The Icelandic Energy Market
September 2012
Foreword In recent years Íslandsbanki and its predecessors have established themselves in the renewable energy and environmentally friendly energy sources sector. The bank bases its success in this field on Iceland’s decades-long experience of utilising hydropower and geothermal power. It is with great pleasure that we publish a new report on the Icelandic energy market. Íslandsbanki has issued a number of analytical reports on the geothermal energy market over the years, both the market in Iceland and in the US. This report is a follow-up to the report on the Icelandic geothermal market that was issued in April 2010. The aim of this report is to provide an insight into the Icelandic energy market as it is at present, its standing, the main companies involved in the sector, and available opportunities and obstacles. Iceland holds a unique position in the field of renewable energy and the opportunities available are considerable. Icelanders have taken advantage of the knowledge built up in conjunction with the development of the domestic energy sector to win overseas projects. Increases in the number of employees in Icelandic engineering firms, for instance, appear to be directly linked to increases in the number of overseas projects. Icelandic engineering firms, moreover, hold a strong position due to the weak standing of the króna. The main challenge in the next few years will be to maximise the successes of overseas projects through, for example, cooperation among Icelandic entities, with the goal of offering more valuable, comprehensive solutions, instead of undertaking small, limited parts of projects.
2
The Icelandic Energy Market
Despite significantly less investment in this sector over the past three to four years, as compared to the preceding years, there are a number of projects underway. The largest single construction project currently being carried out is the construction of the Búðarháls Power Plant. The focus is on increasing and maintaining the specialist knowledge that has formed in Iceland. To this end, one can mention the establishment of the Geothermal Cluster in 2011 and the new Renewable Energy Graduate Programme established by the School of Engineering and Natural Sciences at the University of Iceland. Moreover, ideas on the exploitation of the Dreki area and the laying of a submarine power cable to Europe promise to provide exciting projects in the future. There is, therefore, every reason for optimism as regards Iceland’s future prospects in the field of energy issues. It is our hope that this report will provide you with an interesting and accessible overview of the Icelandic energy market as it stands today. This report has been prepared by Íslandsbanki’s Geothermal Industry Team and is based on the Team’s analytical work and interviews with interested parties in the sector. Hjörtur Thor Steindórsson Executive Director, Energy
Contents Foreword 2 Íslandsbankis´ Dashboard 4 Introduction 4 The Icelandic Energy Market 4 Main sources of energy 7 Geothermal power 7 Hydropower 9 Other energy sources
11
The Dreki area 11 Submarine transmission cable
12
Development of the Icelandic electricity market 12 Developments 12 Current environment
13
Legal environment
14
United Nations University – Geothermal Training Programme 15 Energy science studies 15 Geothermal clusters
15
Icelandic energy companies 16 Landsnet 17 Financial position of the three largest energy companies 17 Project financing
20
Icelandic engineering firms and serivce companies 21 Overseas operations of engineering firms and service companies 22 The future 23 The authorities 23 Master Plan for hydropower and geothermal energy resources 23 Main obstacles 24 Main opportunities 24 In closing 25 Sources 26 Figures 27 Tables 27
The Icelandic Energy Market
3
Íslandsbanki’s Dashboard Íslandsbanki has, as of 2010, maintained a Dashboard on the renewable energy market. While the site allows visitors to monitor the market in various parts of the world, its main focus is on Iceland. The Dashboard contains information on aspects such as primary energy use and electricity generation by type and country. The Íslandsbanki Dashboard and the reports it has issued on the energy industry can be accessed on the Bank’s website, www.Íslandsbanki.is/energy/.
• Primary energy use in Iceland has increased by over 70% since 2000. At present, approximately 85% of primary energy comes from domestic and renewable energy sources. • Electricity generation has increased by 124% since 2000. The current electricity generation capacity is 17,210 GWh per year, approximately 73% from hydropower and 27% from geothermal sources. • Electricity use per resident, per capita, is nowhere as great as in Iceland. Iceland is also top of the list as regards renewable electricity generation per resident, per capita, or approximately 53.9 MWh/resident in 2011.
Introduction Iceland is rich in natural resources and their use forms the foundation for the nation’s prosperity. The base industries, i.e. fisheries, energy industry, tourism and agriculture, are based on the natural resources to a considerable extent. The utilisation of Icelandic natural resources has been under considerable discussion of late and it is vital that a consensus is reached as regards their exploitation. In 1999, a master plan for the protection and utilisation of natural resources was established with a focus on hydropower and geothermal energy. The programme is expected to be completed in 2012, although it is uncertain if this will be achieved.
The Icelandic Energy Market Icelandic energy supply is based on geothermal energy, hydropower and imported fuel. Energy use per capita in Iceland is one of the highest known and the proportion of renewable energy is much higher than in other countries. The share of domestic energy sources has risen significantly in recent decades and the proportion of domestic energy has never been greater. In 2011, approximately 85% of the total energy use in Iceland was domestic and came from renewable energy sources. The use of geothermal energy forms the largest part of the overall use, or approximately 66%, the majority of which is hot water supply for space heating. Hydropower is approximately 19% and the remainder, approximately 15%, comes from imported energy sources, 13% fuel (petrol and oil) and 2% coal.
Table 1. Primary energy consumption in Iceland
Key highlights
• Kárahnjúkar is the country’s largest hydropower plant with a generation capacity of up to 690 MW. Hellisheiði Power Plant is the largest geothermal power station with a generation capacity of 303 MW. • Landsvirkjun is the largest producer of electricity in Iceland with a share of approximately 73%. Orkuveita Reykjavíkur (Reykjavík Energy) is in second place with a 17% share. • Approximately 850 people work in the country’s energy companies, a similar number as at the beginning of 2008. The educational level of employees is generally quite high. • There are some 14 power generating options on hold or under examination by the energy companies, with a total rated capacity of 995 MW or approximately 7,260 GWh per year. Ten of these options are geothermal power plants. • The planned power plant construction projects call for enormous investments. Challenging conditions in international financial markets and the leveraged position of Icelandic energy companies makes it more difficult for them when it comes to financing new projects. • At present, over 1,260 people work for the main engineering firms and service companies in the energy sector, just shy of 100 fewer than last year. • The proportion of energy and energy related projects in the total turnover of engineering firms and service companies has increased on average since 2008. This increase can be attributed to overseas demand for Icelandic know-how and experience.
2011*
2010
Primary energy Hydropower Geothermal Oil Coal
ktoe 1,075 3,726 728 95
PJ 45 156 31 4
% 19% 66% 13% 2%
ktoe 1,082 3,705 706 95
PJ 45 155 30 4
% 19% 66% 13% 2%
ktoe 546 1,758 901 96
PJ 23 74 38 4
% 17% 53% 27% 3%
Total
5,624
236
100%
5,588
234
100%
3,301
138
100%
*Provisional data PJ: Petajoules ktoe: Kt of oil equivalent 1 Ktoe = 0,041868 PJ = 11,63 GW
4
2000
The Icelandic Energy Market
Source: National Energy Authority
Hydropower is Iceland’s primary energy supplier, providing approximately 78% of the supply in 2011. Geothermal energy provides just over 27%. Electrical power generation from fuel-run generators is only 0.01% of the total generation.
250 200
PJ
The main supporting utilities, Landsvirkjun (73%), Orkuveita Reykjavíkur (17%) and HS Orka (8%) produce most of Iceland’s energy, supplying approximately 98% of the energy used. There are several smaller production plants in Iceland with Orkusalan (1.54%) and Orkubú Vestfjarða (0.45%) being the main ones.
Figure 1. Energy consumption by source, 1991-2011
150 100 50 0
Electricity consumption in Iceland is divided between heavy industry on the one hand and general use on the other. Heavy industry is by far the largest electricity consumer in Iceland, being responsible for approx. 80% of all use. The aluminium industry is responsible for just under 74%, while other industries use much less, e.g. the ferro-alloy industry is responsible for about 6% of the use. Electricity to Icelandic homes is only just over 5% of total electricity use.
90 991 992 993 994 995 996 997 998 999 000 001 002 003 004 005 006 007 008 009 010 011 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2
19
Domestic
Imported Source: Statistics Iceland and National Energy Authority
Figure 2. Electricity consumption by industry – 2000 and 2011 4% 5%
14%
5%
6%
Aluminium industry
6%
Aluminium industry
Services
9%
49%
14%
Ferro-alloy industry
Services
6%
Ferro-alloy industry
Homes
Homes
Utilities
Utilities
Other
Other
74% 9%
Total electricity consumption in 2000: 7,242 GWh
Total electricity consumption in 2011: 16,569 GWh Source: National Energy Authority
Figure 3. Division of electricity by producer – 2000 and 2011
6%
2% 5% 2%
8% Landsvirkjun
1% 2% Landsvirkjun
17%
Orkuveita Reykjavíkur
Orkuveita Reykjavíkur
HS Orka
HS Orka
Rafmagnsveitur ríkisins
Orkusalan
Others
Others
86%
Total electricity generation in 2000: 7,678 GWh
73%
Total electricity generation in 2011: 17,210 GWh Source: National Energy Authority
The Icelandic Energy Market
5
In 2011, electricity generation in Iceland was 17,210 GWh. Iceland ranked 13th in comparison with other European nations as regards electricity generation from renewable resources. Iceland, however, produces by far the most electricity in the world based on per capita calculations (53.9 MWh/resident).
120 100 80
TWh
Yale University has in recent years monitored the progress of nations as regards environmental issues. In 2012, 132 countries were assessed based upon 22 performance indicators across ten policy categories covering both environmental public health and ecosystem vitality. Of these 132 countries, Iceland ranks 13th if account is taken of all ten categories and is second, after Paraguay, when the countries are assessed with respect to renewable energy. Lower on the list are countries such as Norway, Costa Rica and Sweden. This draws up a very bright image of Iceland’s performance in energy matters. With the continuing development of the energy sector, Iceland will have to build on this track record and maintain its leadership in using its natural resources wisely for the benefit of the nation.
Figure 4. Renewable energy by country – 2011
60 40 20 0
ce ny taly den key stria and gal UK ania and and ece atia ark aria akia and ay in I u l rw Spa ran rma e Tur m Icel Finl Gre Cro enm ulg lov Pol F Au itzer Port No Sw B S Ro Ge D Sw Source: Eurostat and National Energy Authority
Figure 5. Electricity generation per resident (kWh/resident) – 2011 53.9 Iceland Norway
Finland Qatar
16.2
Canada
15.8
Kuwait
15.5
Sweden
14.8
Luxembourg
13.0
United Arab Emirates
12.8
United States
12.4
Australia
27.5
16.6
10.2
Cayman Islands
9.9
Thailand
9.6
New Zealand
9.1
Bahrain
8.3 Source: CIA World Factbook
Figure 6. Renewable energy by country acc. EPI 2012 Paraguay
100.00
Iceland
99.99
Mozambique
99.92
Zambia
99.69
Nepal
99.58
Dem. Rep. Congo
99.55
Albania
99.39
Tajikistan
97.97
Norway
96.59
Costa Rica
95.15
Kyrgyzstan
89.28
Brazil
89.04 87.63
Ethiopia Georgia Namibia
86.61 82.03
This index shows the proportion of renewable energy of the net energy production of the countries. Iceland ranks second after Paraguay according to EPI 2012. Renewable energy includes, e.g. biofuels, geothermal energy, wind, solar energy and gas. Prepared from data from 2009. Source: Yale University
6
The Icelandic Energy Market
Main sources of energy Geothermal power Geothermal energy is usually considered to be a renewable energy source in the sense that the geothermal energy continuously renews itself, even if such renewal is not at the same rate in all production areas. Geothermal energy in Iceland is in all cases a sustainable source of energy, based on a flow of energy from below, from the bowels of the earth, and a steady flow of rainwater through the strata. To maintain utilisation over a long period of time it is important to keep production within certain limits. Icelanders are among the forerunners when it comes to taking advantage of geothermal energy. In 2011, energy from geothermal sources was 66% of the primary energy consumption in Iceland.
