Skip to content

Posts from the ‘Subsea Interconnector’ Category

UK affirms interest in IceLink interconnector

HVDC-Letter-UK-to-Iceland_2015-01-29_17-55-03_GBG_January-2015Iceland’s Minister of Industry, Ms. Ragnheiður Elín Árnadóttir, recently received a letter from Mr. Matthew Hancock, UK’s Minister of State at the Department of Energy and Climate Change (DECC).

In his letter, Mr. Hancock expresses his interest in an electric connector between Iceland and the United Kingdom (UK).  The letter is dated January 24th 2015 and reads as following:

Dear Ragnheiður Elín,

You met Michael Fallon in spring last year [2014] to discuss the possibility of an electricity interconnector between Iceland and the UK. I have taken over as Energy Minister and wanted to write following a meeting I had recently with one of the potential developers. I was very pleased to hear that a new Steering Committee is being set up to help you consider the impacts of such a major project. If it would be helpful, my officials stand ready to assist the work of this Committee, for example by providing information on the UK regulatory regime.

Studies we have commissioned indicate that an electricity interconnector between our two countries could provide economic benefits to us both and I am therefore interested in examining such a project further. The UK Government is considering options for sourcing low carbon, secure and affordable electricity post-2020 and an interconnector between our two countries might be one of the options we could examine in this process.

Matthew-Hancock_UK-Minister-Energy-Climate-Business-InnovationI would welcome your own views on the benefits of such a project and would of course, be very happy to discuss this with you if you have the opportunity to come to London at any time. I look forward to hearing your thoughts on the next steps.

Then the letter ends with Mr. Hancock’s signature [“Matt”]. It will be interesting to see how this possible project will develop in the next months.

NordLink: 1,400 MW interconnector between Norway and Germany

Earlier this month (February 2015) final investment decision for the NordLink high voltage direct current (HVDC) interconnector was made by partners Statnett, TenneT and KfW.

HVDC-Nordlink-MapThis will be the first direct connection between the German and Norwegian electricity markets and is yet another indicator how positive interconnectors are for the Norwegian electricity market. This development is also likely to strengthen interest in a cable project connecting Iceland and Europe (sometimes referred to as IceLink). Thus, we at Askja Energy will closely be following the construction of the NordLink.

NordLink is a turning point in the development of subsea electric cables. The longest cable of this kind today is the 580 km long NorNed between Norway and the Netherlands, which has been in operation since 2008. The length of NordLink will be close to 600 km, of which 516 km will be a subsea cable. Furthermore, the capacity of NordLink will be 1,400 MW and the voltage will be 500 kV, while NorNed is only 700 MW (and 450 kV).

The NordLink will be realized by the Norwegian Statnett and Nordseekabel, each with 50 percent ownership in the project. The Dutch TSO TenneT (which also operates transmission system in Germany) and the German promotional bank KfW each have shares of 50 percent in Nordseekabel.  The tender process has been finalized, where Nexans and ABB have been awarded contracts for the HVDC cable itself and ABB has been awarded the contract for the converter stations (on each end of the cable in Germany and Norway). Lead insurer for the project will be Codan.

NordLink signingThe NordLink comprises a total investment volume of approximately EUR 1.5 – 2 billion EUR (equivalent to 1,7-2,3 billion USD). The interconnector is scheduled for commissioning and trial operation in the last quarter of 2019, and after the trial period the interconnector will go into commercial operations in 2020.

The most important aspect of NordLink’s business model is to utilizing the flexibility of Norway’s hydropower system as storage for German wind power. This will increase the utilization of the German wind power capacity and also make it possible to maximize profits of the Norwegian hydropower industry, creating a win-sin situation. The result will also be increased proportion of renewable electricity and increased security of supply. Without doubt, an interconnector between Iceland and Europe would offer similar advantages.

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.

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.

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.

Norway’s positive experience from interconnectors and open electricity market

Earlier this month, Mr. Ola Borten Moe, former energy- and petroleum minister of Norway, was in Iceland, discussing the development of the Norwegian electricity market.

