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Study on cost of IceLink: 2.7 billion USD

The cost of a 1,200 MW HVDC electric submarine cable between Iceland and the United Kingdom (UK) is likely to be GBP 1.58-1.68 billion (USD 2.63-2.80 billion). This includes the cable (with a capacity of 1,200 MW), converters, cable mobilization, and installation. These cost-figures are presented in a research paper from 2010; Proposed Iceland / UK (Peterhead) 1.2 GW HVDC Cable. The authors are three engineers; Thomas J. Hammons from University of Glasgow in Scotland, Egill Benedikt Hreinsson from University of Iceland, and Piotr Kacejko from Lublin University of Technology in Poland.

LV-HVDC-Iceland-UK-London-august-2012-2The subject of the paper is a 1,200 MW connector from Iceland to a landing point at Peterhead Scotland (a distance of 1,170km). The paper addresses market considerations with cost of electricity in UK (from new offshore and inland wind power, gas, coal, and nuclear), investments for the development of hydro resources in Iceland, investments for submarine cables and converter plant, and overall capacity of the link. Also reviewed by the authors, is the exploration of deep unconventional geothermal resources in Iceland that could be harnessed in future and developed for the IceLink. The economics, availability, and reliability of geothermal plants are reviewed. [The slide above is from a recent presentation by the Icelandic power company Landsvirkjun}

According to the paper, there should be no major difficulties in the manufacture and laying of submarine cables of length and type necessary for the IceLink connector. What is no less interesting is the finding that the cost of delivered energy would be very competitive with offshore and onshore wind, and of new coal/gas and nuclear plant. Also, the connection would offer high reliability; at least equal to that of new coal/gas and nuclear plant in the UK.

The main conclusions are as follows:

  1. Cost of electricity delivered would be very competitive with that from new wind-farms, nuclear, modern gas/coal fired plant, and tidal barrage / tidal stream power.
  2. Availability of the connection should at least equal that from nuclear, and gas/coal fired plant.
  3. No major difficulties are anticipated in manufacturing, laying and repairing the submarine cables or in construction of hydro schemes for the Link.
  4. Expected life for hydro developments is at least 60 years, submarine cables 50 years, and rectifier/inverter stations 30-40 years.
  5. The link could be considerably expanded in future to utilize deep-well geothermal power when the technology is proven.
  6. The contribution would make a significant contribution towards UK and European targets for renewable energy. The development would benefit the Icelandic economy, rather than demanding huge amounts out of a heavily damaged economy without supporting necessary recovery.
  7. The Icelandic hydroelectric system is likely to be a perfect match for interacting with the UK/North sea wind energy resources in a similar way as the Norwegian hydroelectric power system.
  8. The HVOC UK-Iceland link can serve partly as a one­ way exporter of hydroelectric or geothermal energy from Iceland to the UK or it can be considered as a short term bilateral medium for hourly interaction of hydro with marketslwind based on market signals or short term shadow prices. This dual role should be further defined in a negotiation process between the respective national authorities.

IceLink-Study-University-of-Iceland-2010The study can be downloaded here (pdf) from the website of University of Iceland.

UK National Grid: IceLink is feasible, achievable and viable

Economist-Iceland-UK-HVDCAccording to a recent article in the Schumpeter column of the Economist, the proposed IceLink power cable between Iceland and Britain seems to be getting a deservedly serious hearing.

The IceLink would be the longest undersea cable in the world, at at least 1,000 km, costing on current estimates billions of EUR.  According to the Economist It would take four years to construct the cable and would have a capacity of 1,000 MW. And the Economist is very positive about the project:

Iceland is in a unique position with regard to energy: it has in effect unlimited power, from both geothermal and hydro-electric. Apart from keeping the hardy Icelanders warm, it also runs aluminum smelters. But exporting electricty would give the small island economy a new source of income (the main other ones, since the collapse of the financial bubble, are fish and tourism).

HVDC-Cable-Iceland-Europe-map-slideThe Economist goes on by pointing out that the attraction of the IcLink for Britain is flexibility. The increasing dependence on wind energy, which produced a record ten percent of Britain’s power in last December (2013), may be questionable from an economic point of view. And it creates a technical difficulty too: if the wind drops, you need a speedy alternative source of power. When it blows strongly, you need somewhere to store it. Iceland’s stable geothermal- and hydro-electric generation is ideal for both purposes. But Britain has rather little hydro and close to none geothermal.