By far the highest proportion of geothermal energy used in Iceland is used to heat buildings, or 45%. Closely following space heating is electricity generation, with approximately 39%. Together these two sectors utilise approximately 84% of Iceland’s geothermal energy. Iceland’s high-temperature areas are extensive as the Mid-Atlantic Ridge cuts right across the country. The most powerful hightemperature areas all lie within the volcanic zone, where conditions are the most efficient due to sufficient sources of heat and an extensively fractured and extremely water permeable crust (hydraulic conductivity).
Figure 7. Geothermal energy consumption by type – 2005 and 2010
6%
3%3% Space heating
4%
Electricity generation
4%
4% 4%
2% 4% 2% Electricity generation
Swimming pools
Swimming pools
Snow-melting
20%
Space heating
45%
Aquaculture
60%
Industry Greenhouses
Total geothermal energy consumption in 2005: 28.7 PJ
Snow-melting Aquaculture Industry
39%
Greenhouses
Total geothermal energy consumption in 2010: 41.4 PJ Source: National Energy Authority
Figure 8. Division of geothermal areas in Iceland There are seven geothermal power plants in Iceland. • Hellisheiði Power Plant (electricity generation capacity: 303 MWe) • Nesjavellir Power Plant (electricity generation capacity: 120 MWe) •
Reykjanes Power Plant (electricity generation capacity: 100 MWe)
• Svartsengi Power Plant (electricity generation capacity: 76.4 MWe) • Krafla Power Plant (electricity generation capacity: 60 MWe) • Bjarnarflag Power Plant (electricity generation capacity: 3.2 MWe) • Húsavík Power Plant (electricity generation capacity: 2 MWe – planned generation for autumn 2013) Bedrock High temperature field Low temperature field
< 0.8 m. years 0.8 - 3.3 m. years 33 - 15 m. years Source: National Energy Authority
The Icelandic Energy Market
7
Main geothermal power plants in Iceland
Hellisheiði Power Plant – south-west Iceland Owner: Orkuveita Reykjavíkur Electricity generation capacity: 303 MWe Start of operation: 2006 Turbines: 6 x 45 MW, 1 x 33 MW Wells: 71 Source: Orkuveita Reykjavíkur
Nesjavellir Power Plant – south-west Iceland Owner: Orkuveita Reykjavíkur Electricity generation capacity: 120 MWe Start of operation: 1990 Turbines: 4 x 30 MW Wells: 26 Source: Orkuveita Reykjavíkur
Reykjanes Power Plant – south-west Iceland Owner: HS Orka hf. Electricity generation capacity: 100 MWe Start of operation: 2006 Turbines: 2 x 50 MW Wells: 28 Source: HS Orka hf.
Svartsengi Power Plant – south-west Iceland Owner: HS Orka hf. Electricity generation capacity: 76.4 MWe Start of operation: 1977 Turbines: 6 MW, 7 x 1.2 MW, 2 x 30 MW, 2 MW Wells: 24 Source: HS Orka hf. Photo: Shutterstock
Krafla Power Plant – north-east Iceland Owner: Landsvirkjun Electricity generation capacity: 60 MWe Start of operation: 1978 Turbines: 2 x 30 MW Wells: 22 Source: Landsvirkjun Photo: Shutterstock
8
The Icelandic Energy Market
Hydropower Hydropower is a sustainable source of energy based on the flow of energy inherent in the continuous cycle of water, i.e. precipitation. There is enormous power in flowing water and this is used for the generation of electricity all over the world. Icelanders have been industrious in taking advantage of the great potential they have in the harnessing of waterfalls and are among the leading nations in this respect. In Iceland, available hydropower has historically been estimated to be approximately 30,000 GWh. Approximately 12,500 GWh of hydro-energy has already been harnessed in Iceland and it is therefore clear that harnessing more energy is an option. As has been stated, the greater part of electricity generation in Iceland is from hydropower, or 73%. The Kárahnjúkar Hydro-power Plant is the largest hydropower station in Iceland with an installed capacity of around 690 MW. The plant generates approx. 4,600 GWh per year, all of which is used by the Fjarðaál aluminium plant in Reyðarfjörður. In order to put the production capacity of the Kárahnjúkar power plant into context, the total energy use of homes and summer cottages in Iceland in 2010 was approximately 962 GWh. The plant, therefore, could handle five times the electricity requirements of Icelandic homes and summer cottages.
Numerous hydropower plants have been built in Iceland over the years. Below is a list of five of the largest hydropower plants: •
• •
• •
Kárahnjúkar Power Plant (electricity generation capacity: 690 MW) Búrfell Power Plant (electricity generation capacity: 270 MW) Hrauneyjafoss Power Plant (electricity generation capacity: 210 MW) Sigalda Power Plant (electricity generation capacity: 150 MW) Sultartangi Power Plant (electricity generation capacity: 120 MW)
Figure 9. Energy production by source - Hydropower 18,000
100%
16,000
90% 80%
Gwh
14,000
70%
12,000
60%
10,000
50%
8,000
40%
6,000
30%
4,000
20%
2,000
10% 0%
0 0
9 19
1
9 19
2
9 19
3
9 19
4
9 19
5
9 19
6
9 19
7
9 19
Hydro (l.ax)
8
9 19
9
9 19
0
0 20
1
0 20
Other energy (l.ax)
2
0 20
3
0 20
4
0 20
5
0 20
6
0 20
7
0 20
8
0 20
9
0 20
0
1 20
1
1 20
Hydro as proportion of total (r.ax) Source: National Energy Authority
The Icelandic Energy Market
9
Main hydropower plants in Iceland
Kárahnjúkar Power Plant – east Iceland Owner: Landsvirkjun Electricity generation capacity: 690 MW Start of operation: 2007 Turbines: 6 x 115 MW Head: 599 m Source: Landsvirkjun. Picture obtained from the website: http://www.flickr.com/photos/zunderman/6159743929/
Búrfell Power Plant – south-west Iceland Owner: Landsvirkjun Electricity generation capacity: 270 MW Start of operation: 1969 Turbines: 6 x 45 MW Head: 115 m Source: Landsvirkjun
Hrauneyjafoss Power Plant – south-west Iceland Owner: Landsvirkjun Electricity generation capacity: 210 MW Start of operation: 1981 Turbines: 3 x 70 MW Head: 88 m Source: Landsvirkjun Photo: Emil Þór Sigurðsson
Sigalda Power Plant – south Iceland Owner: Landsvirkjun Electricity generation capacity: 150 MW Start of operation: 1977 Turbines: 3 x 50 MW Francis Head: 74 m Source: Landsvirkjun
Sultartangi Power Plant - south-west Iceland Owner: Landsvirkjun Electricity generation capacity: 120 MW Start of operation: 1999 Turbines: 2 x 60 MW Francis Head: 44.6 m Source: Landsvirkjun Photo: Gerður Jensdóttir
10
The Icelandic Energy Market
Other energy sources In addition to hydropower and geothermal energy, there are several other possible sources of energy in Iceland. They are listed below: • • • • • •
Wind Tidal power Organic waste Oil Solar power Solar cells
According to Landsvirkjun’s annual report in 2011, the company has recently been researching the utilisation of wind energy in several locations in Iceland for the purpose of assessing the economic feasibility of building wind power stations. Wind measurements have been carried out near the Búrfell Station, east of the R. Þjórsá, west of Þorlákshöfn on the south coast and on Auðkúluheiði heath, north of the Blanda Reservoir. The investigations indicate that this could be a desirable option for electricity production. Utilisation of wind energy among other nations is considerable and has increased significantly over the past few years. In 2011, China had the highest installed wind power capacity in the world, or approximately 43 GW, thereafter were the United States, Germany and Spain. Wind power is a renewable source of power that can be harnessed almost anywhere. The technology involved in setting up wind power stations has advanced at a rapid rate in recent years and costs have fallen. Wind, however, is unpredictable and, as a result, the electricity generation fluctuates according to the weather. The cost of installation is high and the wind turbines are large and can cause visual pollution. Breiðafjörður
Photo: Peter Schninzel http://www.passionandlight.com/keyword/iceland#!i=1193069926&k=AdHBZ
Table 2. Installed wind power capacity by country at year-end 2011 Country China US Germany Spain India France Italy UK Canada Portugal Others Total
GW 62 47 29 22 16 7 7 7 5 4 32 238
% 26% 20% 12% 9% 7% 3% 3% 3% 2% 2% 13% 100%
Source: Global Wind Energy Council
is much less than previously believed. In addition, the cost of such construction is quite high and tidal power therefore is not able to compete with hydropower stations in this respect at present.
The Dreki area According to the National Energy Authority, there are two areas on the Icelandic continental shelf that could contain hydrocarbons (oil and natural gas). These are the Dreki area, which has been much debated recently, and the Gammur area just off North Iceland. The Dreki area lies near the Jan Mayen ridge, east and north-east of Iceland. The area has similar geological characteristics as areas in eastern Greenland, near the Norwegian coastline and in the continental shelf of the Faeroe Islands and the Shetland Islands where, in some cases, oil in extractable quantities has been found. Preliminary research into the Dreki area has given strong indications of the presence of oil. Further research, however, is required, as are drilling operations to find out whether there are sufficient quantities for extraction. There is no doubt that investigative work and the possible extraction of oil would have a considerable positive effect on Iceland’s economy. In April 2012, the National Energy Authority received applications from three enterprises for concessions for the exploration and production of hydrocarbons in the Dreki area. Behind the enterprises are Icelandic and foreign investors, Icelandic engineering Figure 10.
Landsvirkjun has decided to build one or two wind turbines for experimental purposes at the production area of Búrfell Power Plant (total power generated approx. 2MW) to find out whether this alternative suits Icelandic conditions before any decisions are made regarding investment in a bigger wind farm. This could be an exciting option for Icelanders and it will be interesting to follow the continuing developments. Harnessing tidal power has been under some debate in recent years. However, much more research is required, as well as detailed measurements of depths, currents and sea levels around Iceland. Basic research has been carried out on tides in the inner part of Breiðafjörður, an area that has long been considered the only realistic option for harnessing tidal power in Iceland. Results showed, however, that the energy Source: National Energy Authority The Icelandic Energy Market
11
Figure 11. Possible route of submarine cable
firms and foreign oil companies. In the processing of the applications the National Energy Authority will evaluate the finances, technical ability, experience and research plans of the entities in question. The Authority plans to complete the processing of applications by the end of November 2012.
