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Landsvirkjun and Century Aluminum agree on new power tariff

new power contract between Landsvirkjun and the Norðurál smelter of Century Aluminum at Grundartangi in Iceland, was negotiated in 2016. Landsvirkjun describes this contract as an extension of the original contract from 1997. That original contract was amended in 1999, extending the validity of the original power contract to 2019.

lv-nordural-ceo-new-power-contract-2016The new extension, concluded in May 2016, changes the terms of the older contract and will enter into force in 2019. This is a fairly short-time contract/extension, expiring already in 2023. This short time frame of the contract is interesting, as all the earlier Icelandic power contracts with aluminum smelters in Iceland have applied for much longer periods (usually from 20 to 40 years).

The new contract-terms include a major change of the pricing method for energy delivered to Norðurál. From 2019, the tariff will be linked to the market price for power in the Nordic power market (Nord Pool Spot; NPS). This replaces the previous price-link to aluminum prices at the London Metal Exchange (LME), which is used in the current power contract  from 1997/1999.

According to the EFTA Surveillance Authority (ESA), the electricity tariff in the new contract is “tied” to the monthly “market price for power in the Nordpool Elspot power market”. This clear reference to Elspot may not necessarily mean that the new price will be exactly the same as the spot market power price on NPS. However, it is clear that this new pricing method, replacing the previous/current price-link to aluminium price, will make the revenues of Landsvirkjun more aligned with power prices on the Nordic and European power markets. What is also new, is that this being the first power contract with an aluminum smelter in Iceland not having the transmission cost included. Norðurál will need to pay the transmission cost directly to the Icelandic TSO; Landsnet.

nordural-century-aluminum-smelter-grundartangi-iceland-in-winterLinking the power tariff to electricity prices abroad is a new approach in the pricing of Icelandic electricity to aluminum smelters.  This new approach is a clear sign of important changes in the Icelandic power market, moving towards the development on nearby power markets in NW-Europe. The result will probably be a doubling of the current power tariff to the Norðurál smelter, when the new extension comes into effect in 2019 (depending on price development in the Nordic power market).

The new pricing method may explain why the contract was only made for a four-year period (2019-2023). When negotiations between Landsvirkjun and Norðurál were ongoing, in 2015 and early 2016, the Elspot power price at NPS was very low (close to 21 EUR/MWh on average in 2015). The management of Norðurál most likely pushed for aligning the power tariff to the then current low electricity price in NW-Europe and/or N-America, in the hope of avoiding a higher tariff, like Landsvirkjun agreed with the ISAL smelter in 2010. The ISAL smelter in Straumsvík, owned by Rio Tinto, is now paying more than 30 EUR/MWh and a little under 30 EUR when transmission cost is excluded.

Although NPS did experience very low power price in 2015, it is quite possible that the spot price on the Nordic power market will rise in the coming years. Already in 2016, the average Elspot price on NPS was close to 27 EUR/MWh (up from 21 EUR/MWh the year before). So it was obviously quite risky for Norðurál to make a long-term contract based on the Elspot price; thus agreeing on a four year contract only.

Icelink-HVDC-UK-NG-nov-2013-4Landsvirkjun may also have wanted to avoid a new long-term contract, as the necessary power capacity is already available (no new investment in power generation is needed to deliver the power to the Norðurál smelter). The main reason for such a strategy of Landsvirkjun – going for a short-term contract – is the possible construction of an electric HVDC cable between Iceland and Britain (often referred to as IceLink).

If such a subsea interconnector will be developed in the near future, it might become operational around 2025 or few years later. Such an interconnector would offer Landsvirkjun the opportunity to sell power into the high priced electricity market on the UK.  Thus, a short time power contracts makes sense for Landsvirkjun, at this point, rather than making long-term commitments regarding electricity sales to aluminum smelters. This reflects the current strategy of the Norwegian power company Statkraft, which also is focusing on the spot market development rather than making new long-term power contracts.

We at the Icelandic and Northern Energy Portal will soon be analysing this new contract/extension of Landsvirkjun and Norðurál in more details, putting the new tariff into context with other new power contracts in Iceland and Canada. Stay tuned.