In a presentation, at the Harpa Conference Hall in Reykjavík, Mr. Borten Moe gave a comprehensive insight on the matter. This open meeting took place on September 9th (2014) and was hosted by VÍB. The meeting was very well attended; in addition to the crowd at the hall at Harpa close to two thousand people watched the event live on the web (where a video recording is now available).

Iceland-Energy-Harpa-September-2014_Norway-Borten-Moe_Ragnheidur-Elin-Arnadottir_Hordur-Arnarson_Ketill-Sigurjonsson-1After the keynote speach by Mr. Borten Moe, there were panel discussion with three more participants; Ms. Ragnheiður Elín Árnadóttir, Icelandic Minister for Energy and Industries, Mr. Hörður Arnarson, CEO of Landsvirkjun Power Company, and Mr. Ketill Sigurjónsson, Managing Director of Askja Energy Partners. In his presentation Mr Borten Moe especially focused on two main issues; .Norway’s experience from the liberalization of the electricity market and Norway’s experience from the interconnectors (electric HVDC cables) between Norway and outher countries. Here we will highligt some parts of Mr. Borten Moe’s presentation. For reference, we will quote a transcript from the meeting, now accessible at the website of Landsvirkjun.

Positive economic and environmental effects

Mr. Borten Moe explained how the Norwegian deregulation of the elctricity market, which happened in the 1990’s, became a model for similar changes in Europe a decade later. He also described how interconnectors (electric cables) between Norway and other countries have benefitted both the Norwegian people and the domestic energy industry in Norway.

According to Mr. Borten Moe, the market deregulation and the interconnectors have been very positve for the Norwegian society. It has lead to more efficiency in the Norwegian hydropower industry, wich is mostly in public ownership. Also Mr. Borten Moe stated, that the interconnectors have resulted in a better access to electricity supply, which has especially been important for Norway in dry periods (as Norway’s electricity generation is almost 100% based on hydropower). Even more, the result of the more competitive electricity market has not only been the financial benefit, but also a better stewardship of the natural resources. In Borten Moe’s own words:

Iceland-Energy-Harpa-September-2014_Norway-Borten-Moe-1“We [Norwegians] experienced a huge efficiency gain in the power production industry. And not did they only turn around all the heads in all of the industry, but […] also turned around the head to everyone owning the industry. Meaning that thousands of people could be liberated or do something else and more productive for society.”

“From the mid-1990s and outwards, the [electricity generating] industry produced huge surpluses, and these are values that are put back into work for the Norwegian society through the fact that there are municipalities, counties, and the government owning it. So we build roads, we build schools, we build health care systems for the values created in our power industry.”

“I foresee Norway being willing to take a bigger place when it comes to capacity regulating systems, using our hydropower system more to regulate for necessary regulations of the European power markets being more dependent on renewables […] and also maybe even selling electricity, being a net exporter. That is basically what we do with oil and gas.“

“So far in Norway, this has been the story that I told you. It has been more well functioned markets, increased efficiency, more values created, more security of supply and now lower electricity prices because we have introduced more production capacity into the market.”

Efficiency in the electricity industry serves as natural protection

The Norwegian electricity market was tightly regulated up until the 1990’s. This meant very limited competition. Low returns were a normal condition in the electricity production and this lead to over-investment in the hydropower sector. One of the effects of the deregulation was more access to economical supply outside of the former small highly regulated markets in Norway. Thus, the deregulation served as an incentive to not utilize some of the less economic hydropower sources. Or as Mr. Borten Moe explained:

Iceland-Energy-Harpa-September-2014_Borten-Moe_Ragnheidur-Elin-Arnadottir_Hordur-Arnarson_Ketill-Sigurjonsson-panel“[My] predecessor, Eivind Reiten, who is the father of the new energy system, when he presented the new energy bill to Parliament in 1990, deregulating the whole sector as one of the first countries in the world, he said that this bill would save more Norwegian nature and water and waterfalls than any gang in chains would ever do. And he was right. So the deregulation and the market system in Norway has also been one of the biggest reforms to save Norwegian nature.”