1250 km
1000 km
Submarine transmission cable Ever since 1952, there have been discussions and investigations into a possible submarine cable between Iceland and mainland Europe. The cable would link the Icelandic electricity grid to mainland Europe. Until recently, this idea has been regarded as technically possible but not profitable. The main risk aspects include unexplored areas (the location of the cable in the North Atlantic Ocean), breakdown rate, excessive depth and its length, as the cable would be the longest ever laid. A study that Landsvirkjun and Landsnet prepared jointly in 2009 and 2010, however, indicated that the project could be both technically feasible and profitable. This change can for the most part be traced to changed market criteria and the increased focus on the utilisation of renewable energy in Europe. According to a press release from the Minister of Industry and Finance in April 2012, an advisory group has been appointed to further examine the possibility of laying a submarine cable between Iceland and mainland Europe. The advisory group contains representatives from all political parties, entities from the labour market and representatives from principal interest groups. The advisory group is under obligation to hand in its report by the end of 2012. At the end of May 2012, the British Energy Secretary paid Iceland a visit and signed, together with the Icelandic Minister of Industry, a joint Memorandum of Understanding (MOU) between the countries as regards energy issues. The MOU reveals the intention of both countries to work together on the development of geothermal energy utilisation in the UK for the development of heating utilities. The MOU also provides for investigating the possibility of laying a submarine cable between Iceland and the UK. Green energy production is of great interest to Britain due to its commitment to ensure that 15% of the energy use in the UK will be sourced from renewable energy sources by the year 2020. For this reason, the UK has also signed an agreement for collaboration with Norway for the importation of green energy, a project that is currently under examination. The Norwegians are quite familiar with submarine cables as, in 2008, a submarine cable between Norway and the Netherlands was taken into use and is the longest of its kind, or 580 km. The possible submarine cable between Iceland and the UK would be between 1,180 and 1,900 km long, almost four times the length of the Norwegian cable. The cable between Norway and the Netherlands (NorNed) is also at a much lesser depth than the planned cable from Iceland and it is safe to assume that the starting costs will be considerably higher. The initial costs of the NorNed submarine cable were USD 900m. It is vital to reach a general public consensus about Iceland’s participation in laying a submarine cable. This means that a very detailed analysis must be carried out to better understand what effect this could have on Icelandic society as a whole, the energy industry in Iceland, electricity prices, derived jobs and more. Another aspect that needs to be examined is whether currently effective legislation permits a changed energy environment such as the laying of a submarine cable would entail.
12
The Icelandic Energy Market
1170 km
1900 km
Source: Landsvirkjun
Development of the Icelandic electricity market Developments Electrical power generation in Iceland has been growing significantly over the past decade and has increased by 124% since 2000. Electrification in Iceland began at the beginning of the 20th century. In 1904, the first power plant serving the general public was constructed. The plant was a 9 kW hydropower station built in Hafnarfjörður. During the first decades of the 20th century, various local authorities constructed power plants and 1921 saw a major milestone when Reykjavík built a plant in the Elliðaárdalur valley to harness the rivers there. During the 1930s, the Ljósafoss plant in R. Sog and R. Laxá in Þingeyjarsýsla district were built. There were considerable changes in the development of electricity in 1969 when Búrfell Power Plant was built for the aluminium plant in Straumsvík. Since then, power production for heavy industry has increased significantly, as by 2011 it amounted to approximately 74% of all electricity production in Iceland. This considerable increase over recent years is due to a number of larger power developments as, in addition to the Bland Power Plant (brought on-line in 1991), five power plants have been constructed in the R. Þjórsá and R. Tungnaá catchment areas. Construction on the Kárahnjúkar Power Plant, moreover, was completed in 2007. All the electricity produced by the Kárahnjúkar plant is transmitted directly to the aluminium plant in Reyðarfjörður. Hydropower has from the very beginning been the source of the vast majority of electricity production in Iceland.
The electricity industry has developed with government support for building power generation capacity. At present, there are six energy companies involved in the development of geothermal energy and hydropower, two drilling companies and numerous service companies working in the research sector, as well as engineering firms and consultancy companies. Governmental involvement is mainly in the field of research and regulation and the energy companies are mostly state or municipality owned. HS Orka and Orkusalan are the only privately owned energy companies in Iceland. One of the drilling companies, Jarðboranir hf., is the largest drilling company globally that specialises in geothermal energy. The company has been operated since 1986 and has drilled all the geothermal wells in Iceland. The company is also heavily involved overseas. The other drilling company, Borholur ehf., was established at the
Electricity generation using geothermal energy has increased significantly in recent years. The installed capacity of the geothermal plants is 665 MW. The oldest geothermal plant is Bjarnarflag near Námafjall (3MW), which was brought on-line in 1969. The plant at Svartsengi has been in operation since 1977 and was the first of six electricity plants in that area. At present, the production capacity of the power plant at Svartsengi is approximately 75 MW. The Krafla Power Plant has been in operation since 1978 and electricity generation began at Nesjavellir near the end of 1998 with two 30 MW turbines. The plant was enlarged in 2001 to 90 MW with the instalment of the third turbine. The largest geothermal power plants that have been completed in recent years are Hellisheiði Power Plant (the final phase was completed in 2011) and Reykjanes Power Plant (completed in 2006).
Figure 12. Development of electricity generation in Iceland, 1976-2011
Svartsengi 30 MW
20,000 18,000 Kárahnjúkar
16,000
690 MW
Gwh
14,000
Sultartangi 120 MW
12,000 10,000
Svartsengi 2 MW
8,000
Sigalda 240 MW
6,000
Hellisheiði 90 MW
Blöndustöð 150 MW Svartsengi 6 MW
Krafla 30 MW
4,000
Nesjavellir 120 MW
Hrauneyjafoss 280 MW
Svartsengi 30 MW
Svartsengi 8,5 MW
Reykjanes 100 MW
Hellisheiði 90 MW
Hellisheiði 33 MW
Hellisheiði 90 MW
Húsavík 2 MW
Krafla 30 MW
2,000 0
76 19
78 19
80 19
82 19
84 19
86 19
88 19
90 19
92 19
Hydro
94 19
96 19
98 19
00 20
02 20
04 20
06 20
08 20
10 20
Geothermal Source: National Energy Authority
At present, Landsvirkjun is working on the construction of a hydropower station at Búðarháls. The projected capacity of the plant is around 95 MW and it is assumed that the project will be completed in 2013 and that the sale of electricity will begin before the end of 2013.
Current environment The twentieth century is called, by some, the first age of energy issues, and for most of the century energy production and the distribution of electricity and thermal capacity in Iceland was, for the most part, in the hands of public authorities or companies owned by them. At the start of the new century, new legislation was approved to create a foundation for competition in electricity generation and sales. Several new, privately operated undertakings were established shortly thereafter. Landsvirkjun produces most of the electricity generated in Iceland, or approximately 73%. Orkuveita Reykjavíkur (Reykjavík Energy) is in second place with a 17% share. Several smaller energy companies are responsible for the rest of the production. Hydropower is Landsvirkjun’s primary energy source, as 96% of Landsvirkjun’s total power production is from this source. At Orkuveita Reykjavíkur the opposite is the case, as 97% of Orkuveitan’s total power production is from geothermal sources.
end of 2011. The company offers highly developed solutions in the field of high-temperature drilling suitable for Icelandic conditions. After the oil crisis in the 1970s, there was increased pressure on the authorities towards the utilisation of Iceland’s own natural resources of hydro and geothermal energy. This led to much increased research and development. One of the actions taken was the establishment of the National Energy Authority (Orkustofnun) in 1967. The Authority operates under the auspices of the Ministry of Industry. The National Energy Authority’s role is twofold; on the one hand it is responsible for monitoring the Icelandic energy market and, on the other, it plays an administrative role and is responsible for all permit issuance for research into, and the utilisation of, resources and energy production. The National Energy Authority provides the government with consultancy services relating to energy issues and other resource issues, supports energy research and is responsible for preparing long-term projections on Iceland’s energy requirements. The Authority has been operating for over 30 years and, during that time, has established itself as one of the foremost research institutes in the field of geothermal energy in the world. The National Energy Authority was divided on the basis of new legislation that came into
The Icelandic Energy Market
13
effect in 2003, with the consulting and research arm of the organisation established as an independent but governmentally owned research and service institution, named Iceland GeoSurvey (ÍSOR). The National Energy Authority and ÍSOR have provided communities, companies and individuals with consultancy services and advice on the utilisation of geothermal resources, in Iceland and internationally.
industry and encourage regional development. The act further seeks to create a competitive environment for the generation and sale of electricity and to foster the efficient and cost-effective transmission and distribution of electricity. It also seeks to ensure the security of the electricity system and the interests of its consumers, and it promotes the use of renewable energy sources.
The main public bodies involved in the market, and who are in fact responsible for Icelandic energy and energy related issues, are the Ministry of Industry, the Ministry for the Environment, the National Energy Authority and Iceland GeoSurvey (ÍSOR).
Landsnet, a limited liability company, was formed in order to separate generation from transmission and distribution. Established in early 2005, the company is responsible for the transmission and system operation services of its predecessor, Landsvirkjun (National Power Company), which holds 65% of Landsnet’s shares. Other owners are RARIK, Orkuveita Reykjavíkur and Orkubú Vestfjarða. Following the establishment of Landsnet, the transmission system was enlarged, and it now provides greater equality in transmission costs, particularly for customers in remote areas of the country.
In relation to the use of natural resources, the Icelandic Ministry for the Environment also plays an important role, as it formulates and enforces Icelandic government policy on environmental affairs. The ministry supervises affairs pertaining to nature in Iceland, conservation and outdoor recreation, the protection of animals, wildlife management, pollution prevention, hygiene, planning and building matters, fire prevention, weather forecasting and avalanche-protection, surveying and cartography, forestry and soil conservation, environmental monitoring and surveillance. The National Land Survey and the Planning Agency fall under the auspices of the same ministry. The National Energy Authority, as an agency under the auspices of the Ministry of Industry, Energy and Tourism, is probably the most important organisation related to geothermal energy and hydropower development in Iceland, as its primary role and responsibility is to “advise the Icelandic government on energy issues and related topics, promote energy research and administrate development and exploitation of the energy resources” of the country. Services to the energy sector are for the most part provided by privately owned engineering firms and service companies, as well as by ÍSOR. Icelandic engineering firms have decades-long experience from energy or energy related projects in Iceland and most of them have been successfully involved in energy related projects overseas. In 2006 and 2007 there was considerable growth in the development of the energy sector in Iceland. This had the result that many engineering and consultancy firms merged and expanded their operations. At present, these companies have the knowledge, manpower and ability to operate in the international market, something that has increasingly been the case after the autumn of 2008.
Legal environment Iceland is a member state of the European Economic Area (EEA), which extends the internal market legislation of the European Union to Iceland, with the exception of issues relating to agriculture and fisheries. Legislation in the member states of the EEA covering the energy market and environmental issues must comply with corresponding EU Directives. EU Directive No 96/92 applies to the electricity market, and the Icelandic Electricity Act No. 65/2003, enacted in mid-2003, implemented this EU legislation in Iceland. The Icelandic Electricity Act includes various elements from older legislation, including the Inland Waters Act (No. 15/1923), the Energy Act (No. 58/1967), the Electricity Generating Stations Act (No. 60/1981) and legislation covering individual energy companies. The Electricity Act brought substantial changes to the organisation of the electricity market. The objectives of the legislation are to encourage an economical electricity system, strengthen the Icelandic energy
14
The Icelandic Energy Market
Companies that provide both heating services and electricity may operate in the electricity market, but they are required to maintain separate accounts in order to prevent conflicts of interest. Legislation applying to the energy market in Iceland covers natural resources, the distribution of heat and electricity generation. The following is a list of legislation and other regulations that directly or indirectly apply to the energy market. It should be noted that the list is not exhaustive and there are numerous other laws and regulations that must be complied with. The list can be accessed from the website of the Ministry of Industry http://www.idnadarraduneyti.is/logog-reglugerdir/OrkumalOgNattura/nr/281.