According to the Economist, the UK National Grid (the transmission operator for electricity and gas) likes the project, describing it as “Technically feasible…Politically achievable…Commercially viable”. Britain and Iceland signed an intergovernmental memorandum of understanding on the project in 2012. In June last year, the project won backing from an UK cross-party government advisory committee. Now the British government is waiting for the Icelandic side to come out with a firm proposal.

UK National Grid showing interest in IceLink

According to news from Norwegian energy information provider Montel, the cost of electric power from the potential subsea interconnector linking the UK with Iceland  will be around GBP 100/MWh (164 USD/MWh). This new subsea cable, which is sometimes referred to as the IceLink, would thus offer electric power at substantiall lower prices than for example from offshore wind.

Icelink-HVDC-UK-NG-nov-2013-5The IceLink would be a high voltage direct current (HVDC) cable, with a power capacacity of 700-1,000 MW.  It would be 1,000-1,500 km long, making it qute a bit longer than any existing subsea cable of this kind today. The longest subsea electric cable is currently the 580 km NorNed cable between Holland and Norway. Longer cables of this type are being planned, such as a cable between Norway and the United Kingdom that will be more than 700  km long, and even longer cables in the Mediterranean.

Mr Hörður Arnarsson, CEO of the Icelandic  state owned power company Landsvirkjun has expressed that the Icelink cable could add “very valuable” flexibility to offset intermittent renewables production in the UK. Landsvirkjun generates 75% of all electricity used in Iceland.

Icelink-HVDC-UK-NG-nov-2013-4In May 2012, Icelandic and UK ministers signed a memorandum of understanding over a new interconnector between the countries. The UK TSO National Grid has been showing interest in the Icelink, focusing on issues such as supply diversification, and gaining access to the reliable hydro- and geothermal energy resources of Iceland.

In the last few months,Mr. Paul Johnson, Project Director and Head of Cables at National Grid, has at numerous occasions expressed that the need for such an interconnector between Iceland and the UK has come to the fore. According to Mr. Johnson, the IceLink is a realizable goal and there is political will for the connector. Mr. Charles Hendry, MP and former UK Energy Minister has been of the same opinion, as the IceLink project offers low-risk, predictable returns attractive to investors, such as pension and infrastructure funds.

Icelink-HVDC-UK-NG-nov-2013-7

According to Montel, the costs of the IceLink are estimated at GBP 4 billion, with it being possibly completed by 2022. The project could supply up to 5 TWh of power annually to Britain from hydro, geothermal and wind sources in Iceland.

While Icelanders still need to engage in national discussions about the costs and benefits of a subsea power cable to the UK, policy makers in the UK seems to agree on the project. In addition, the President of Iceland, Mr. Ólafur Ragnar Grímsson, has addressed leaders and people in the energy business, expressing his view that the Icelanders and the Brits should jointly examine the options of an interconnector.

Iceland-UK-BICC-meeting-Nov-2013-ORG-2At an energy conference in London in last November (2013), Mr. Grímsson said the proposed IceLink should be hard-headed analysis driven by engineers and energy specialists. “We should listen to the government in Britain…then in two to three years we can come back to the table and make the real decision.”

Grimsson said popular support was necessary before a project to bring geothermal power from Iceland to the UK could get off the ground. “As we move forward we need to bring all segments of Icelandic society into this discussion,” he said. “Then we will take a decision based not only on the business sense and the technical feasibility [of the project] but on the national will,” Grimsson said, adding that unless “there is a broad national will behind this, you will never get the necessary players on board”.

The three slides above are from a presentation given by Mr. Paul Johnson from UK National Grid, at the Bloomberg Icelandic Energy Summit. It took place in London on November 1st 2013.

UK’s electricity strike prices positive for IceLink

In last October, the Government of the United Kingdom (UK) gave the go-ahead for a new nuclear plant. This will be the first nuclear power station to be be constructed in the UK for numerous decades. The agreement regarding this nuclear plant shows well how competitive Icelandic electricity is, and makes it clear that an electric cable between Iceland and the UK could be very positive for both countries.

The nuclear strike price will be 92.50 GBP/MWh (close to 150 USD/MWh)

The above mentioned agreement on the nuclear energy involves an enlargement of the Hinkley Point Nuclear Plant in Somerset (Hinkley Point C). The new reactors are scheduled to be completed ten years from now (2023). The plant will be built and operated by the French energy firm EDF (Électricité de France) in cooperation with Chinese investors.

UK-Hinkley-Point-C-new-Nuclear-Plant-diagramEDF has negotiated a guaranteed fixed price – a strike price – for the nuclear electricity at 92.50 GBP/MWh (equivalent to approximately 150 USD/MWh). This strike price is in 2012 prices. The price will be adjusted according to inflation during the construction period and over a subsequent period of 35 years. According to the BBC, the existing nuclear plant at Hinkley produces about 1 per cent of the UK’s total electricity. This is expected to rise to 7 per cent once the construction of Hinkley Point C will be completed in 2023.