Serious geothermal troubles for Reykjavík Energy

Few months ago, we wrote about the troubles of Reykjavík Energy regarding its 303 MW Hellisheiði geothermal plant. Now, an Icelandic newspaper has looked into the matter, and it seems that the future generation of the Hellisheiði plant is somewhat uncertain. Following is a rough translation of a story published yesterday in the daily paper Fréttablaðið:

hellisheidi-geothermal-plant_reykjavik-energy-2Icelandic energy firm ON, a subsidiary of Orkuveita Reykjavíkur (Reykjavik Energy) has planned a six-year drilling program, costing ISK 13 billion, just to maintain enough steam for the Hellisheiði geothermal plant. The plant was constructed in three phases in the period 2006-2011. If nothing will be done, this fairly new geothermal power plant will experience rapidly falling generation.

Reykjavik Energy has already announced a tender for the drilling of seven new geothermal wells over the next three years. It is not yet known how many new wells in total will be needed to ensure full generation of the plant. But a newly revised plan of ON allows for 15 new wells to be drilled over the coming ten years.

This is somewhat less drilling than ON had anticipated necessary when the power company first introduced its drilling program last autumn (2016). However, the situation has turned out to be more serious than originally thought in 2013, when the company first admitted the problem of falling steam. The fact is, that very soon after the Hellisheiði station was fully constructed it became clear that the plant would also be needing geothermal steam from the nearby Hverahlíð geothermal area.

The geothermal resource at Hverahlíð now supplies Hellisheiði with enough steam for 50 MW of power capacity. The original geothermal area which the Hellisheiði station is utilizing, now only supplies enough steam for 225 MW (but the plant has an installed capacity of 303 MW). In addition to the cost of drilling for more steam, Reykjavík Energy also needs to invest an estimated ISK five billion over the next five years, for re-injecting water into the deep geothermal source.

reykjavik-energy_hengill-geothermal-areasAlready in 2012, the management of Reykjavík Energy had realized that the Hellisheiði geothermal plant was experiencing falling steam, thus not being able to deliver expected sustainable generation. The following year (2013) it was decided to connect the plant with the nearby geothermal area called Hverahlíð. Until then, Reykjavík Energy had been planning a new 90 MW geothermal station at Hverahlíð, to further supply aluminum industry in Iceland.

The new pipeline from Hverahlíð started delivering steam to the Hellisheiði station in early 2016. The cost of the pipeline was more than ISK three billions. If this pipeline-project would not have been realized, Reykjavík Energy would have needed to drill several new geothermal wells, between 2012 and 2014, at an estimated cost of ISK 700 millions for each well. Such drilling project at that time would have been almost impossible, as the company was in critical financial situation.

In 2013, scientists at Reykjavík Energy predicted that due to over-exploitation of the geothermal resource, the performance of Hellisheiði station would decline by an equivalent of seven MW on average annually. By then, the management realised that the time-frame in which the 303 MW power plant had been constructed, had been unrealistically short.

Now it is generally accepted that geothermal resources in Iceland need to be utilized in smaller phases, to ensure enough geothermal steam for the turbines. And the result of each modest step needs to be analyzed before starting on the next phase.

reykjavik-energy_bjarni-bjarnason-ceo-of-the-year-award-2014Bjarni Bjarnason, CEO of Reykjavík Energy and Chairman of its subsidiary ON, now says that soon after the Hellisheiði plant came into full operation, it became clear that the geothermal area utilized by the plant was not performing as the company had hoped for.

“After mid-year 2014, it became clear that the area was not delivering as sustainable power as had been expected. The falling generation was equivalent to loosing 20 MW of capacity each year, which was much more than had been expected when the plant was designed and constructed.”

Bjarnason acknowledges that this outcome was a shock. And he adds that last autumn (2016) when the company was deciding on future plans and budget, the scenario was “very dark”. [It should be noted that Bjarnason was not working at Reykjavík Energy when decisions where taken regarding construction of the Hellisheiði plant].