• Act on Landsvirkjun, No. 42/1983 • Act on the creation of Hitaveita Suðurnesja, No. 106/2000 • Act on the guarantee of origin of electricity produced from renewable energy sources, etc., No. 30/2008 • Electricity Act, No. 65/2003 • Act on the establishment of Landsnet hf., No. 75/2004 • Act on the survey and utilisation of ground resources, No. 57/ 1998 • Act amending various acts of law relating to natural resources and energy, No. 58/2008 • Act on Water, No. 20/2006 • Act on the evaluation of environmental impact, No. 106/2000 • Various regulations on the provision and distribution of heating services for a number of individual communities/ municipalities.
The National Energy Authority is the supervisory authority for both the transmission and distribution companies. The Authority establishes income caps for company tariffs and is the supreme authority as regards concessions. The generation and sale of electricity is monitored by the competition authorities. A special Appeals Committee on Electricity has been set up to examine any disputes that might arise from administrative decisions made by the National Energy Authority. The Energy Act contains various other general provisions relating to how licences are granted, other procedures, tariffs and how accounts must be kept separate.
The most important pieces of legislation for the utilisation of geothermal and hydro resources are the Act on Surveys and the Utilisation of Ground Resources, No. 57/1998, and the Electricity Act, No. 65/2003; based on those two pieces of legislation, research and utilisation of ground resources are subject to governmental licensing, despite resource ownership being based on the ownership of land. Additionally, surveys, utilisation and other developments are also subject to the Nature Conservation Act, the Planning and Building Act and other acts relating to the surveying and utilisation of land and land benefits, which fall under the auspices of the Ministry for the Environment and related supervision.
United Nations University – Geothermal Training Programme The United Nations University–Geothermal Training Programme has been operated in Iceland since 1978 and specialises in the education of geothermal experts. The programme is financed for the most part with funds from the Icelandic government. The National Energy Authority houses the programme and is responsible for its operation. The programme is based on a six-month training course for experts from developing countries that have geothermal resources. More than 450 students have attended the school since its establishment. In addition to the normal six-month programme the school also supports students intending to complete their master’s degree and doctorates in Iceland. The school also regularly holds courses in developing countries. The object of the school is to strengthen international cooperation between the United Nations, universities and others involved in scientific research, with a particular focus on the developing countries. Its goals include forming relationships between scientists internationally and strengthening research into issues that are high on the United Nation’s agenda. The school has proved to be a success and its location is evidence of Icelanders’ reputation among other nations when it comes to taking advantage of geothermal energy. The Icelandic energy companies have increasingly been taking advantage of the knowledge of newly graduated experts in new projects overseas.
Energy science studies In the autumn of 2012, the University of Iceland intends to launch a new master’s degree programme in renewable energy in the School of Engineering and Natural Sciences. The University of Iceland has been a leader in the teaching and research of renewable energy in Iceland for a number of years. The programme is based on the following fields; geothermal engineering, hydropower engineering, ecological electrical engineering, geothermal sciences, energy economics, environmental impact and sustainability. As has been touched on previously, there are considerable opportunities in renewable energy sources, particularly as regards research and development, both in Iceland and overseas. In 2009, Keilir offered, in cooperation with the University of Iceland, a university level programme in energy and environmental technologies. The first
15 students graduated from the programme in the spring of 2012. The programme has been steadily growing in popularity during the three years that it has been on offer. The energy and environmental technologies programme is interdisciplinary and provides a sound background in the harnessing and utilisation of geothermal energy. The programme’s main point of focus is on geothermal energy and ensuring that the students gain an understanding of the technological issues that relate to what happens both below ground and above ground. The programme also addresses the harnessing of other green and renewable energy forms. There has been a growing need for technologically educated employees to work in, among other things, the preparation and assessment of projects, design, implementation, supervision, operation and maintenance of power plants and, as a result, these specialised study programmes are very welcome and will without a doubt help in maintaining the knowledge and development within the energy sector in Iceland. There has been a severe lack of engineering, industrial and technologically educated people in Iceland in recent years. According to a report prepared by the Confederation of Icelandic Employers at the end of April 2012, this lack, all things being equal, will hamper the development of energy, engineering and service companies involved in heavy industry and could slow down the progress of the Icelandic economy. According to the survey, the number of graduates from engineering, technology and sciences programmes in Iceland must increase to meet the demands of the companies. There is already considerable demand for university educated employees and this will only increase as companies increase their activities overseas. If the academic system is unable to meet this growing demand there is a risk that engineering firms and service companies will be more likely to be based overseas. Iceland lags behind, being ranked 24th, in international comparisons of technology educated people aged 25–35. Approximately 37% of people in Iceland aged 25–35 have university degrees, in Norway this percentage is around 47%. In 2010, Icelandic universities graduated 630 students in the sciences, mathematics, computer sciences, engineering and construction, which is approximately 18% of all graduated students that year. Based on the increased national debate on geothermal energy and the opportunities this sector has to offer, both here in Iceland and overseas, there are high hopes that there will be an increase in the number of graduated students in these fields over the next few years.
Geothermal clusters At the beginning of 2009, the Science and Technology Policy Council allocated a grant to the project The International Research Cluster for Geothermal energy or GEORG – Geothermal Research Group. GEORG is a research-driven cluster formed by 22 participants, Icelandic and foreign. Numerous projects in various fields of geothermal research and development are carried out within the framework of GEORG. The cooperation supports a large number of post-graduate university students. GEORG is also one of the founding members of the Icelandic geothermal cluster, Iceland Geothermal, which is an enterprise driven cluster collective that began formally in 2011. The founding members number around 20 and are the principal Icelandic companies involved in this sector. The object of the cluster cooperation is
The Icelandic Energy Market
15
to link together dissimilar cluster members, companies and the authorities and to support innovation in geothermal technology, including the development of new products. The collaboration is also intended to lead to the improved competitiveness of the geothermal cluster and thereby Iceland, to increase the value of products and services in the geothermal sector and to strengthen current undertakings in geothermal utilisation. It is hoped that the collaboration will lead to the establishment of new companies in the field of geothermal energy, attract domestic and foreign investments and encourage the exportation of goods and services relating to geothermal utilisation. The cluster collaboration is based on ten defined partner projects that all involve geothermal energy in some form or another. Having defined the projects, ten professional groups, one for each partner project, were established and will complete their work by the end of 2012. The consultancy firm Gekon is responsible for managing the Iceland Geothermal cluster collaboration.
Icelandic energy companies As has previously been mentioned, there are six energy companies operating in Iceland in the development of geothermal energy and hydropower. All the companies except two are owned by the Icelandic authorities while HS Orka and Orkusalan are privately owned. All these companies are working on a large number of projects to add electricity generation capacity from hydro and geothermal resources, driven mostly by increasing demand. Three of these companies are by far the largest, i.e. Landsvirkjun, Orkuveita Reykjavíkur and HS Orka. Landsvirkjun is fully owned by the Icelandic state, its role is to maximise results from the energy sources entrusted to the company with sustainable use, value creation and economy as its guiding light. Landsvirkjun is responsible for 73% of all electricity in Iceland and is the largest electricity producer in Iceland. At the same time, the company is a leader in the sustainable use of energy sources and supports increased knowledge, innovation and technical development. Landsvirkjun had 232 employees at the end of 2011. Orkuveita Reykjavíkur is owned by three municipalities; the City of Reykjavík and the municipalities Akranes and Borgarbyggð. Orkuveita Reykjavíkur is the second largest energy company and produces 17% of all electricity produced in Iceland. The company is by far the largest geothermal energy producer in Iceland and produces, distributes and sells hot and cold water and electricity. The company is responsible for the construction and operation of sewerage systems, provides data transfer services and sells, moreover, consultancy services that relate to energy issues. The company employs approximately 400 people. HS Orka hf. is owned by Magma Energy Sweden A.B. (66.6%) and Jarðvarmi slhf. (33.4%). Magma Energy is a subsidiary of Alterra Power, which is an energy company listed on the market in Canada. Jarðvarmi slhf. is owned by 14 Icelandic pension funds. HS Orka is the largest privately owned energy company and is responsible for 8% of all electricity generated in Iceland. HS Orka hf. is the first Icelandic energy company not owned by public bodies and is the first energy company to become a limited liability company. The object of establishing the company was to harness the geothermal energy at Svartsengi near Grindavík, or elsewhere in Reykjanes, and to connect the electricity to built-up areas in the Suðurnes region, to lay a distribution system and to sell hot water to users in the area. The company has approximately 135 employees.
16
The Icelandic Energy Market
Orkusalan is owned by RARIK (100%) and produces around 2% of all electricity generated in Iceland. Orkusalan handles the retail production, purchase and sale of electricity. Orkubú Vestfjarða hf. (Vestfjords Energy) is owned by the State Treasury of Iceland (100%) and provides electricity related services to the local authorities in the Westfjords region. Orkuveita Húsavíkur ohf. (Húsavík Energy) is owned by the local municipality of Norðurþing in the north-east of Iceland (100%). The role of Orkuveita Húsavíkur ohf. is to provide the residents and companies in the Þingeyjarsýsla region with access to hot and cold water as well as to provide sewerage services. Norðurorka is owned by six municipalities in the Eyjafjörður and Þingeyjarsveit region; i.e. Akureyrarbær (98%), Arnarneshreppur, Eyjafjarðarsveit, Grýtubakkahreppur, Svalbarðsstrandarhreppur and Þingeyjarsveit. Noðurorka’s role is to provide services to homes and companies in the area in which it operates by acquiring and distributing potable water and hot water to customers, as well as being responsible for electricity distribution in Akureyri. There are approximately 850 employees working for the Icelandic energy companies, a similar number as were employed in the sector at the beginning of 2008. The number of employees decreased considerably in the wake of the collapse of the Icelandic economy. However, the sector has been slowly recovering and the number of employees has been steadily rising. The educational level of employees in the energy companies is generally high. Most of those working in the energy sector have university degrees, generally engineering, industrial or technology degrees. It is sometimes maintained that nothing has been happening in the energy industry since the economic collapse and that there is a certain sluggishness about the sector as a whole. However, figures from Statistics Iceland reveal that electricity generation in Iceland has been Main projects completed in 2010 and 2011 in the three largest energy companies • • • • • • • • • • • •
Preparations for a pumping station in Reykjanes (HS Orka) Project at Svartsengi, mainly disposal of drainage water (HS Orka) Aquaculture partner project in Reykjanes (HS Orka) Hellisheiði Geothermal Plant (OR) Connection to Nesjavellir line 2 (OR) Research and development projects Gas separator station (OR) Construction of four biotreatment stations for sewage in Borgarfjördur rural areas (LV) New interactive energy exhibition opened at Búrfell Power Station (LV) Assistance in the opration and mantainance of hydropower stations and transmission lines in Greenland (LV) Construction at Kárahnjúkar, Sauðár utility, etc. (LV) Preparatory work for power development (LV) • Bjarnarflag Power Station • Krafla Power Station • Þeistareykir • Lower Þjórsá river
increasing every year and has never been more than at present. The energy companies have managed to complete a number of projects over the past two years, the main ones are listed in the box on page 16.
centres in two locations in Iceland, in Reykjavík and in Egilsstaðir. Landsnet has no foreign operations but is in partnership with foreign companies as regards developmental projects overseas.
