The think tank is not realizing the main advantages of an interconnector to Iceland

The best opportunity offered by a HVDC cable connecting Iceland and UK, is to harness the Icelandic hydropower resources (and reservoirs) for high demand peak load power in the UK – and as energy storage during low power demand in the UK. Icelandic reservoirs are like natural energy batteries, where Icelandic electricity firms can “store” the energy to the exact period when it is most needed. This makes it possible to manage the electricity generation very accurately – and thereby increase or decrease the production with a very short notice in line with changes in the electricity demand. Therefore, hydropower with large reservoirs are excellent system stabilizers. This flexibility or steerability of hydropower also offers possibilities for maximizing the profitability of the electricity production. The result is that utilizing the flexibility of Iceland’s hydro power would be a great benefit to both the UK and Iceland.

HVDC-Interconnectors-Report-Policy-Exchange-UK-2014-3

Steerable hydropower is tremendously important and valuable. The reliable and controllable renewable power source of hydropower from reservoirs is by far the best choice to meet increased (or decreased) electricity demand and balancing the system. This positive feature of hydropower is reflected by the well known concept of pumped hydropower storage, where it makes economical sense to spend electricity on pumping water up to reservoirs. In a nutshell, hydropower plants with large reservoirs can serve as energy storage when electricity demand is low, and when the demand rises it only takes a few moments for the hydropower plant to increase production. This is obviously a very positive feature, such as at peak load times (normally occurring during the day rather than night). It also means that the operator of a hydropower plant can maximize the profitability of the plant by utilizing the flexibility of the plant – by running the plant at full capacity when electricity prices are highest. Therefore, hydropower can be substantially more profitable than other electricity sources.

Having this feature of hydropower in mind, it is quite surprising to see Policy Exchange suggesting to market Icelandic hydropower as base-load energy source. By doing so, Policy Exchange is ignoring the fact that the Icelandic hydropower could create much more value if the business model would focus on peak demand rather than base-load power supply. And this would not only benefit Iceland, but also the UK.

Icelandic hydropower would be an important system stabilizer for the the UK

In its report, Policy Exchange recommended that the interconnector between Iceland and UK should be one way export of electricity from Iceland and be directly in competition with other base-load power sources, such as nuclear power. This suggestion ignores how the flexibility of hydropower stations with large reservoirs (like in Iceland) makes hydropower quite unique and very different from nuclear power (only gas powered generators have the possibility to respond as quickly to changing system conditions as hydroelectric generators). In fact, nuclear power plants must be run at close to full output all of the time – and they actually need capacity liked pumped hydro storage for excess power at times of low demand. Therefore, it is quite obvious that the main advantage for the UK, by the construction of an interconnector between UK and Iceland, is the access to peak load renewable power from Iceland, rather than base-load.

Iceland-Europe-submarine-hvdc-cable_routesThe interconnector between Iceland and the UK should also be in the role of bringing electricity from the UK to Iceland at periods of low demand in the UK. This would maximize the flexibility and steerability of the Icelandic reservoirs, and at the same time increase the opportunities for the UK to stabilize the British electric system. In this case, the Icelandic reservoirs would act as valuable energy storage for the British electricity market. This is especially important as more and more wind power is harnessed in the UK. More wind power will mean increased fluctuation in the electricity system and call for increased access to reliable flexible power source – like Icelandic hydropower.

It will not only be important to export electricity from Iceland to UK. Exporting electricity from UK to Iceland will also benefit both nations. During periods of low power demand in the UK (such as at nighttime), electricity generated by power plants in the UK could be used to fulfill electricity demand in Iceland. At the same time, water flowing from the Icelandic highlands and mountainous areas would be saved in the Icelandic reservoirs. When electricity demand in UK rises in the morning and during the day, the water in the Icelandic reservoirs would be utilized for generating electricity at high capacity to meet the increased demand. The result is that an interconnector between UK and Iceland offers access to valuable and renewable energy storage, ready for peak load demand – at relatively low price. It is even possible that electricity from the UK might be used for pumping water up to the Icelandic reservoirs from downriver during the periods of low electricity demand in the UK – this pumped water would then be available as a increased power source when demand in the UK rises during the day.

Win-win situation

Although Policy Exchange is somewhat inaccurate when it sees Icelandic electricity as basload power, the think tank is correct in its conclusions, when it states that “interconnectors appear to be an attractive option for the British electricity sector”. Policy Exchange is also correct when saying that “British consumers would benefit from importing overseas-generated power which is cheaper than domestic alternatives”. Electricity generated by hydropower (and geothermal power) in Iceland would be less costly for consumers in UK than electricity from for example new wind parks or new nuclear plants. And it is true that an interconnector between UK and Iceland would be “one way of achieving the oft-sought goal in energy policy of diversification of supply” – as Policy Exchange mentions in its report . And such a project would indeed provide both technical and geographic diversification, as the report says.