Strike Prices effectively remove price volatility risk for electricity generated from low-carbon sources. This ensures greater certainty to generators and minimizes their risk. The goal is to bring forward investment in affordable low-carbon electricity generation, including renewables and new nuclear. In total, renewable energy is expected to make up more than 30 per cent of the UK’s electricity mix in 2020, helping to significantly decarbonize the power sector by 2030. This means that the UK has very ambitious plans in expanding the production of renewable power.

Strike price for renewable power will be even higher

Earlier this year (2013), the British Government introduced the strike price which renewable energy technologies can expect in the coming years (2014-2019). The proposals are expected to become legislation in early 2014. According to a publication by the UK Department of Energy and Climate Change (DECC) the new regime will make the UK market one of the most attractive for developers of most renewables technologies, whilst minimising the costs to consumers. The proposed renewable electricity technologies eligible for the strike prices for example include hydro, geothermal, onshore and offshore wind, tidal and solar projects.

UK-Renewable-Energy-Strike-Price_2014-2019-The strike price for geothermal power will be 120-125 GBP/MWh (approximately 190-200 USD/MWh) and strike price for hydro will be 95 GBP/MWh (approximately 150 USD/MWh). The lowest strike price is for sewage gas; 85 GBP/MWh (close to 135 USD/MWh).

However, what is probably most important and interesting is the strike price for wind power. The British Government expects the overwhelming majority of the new renewable-capacity will be new wind farms, both onshore and offshore. This is understandable, because the utilization of wind power for electricity production is a well known and mature technology. In fact the strike price for wind power can be said to be the base price for new renewable generation. And the strike price introduced for onshore and offshore wind is 95-100 GBP/MWh and 135-155 GBP/MWh, respectively.  This is equivalent to approximately for 150-180 USD/MWh for onshore wind, and 215-250 USD/MWh for offshore wind.

IceLink could be an important part of the solution

In comparison, Iceland could most likely offer the UK electricity from renewable sources at prices similar or even substantially lower than the strike price for new offshore- or even onshore wind capacity in the UK. And actually the Icelandic electricity can be seen as a better product and thus a better option than massive wind power in the UK. Both hydro- and geothermal power offer stable base load electricity, which is very different from the unstable wind power.

Iceland-UK-BICC-meeting-Nov-2013-Landsvrkjun-Hordur-Arnarson-slide-7With an electric cable between Britain and Iceland (IceLink), the Icelandic energy sector could provide the UK with stable and reliable power from the Icelandic hydro- and geothermal power plants, at very competitive prices. Iceland could also import some of the unstable wind power from the UK; especially during the night. This would give an option to “store” even more of the controllable hydro power in the dams in Iceland during the night. When demand in UK rises during the day this power can then be transferred through the cable to the electricity markets in UK.

The UK wants to be able to move away from fossil fuels towards low-carbon power. What is even more important for the UK is to gain more energy independence and be able to rely on energy from politically stable neighbours (rather than for example importing more LNG from Algeria). Both the nuclear plant at Hinkley Point and plans for more renewable energy in the UK’s energy mix, are important in this context. In addition, a fifth of Britains’ aging power plants are due to close over the coming decade (with further closures in the 2020’s). Thus, the UK needs not only huge investment in energy production and -infrastructure, but also need to secure it self access to numerous reliable energy sources. Therefore the IceLink is a project that undoubtedly will interest the British energy sector and investors.

Icelandic wind power becoming highly interesting

So far, less than a handful of modern wind turbines have been constructed in Iceland. It has simply been more economical to harness geothermal- and hydro resources for power generation. This situation may be changing, as it is becoming economically interesting to harness Icelandic wind energy. In this article we take a look at some hydropower projects that are currently being considered in Iceland, comparing them to the cost of utilising wind energy. It turns out that harnessing the Icelandic wind may indeed becoming a very interesting investment.

Astonishing cost decline of wind power

Hreyfiafl-wind-power-cost-development_2009-2017_Lazard-LCOE-version-11

LCOE for onshore wind. Analysis by Lazard.

It has been called “the fastest and most astonishing turnarounds in the history of energy“: In some areas, building and running new renewable energy has become cheaper than just running existing coal and nuclear plants.