In recent years, the energy companies have changed the focus of their operation in tune with altered market circumstances and have begun to turn their attention to industries other than heavy industry. As of 2008, most major investment projects, mainly those involving the construction of new aluminium plants, have been put on hold, with the exception of Hellisheiði Power Plant. There are plans, however, for constructing an aluminium plant in Helguvík. Norðurál, the owner of the planned aluminium plant in Helguvík, has been engaged in preparing the project since 2004 and the ground-breaking ceremony was held in 2008. Construction work has been on-going in the area since then. A dispute arose between Norðurál and HS Orka on the one hand, and Norðurál and Orkuveita Reykjavíkur on the other, as regards the performance of the agreements signed in 2007. Norðurál summoned HS Orka before a court of arbitration in Sweden due to a disagreement on the volume and price of electricity to the aluminium plant in Helguvík. In December 2011, the court of arbitration concluded that the electric power sales contract was in effect and that the contract should be followed. However, there are on-going disputes as regards various reservations in the contract and Norðurál and HS Orka have been negotiating these over the past few months. In addition, another dispute between the two companies, initiated shortly after the ruling was issued in the earlier case, is currently before a court of arbitration. If the companies are unable to reach a settlement in this dispute, the court of arbitration will probably not reach a decision before next year. If negotiations are successful and construction of the new aluminium plants begins, this will create a number of new jobs. HS Orka estimates that during its operation, the aluminium plant will create 600 new jobs in the plant itself and almost 2,000 jobs in connection with the plant and its operation. The assumption is made, moreover, that 4,000 jobs will be required to build the aluminium plant, as well as a total of 10,000 jobs in constructing the aluminium plant and related constructions, such as energy installations, port services and more.
Landsnet owns and operates all principal electrical transmission lines in Iceland. The current transmission system is unable to handle more electricity generation unless the system is upgraded extensively. According to a presentation that Landsnet delivered at its Annual General Meeting earlier this year, the company plans to invest considerable funds for new construction over the next few years. These plans are dependent on continued energy developments in Iceland and a conclusion being reached in the Master Plan. It must be considered likely, however, that the projected investment in the development of the transmission system this year will not be realised due to the objections of certain local authorities to the installation of overhead lines and the ever louder demands for the laying of underground cables.
Landsnet Landsnet hf. is owned by Landsvirkjun (65%), RARIK ohf. (22.5%), Orkuveita Reykjavíkur (6.8%) and Orkubú Vestfjarða ohf. (6%). The company was established on the basis of the Electricity Act that was passed in 2003. The company’s role is to manage the transmission of electricity, manage Iceland’s electricity system and ensure and maintain the capacity and operational security in the long-term. Landsnet operates in accordance with special licence and is subject to the supervision of the National Energy Authority. The National Energy Authority determines the framework on which the company’s price list is based. The company has 100 employees and has operating
Discussions on the option of laying high-voltage lines underground has increased recently in conjunction with growing concerns about environmental issues. The vast majority of transmission lines in Iceland are overhead power lines. The slow spread of underground cables can be explained by, among other things, the immense initial costs, in some cases ten times higher than the installation of overhead lines. There are also technical limitations and problems with the operation of underground cables carrying high voltages. It is in some ways understandable that local authorities and landowners are against the installation of overhead lines with the attendant visual pollution when they cannot see any direct benefits. It should be kept in mind, however, that a better and more reliable transmission system is to the benefit of all Icelanders and that the laying and maintenance of underground cables with high voltages is an unrealistic option at present due to the high cost. Earlier this year, the Minister of Industry appointed a committee intended to formulate policies on the laying of electrical lines underground. The committee is expected to hand in its report by the end of the year. It is vital that the authorities establish clear rules with respect to the installation of new and improved lines, so that it is possible to embark on the necessary investments in the transmission system, which is one of the prerequisites for continued energy and industrial development in Iceland.
Financial position of the three largest energy companies During 2006–2008 there was considerable growth in the Icelandic energy market, with Landsvirkjun, HS Orka and Orkuveita Reykjavíkur leading the way in this respect. The largest and most extensive project was the construction of the Kárahnjúkar Power Plant, which is currently Iceland’s most powerful plant generating 690 MW. The total cost of the project (including interest, indexation and exchange rate changes during the construction period – actual cost at the 2009 price level) was approximately ISK 140bn. In addition, Orkuveita Reykjavíkur built the Hellisheiði Power Plant, 2004 to 2011 (1/3 of investments in 2008) and HS Orka built the Reykjanes Power Plant, 2004 to 2006. In total, the investment in these three plants amounted to around ISK 220bn. The above projects were for the most part funded with loan capital, which meant that the energy companies were rather heavily leveraged in the autumn of 2008. The difference in the manner in which the companies were leveraged was the difference in their reporting currency. For instance, Landsvirkjun’s reporting currency is the USD, which meant
The Icelandic Energy Market
17
that the collapse of the ISK had little effect on the company’s balance sheet, while e.g. Orkuveita Reykjavíkur’s reporting currency is ISK and has by far the largest part of its financing in foreign currency. This fact had an enormous impact on the financial position of Orkuveita Reykjavíkur (OR), as can be seen in the figures below. All three companies have at present managed to decrease their debt ratios since 2008, with OR achieving the greatest success proportionately, as can be seen in table 3. The increased leveraging of Landsvirkjun before 2008 was due to the Kárahnjúkar Power Plant and the company has systematically worked on improving all the company’s ratios during the past year. According to information from Landsvirkjun, the company remains too leveraged, although steps have been taken in the right direction and the company’s finances are sound at present. As a sign of the strengthening of Landsvirkjun’s finances, the company has recently taken advantage of overseas investment finance markets. At the close of 2011, the company refinanced a revolving credit agreement amounting to USD 200m.
Orkuveita Reykjavíkur was building Hellisheiði Power Plant and the project was at its peak when the economic collapse occurred in the autumn of 2008. After the fall of the exchange rate of the ISK in 2008, OR’s debts rose by 90%, as reflected by the company’s total financial leverage and most of its ratios. OR has recently presented a five year schedule on how it intends to improve its cash position. The measures include economisation, sale of assets, decreased investments and price list increases. The action plan should have the effect of decreasing the company’s indebtedness. The schedule has been successful and OR exceeded expectations by 10.5% in 2012. Furthermore, OR has established risk policies for itself, as risks involving aluminium prices, foreign currency and interest rates can have considerable impact on the company’s results. OR has negotiated with the Netherlands bank ING for hedges with respect to exchange rates and interest. Just like OR, HS Orka had a stormy ride following the weakening of the ISK. The company’s debts in foreign currencies rose by ISK 9.3bn. This meant that by the end of 2008, the company no longer fulfilled the conditions of loan agreements as regards equity ratios and
Table 3. Financial position of the three largest energy companies in Iceland All figures in ISK millions
Landsvirkjun (converted to ISK) Turnover EBITDA Change between years in % EBITDA margin Net debt Indebtedness (Net debt/EBITDA) Change between years in % Equity ratio Orkuveita Reykjavíkur Turnover EBITDA Change between years in % EBITDA margin Net debt Indebtedness (Net debt/EBITDA) Change between years in % Equity ratio HS Orka * Turnover EBITDA Change between years in % EBITDA margin Net debt Indebtedness (Net debt/EBITDA) Change between years in % Equity ratio Total LV, OR, HS Orka Turnover Net debt EBITDA Indebtedness (Net debt/EBITDA) *HS Orku and Veitur had not been separated in 2007
18
The Icelandic Energy Market
2011
2010
2009
2008
2007
51,603 42,443 23% 82.2% 307,728 7.3 -19% 35.9%
44,293 34,384 1% 77.6% 308,442 9.0 -14% 34.0%
37,539 34,017 -5% 90.6% 353,605 10.4 8% 32.6%
54,772 35,958 182% 65.7% 345,368 9.6 -33% 29.8%
23,081 12,740 -14% 55.2% 181,701 14.3 33% 31.1%
33,626 21,235 52% 63.2% 228,571 10.8 -33% 20.8%
27,916 13,951 8% 50.0% 222,847 16.0 -13% 18.4%
26,013 12,970 11% 49.9% 233,625 18.3 2% 14.4%
24,168 11,652 18% 48.2% 204,537 18.0 90% 18.6%
21,364 9,914 16% 46.4% 88,890 9.4 15% 46.5%
7,431 2,678 -7% 36.0% 18,273 6.8 1% 41.1%
6,994 2,883 -7% 41.2% 19,479 6.8 -15% 41.6%
6,226 3,098 7% 49.8% 23,624 8.0 10% 33.5%
5,425 2,883 n/a 53.1% 23,854 7.3 n/a 17.7%
n/a n/a n/a n/a n/a n/a n/a n/a
92,661 554,573 66,356 8.36
79,203 550,768 51,218 10.75
69,778 610,854 50,086 12.20
84,365 573,759 50,493 11.36
n/a n/a n/a n/a
Source: Companies’ annual reports and statistics from managers
Billion
Figure 13. Landsvirkjun 60 50 40 30 20 10 0
100% 80% 60% 40% 20% 0%
2007
2008
2009
Turnover
2010
EBITDA
operating ratio, which provided creditors with authorisation to call in loans (source: Annual Financial Statement of HS Orka). The company negotiated with its creditors and has subsequently managed to lower its debt ratios and strengthen the company’s balance sheet. As shown in Table 3, the three largest energy companies had a turnover of almost ISK 93bn in 2011, returning approximately ISK 66bn in EBITDA (earnings before interest, taxes, depreciation and amortisation).
2011
EBITDA margin (r.axis)
Source: Companies’ annual reports and statistics from managers
The indebtedness of the energy companies grew considerably in the wake of the extensive weakening of the ISK in 2008 and peaked in 2009 at over 12 x EBITDA, or ISK 611bn. Over the past few years, the indebtedness of the companies has decreased and, at the close of Figure 16. Development of net debts and net debts/ EBITDA 2007-2011
100% 80%
700
14
40%
600
12
20%
500
10
400
8
300
6
200
4
100
2
60%
Billion
Billion
Figure 14. Orkuveita Reykjavíkur 40 35 30 25 20 15 10 5 0
0%
2007
2008
2009
Turnover
2010
EBITDA
2011
EBITDA margin (r.axis)
Source: Companies’ annual reports and statistics from managers
0
Billion
Figure 15. HS Orka 8 7 6 5 4 3 2 1 0
0
2007
80%
0%
2008
2009 Turnover
2010 EBITDA
2011 EBITDA margin (r.axis)
Source: Companies’ annual reports and statistics from managers
2010
2011
Source: Companies’ annual reports and statistics from managers
60% 20%
2009
Landsvirkjun Orkuveita Reykjavíkur HS Orka Net dept/EBITDA (r.axis)
100%
40%
2008
2011, the figure stood at approximately 8.4 x EBITDA or ISK 555bn. The equity position for the companies has at the same time become stronger, with HS Orka leading the way in this respect with an equity ratio of over 40% by the end of 2011. The charts here show how turnover, EBITDA and EBITDA margins have developed over the period, as well as net debts and leveraging (net debts against EBITDA).