UK-Policy-Exchange-_Interconnectors-HVDC-Report-Cover-2014In its report, Policy Exchange expresses, that the UK wants more electricity from overseas and that there is no good reason to stand in the way of new interconnectors (“we want their electricity; they want our money”) . This argument is e.g. based on the fact that Icelandic renewable electricity would be available to the Brits for less money than the electricity would cost if it was generated at home (in UK). In addition, an Interconnector between UK and Iceland would offer British consumers access to much more reliable energy sources than for example British wind energy can ever be.

Economically and politically it is highly unlikely that the project will ever be realized if the business model is a one-way base-load interconnector. To create a win-win situation for both UK and Iceland the electricity must be able to flow in both directions, where the cable would have the purpose to meet peak load demand and also offer the possibility to utilize Iceland’s flexible hydrpower system as energy storage. Finally, it is worth mentioning that according to the latest news from ABB the technology for an interconnector between Iceland and UK is available.

Icelandic hydropower offers great possibilities for the UK

FT-Electricity-2014-1The Financial Times (FT) recently published an interesting story about how electricity suppliers in the UK “struggle to quench business thirst for power”. This article in the FT is an excellent reminder about how important and valuable it is to have access to reliable on-demand power whenever necessary.

Here, we will explain how the flexibility of the Icelandic water reservoirs can be utilized as a source for peak load electricity demand in Europe, and at the same time substantially increase revenues and profits in the Icelandic energy sector. Such a value creation could be a great business opportunity for the steerable Icelandic hydropower.

Access to flexible electricity is extremely important

In most European countries demand for electricity can fluctuate significantly between day and night. The electricity consumption within the day can also fluctuate – sometimes with a very short notice.

As an example, electricity consumption can change suddenly at commercial brakes within popular television broadcasting shows – when tens of thousands of families suddenly put the kettle on and/or the microwave. Such fluctuations in electricity demand are often unforeseen. That’s why most European nations need to have good access to energy sources that offer highly flexible and controllable production.

But not all energy sources offer good possibilities to increase or decrease electricity-production rapidly. It is actually only natural gas-fired stations and hydropower stations with reservoirs that are flexible enough to fulfill the need of stability in the electricity system.

Hydropower and natural gas are the best options for stabilizing the system

Yes – It is a well known fact that when demand for electricity changes significantly and abruptly, it is natural gas fried power plants and hydroelectric power plants (with reservoirs) that have the best capabilities to meet such changes. This both applies to the need of increased or decreased production.

UK-Electricity-typical-weekly-demand_University-of-Glasgow-presentation-2012Response time of coal power plants is much slower. And nuclear power stations offer base load power and must be run at close to full output all of the time (therefore storage capacity is needed for excess power generated by nuclear plants at times of low demand).

Wind power and solar power plants are almost useless in the regard of flexibility. Because they are subject to the present natural forces (the wind and the sun). In fact, increased use of wind and solar energy in Europe has made it even more difficult to control the balance in the electricity system. Hence, the need for flexible and controllable power production has become ever greater as the use of wind and solar energy increases.

Steerable renewable electricity is tremendously valuable

Because of the flexibility of hydropower- and natural gas plants – these are the best energy sources to take advantage of price volatility on the power market. The water reservoirs make it possible to manage the production very accurately – and thereby increase or decrease the electricity production with very short notice in line with changes in the electricity demand. Thus, hydropower plants have excellent possibilities to maximize their revenues and profits with regard to price fluctuations in the electricity market.

This feature makes hydropower quite unique and makes it the energy source that can deliver the highest return on investment. Moreover, hydropower has the advantage over natural gas being a renewable source of energy. Thus, hydropower can be described as the jewel in the electricity sector – at least if the hydropower station has access to a traditional power market where the demand for electricity fluctuates substantially.

Pumped storage is an excellent example of the great value of hydropower

To have a better access to flexible electricity, there are examples of water being pumped up to reservoirs (pumped storage). This same water is utilized for electricity production later, when demand is high. Pumped storage also serves as important factor in load balancing. This kind of electricity production is e.g. well known in Austria and Switzerland, as well as in the United Kingdom.

Obviously substantial amount of energy is needed for the pumping. But as the pumping primarily takes place during night (when electricity demand is minimum and electricity prices are low) and the water from the upper reservoir is used for electricity production when the demand is high (and prices also), this is a viable option.