As Iceland is or at least has been quite special, by generating all its electricity through harnessing fairly low-cost geothermal- and hydropower sources, one might wonder if the declining cost of wind and solar will have any consequences for the Icelandic power sector? The answer is not very complicated. Due to Iceland’s northerly location, solar power is not becoming a real competitive option in generating electricity in Iceland. On the other hand, Iceland offers numerous locations with very high wind capacity factor. Thus, the declining cost in the wind power industry may soon drive important changes in the Icelandic power sector, where wind farms will become a lucrative business.

Several small [expensive] hydropower plants being prepared

Several small hydroelectric projects (with a capacity below 10 MW) are currently being prepared in Iceland. These include 9.9 MW Brúará hydropower station in South Iceland, 9.8 MW Svartá hydropower station in Northern Iceland, 9.3 MW hydroelectric plant in glacial river Hverfsfljóti in Southwest Iceland, and 5.5 MW Hólsvirkjun hydropower station in Northern Iceland. The combined capacity of these four stations would be close to 35 MW. With an estimated cost well above 3 million USD pr. each megawatt, all those projects will be quite costly and probably more costly than harnessing Icelandic wind energy.

Somewhat larger project is the 55 MW Hvalá River hydropower station, to be constructed in the faraway Northwestern part of Iceland (Vestfirðir or West Fjords). This power plant will be quite costly and the transmission cost will be high, as the project is far away from the current transmission system. However, due to the high reliability of the Hvalá station with its mountain reservoirs, the project can be seen as quite sensible. On the other hand, wind farms may also offer quite strong reliability, such as if constructing three 30-40 MW of wind power in different locations in or close to the West Fjords. By locating the wind farms adjacent or close to the current transmission lines, such a project might be less costly than the somewhat expensive Hvalá hydroelectric station with its high transmission cost.

Icelandic wind power becoming competitive

According to a recent study published by the federation of energy and utility companies in Iceland (Samorka), the levelized cost of energy (LCOE) for upcoming Hvalá River hydropower station is expected to be 49.70 USD/MWh (and then the transmission cost is not included). In comparison, in its most recent “levelized cost of energy analysis” 
(LCOE), financial advisory and asset management firm Lazard now estimates the LCOE for wind farms in good locations in the USA as low as 30 USD/MWh (as explained on the slide at top of the article).

Slide by IIT Comillas and MIT.

It is also interesting that according to a new study by the universities IIT Comillas in Madrid and MIT in Boston, wind farms in Iceland could generate electricity at LCOE close to or even below 35 USD/MWh. This low cost beats all planned geothermal projects in Iceland and is lower cost than most of the hydropower projects under consideration, making the development of wind farms in Iceland highly interesting.

However, it is still interesting to invest in new geothermal- and hydropower plants in Iceland, as they in general offer very reliable power production. Iceland is an isolated power market with no interconnectors to other countries, and thus the country has to rely on domestic access to spare capacity when the wind would not be blowing well enough.

For wind farms to be competitive in Iceland, they need to be cheap enough to make it an interesting option to increasing the output from the robust system of the Icelandic hydro reservoirs (such process of adding new turbines to conventional hydropower stations has already started in Iceland). By such methodology it will be possible to add substantial capacity in the power system without constructing expensive new hydropower reservoirs or geothermal stations. Also, low-cost Icelandic wind power could be harnessed to save water in the current reservoirs, and/or work as pumped hydroelectric storage. Due to such interesting possibilities, it is likely that wind farms will soon be constructed in Iceland even without any connection with foreign power markets. Of course an interconnector like IceLink would make Icelandic wind power even more interesting to harness.

One wind farm instead of four hydroelectric plants?

Earlier we mentioned the four fairly small hydroelectric projects (each below 10 MW) currently being prepared in Iceland. When comparing how much wind power would be needed to offer equal generation as the four hydropower stations, it seems quite clear that harnessing the Icelandic wind would be less costly and have less negative environmental impacts.

The total power capacity of the said four hydropower stations (Brúará, Svartá, Hverfisfljót and Hólsvirkjun) will/would amount to approximately 35 MW. Some of them would have the advantage of offering quite stable generation all year around, while a project like the 9.3 MW Hverfisfljót hydropower station would be harnessing glacial water where the flow in winter is very low. This means that the yearly capacity-factor of the Hverfisfljót station will probably be quite low; even under 50%.

Of course a wind farm would deliver more fluctuating production than the combined four hydropower stations, thus needing more backup power. And in the long run, hydropower is probably almost always the lowest cost option (due to very long life time), at least if the environmental damage by dams and head-race canals of the hydro projects are not taken into account.