Table 4. Potential Power Plants Plant sites Type Developer Location
MW
Capacity Planned Gwst/year construction
Electricitybuyer
Status
Bjarnarflag I
Geothermal
Landsvirkjun
NA
45
370
2012
N/A
3
Bjarnarflag II
Geothermal
Landsvirkjun
NA
45
370
2014
N/A
3
Búðarháls
Geothermal
Landsvirkjun
SV
95
600
2010
Eldvörp
Geothermal
HS Orka
SV
45
370
2013
Helguvík 2
Staumsvík 4
Holtavirkjun
Hydro
Landsvirkjun
SV
53
415
2014
N/A
3
Hvammsvirkjun
Hydro
Landsvirkjun
SV
82
665
2013
N/A
3
Hverahlíð
Geothermal
OR
SV
90
570
2013
Helguvík 3
Krísuvík 1
Geothermal
HS Orka
SV
75
470
2013
Helguvík 3
Krísuvík II
Geothermal
HS Orka
SV
75
470
2015
Helguvík 2
Krísuvík III
Geothermal
HS Orka
SV
75
470
2015
Helguvík 2
Reykjanes II
Geothermal
HS Orka
SV
50
400
2012
Helguvík 4
Reykjanes III
Geothermal
HS Orka
SV
45
370
2013
Helguvík 4
Landsvirkjun
SV
130
980 2015
N/A 3
Landsvirkjun
NA
90
740 2015
N/A 3
Urriðafossvirkjun Þeistareykir I & II
Hydro Geothermal
Total 995 7,260
Source: Íslandsbanki
1 Interest in place, feasibility survey underway 2 Feasibility survey completed (interest in place, electricity within reach) work on environmental impact assessment and permits 3 Environmental impact assessment completed or unneccessary, work on permits, construction may have begun or is beginning 4 Permits granted, construction work beginning or well on its way, work on financing
The Icelandic Energy Market
19
Several power plant construction projects are on hold or under examination at Landsvirkjun, Orkuveita Reykjavíkur and HS Orka. Table 4 was prepared based on information from the companies and shows the main power plant construction projects, listed according to the estimated construction period and their status. The aggregate installed capacity of these 14 project options is 995 MW or approximately 7,260 GWh per year. Iceland’s current electricity generation capacity is, as stated earlier, 17,210 GWh per year and the increase is, therefore, just over 42%. Geothermal power plants are expected to play a more important role than previously as over 60% of the planned energy production capacity is from geothermal sources. Most of these projects are at the tendered design stage, i.e. construction design has been finished and the projects can be started up on short notice, provided that there is a buyer for the energy available. As mentioned before, HS Orka has several projects on hold due to disputes between the company and the buyer of the energy, Norðurál. Moreover, several attractive project options have been put on hold due to uncertainties about the Master Plan for Geothermal and Hydropower Development in Iceland and thereby uncertainties as to which geographical areas will be classified as on hold. If the current projections are realised, the last projects will be initiated in 2015 and Urriðafoss Power Plant would take approximately four years to complete, so that by 2019 these power plants would have increased Iceland’s power production capacity by 900 MW, which is an increase of just under 20% from the current production capacity. There will be a substantial increase in available jobs if these projects are carried out, as it is estimated, for instance, that 600 jobs will be created during the enlargement of the Bjarnarflag plant and around 150 to 200 jobs in the project in Reykjanes. If all the above planned plants go ahead, approximately 4,000–5,000 direct jobs could be created in Iceland. The above project options demand large investments. If account is taken of earlier projects and conversations with the principal companies in the sector, the investment needed may be roughly estimated to be ISK 300bn. In addition, Landsnet estimates investments to the year 2020 to be around ISK 75bn in connection with new plants and the development of the transmission system. If the projects are initiated they will have a huge impact on the Icelandic economy.
Project financing In addition to challenging conditions in international financial markets, the leveraged position of Icelandic energy companies makes it more difficult for them when it comes to financing new projects. This heavy indebtedness is one of the main reasons that the Icelandic energy companies are in a worse position to obtain credit than comparable companies in our neighbouring countries. The circumstances, however, are not desperate and the energy companies have systematically worked on reducing their debts and improving their ratios. Due to the economic situation in Iceland, the debt position and the low equity ratio of most of the energy companies, it has proven difficult to obtain credit on acceptable terms to start up new projects. There are other options available when financing individual projects, however, such as project financing.
20
The Icelandic Energy Market
Project financing involves establishing a separate company for a project. The owners of the company provide it with equity and then the project is financed with loans, where the project itself is used as collateral to guarantee repayment. This means that the tax income of the Icelandic state is not pledged in the case of new power plants (as with Landsvirkjun) given that there are already sufficient power plants to fulfil the daily needs of Icelanders. Orkuveita Reykjavíkur is considering project financing for the Hverahlíðar Power Plant, as in April this year the board of Orkuveita Reykjavíkur granted the Managing Director of the company authorisation to embark on discussions with the Icelandic pension funds to establish a separate company for the project. It should be noted that one of the prerequisites for project financing is the existence of a sound long-term energy sales agreement with a solid energy buyer to guarantee cash flow to repay the loans that are used to finance the project. The idea of project financing is not a new one in the debate on financing power plants in Iceland and there are certainly drawbacks to this method of financing. A recent report on the profitability of energy sales to large scale industries in Iceland, prepared by Sjónarrönd for the Ministry of Finance, points out that the actual profitability of the total funds from power plants for large scale industries, from 1996 to 2010, is approximately 5%. This actual profitability is much lower than in comparable operations outside Iceland. It is worth contemplating whether project financing is a realistic option in Iceland as one may expect investors to demand a higher rate of return. This applies not least to geothermal projects, as the risks during the first phases of the project are considerable. It would certainly be possible to raise the electricity price to large scale industries and thereby probably increase profitability although this would harm Iceland’s competitive capacity and could deter potential energy buyers. As previously stated, loans in project financing would only be guaranteed with a mortgage in the project itself. These loans would, in most cases, be on worse terms than direct loans to the energy companies themselves, who are publicly owned and have guarantees, state guarantees in the case of Landsvirkjun. Poorer terms would have further negative effects on the profitability of projects. There are other options for financing power projects in Iceland. One of these involves increasing share capital. At present, HS Orka is one of three privately owned large energy companies and can, therefore, embark on an increase in share capital, as the company did at the beginning of the year to finance a proportion of new construction. The sale of HS Orka to Magma Energy caused strong reactions at the time and launched a debate on the ownership of energy companies. At present, Landsvirkjun and Orkuveita Reykjavíkur are publicly owned, as stated earlier, and there is little or no likelihood that this will change in the near future. The main criticism of public ownership revolves around the risk of political interference and unprofessional working practices. Furthermore, it can prove difficult to make unpopular decisions, such as reducing the number of employees. It begs the question whether a public limited company would be a better legal form for the Icelandic energy companies so that new projects would not be wholly guaranteed by taxpayers. Although the energy companies were transformed into public limited companies, one would expect the state, in the case of Landsvirkjun and Orkuveita Reykjavíkur, to remain the largest shareholder. General ownership could also be an attractive option for the Icelandic pension funds instead of, for instance, participation in project financing. There is, however,
Figure 17. Total turnover of Icelandic engineering firms and service companies 30 25
Billion
much that advises against the privatisation of the energy companies. For example, mention should be made of the fact that power plant projects require considerable investment during the initial and construction phases and often have a very long repayment time. The energy companies have been built up over a long period of time using taxpayers’ money and it is therefore reasonable that the general public should enjoy the benefits of the future profits from the country’s resources. No position will be taken with respect to the ownership of the Icelandic energy companies in this report.
20 15 10 5 0
2009
Icelandic engineering firms and service companies
Energy or energy related projects * 2013 figures - estimated
Numerous engineering firms and service companies operate within the energy sector or provide the sector with some form of services. The following statistics are prepared from data that Íslandsbanki’s Geothermal Industry Team has collected. The following list shows the largest engineering firms and service companies that serve the energy sector. • • • • • • • •
EFLA ÍSOR Jarðboranir Mannvit National Energy Authority Reykjavík Geothermal Verkís VSÓ
All in all, there are over 1,260 people working for these eight companies. Mannvit has the highest number of employees, approximately 400, then Verkís with 375 (after the merger of Verkís and Almenna verkfræðistofan) and then EFLA with 210 Table 5. Engineering firms and service companies No of employees 2008 2012 Total 1,360 1,264
2011
No of staff working in energy and energy related projects 2008 2012 821 949
% of total 60% 75%
2013* Other operations Source: Íslandsbanki
employees. Together, these three largest engineering firms have around 950 employees or approximately 75% of the total number of employees. In 2008, 1,360 employees were registered as working for the companies, around 100 more jobs than there are today. In the wake of the economic collapse, the companies needed to economise in order to survive, the number of projects decreased and subsequently many employees were dismissed. The number of projects has been rising again slowly and, as a result, most of these companies have been adding to their workforce again. The number of employees working in energy or energy related projects for engineering firms and service companies has increased since 2008. In 2008, approximately 60% of the employees of engineering firms and service companies were engaged in work in energy or energy related projects. At present, four years later, approximately 75% of employees are engaged in such projects. This increase can for the most part, or entirely, be traced to the increased operations of the engineering firms and service companies overseas. The proportion of energy or energy related projects in the total turnover of the above companies has also increased on average between 2008 and 2011. This increase can for the most part be traced to increased demands from overseas for Icelandic knowledge and experience that formed here during the years prior to 2008, with the attendant development of power plants. Figure 19 shows the development of energy and energy related projects as a proportion of the total turnover of the companies. The proportion of energy or energy related projects in the total turnover of the companies may be expected to increase over the next few years due to their increased involvement overseas.
Source: Íslandsbanki The Icelandic Energy Market
21
Figure 18. Overseas operations of engineering firms and service companies
Projects Subsidiary or associated undertaking Headquarters Source: Íslandsbanki
At present, seven of the eight companies listed earlier operate overseas. The only exception is the National Energy Authority, which is only operated in Iceland and is responsible, as mentioned earlier, for all permit provision in Iceland. Even though the National Energy Authority does not directly operate overseas, the company has considerable communications with overseas entities and is party to international agreements between Iceland and 14 other countries. The National Energy Authority has, among other things, since 2008, managed the EFTA Development Fund. The object of the Fund is to minimise social and economic inequality in the European Economic Area and to strengthen bilateral connections between the EFTA countries and the grant receiving states. The National Energy Authority is responsible for the management of three energy programmes within the EFTA Development Fund, in Hungary, Romania and Portugal. The programmes focus on the utilisation of geothermal resources. The greater proportion of the funds may be expected to go toward the drilling of production wells and recharging boreholes. EFLA, ÍSOR, Jarðboranir, Mannvit, Reykjavík Geothermal, Verkís and VSO all have some form of operation overseas. Reykjavík Geothermal, for instance, is exclusively based overseas. The majority of the foreign projects in which the engineering firms and service companies are involved are in the geothermal energy sector. This includes specialised project work, consultancy services, processing in the field of geothermal research, training and education. The companies are not equally advanced in their marketing overseas and the size of their contact networks abroad varies. The companies with the greatest market share outside Iceland and which have worked the longest are ÍSOR, Mannvit, EFLA and Jarðboranir. Figure 20 shows the scope of the activities of Icelandic engineering firms and service companies
22
The Icelandic Energy Market
outside Iceland. As the figure shows, the projects are located all over the world and are in countries such as Chile, Kenya, Ethiopia, New Zealand, Greenland and Norway. The proportion of overseas turnover in the total turnover of the engineering firms and service companies varies. Almost all the companies plan to increase their overseas share over the next five years by an average of 10%. Almost all the overseas projects are energy or energy related projects. According to information obtained from the companies, there are over 200 employees located overseas. More employees of the companies work on overseas projects but are based in Iceland and fly between countries to handle individual projects. It is important for Iceland to maintain the knowledge and human resources that have been created here over the past decade, so that the improvement and development of the energy industry continues to grow and flourish with future generations.