“Norwegians strongly believe that access to electricity should be cheap, it should be unlimited, and it should be safe. And it should not disturb the nature, which basically means that you have a lot of wishes and demands and it’s not always very easy to fulfill all those wishes at once.”

“I think it is a fact that you need to consume nature to produce electricity and power but basically I would say that if you are to do it at least you need to produce a lot of money, a lot of values for society doing it.”

Competitiveness of Norwegian industries is still strong

The deregulation of the Norwegian electricity market and increased interconnectors have had fairly limited impact on industries in Norway; even energy-intensive industries. Electricity prices have indeed risen, but the competitiveness of the industry relies much more on the global market conditions rather than the electricity price in Norway.

Iceland-Energy-Harpa-September-2014_Borten-Moe_Ragnheidur-Elin-Arnadottir_Hordur-Arnarson_Ketill-SigurjonssonThe interconnectors and increased efficiency in the Norwegian electricity sector has been a success in increasing profits in the industry. One of the results is increased tax-revenues. This has created more possibilities for the Norwegian government to set up incentive schemes to positively increase investment of industries in Norway. When valuating the financial effects of the deregulation and more interconnected electricity market, the wholistic economic result in Norway has been very positive. As Mr. Borten Moe explained:

“What we have seen when it comes to our industries during the last 25 years, both through the deregulation and now with the more Nordic and European electricity market, is not that they have fled the country.”

“The world markets are far more important for the development of our power intensive industries than the electricity prices, and the electricity prices have not gone all that much up.”

“We see a new interest in reinvesting in Norway, Norwegian power intensive industries. Norwegian, our Norsk Hydro, which is our huge aluminum smelter company, is probably going to build a huge new smelter up in Karmøy [in Southwestern Norway].

Ola-Borten-Moe-Presenting-in-Norway-2011“And it is also a fact that in Norway, the power companies, the production companies, when they negotiate long term contracts, they know that they need the power intensive industries, after all, it’s their biggest clients. They use around 40 out of 120 terawatt hours, and if they go away, you would completely take the floor out of the Norwegian electricity market and the prices of the whole portfolio would go to the bottom. And they would lose a lot of money.“

“In Norway at least, I am convinced that we are not going to produce aluminum because we have cheaper prices than anywhere in the world or because we have lower regulations on the environment. On the contrary I think that we should have good prices on energy, meaning also [the aluminum smelters] should pay enough for the energy to make them wish every day they wake up to get a little better and a little bit more efficient and a little bit more competitive and it should be the same when it comes to environmental regulations.“

Stable and secure energy supply

According to Mr. Borten Moe, increased interconnection has contributed to strengthening the electricity supply for Norwegian consumers. Norway’s electricity production is close to 100% based on hydropower. In dry periods, less water in rivers and reservoirs can result in temporarily very high electricity prices and even problems in supplying enough electricity to meet the demand. The possibility of importing electricity through subsea cables and other interconnectors, makes it much easier for the generating industry to offer stable and secure supply of electricity.

Karahnjukar_Hydropower_spillwayThe interconnectors also offer the possibility to export electricity when prices at the other end of the cable (such as in the Netherlands) are high. This means that interconnectors improve yield and profitability of the utilization of hydropower resources in Norway.

With this in mind, it is interesting that on average approx. 10% of the water in the Icelandic hydro reservoirs flows through spillways. If Iceland would be connected with another electricity market (preferably fairly large market, such as the British or German markets) it could be very economic and efficient to add more turbines and utilize the spillwater to generate electricity and sell it through such a subsea cable (interconnector). With regard to this, it is interesting to consider Norway’s experience as described by Mr. Mr. Borten Moe:

“In 2003, I think we had a summation, a mind gobbling situation, because the prices of electricity peaked, and the population asked serious questions about is Norway really able to secure the amount of energy that we need when we need it, and at a price that is affordable. At that time, I would say that this was a fair question. And if you look at […] 2002, 2003 in this form, you’d also see that production was fairly low and that it was a combination of little rain, low temperature, and lack of import capacity that brought us into this situation.“

Norway-Electricity-Balance_2009-2013_SSB-table“In 99% of the cases we manage to get the electricity out on the market, use more of it but as you said, if we had been an island, well then we, the electricity that we [sold to] Sweden, Denmark, Finland, Russia, the Netherlands would have been water going over the dams.”