It is not simple to estimate how much Icelandic wind power would be needed to generate a similar amount of electricity as the four hydropower stations. Probably a well-located Icelandic wind farm(s) with a capacity of approximately 70-80 MW could generate as much electricity annually as the four hydropower stations of totally 35 MW. The cost of the hydroelectric stations would most likely be close to USD 120 million. The cost of 70-80 MW wind farm in Iceland could be substantially lower; probably below USD 100 million.

When also having regard to the environmental impact, the option of wind power in Iceland becomes even more attractive. Besides the wind farm(s) of 70-80 MW being less costly than the four hydropower stations of 35 MW, the wind farm offers the chance of avoiding severe environmental damages to some of Iceland’s wild and free running rivers. For example in the case of the Hverfisfljót hydropower project, the waterfalls in the river-canyon would become close to dry substantial part of the year. However, the key issue for harnessing Icelandic wind power is the declining cost in wind energy technology. Which now is making wind power a real option in the Icelandic energy sector.

NB: Icelandic wind power development firm Hreyfiafl has same ownership as Askja Energy Partners. Hreyfiafl aims to have its first wind farm in Iceland in operation within five years from now. Icelanders can follow the process through the Twitter-account of Hreyfiafl.

Joint statement from UK–Iceland Energy Task Force

In October 2015, the governments of UK and Iceland agreed to create a special Energy Task Force to look at the benefits of a subsea interconnector between the two countries. The project is referred to as IceLink.

Following their work, the energy task force issued a statement on 12th July 2016, stating that their work was concluded and they would leave the decision to continue the work of the energy task force with their respective governments. The text of the statement (unsigned) can also be seen on the website of the Icelandic government. The title of the statement is “Joint statement from UK – Iceland energy task force“, and it reads as follows.

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The idea of an electricity interconnector between the UK and Iceland has been explored on various occasions in recent years. At a meeting between Prime Minister David Cameron and Prime Minister Sigmundur Davíð Gunnlaugsson in Reykjavík on 28 October 2015 it was agreed to explore further the possibility of an interconnector with initial discussions between the two Governments which should be concluded within six months.

Subsequently, a UK – Iceland Energy Task Force was established to carry out the discussions. The Task Force agreed that the discussions should be an early stage exploration of the issues which will inform decisions by Ministers on the extent of further work. The proposed areas for discussion between the two Governments were identified as interconnector models, regulatory treatment, financing and general impact assessment.

The objective of the UK – Iceland Energy Task Force was to consider whether further investigation of an interconnector between the UK and Iceland might have merit through identifying common ground between the two parties. It was a mutual understanding between the parties that the Task Force should conclude its work in May 2016.

Over the course of recent months, the two parties exchanged information on work already conducted, or in progress, concerning a possible interconnector between Iceland and the UK. The UK gave presentations on the UK electricity system, UK energy policy, interconnector projects, interconnector regulatory approaches and renewable support mechanisms. Iceland presented an overview of the work streams being carried out in relation to an interconnector and an overview of the Icelandic energy sector and energy policy, along with other issues related to the concept of an interconnector.

A large part of the discussions within the Task Force was on project economics, regulatory treatment and general impact assessment. Iceland presented a recent Cost Benefit Analysis and Impact Assessment, that they had commissioned on their own behalf, on an interconnector between Iceland and the UK. The UK delegation provided valuable feedback and comments on this report.

The Task Force discussed the potential mutual economic benefit for both parties in the project and the eligibility of support schemes. The Task Force acknowledged that a renewable export business model, with an appropriate support mechanism, could provide a viable business case and be compatible with a competitive market for low carbon electricity production. The interconnector‘s project costs could also be subject to an element of competition.

The Task Force acknowledged that the UK – Iceland interconnector concept is in many aspects different from other interconnector projects and that revised regulatory models may need to be considered as part of a further phase of work.

The Task Force agreed that a decision on whether to undertake a second phase of work is outside the scope of the Task Force. However, if a decision is taken to continue with a second phase of work, this could include further government-to-government discussions and investigation into regulatory approaches, revised regulatory models and a possible joint cost-benefit analysis to better understand the project economics and assumptions.

The Task Force is of the opinion that the work conducted in the last six months achieves the mandate of the group and should provide valuable information in order to assist in any decision making on the next steps of the potential UK – Iceland interconnector.

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NB: Iceland had general elections in October 2016, and now the country has a new government. Since then, there have been no formal talks between the governments of Iceland and UK on the IceLink cable project. This is not surprising as it is unclear what will be the energy policy of the UK after the Brexit.

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.