The situation Reykvík Energy was faced with in the autumn of 2016, was to drill up to 26 new geothermal wells, just to maintain the production of the Heillisheiði plant. The total new investment in the coming five years was expected to be ISK 27 billion – just to keep the generation of the plant stable at a satisfactory level.

hellisheidi-geothermal-plant_on-2At that time the company launched a special program to analyze the geothermal resource. This research lead to a conclusion which is more positive than the previous estimate from last autumn. It is now expected that the drilling needed to keep the production stable will have a total cost of ISK 19 billions.

This lower cost reflects the new estimate of the resource, resulting in fewer new wells needed to deliver enough energy for the plant. The new geothermal wells are expected be drilled both in the Hellisheiði and Hverahlíð areas, and are supposed to maintain enough steam for 285 MW.

Asked if the decision to connect the Hellisheiði Plant with the geothermal area in Hverahlíð was a mistake – given the current need to undertake a major drilling for more steam – Bjarnason points out that the pipeline to Hverahlíð was both successful and necessary to save the operation of the Hellisheiði plant.

“ When we look at our decision [to connect the Hellisheiði plant with the Hverahlíð geothermal area] it was absolutely correct. And the project itself was successful; no technical problems nor accidents occurred during the construction of the pipeline, despite the snowy winter that year”.

reykjavik-energy_hverahlid-geothermal-areaBjarnason also points out that the steam from Hverahlíð has given Reykjavík Energy the opportunity to reduce exploitation of older geothermal areas. And he claims that it has already become obvious that the already explored areas have recovered faster than expected.

The total cost of Hellisheiði geothermal plant so far is about ISK 94 billion (close to USD 850 millions or just under USD 3 million pr. each MW). Having regard to this cost, it is clear that the extra cost due to the new geothermal wells (ISK 19 billions) is significant. However, Reykjavík Energy would in any case have needed to drill new wells to keep the production of the Hellisheiði plant stable. If original plans would have been realized, the company would in any case have drilled one new geothermal well every year (on average) to keep the generation stable.

The Hellisheiði plants generates 20% of all revenues of Reykjavík Energy. The profitability (return on investment; ROI) of the plant is considered not to be acceptable. According to the annual report of Reykjavík Energy for 2015, the combined ROI of the two geothermal plants at Hellisheiði and Nesjavellir was 4.8% for hot water production and 4.9% for electricity generation. This is much lower return than the normal target for profitability in competitive energy services, where 7-8% return may be seen as acceptable.

Whether the new geothermal wells will return the generation at the Hellisheiði geothermal plant into balance, and offer a satisfactory ROI, remains to be seen. The success of drilling for geothermal steam is always uncertain.

Earlham Institute in partnership with Verne Global

The Earlham Institute (EI) as selected Verne Global’s data centre campus in Iceland to investigate the efficiencies of distributing large-scale genomics and computational biology data analysis.

verne-global-data-centre-icelandEI, through Verne Global, will have access to one of the world’s most reliable power grids, delivering close to  100% geothermal and hydroelectric renewable energy. According to a story on Yahoo Finance, Verne Global “will enable the EI to save up to 70% in energy costs […] and with no additional power for cooling, significantly benefiting the organisation in their advanced genomics and bioinformatics research of living systems.” The power cost for EI in Iceland is said to be 40 GBP/MWh, which at current exchange rate is close to 50 USD/MWh.

One of EI’s goals is to understand crop genomes so new varieties can be developed to secure food supply in the face of a growing population and environmental change. In an announcement, Dr Tim Stitt, Head of Scientific Computing at EI, says that modern bioinformatics is driven by the generation of ever increasing volumes of genomic data requiring large and collaborative computing resources to help process it quickly and at scale. “At EI, we have some of the largest computational platforms for the Life Sciences in Europe and the demand for our computing capability is only increasing, putting pressure on the capacity and operational costs of our existing data centres.”

tim_stitt_earlham-instituteIn a video posted on EI’s website (also available on Vimeo), Dr Stitt further describes why moving their High-Performance Computing  (HPC) workload to Iceland made economic sense. To tackle the big data requirements of EI’s genomics and bioinformatics research in decoding living systems, EI wanted to explore the benefits of remotely managing its HPC resources. Mr Stitt explains that the Verne Global Icelandic campus provides an economical solution by protecting against energy price inflation over the next 10-20 years, with their environmentally friendly and fully sustainable power supply. In addition, the cooling is free and optimised design infrastructure is to reduce the total costs of EI’s scientific computing infrastructure.