Figure 19. Proportion of overseas operations of the total turnover of engineering firms
25 20
Billion
Overseas operations of engineering firms and service companies
15 10 5 0
2011 Domestic operations * 2013 figures - estimated
2013* Overseas operations Source: Íslandsbanki
The future
Master Plan for hydropower and geothermal energy resources
Over the past few years the National Energy Authority has prepared a forecast on the future demand for electricity in Iceland in its assessment of electricity needs. Most recently, the National Energy Authority issued a forecast for Iceland’s electricity needs for the period 2011–2050 where the needs are itemised into priority and secondary power. This estimate is based only on current contracts for energy intensive industries and not the construction projects already at the planning stage. According to the Energy Authority’s most recent forecast, the general use of priority energy, from 2011, will increase by 9% until 2015 and by 27% in total to the year 2050. Distribution losses and production companies’ consumption are included. The annual average increase in consumption is 1.7% on average over the next 39 years.
The work on this master plan looks into all potential power projects in hydro and geothermal, evaluating and categorising them based on energy efficiency, economics and the potential impact on the environment. Comparable to the planning of land use and land protection, the master plan is not intended to go into details regarding an environmental impact assessment (EIA), but is supposed to “find those projects that are best suited for development based on energy production, economy and protection the of nature.” The first phase of the work, carried out in 1999–2003, looked primarily into the use of energy resources in Iceland, focusing on larger hydropower plants, mostly built in the highlands of Iceland, and on geothermal power plants. Twenty possible hydro project sites were evaluated at 11 locations and 20 possible geothermal project sites in 8 high-temperature areas.
Figure 20. Electricity forecast for Iceland 2005-2050 25,000 20,000
Gwh
In 1999, work started on an Icelandic master plan for the protection and use of natural resources, which focused on hydro and geothermal areas. The project was in two phases, with the first phase ending at the end of 2003 and the second ending in 2011.
Phase 1 was concluded with a preliminary finding, recommending that more research would be needed into the geothermal hightemperature areas.
15,000 10,000 5,000 0
2005* 2010* 2015 2020
2025
2030
2035
2040 2045
2050
Electricity forecast *Actual figures
Source: National Energy Authority
The authorities According to the declaration of the current government, the LeftGreen Movement and the Social Democratic Alliance, as regards energy and resources issues, the parties are in agreement as to the importance of safeguarding the shared property of the Icelandic nation, i.e. its natural resources. During its term of office, the government does not intend to make any changes to the state’s ownership of the energy companies and wishes to make an effort to enact provisions on the shared ownership of Iceland’s natural resources into the constitution. Furthermore, the government is determined to halt the privatisation process of the energy companies that was initiated previous governments and to secure the communal custody of resources and energy companies. The government wishes to strengthen green economic operations, including projects where clean renewable energy is used sustainably for value and job creation.
Phase 2 of the master plan work, carried out between 2004 and 2007, and from 2007 to 2011 (with new project management from 2007– 10), has primarily looked at the protection and use of the natural environment in respect of hydro and geothermal resources. The main focus in this phase was put on the protection and varied use of natural resources, as well as the sustainability of the energy resources. The final conclusions of Phase 2 were published in 2011. Thereafter there was a 12-week consultation process where the public, companies and public bodies were given the opportunity to send in comments to the draft for a parliamentary resolution issued by the Minister of Industry and the Minister for the Environment. The consultation ended in November 2011 and 200 comments were submitted. The Minister for the Environment and the Minister of Industry will review the comments and will thereafter jointly submit a parliamentary resolution to the Althingi, which will have the final say as to the manner in which the areas assessed will be ranked into a utilisation category, on hold category or protected category. There have already been loud protestations to the effect that the master plan has become political in nature rather than being a professional assessment of each geographic area taking into account environmental assessments. No position will be taken on this opinion in this report although it is important that the master plan be prepared in a professional manner in order for it to be possible to engage in economical and profitable operations for the benefit of the country and its people.
The Icelandic Energy Market
23
Main obstacles
Main opportunities
The main obstacles facing the energy companies today are diverse in nature. Uncertainty and instability in the international market mean that demand for Icelandic energy has begun to fail. Prospective buyers have decided to hold back and it is uncertain how matters will develop over the next few years. The severe leveraging of the energy companies and changed points of focus in their operation mean that larger projects are put on hold and, as a result, there are uncertainties in the financing of new projects. The agreement on the master plan also causes uncertainties to energy, engineering and service undertakings. It is vitally important that the authorities agree on the master plan, so that the energy companies can see the advantage of investigating and drilling pilot holes in the areas where harnessing power will be allowed. Political willingness for the increased growth of the Icelandic energy market is important for the sector and, as the state is the owner of the two largest power producers in Iceland, they can, if they are willing, have a significant impact on the development of the energy sector.
Although there are many obstacles present in the Icelandic energy market, the energy industry, engineering firms and service companies have grown and prospered over the past two years, they have recruited more staff and there has been an increase in the number of projects. The projects are varied and are divided between foreign and Icelandic projects. Mention may be made of examples such as hydropower plants, high-temperature drilling, silicon metal plants, submarine cables, data centres, polysilicon plants, carbon fibre, algae farming, and so on and so on. The basic premise for these projects being realised is continued energy development in Iceland and, therefore, clear policies thereto from the authorities. Landsvirkjun has already decided to install one or two wind power stations to investigate whether it is possible to harness the energy in Iceland’s high winds and thereby find a new source of energy. Iceland is competitive when compared with other nations in the generation of green energy. Iceland has by far the most production per capita, while being ranked 13th if account is taken of the total production of each country. There is a great deal of demand for green energy in Europe and it is important that Icelanders recognise their advantage in these matters and see the options that such opportunities offer, whether by laying a submarine cable or doing something else.
Political risk has also been mentioned, and quite rightly so. The last thing foreign investors want to hear, see or experience is that the rules of the game are unclear and that they may possibly be changed at any point. In order to invest, whether with borrowed funds or own funds, investors must be able to prepare schedules based on defined criteria. The stronger these criteria are, the lower the risk coefficient calculated into schedules. Political risk just raises the risk coefficient of projects to such an extent that they become unattractive. Now that foreign investments are at an all-time low we do not need foreign investors to decide to invest elsewhere due to political instability in Iceland. There is little or no construction of large industry plants at present and, as a result, there are opportunities now, both for the country and its people, to formulate clear policies for future energy issues and to establish a new regulatory framework to work in accordance with. It is also important that the discussions concerning the future of energy development in Iceland begin to revolve around the benefits for the nation from such projects and not the potential consequences from individual plants. The financial position of the energy companies and their decision to delay larger projects has a chain reaction on the market and is detrimental to e.g. engineering firms and service companies, some of which owe a large proportion of their turnover to the energy or energy-related market. These circumstances in Iceland have had the effect that engineering firms and service companies have changed their tack and have increased the scope of their operations in overseas markets. This trend, however, is a considerable challenge for engineering firms and service companies, and can be difficult, as there is much talk of the lack of capable staff overseas and the lack of professional knowledge of international operations.
24
The Icelandic Energy Market
There are, moreover, opportunities overseas for the engineering firms and service companies. There are already exciting projects underway in countries such as Norway, Sweden, Hungary, Chile, Africa, Greenland, Indonesia, the Philippines and elsewhere. These projects are diverse in nature and almost all have been realised due to contact networks or the reputation the companies have created for themselves in other comparable projects. These projects range from providing consultancy services and carrying out research and supervision in the geothermal sector, to drilling geothermal wells and constructing installations. Considerable experience has formed in the engineering firms and service companies in Iceland due to the growth and development that occurred here, and this is the knowledge that the companies have been providing overseas to high acclaim.
In closing As has been shown in this report, Iceland is quite advanced in the production of renewable energy. The electricity needs of households in Iceland are completely met by renewable energy, which is quite an achievement in comparison with other nations. Iceland’s resources are not limited to natural resources but also include the knowledge of how to utilise such resources, knowledge that has formed in the energy companies, engineering firms and the country’s industrial companies who operate in the sector, not to mention the universities. The challenge that we face is to decide how best to utilise those resources for the greatest benefit of the country and nation. As was shown in Table 2, there are 14 project options available to the three largest energy companies. The aggregate installed capacity of these 14 potential plants is 995 MW or approximately 7,260 GWh per year. If these projects are realised they will have a considerable impact on the Icelandic energy market and will increase Iceland’s electricity generation capacity by 42%. A great deal of effort has been spent on forming the master plan and interested parties in the sector have submitted their views in its formulation. The result from this work was submitted to the legislature in July 2011 and the pressure is now on obtaining a political consensus on the issue. The current political conflicts
about these matters must not result in a master plan that is not credible and an unacceptable regulatory framework. It now appears that this master plan, which initially had such lofty goals, is ending in political trench warfare. It is a pity if all the hard work spent on preparing the plan is discredited due to political disputes and horse-trading at the very ending of the process. The term irresponsibility has been mentioned in the debate on future plans and potential project options within the Icelandic energy market. Also mentioned is that we as a nation have harnessed too much energy in recent years. While it is certainly true that Icelandic resources are great, particularly when viewed per capita, such value carries great responsibility, irrespective of whether the decision is made to harness the energy or not. There have been considerable political struggles about this issue and these can cause great damage as regards the future development of the market. It would be highly irresponsible if it is not possible to address these matters professionally and agree to a reasonable plan on the utilisation of the resources that are available. The main goal must be to take advantage of the energy, and related knowledge, in as efficient manner as possible, for our benefit and that of future generations.