Iceland’s new energy segment

If the IceLink HVDC subsea interconnector between Iceland and UK, will be developed, more than 2,000 new megawatts (MW) of power capacity is expected to be developed in Iceland in the coming two decades. All these capacity additions will all be in renewable power technology. Most of it will be in the traditional types of Icelandic electricity generation, which is hydro- and geothermal power. However, substantial amount of the new capacity will be in wind power, making wind power the fastest growing type of generation in Iceland.

Low-Cost Wind means Slower Growing Geothermal

It is hard to predict with precision how much capacity will be added to each of the three types of renewable generation mentioned above. The table below shows two predictions, one by Kvika/Pöyry and the other by Askja Energy Partners. According to Kvika/Pöyry, IceLink will need approximately 1,459 MW of new capacity, bringing total new capacity in Iceland to 2,137 MW by 2035.

Analysis of Askja Energy shows that Kvika/Pöyry may be over-estimating how fast new geothermal power can be developed in Iceland (and under-estimating the potentials of Icelandic wind power). We at Askja Energy, predict slower growth in new Icelandic geothermal power, and somewhat faster growth in wind power. In addition, it is very likely that new Icelandic hydropower can be developed somewhat faster than Kvika and Pöyry are forecasting in their central scenario.

Table: New power capacity (MW) in Iceland until 2035
Central scenario with IceLink HVDC cable
Forecast by Forecast by
Technology Kvika/Pöyry Askja Energy
Geothermal 722 580
Hydro 865 933
Wind 550 768
Total new capacity added 2,137 2,281

Note that the Askja Energy scenario assumes faster capacity additions in hydropower and wind power than Kvika/Pöyry, but substantially slower geothermal capacity additions. The result is less generation pr. each new MW (thus, higher new capacity needed in total to deliver same/similar generation). All numbers are an estimation and may vary, such as due to what power projects exactly (in each category) will be developed.

Wind Power the Fastest Growing Segment

No matter if the forecast by Askja Energy or the forecast by Kvika/Pöyry will be closer to the real development, wind power can be expected to become Iceland’s fastest growing energy segment. If IceLink will be constructed, no type of generation in Iceland will grow as fast (in percentages) as wind power. As explained on the graph below.

iceland-power-capacity-additions-until-2035_ketill-sigurjonsson-2016The question that remains, is if and when the decision will be taken on IceLink. But even without IceLink, it is likely that new wind power will be developed in Iceland in the coming years, as numerous locations in Iceland offer very high capacity factor for wind turbines.

Pöyry overestimating Icelandic geothermal

In their recent report titled “Subsea electric cable between Iceland and Britain – cost-benefit analysis”, Kvika bank and Pöyry seem to overestimate how fast Icelandic geothermal power can be developed. In their central-scenario, having regard to new demand from the IceLink subsea power cable, Kvika and Pöyry predict that by 2025 Iceland may have developed 820 MW of new geothermal capacity. This is somewhat surprising estimation, as it seems unrealistic to expect such a fast construction of new geothermal plants in Iceland.

kvika-poyry-iceland-new-electricity-generation-until-2035

According to Kvika and Pöyry, Iceland will need around 1,416 MW of new power capacity by 2025 if IceLink will be constructed. As shown on the graphs at left and below, Kvika/Pöyry expect most of this new capacity to be in new geothermal power plants, with a capacity of 820 MW. According to their report, 785 MW will be new traditional geothermal power plants and 35 MW will be smaller low temperature geothermal stations (totally 820 MW in new geothermal power).

The rest of the needed capacity by 2025, around 596 MW, is expected to include 448 MW in hydropower refurbishment (such as added capacity in current hydro stations), 93 MW in new large hydropower plants, and 55 MW in new small hydropower plants. Note that the exact predicted megawatts for each category are not absolute figures, so for each category there may be a few more or less MW. Thus, it is maybe not very surprising that the given figures in Pöyry’s slide-presentation for hydropower refurbishment, do not quite match (450/448), as can be seen on the graphs and also here on Twitter.

kvika-poyry-iceland-new-electricity-generation-until-2035-graphIceland offers very good geology for geothermal power development. However, it is costly and complicated to sufficiently establish and harness the geothermal resource in each new area. Having regard to the Icelandic experience in geothermal development so far, 785 MW of new large geothermal power stations may call for approximately eight to ten new development areas, each area with close to 100 MW of power capacity constructed in preferably two steps (starting with 50 MW or so).

There may be some possibilities to construct new Icelandic geothermal stations with 100 MW capacity before 2025. However, such an intensive construction/utilization in a new area could substantially increase the risk of over-exploitation of the geothermal area. And it is also important to have in mind that due to environmental regulations, such as regarding planning and impact assessment, it becomes even more unlikely that up to ten new geothermal projects can be developed in Iceland in less than a decade.