This is obviously a very positive development for the Icelandic data centre industry. Which can be expected to experience rapid growth in the coming years.

HVDC Hansa PowerBridge cooperation agreement

A new 700 MW HVDC (high voltage direct current) subsea electric cable is planned to be constructed between Sweden and Germany. The cable is refereed to as the Hansa PowerBridge. The project has been on preparation level for several years, and now it has been decided that the 300 km long interconnector will be commissioned by 2025/26.

hansa-power-bridge-map-2In last January (2017) the Swedish and German transmission system operators (TSO’s) Svenska kraftnät and 50Hertz  agreed on further details regarding the planning and construction of the Hansa PowerBridge, when a cooperation agreement was signed in Berlin. The new agreement includes time-schedule and provisions on the technical design, project organisation, ownership structures, cost allocation, tendering, construction and commissioning of the planned interconnector.

The approximately 300 km long Hansa PowerBridge will be submarine at 200 km. The German grid connection point for the cable is planned in Güstrow, Mecklenburg-Western Pomerania. On Swedens side the cable will connect to the Swedish transmission network at Hurva in Skåne. It is expected that German consumers will benefit greatly from being connected to Scandinavian hydropower capacities. Also the cable makes it possible for Sweden to import electricity generated by strong winds in the north-eastern part of Germany .

germany-new-planned-electricity-interconnectors-mapThe Hansa PowerBridge is seen as one more important step towards a common European electricity market, as it will improve the integration of renewable energy sources in the transmission system. As such it enables an even more efficient use of the renewable generation capacities across the border. This should contribute to the climate-friendly and cost-efficient generation of electricity.

The next steps in the project will be preparations for the permitting procedure (to be concluded by end of 2021), then having call for tenders for the installations (in 2022), and finally the interconnector being operational in 2025/2026. The total investment costs is estimated close to 600 million EUR, and will be evenly distributed among the two TSOs.

The green transformation of DONG Energy

Danish energy firm DONG Energy is in the process of selling all its oil and gas business. This is part of a major strategy where DONG is to lead the way in the transformation to a sustainable energy system and to create a leading green energy company.

Away from oil and gas

DONG’s oil and gas business on the continental shelf of Denmark, Norway and the United Kingdom has for decades been a core part of the company. According to Henrik Poulsen, CEO of DONG, the company now aims at selling all its oil and gas fields as one package, already this year (2017).

It has not been revealed who the potential buyer is. According to Danish media the most likely candidates are Maersk Oil and the US private equity fund EIG Global Energy Partners. EIG is the investor behind the company Chrysaor, which few days ago bought a variety of oil and gas fields in the North Sea from Shell.

Focusing on renewable power generation

dong-energy-green-transformation_2016DONG is also transforming its power production, by out-phasing coal. Not long ago coal used to be the overwhelming source for DONG’s (and Denmark’s) electricity- and heat generation. During the last ten years, DONG has reduced its coal consumption by 73% and is now aiming at phasing out coal completely from its power and heat generation by 2023. This will happen by replacing coal with sustainable biomass, at the same time as DONG will increase wind power generation.

dong-energy-mix_2006-2016-1This means that in just one decade, DONG Energy will have gone from being one of the most coal-intensive utilities in Europe to being among the greenest energy companies on the continent, being able to compare it self with Norwegian Statkraft and Icelandic Landsvirkjun.

Thus it may be no surprise that DONG now has launched a competition where Danes can try out their knowledge on green energy – and the winner will be awarded a week travel trip to Iceland. Iceland is of course the only European country fulfilling all its electricity consumption with renewable power generation. In addition, most of Iceland’s heating is supplied by utilisation geothermal sources, making Iceland the greenest energy country in Europe.

dong-energy-award-iceland-trip_2017

Does Facebook not want truly GREEN data centers?

facebook-zuckerberg-datacentre_screen-shot-2017-01-22-at-18-14-02Two years ago, we where wondering if Apple does not want truly green data centers. Now we might ask if this also applies to Facebook. Because it seems that Facebook is in fact not to keen on truly green data centers.