Glossary
Special thanks
KW:
Kilowatt
Landsvirkjun
MW:
Megawatt (1,000 kW)
Reykjavik Energy (Orkuveita Reykjavíkur)
GW:
Gigawatt (1,000 MW)
HS Orka
kWh:
Kilowatt hour
Landsnet
MWh: Megawatt hour (1,000 kWh)
National Energy Authority
GWh: Gigawatt hour (1,000 MWh)
ÍSOR – Iceland GeoSurvey
TWh: Terawatt hour (1,000 GWh)
EFLA
TJ:
Terajoule
Mannvit
PJ:
Petajoule (1,000 TJ)
Verkís
TJ/yr: Terajoule per year
VSÓ Iceland Drilling (Jarðboranir) Annað veldi ehf. Reykjavík Geothermal Samál
The Icelandic Energy Market
25
Sources Annað veldi ehf., 2012. “Submarine cable to the Netherlands”. [Online] Available at: http://www.veldi.is/modules/files/file_group_1/orkum%E1l/Kapall%20til%20Evr%F3pu%202.pdf, retrieved June 6, 2012. Björn Jóhann Björnsson, Morgunblaðið, June 15,2008. “Mannvit bætir við sig 70 manns”. [Online] Available at: http://www.mbl.is/greinasafn/grein/1222317/, retrieved June 27, 2012. Central Intelligence Agency (CIA), 2011. “The World Factbook”. [Online] Available at: https://www.cia.gov/library/publications/the-world-factbook/rankorder/2038rank.html , retrieved August 13, 2012. Ministry of Finance and Economic Affairs, 2011. “Mat á arðsemi orkusölu til stóriðju, önnur áfangaskýrsla”. [Online] Available at: http://www.fjarmalaraduneyti.is/media/skjal/Mat_a_ardsemi_orkusolu_til_storidju.pdf, retrieved August 9, 2012. Gamma, 2011. “Landsvirkjun´s Renewable Energy Potential and its Impact on Iceland´s Economy”. [Online] Available at: http://www.gamma.is/media/skjol/GAMMA-Efnahagsleg-ahrif-af-ardsemi-Landsvirkjunar-til-2035.pdf, retrieved August 10, 2012. Gekon, 2012. “Iceland Geothermal klasasamstarfið júlí 2011 – apríl 2012, stöðuskýrsla”. [Online] Available at: http://www.icelandgeothermal.is/images/Skyrslur/Iceland%20Geothermal.Stoduskyrsla.26042012.pdf, retrieved August 8, 2012. Guðni Einarsson, Morgunblaðið, November 21, 2009. “Virkjun sjávarfalla í Breiðafirði er talin vel möguleg“.[Online] Available at: http://www.mbl.is/frettir/innlent/2009/11/21/virkjun_sjavarfalla_i_breidafirdi_er_talin_vel_mogu/, retrieved June 5, 2012. Guðmundur Ingi Ásmundsson, Landsnet, 2012. “Þróun flutningskerfis Landsnets”. [Online] Available at: http://landsnet.is/uploads/1157.%20%C3%9Er%C3%B3un%20flutningskerfis%20Landsnets_GI%C3%81.pdf, retrieved August 16, 2012. Statistics Iceland, Website: http://hagstofan.is/Hagtolur/Idnadur-og-orkumal/Orkumal , retrieved June 13, 2012. Iceland Geothermal, Website: http://www.icelandgeothermal.is , retrieved August 8, 2012. International Energy Agency (IEA), 2011. “Key World Energy Statistics”. [Online] Available at: http://iea.org/publications/freepublications/publication/key_world_energy_stats.pdf, retrieved August 13, 2012. Ministry of Industries and Innovation, May 29, 2012. “Breski orkumálaráðherrann á Íslandi 30. og 31. maí”. [Online] Available at: http://www.idnadarraduneyti.is/frettir/frettatilkynningar/nr/3551, retrieved June 13, 2012. Íris Baldursdóttir, 2007. “Loftlínur eða jarðstrengir”. [Online] Available at: http://landsnet.is/uploads/1064.pdf, August 13, 2012. Landsvirkjun, 2011. “Aflstöðvar og orkuvinnsla”. [Online] Available at: http://www.landsvirkjun.is/media/um-landsvirkjun/stodv_minni_spreads.pdf, retrieved August 13, 2012. Norðurál, Website: http://www.nordural.is, retrieved June 18, 2012. National Energy Authority, 2011. “Energy Statistics 2011”. [Online] Available at: http://www.os.is/gogn/os-onnur-rit/orkutolur_2011-islenska.pdf, retrieved May 2, 2012. National Energy Authority. “Energy Statistics 2004-2010”. [Online] Available at: http://orkustofnun.is/orkustofnun/utgafa/orkutolur/, retrieved May 2, 2012. National Energy Authority and Ministry of Industries and Innovation, 2003. “Orka Íslands, upplýsingarit um orkumál”. [Online] Available at: http://www.os.is/media/eldri-utgafa/orkaislands.pdf, retrieved May 23, 2012. National Energy Authority, 2012. “Orkumál, raforka”. [Online] Available at: http://os.is/gogn/Orkumal-arsrit/Orkumal-Raforka-2012-8-1.pdf, retrieved September 11, 2012. National Energy Authority, 2011. “Raforkuspá 2012-2050”. [Online] Available at: http://os.is/gogn/Skyrslur/OS-2012/OS-2012-04.pdf, retrieved September 11, 2012. Reykjavik Energy, Website: http://www.or.is, retrieved August 10, 2012. Ragnar Árnason, Fjármálatíðind,. 51. Issue, pages 17-32, 2004. “Náttúruauðlindir, hagvöxtur og velferð“. [Online] Available at: http://sedlabanki.is/lisalib/getfile.aspx?itemid=3194, retrieved June 18, 2012. National Broadcasting Service (RUV), April 27, 2012. “Allt í hnút hjá HS Orku og Norðuráli“. [Online] Available at: http://www.ruv.is/frett/allt-i-hnut-hja-hs-orku-og-nordurali, retrieved June 18, 2012. Confederation of Icelandic Employers (SA), 2012. “Uppfærum Ísland”. [Online] Available at: http://www.sa.is/files/Uppfærum%20Ísland%20-%20tillögur%20SA%2018.4.%202012_402336183.pdf, retrieved July 9, 2012. Confederation of Icelandic Employers (SA), Website: http://www.sa.is, retrieved July 4, 2012. The Federation of Icelandic Industries (SI). [Online] Available at: http://www.si.is/malaflokkar/opinber-innkaup-og-utbod/frettir/ Government Offices of Iceland, 2008. “Samstarfsyfirlýsing ríkistjórnar Samfylkingarinnar og Vinstrihreyfingarinnar græns framboðs”. [Online] Available at: http://www.stjornarrad.is/Stefnuyfirlysing/, retrieved June 4, 2012. Visir, July 28, 2010. “Yfirlýsing ríkisstjórnarinnar vegna orku- og auðlindamála”. [Online] Available at: http://www.visir.is/yfirlysing-rikisstjornarinnar-vegna-orku--og-audlindamala/article/2010418393147, retrieved June 4, 2012. Þórður Snær Júlíusson, Vísir, July 4, 2012. “Gríðarleg tækifæri framundan“. [Online] Available at: http://visir.is/gridarleg-taekifaeri-framundan/article/2012707049927, retrieved July 4, 2012. Wikipedia. “Sjávarfallaorka”. [Online] Available at: http://is.wikipedia.org/wiki/Sj%C3%A1varfallaorka, retrieved May 23, 2012.
26
The Icelandic Energy Market
Figures Fig. 1: Fig.2: Fig.3: Fig.4: Fig.5: Fig.6: Fig.7: Fig.8: Fig.9: Fig.10: Fig.11: Fig.12: Fig.13: Fig.14: Fig.15: Fig.16: Fig.17: Fig.18: Fig.19: Fig.20:
Energy consumption by source 1990-2011. SOURCE: Statistics Iceland and National Energy Authority. Page 5 Electricity consumption by industry, 2000 and 2011. SOURCE: National Energy Authority. Page 5 Division of electricity by producers, 2000 and 2011. SOURCE: National Energy Authority. Page 5 Renewable energy by country, 2011. SOURCE: Eurostat and National Energy Authority. Page 6 Electricity consumption per resident (kWh/resident), 2011. SOURCE: CIA World Factbook. Page 6 Renewable energy by country acc. EPI 2012. SOURCE: Yale University. Page 6 Geothermal energy consumption by type, 2005 and 2010. SOURCE: National Energy Authority. Page 7 Division of geothermal areas in Iceland. SOURCE: National Energy Authority. Page 7 Energy production by source - hydropower. SOURCE: National Energy Authority. Page 9 The Dreki area. SOURCE: National Energy Authority. Page 11 Possible route of submarine cable. SOURCE: Landsvirkjun. Page 12 Development of electricity generation in Iceland, 1976-2011. SOURCE: National Energy Authority. Page 13 Turnover, EBITDA and EBITDA margin trends 2007-2011, Landsvirkjun. SOURCE: Companies’ annual reports and statistics from managers. Page 19 Turnover, EBITDA and EBITDA margin trends 2007-2011, Orkuveita Reykjavikur. SOURCE: Companies’ annual reports a nd statistics from managers. Page 19 Turnover, EBITDA and EBITDA margin trends 2007-2011, HS Orka. SOURCE: Companies’ annual reports and statistics from managers. Page 19 Development of net debts and net debts/EBITDA, 2007-2011. SOURCE: Companies’ annual reports and statistics from managers. Page 19 Total turnover of Icelandic engineering firms and service companies. SOURCE: Íslandsbanki. Page 21 Overseas operations of engineering firms and service companies. SOURCE: Íslandsbanki. Page 22 Proportion of overseas operations of the total turnover of engineering firms. SOURCE: Íslandsbanki. Page 22 Electricity forecast for Iceland, 2005-2050. SOURCE: National Energy Authority. Page 23
Table 1: Table 2: Table 3: Table 4: Table 5:
Primary energy consumption in Iceland. SOURCE: National Energy Authority. Page 4 Installed wind power capacity by country at year-end 2011. SOURCE: Global Wind Energy Council. Page 11 Financial position of the three largest energy companies in Iceland. SOURCE: Companies’ annual reports and statistics from managers. Page 18 Potential Power Plants. SOURCE: Íslandsbanki. Page 19 Engineering firms and service companies. SOURCE: Íslandsbanki. Page 21
Tables
Disclaimer This report is made by Íslandsbanki hf. The information in this summary is based on publicly available data and information from various sources deemed reliable. The information has not been independently verified by Íslandsbanki hf. which therefore does not guarantee that the information is comprehensive or accurate. All views expressed herein are those of the author(s) at the time of writing and may change without notice. Íslandsbanki hf. holds no obligation to update, modify or amend this summary or to otherwise notify readers or recipients of this summary in the event that any matter contained herein changes or subsequently becomes inaccurate. This summary is informative in nature, and should not be interpreted as a recommendation to take, or not to take, any particular investment action. This summary does not represent an offer or an invitation to buy, sell or subscribe to any particular financial instruments. Íslandsbanki hf. accepts no liability for any possible losses or other consequences arising from decisions based on information in this summary. Any loss arising from the use of the information in this summary shall be the sole and exclusive responsibility of the investor. Before making an investment decision, it is important to seek expert advice and become familiar with the investment market and different investment alternatives. Various financial risks are at all times present during investment activities, such as the risk of no yield or the risk of losing the capital invested. It should further be noted that international investment includes risks related to political and economic uncertainties, as well as currency risk. Each investor´s investment objectives and financial situation is different. Past performance does not indicate or guarantee the future performance of an investment. Reports and other information received from Íslandsbanki hf. are meant for private use only.
This material may not be copied, quoted or distributed, in part or in whole, without written permission from Íslandsbanki hf. This document is a brief summary and does not purport to contain all available information on the subject covered. Regulator: The Financial Supervisory Authority of Iceland (www.fme.is) United States Neither this report nor copies may be distributed in the United States or to recipients who are citizens of the United States due to restrictions stipulated in US legislation. Distributing the report in the United States might be seen as a breach of the said legislation. Canada The information provided in this publication is not intended to be distributed or circulated in any manner in Canada and therefore should not be construed as any kind of financial recommendation or advice provided within the meaning of Canadian securities law. Other countries Laws and regulations of other countries may also restrict the distribution of this report. This summary does not constitute any solicitation of services by Íslandsbanki hf. in the United States or Canada. For further information relating to this introduction see: https://www.islandsbanki.is.
The Icelandic Energy Market
27
The Icelandic Energy Market Íslandsbanki, Kirkjusandi, 155 Reykjavík, Iceland Tel.: +354 440 4500 For more information: www.islandsbanki.is/energy