This does not mean that Iceland would not be able to deliver the power needed for IceLink in time. Due to well-known hydropower opportunities and good wind potentials, economical wind- and hydropower (in addition to substantial new geothermal power) would most likely ensure sufficient power supply for IceLink. But the scenario for each power category (geothermal, hydro, and wind) will most likely be somewhat different from what Kvika/Pöyry estimate.

For some reason, Kvika/Pöyry made little effort to cost-analyze the development of wind power in Iceland. Having regard to numerous good sites for high-capacity wind farms in Iceland, it can be argued that wind power can fill in the gap which may occur due to slower than expected development of geothermal power. In our next article, we will be looking further into this issue, explaining how much wind power may be developed in Iceland in the coming decade.

Pöyry’s analysis on Icelandic wind power potentials

Following a tender in 2015, the Icelandic Ministry for Industries and Innovation signed Kvika bank and Pöyry to deliver advanced macroeconomic cost-benefit analysis of the impact of a subsea power cable between Iceland and Great Britain on Icelandic society. The report was published around mid-year 2016. The Icelandic title of the report is “Raforkusæstrengur milli Íslands og Bretlands, kostnaðar- og ábatagreining“, which in English would read as “Subsea electric cable between Iceland and Britain – cost-benefit analysis”.

The key assumptions of the report are based on the following issues: Development of electricity demand in Iceland, the possibilities of new electricity generation in Iceland (including wind power), the cost of the project (including cost of the subsea interconnector, converter stations, new power capacity, and new transmission lines), cable-capacity and cable-uptime, cost of capital, development of electricity prices in the UK, and possible support from the British government. These issues include a.o. analysis on how much new hydro-, geothermal- and wind power capacity is expected to be constructed in Iceland until 2035.

kvika-poyry-icelink-report-2016-coverThe report by Kvika/Pöyry is highly interesting and includes extensive information which is very relevant to the project. However, it is obvious that its authors have made little effort in analyzing the possibilities of Icelandic wind power. This becomes evident when reading the part of the report that focuses on wind power (chapter 15.3.3). It is also noteworthy that the report makes absolutely no reference to the numerous recent university theses on Icelandic wind energy. And very limited direct references are made to the scientific paperThe wind energy potential of Iceland” by Nawri et.al., which so far is probably the main scientific examination on Icelandic wind potential.

The result is that the report by Kvika/Pöyry only offers a somewhat general introduction of wind energy utilization, without any real analysis on the potentials of harnessing wind for electricity generation in Iceland. The authors of the report simply make the general claim that wind power is still more costly than most planned hydro- and geothermal power projects in the utilization category of the Icelandic Master Plan for Nature Protection and Energy Utilization. This claim is not very well supported in the report. But the result is a conclusion by Kvika/Pöyry, that it is unlikely that any wind power will be harnessed in Iceland unless the IceLink HVDC subsea interconnector will be constructed.

wind-lcoe-history_lazard_askja-energy-partners-2016It should be noted that many of the power projects, described in the utilization category of the said Master Plan, have an expected LCOE between 40 and 50 USD/MWh (this especially applies to the geothermal projects). Having those cost figures in mind, it is interesting that high capacity wind locations outside Iceland offer as low LCOE as 32 USD/MWh (as explained by Lazard) and in rare cases even lower. When also having regard to other recent wind projects in high capacity areas, it seems clear that such projects offer LCOE that is lower than the expected cost of some of the planned geothermal projects in Iceland.

We could refer to several other recent wind power cost-analysis for the same outcome. As an example, Goldman Sachs expects onshore wind costs to fall into the range of 30-35 USD/MWh due to technology advancements. With this all is mind, it would have been both interesting and important if Kvika/Pöyry would have made further effort to analyze the potentials and cost of possible upcoming wind power projects in Iceland.

Of course it is also important to remember that extensive wind capacity may call for an increase in backup power. The extra cost due to such capacity additions may indeed make wind power more costly than explained by simple LCOE-analysis. However, the general assumption by Kvika/Pöyry, declaring Icelandic wind power in most cases more expensive than geothermal power in Iceland, seems somewhat hasty. The result may be an under-estimation of the potential of Icelandic wind power. And due to sensitivity of geothermal resources to over-exploitation, it is even possible that the expected fast-capacity growth of geothermal power in Iceland may in fact be an over-estimation.