According to an announcement published in last January (2017), Facebook is going to build a new data centre in the Danish city of Odense, on the island of Funen (Fyn) west of Copenhagen. At a press conference with local authorities, the California-based tech company said this data centre to be the companies third such facility outside of USA.

And Facebook’s director of data center operations, Niall McEntegart, was quoted saying that “the Odense data centre will be one of the most advanced, energy-efficient data centers in the world”. It was also stated by Facebook management that the Odense data centre will be powered exclusively by renewable energy.

This is going to be an investment of more than USD 100 millions, and will provide 150 jobs when operational (in 2020). But in fact this new data centre will hardly be powered by 100% renewable energy.

denmark-gross-electricity-consumption_1990-2015-with-forecast-to-2025_table-from-energinet-denmark_sept-2016Surely Denmark generates substantial amount of its electricity by utilising renewable sources (mostly wind). Also, Denmark has interconnectors with major hydro power countries, like Sweden and Norway. However, the fact is that very large share of the electricity people and businesses in Denmark consume, is generated by burning fossil fuels (mostly coal).

According to the most recent information from the European Union, (see table here), the renewable’s share of Denmark’s gross electricity consumption in 2014 was close to 45 percent. More recent information from the Danish transmission system operator (TSO), Energinet, tells us that the share of renewable energy in net generation of 2015 was close to 67%. And according to Energinet, even in 2025 fossil fuels will be an important part of Denmark’s power mix (as explained on the graph at left).

facebook-data-centre_odense-denmark-electricity-supply-mapHaving regard to the facts, it is hardly correct to say that a data centre located in Denmark, connected to the grid.  will be run entirely on renewable energy sources only. Obviously Facebook intends to buy so-called Green Certificates, which are a tradable commodity proving that certain amount of electricity is generated using renewable energy sources only. However, this does not mean that the electricity being consumed by the buyer of the certificate is from renewable sources – it might as well be from a coal power station in Denmark or from a nuclear plant in Sweden.

The result is that every data centre in Denmark, connected to the grid, will in fact be using electricity from all kinds of power plants, including for example coal power stations. If Facebook truly wants to run its data centre on 100% renewable energy, the company should connect the data centre to a grid that only delivers electricity from renewable sources. In Europe probably no grid comes as close to this as in Iceland.

Iceland produces close to 99.9 percent of its electricity by utilising hydro- and geothermal power (and some wind power). So instead of claiming its data centre in Denmark being powered by 100% renewable energy, Facebook should consider Iceland as the location for its next data centre in Europe.

Hellisheiði geothermal plant to be sold?

A firm called MJDB has made offer to buy the Hellisheiði geothermal plant in SW-Iceland.

hellisheidivirkjun_geothermal_power_plantThe Hellisheiði plant is the largest and most recent geothermal plant in Iceland, starting operation in 2003 (the next geothermal plant in Iceland will be the 45 MW station at Þeistareykir in NE-Iceland). Hellisheiði station has a generation capacity of 303 MW and 130 MW in thermal energy. It is owned and operated by the energy firm Orka náttúrunnar (ON), which is a subsidiary of Orkuveita Reykjavíkur (OR); sometimes referred to as Reykjavík Energy. OR / Reykjavík Energy is owned by the city of Reykjavík and couple of other municipalities in SW-Iceland.

The thermal production from the Hellisheiði geothermal station is mainly used by households and businesses in the capital area of Reykjavík. Most of the electricity generated by the plant is sold to the Norðurál aluminum smelter, owned by Century Aluminum.

Not much public information is available about the interested buyer; MJDB. According to Icelandic media, MJDB is mostly owned by Magnús B. Jóhannesson, who is director of a firm with the name of America Renewables, in Rolling Hills in California. No public information is available about the offering price for the geothermal plant.

iceland-grundartangi-century-nordural-elkem-china-bluestarInvestors and large industrial power consumers may see opportunity in owning the Hellisheiði geothermal plant. Two large industrial companies at Grundartangi in Southwestern Iceland, an aluminum smelter owned by the American firm Century Aluminum and a ferrosilicon plant owned by Elkem / China National Bluestar, have major power purchasing agreements running out in the coming years. Due to the current tight power supply situation in Iceland, it may become very valuable to own Iceland’s largest geothermal plant.