Countries with extensive hydro resources are in a key position as system stabilizers

Pumped storage is a good example of how hydropower with water reservoirs offers the best opportunity to be in the role of flexible electricity supply. However, possibilities for pumped storage are limited. Thus, large electricity markets can gain tremendously from being connected to even faraway hydropower sources – like if the UK had a connector to Iceland.

LV-Autumn-Meeting-2013-slide-11This is also an interesting option for Iceland. Areas that enjoy substantial opportunities for developing hydropower stations beyond their local market need can take advantage of sudden price changes on fluctuating electricity markets. It is precisely such given flexibility with water reservoirs, that has greatly increased the value of the Norwegian hydropower. The worlds’ longest subsea electric cable today is the NorNed cable between Norway and the Netherlands. And now a cable between Norway and the UK is being planned and also another cable between Norway and continental Europe.

All this is an indicative of how profitable it is for countries with steerable hydropower to have access to electricity markets where electricity demand fluctuates substantially. In this context electricity from hydropower can be described as the most prestigious product in the energy market.

Iceland has one of the worlds’ most flexible power system

Overseas Iceland is quite well known for its geothermal energy. However, geothermal is the source for only 25 per cent of Iceland’s electricity production. It is hydropower that is Iceland’s most important energy source. The country’s mountainous areas and high precipitation create perfect conditions for utilizing hydropower. Large and small reservoirs are like natural energy batteries, where Icelandic electricity firms can “store” the energy to the exact period it is most needed and sold at the highest prices.

LV-Autumn-Meeting-2013-slide-26Iceland is the largest hydroelectric producer in the world per capita (Norway comes in second place). But Iceland has not yet taken advantage of the flexibility of its hydropower. In most other European countries the reservoirs would normally be in the role of highly profitable flexible energy sources. In Iceland, however, the main role of the reservoirs has been to serve as energy reserves available for aluminum smelters, which require access to cheap and highly reliable energy source.

Moreover, the isolated and closed Icelandic electricity market sometimes results in water flowing from full reservoirs by spillway and into sea without creating any value. Such waste of hydropower is like throwing away the most luxurious goods in the energy market.

If Iceland had access to a more normal electricity market (the aluminum industry uses about 75% of all electricity generated in Iceland) it could present Iceland with an unparalleled business opportunity. At the same time, the overseas market linked with Iceland by an interconnector would have substantially increased access to highly reliable flexible renewable energy source. This can truly been described as a win-win situation.

Interconnector between Iceland and Europe may be within reach

Subsea electric cables are steadily becoming longer and going through more depths. A cable between Iceland and Europe (UK) would probably be close to 1,200 m in length and the greatest depth would be close to 1,000 m. Today the longest cable of this kind is close to 600 km and it is likely we will soon see cables extending 700-800 km (a cable between Norway and the UK may become the next record length). And there are already examples of such subsea cables where the sea is more than 1,600 m deep.

LV-Autumn-Meeting-2013-slide-28It seems becoming both technically and financially possible to have an interconnector between Iceland and Europe and at modest cost. The advantages are obvious; both for Iceland and the European country at the other end of the cable. Due to the distance, the UK seems to be the best option. And actually the energy policy of the UK is also very positive for such a project. Thus, an interconnector between Iceland and the UK may be within reach.

In the earlier mentioned article in the FT, it is described how manufacturing companies in the UK are finding it hard to access electricity for their production: “[A]ccording to research by Edison Group, a consultancy, one in four UK midsized companies are planning for power shortages over the next few winters.” This situation is obviously very worrying for the UK and calls for immediate measures to ensure future access to more (stored) power.

This alarming issue for the UK was the subject of an editorial in the FT on last June 10th (2014). We will conclude this article about how the Icelandic hydropower offers great opportunities – for both Iceland and the UK – by quoting this FT editorial:

FT-Electricity-2014-2

Britain’s supply of electricity is dangerously close to resurgent demand. The safety margin of capacity has been shrinking and now stands well below the 20 per cent necessary to insure against shocks. When demand rises in winter there is a risk that the margin will disappear altogether.

To avert this grim possibility, Britain’s National Grid has just announced measures intended to stave off the risk of looming winter blackouts. The regulated utility plans to pay large users of power to be cut off should demand risk outpacing supply. It also intends to recommission about a dozen mothballed gas-fired power plants to establish a capacity reserve. […] The immediate need is to keep the lights burning. National Grid should do whatever it takes to achieve this until new capacity can be commissioned. This will mean higher bills. But house insurance is never cheap when smoke is pouring from one’s windows.

NB: The three slides above from Landsvirkjun (the Icelandic state owned energy company)  are from a presentation given by the company’s management in late 2013. The presentation is accessible on the company’s website.

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”.

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.

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.

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.

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.

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