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The report by Kvika/Pöyry is officially only available in Icelandic. To give our readers a clear idea about how the report explains and analyses wind energy, we hereby publish an English translation of the part of the report that focuses on wind power (chapter 15.3.3). Note that the somewhat long sentences and un-precise references simply reflect how the Icelandic text is put forward in the report. And we express that all the following text is a translation of chapter 15.3.3 in the report, so the text does not reflect opinions of the Icelandic Energy Portal.

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Chapter 15.3.3:   Options for Onshore Wind Power in Iceland

Wind is a well-known energy source. In recent years, technological development has made wind turbines more efficient and more stable. Also, the cost of constructing and operating onshore wind farms have decreased significantly in a short time, as seen on figure 106. Thus, wind power is closer to becoming competitive with other new energy projects in Iceland. Wind energy is increasingly harnessed worldwide. It is estimated that by 2020, the installed capacity of wind power in the world will be 1,000 GW, or as much as the hydropower in the world today.

kvika-poyry-icelink-report-2016-fig-106[Fig. 106 – Cost of onshore turbines (2014 USD/kW). Sources: Berkeley lab and US Energy Ministry; US Energy Ministry Wind Technology Market Report 2014. Link to source.].

Given the limited environmental impact of wind power compared to prolonged or permanent impact of hydropower, wind power should be considered as an important option for renewable energy production, especially in a country like Iceland, which has great wind power potential and is sparsely populated. [Ref. 215: Icelandic Meteorological Office, Wind energy potentials in Iceland 2013].

Windmills need to be connected to the grid, which preferably should be close to the location of the windmill. It also makes sense to take population density and tourism into account when deciding where to locate windmills, as many feel they spoil the beauty of the landscape in which they stand. All in all, numerous factors need to be taken into account when deciding where to locate windmills. [Ref 216: Wind energy as option in Iceland 2012, Environmental considerations, James Dannyell Maddisson and Rannvá Danielsen]. 

kvika-poyry-icelink-report-2016-table-30In 2014, Europe had 12,820 MW of installed wind power capacity. [Ref 217: Wind energy in Energy statistics 2014 and wind energy scenarios for the year 2030, European Wind Energy Association 2015]. Table no. 30 shows the installed wind power in selected European countries by end of 2014 and forecast for 2030. [Table 30 – Installed wind energy capacity in some European countries and forecast for 2030. Source: European Wind Energy Association].

By end of 2014, installed onshore wind power capacity in Iceland was only 3 MW. Landsvirkjun [the national power company] has presented plans for two onshore wind farms to be evaluated in the third phase of the Master Plan [Icelandic Master Plan for Nature Protection and Energy Utilization]; one wind farm with an installed capacity of 200 MW delivering up to 705 GWh/year and the other 100 MW delivering up to 350 GWh/year, a total of 300 MW and more than 1 TWh/year. Private parties, both domestic and foreign, have also been exploring the possibility of building and operating onshore wind farms in Iceland.

By end of 2014, Norway had constructed wind parks with an installed capacity of 856 MW, delivering an average of 2.2 TWh of electricity annually, with 31% capacity factor [ref 218: Governing department of water resources and energy matters in Norway, NVE], which constitutes to 1.2% of the country’s electricity generation. See Figure 107 – Installed capacity of wind power in Norway.

kvika-poyry-icelink-report-2016-fig-107[Fig. 107 – Installed capacity of wind power stations in Norway; 1997-2014 (MW)].

The development of wind power in Norway has so far not been economical without subsidies and the wind farms that have been constructed have been subject to subsidies. Yet, Norway has in general good wind resources, compared to other countries. By the start of 2014, new wind power projects with a generation of about 9.1 TWh/year had been authorized in the country. However, it is unclear whether all this power will be developed. The possibility, however, exists if market conditions supports the investment, all the necessary planning has been completed, and permits have been given. [Ref 219: Figures from 2015, Energy- and water resources in Norway, Norwegian Oil and Energy Ministry]. Iceland is very well suited for electricity generation by onshore wind, as shown in Figure 108, which shows the average wind speed at 80 m height .

kvika-poyry-icelink-report-2016-fig-108[Fig. 108 – Average wind speed on Earth. Source: World Wind Energy Association. Global evaluation on wind resources. December 2014. Link to source].

Wind measurements give very good results and a limiting factor for the development of wind energy in Iceland will not be lack of wind, but political and environmental concern, proximity to other industries and services, power transmission and wholesale prices of electricity. In our simulation, the cost of onshore wind power is set higher than most other options and thus large-scale wind power development is not expected unless domestic demand will grow much or a subsea cable will be laid. This may change if the cost of new onshore wind power plants continues to decline. Thus, onshore wind energy could become a more economical option than geothermal power plants in the near future.