As the Hellisheiði Station has been under stress due to falling pressure in the geothermal area, with substantial investment needed to keep up full production, the interested buyers may also foresee a chance to get the plant for a fairly low price. However, having Icelandic politics in mind, it is very unlikely that the City of Reykjavík has any interest in selling the plant.

Lower cost of wind power

wind-lcoe_2010-2016_lazard_askja-energy-partners-2017The competitiveness of new wind power has been increasing rapidly. According to Lazard, the levelized cost of energy (LCOE) from onshore wind power in USA, is approximately 50% lower now than it was four years ago, and the lowest cost onshore wind projects now have a LCOE that is 33% lower than it was four years ago. As can be seen on the graph at left.

The lowest cost wind projects in the USA now have a LCOE of 32 USD/MWh. The lowest cost projects are mainly wind farms in the US Mid-West, where wind conditions are good, resulting in a high average capacity factor. And even though the lowest cost was steady (did not decline) between 2015 and 2016, new very large wind farms can be expected to offer even lower cost than 32 USD/MWh. For example, Morocco did receive average bids from Enel and Siemens of 30 USD/MWh from its tender for totally 850 MW wind energy projects (with the lowest offer at around 25 USD/MWh).

kvika-poyry_electricity-generation-cost-lcoe-iceland-slide-13-with-more-recent-figures-2For the Icelandic energy sector, it is interesting to compare the figures in the reports from Lazard on LCOE, with a recent report by Kvika bank and Pöyry. In the report by Kvika/Pöyry the LCOE for up to 6 TWh of new onshore wind power in Iceland is set at a fixed price (LCOE) of approximately 51-52 EUR/MWh. This is quite close to the average LCOE for onshore wind in USA as assumed by Lazard in 2015 (shown with red line on the graph at left).

When having regard to Lazard’s most recent report, from December 2016, it becomes obvious that the LCOE for onshore wind has declined further (the blue line on the graph shows Lazard’s average for onshore wind in its report from 2016). What then becomes especially important, is that now new onshore wind projects in Iceland can be expected to be even more economical than new geothermal projects. For more information on this issue, we refer to our earlier post on the subject.

The most surprising energy fact?

Here at the Icelandic Energy Portal, we are very proud of the fact that power consumption in Iceland is almost totally based on renewable power sources. And when we look at gross energy consumption, Iceland is also the green leader.

iceland-coal-consumption-2015_askja-energy-partners-2017Therefore, it may be a surprising fact that Iceland is fast increasing its coal consumption. In fact the country is becoming a major user of coal (per capita).

According to information from the International Energy Agency (IEA), coal consumption in Iceland (per capita) is now almost on pair with the coal consumption in the United Kingdom (UK). As can be seen on the graph at left.

In the coming years, it is expected that coal consumption (per capita) in Iceland will grow quite fast. And soon become close to the present world average coal consumption (per capita).

Iceland has no coal power station. The reason for the growing use of coal in Iceland, is the heavy industries located in the country. They import and use the coal in their industrial process.

united-silicon-plant_helguvik-icelandIceland has a major aluminum industry and the aluminum smelters need carbon materials for the production. Also, Iceland has a fast growing silicon industry, which also uses coal in their production. These are the reasons why Iceland is becoming such a substantial coal consumer.

The growing use of coal in Iceland in the coming years, is all related to new and upcoming silicon plants. These industrial plants are the main reason why Iceland is scoring much higher on the list of coal consuming countries, than people in general may assume.

Highly competitive wind power

In their recent report on subsea electric cable between Iceland and Britain, Kvika bank and Pöyry predict what new power projects will be developed in Iceland to fulfill the electricity demand. In this article we will focus on why wind power is likely to be an important part of the power development in Iceland. Also we will explain how the information in the said report about cost of wind generation is outdated, and how wind power in Iceland is far more competitive than presented in the report.