“The question of interconnectors in Norway is not only a question about selling electricity, or selling energy. It’s also a question about buying electricity, and it is a question about security of supply, even when the weather is dry and the weather is cold.“

Modest electricity prices for Norwegian households

In his presentation, Mr. Ola Borten Moe stated that despite increased interconnection of electricity markets the electricity price in Norway is generally less than for example on the European mainland. In the opinion of Borten Moe, the impact the interconnectiors have on the electricity price is limited in comparison with the effects of the relative supply and demand within each of the connected electricity markets. As Norway is currently increasing domestic investment in electricity generation, Mr. Borten Moe expects price reductions. In addition, Norwegians have used the revenue from the international connections to lower the electricity bill of Norwegian consumers.

Norway-Electricity-Prices_1998-2013“It is basically the balance in the market, or the lack of balance in the market, that is the most important factor for price. If we have good security of supply, a good balance in market, and slightly more production and consumption, prices will be fairly low.“

“In Norway we are interconnected, but not a part of a perfect market with the European electricity markets. There are still differences in price, between our price and the European price, and it will probably continue to be so.”

“The surplus from these interconnectors goes to lowering the electricity bills to all Norwegian consumers, including industry. So as long as they produce a surplus, it’s a direct benefit to the Norwegian household and the Norwegian industry.“

Issues to consider

The conclusion is that Norway’s experience from the increased interconnection of electricity markets has been positive. Mr. Ola Borten Moe stated that despite this fact, there are nonetheless several issues that Iceland must consider before it is possible to decide on the possible construction of a subsea cable between Iceland and Europe.

Iceland-Energy-Harpa-September-2014_Norway-Borten-Moe_Ragnheidur-Elin-Arnadottir_Hordur-Arnarson_Ketill-Sigurjonsson-HarpaBorten Moe expressed that the Norwegians emphasize the importance of utilizing their infrastructure in a sound economical manner and that further disturbance of the environment must be based on guaranteed profitability. He also mentioned that although subsea electric cables would generally have the effect that electricity prices at the markets at each ends of the cable have the tendency to be similar, at least to some extent, nevertheless it is the supply and demand in each market that is dominating in deciding the prices in each of the markets. As Borten Moe said:

“We like to have control over this kind of infrastructure, we need to know how much goes in, how much goes out. We need to keep control about how the values flow and who gets the benefits.“

Iceland-Energy-Harpa-September-2014_Borten-Moe_Ragnheidur-Elin-Arnadottir_Hordur-Arnarson_Ketill-Sigurjonsson-panel-questions

“It is possible to foresee a future when we use subsidies to get new electricity into the market, taxpayers’ money, new production capacity, and we sell this production capacity with a loss to the European markets and we lose both money and Norwegian nature. And that, of course, would be a whole different story.”

“If you have two markets and you make an interconnector, you will basically have a price that are more of the same. That’s the law of nature and the whole ratio for building such an interconnector. But it’s also fair to say that it’s also a question of what kind of capacity you introduce. In a perfect market, you would have the same price, but these are not perfect markets.”

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.

Iceland and Greenland as strategic energy storage for peak load demand

In 2004, the engineering giant ABB marked the 50th anniversary of its pioneering of high voltage direct current technology (HVDC). In the decade that has passed since then, we have experienced numerous new world records regarding the HVDC technology. An electric cable between Europe and America is probably becoming a question of when, not if.

Strong HVDC technology advancement

The first submarine HVDC cable was commissioned in 1954. The cable connected the island of Gotland (in the Baltic Sea) with the mainland of Sweden. This was a 100 kV subsea cable with a capacity of 20 MW and the length was 90 km.

HVDC-Europe-Subsea-2014As earlier mentioned, this first HVDC subsea cable was constructed by ABB in 1954. Fifty years later, in 2004, ABB proudly looked back to its HVDC achievements. Which included the highest voltage cable in the world (600 kV cable in Brazil), the longest HVDC line and highest converter power rate (in China), and the world’s longest underground cable (Murray Link in Australia).