According to the report by Kvika and Pöyry, levelized cost of energy (LCOE) for 6 TWh of new wind power generation in Iceland will on average be approximately 51-52 EUR/MWh (as can be seen on the top-slide below, which is from a presentation by Kvika/Pöyry). It is interesting to compare this cost figure with LCOE for wind generation as represented by the financial firm Lazard. Note that the cost figures presented by Lazard are in USD, and here we use the average exchange rate in 2016, where one USD equals 0.9 EUR.

  • In 2014, Lazard LCOE for onshore wind was 33-73 EUR/MWh (with 53 EUR/MWh as average).
  • In 2015, Lazard LCOE for onshore wind was 29-69 EUR/MWh (with 49 EUR/MWh as average).
  • In 2016, Lazard LCOE for onshore wind was 29-56 EUR/MWh (with 42.50 EUR/MWh as average).

kvika-poyry_electricity-generation-cost-lcoe-iceland-slide-13The report by Kvika/Pöyry, mentioned above, was officially published around mid-year 2016. However, the main work on the report took place in the latter half of 2015. This means that the most recent LCOE-figures for wind power available when the research for the report was ongoing, were LCOE-calculations for the year of 2014.  Thus, it may not be surprising that the average LCOE for wind in the report by Kvika/Pöyry is close to Lazard’s result as presented in their report from September 2014 (LCOE version 8.0). The numbers are 51-52 EUR/MWh and 53 EUR/MWh, respectively.

We want to emphasise that Kvika/Pöyry did not use Lazard as a reference. Instead, the assumed LCOE in the report by Kvika/Pöyry is based on numbers from IRENA (IRENA Power Costs Report 2014, published in January 2015). It is also important to keep in mind that cost figures used by Kvika/Pöyry included the average cost of linking wind power farms to the grid.

However, what is especially important is how the figures for LCOE of wind power generation were presented in the work by Kvika/Pöyry. While the companies estimated the cost of each new geothermal- and hydro project to be developed, they simply used the average LCOE for wind (approximately 51-52 EUR/MWh) as a fixed LCOE for all new wind power projects in Iceland generating up to 6 TWh annually. Which is a very general and/or imprecise presentation of LCOE for wind.

kvika-poyry_electricity-generation-cost-lcoe-iceland-corrected-2017It would have been much clearer, for the comparison, to estimate not only average cost of wind, but also the lower cost and the higher cost of wind power, when developing 6 TWh of new wind generation. Having regard to the figures from Lazard, it can be expected that such a methodology would have resulted in a LCOE between 33-73 EUR/MWh. This is reflected by the red line on the graph at left (the average cost being the same as estimated by Kvika/Pöyry).

It should also be noted that due to good wind conditions in Iceland, the average cost of 6 TWh of new wind generation development might be even lower than the average given by Lazard or IRENA. Then, more than 2 TWh and possibly up to 3 TWh of new wind generation might be less costly than the high-cost geothermal projects planned in Iceland.

What now becomes quite clear, is how substantial low-cost wind power can be expected to be developed in Iceland, before constructing some of the new high-cost geothermal plants. It seems likely that at least up to 2 TWh of new wind power may be developed in Iceland much earlier than projected by Kvika/Pöyry. This conclusion was missing in the work of Kvika/Pöyry. As a result, Kvika/Pöyry under-estimated the possibilities of wind power in Iceland in the coming years.

kvika-poyry_electricity-generation-cost-lcoe-iceland-corrected_lazard-2017In addition, the cost figures used in the report by Kvika/Pöyry may already be outdated. LCOE for onshore wind has gradually been decreasing. Therefore, wind power may develop faster in Iceland than in the scenario(s) presented by Kvika/Pöyry. According to the most recent report by Lazard (version 10.0 from December 2016), LCOE for wind in the USA is now estimated to be between 28 and 56 EUR/MWh (with an average of 42 EUR/MWh).

These figures are strong arguments for assuming wind power in Iceland will be even more competitive than predicted a couple of years ago. This is explained by the additional red line on the last graph, which is based on the most recent figures from Lazard. The conclusion is that wind parks at sites in Iceland offering high capacity factor, will be more economical than some – or even many – of the geothermal projects now being considered in Iceland.