Another of ABB’s achievements in its 50 year history of HVDC technology, was the world’s longest submarine electric cable; the 260 km long Baltic Cable between Sweden and Germany, which began operation in 1994. Now, a decade later, ABB still holds the world record of the longest submarine HVDC cable. It was in 2006 that construction started of the 580 km Norned cable between Norway and Netherlands. ABB supplied the main part of the NorNed cable as well as the converter stations at both ends. With 450 kV DC, the NorNed now has the highest voltage rating of all submarine HVDC cables (on pair with two other cables in the Baltic).

The next world-record-length for a submarine HVDC cable will probably be a cable that will connect Norway and the UK. The cable length will be close to or a little more than 700 km. The planned capacity is 1,400 MW (double the capacity of NorNed) and the voltage 500 kV. Yet, this new cable between Norway and UK will not have the highest voltage of all submarine HVDC cables. Currently, Prysmian and Siemens are constructing the first HVDC subsea cable link in the world with a voltage of 600 kV. This project is the the 420 km UK Western Link between Scotland and Wales.

This high voltage of 600 kV helps increase line capacity by 20% and reduces transmission losses by nearly a third. The Western Link will also set a new world record for capacity of subsea HVDC cables, as it will have a transmission capacity of 2,200 MW. It is Siemens that will be delivering the HVDC converter stations, and Prysmian, which will deliver the cable.

Electric cable(s) between Europe and America

The longest electric HVDC cables on land today are 2,000-2,500 km long. (cables in Brazil and China). It is unclear when submarine electric cables will be as long. But it is evident that we will soon experience subsea cables that will be more than 700 km long and operate at more than 600 kV. Predicting further into the future, it seems realistic that the development of the subsea cable technology will reflect what has been happening on land.

HVDC-Europe-America_Hydro-Power_Askja-Energy-Partners-Map-2It is probably just a matter of time until the first electrical cable will be laid across the Atlantic. Cables from Greenland to North America and/ or Europe would be 2,000-3,500 km long. A submarine HVDC cable between Greenland and Iceland could be as short as 800 km. This is a very interesting fact, as Greenland has enormous hydropower resources, that could be utilized as a a peak power source for areas in Europe (where electricity prices are among the highest in the world).

The idea of an electric subsea cable between Europe and America may sound like a fantasy. And it is quite possible that the combined length and depth will stand in the way for such a project. However, as 700 km subsea HVDC cables at 600 kV are becoming a reality, and the deepest subsea electric cables today are already working well at a depth in the range of 1500-1700 m, it seems that cables between Europe and Iceland, Iceland and Greenland, and Greenland and Canada (North America) are all becoming technically possible within a decade or few decades from now.

Renewable-Energy-Integration_Practical-Management-of-Variability-Uncertainty-and-Flexibility-in-Power-Grids_2014Therefore, it is no surprise that it is becoming increasingly more common to see for example articles in international academic journals focusing on the potential of electric cables between Europe and North America. However, in the literature the focus is surprisingly often primarily on the potential of harnessing the wind power (in both Greenland and Iceland). The best opportunity offered by HVDC cables connecting Greenland and/ or Iceland with Canada and/ or Europe, is definitely to utilize the great hydropower resources (and reservoirs) for high demand peak load power. The hydropower is not only a less costly process to generate electricity than wind power; hydropower is also much more reliable and controllable power source than wind. Therefore, the hydropwer has great possibilities for maximizing the profitability of energy production, by producing and selling electricity only at day time when electricity prices are highest and receive more water in the reservoirs at night time.

The total hydropower resources in Greenland are believed to be equivalent to 800 TWh annually. By harnessing only approximately 1-2% of that would be enough supply more than two HVDC cables. Iceland already has a large hydropower sector, based on large reservoirs and modern generating stations, where it is possible to add capacity (turbines) at very low-cost. Thus, Greenland and Iceland could develop a perfect strategic partnership in supplying Europe with peak load energy.

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.