Harvesting the Benefits of Iceland’s Energy Resources

Abstract

Iceland is blessed with rich renewable energy resources in hydro, geothermal and wind. Wind is largely untapped, but a considerable part of the hydro and geothermal resources have been harnessed in the last few decades, mostly for local energy intensive industry (EII). The development has been massive and today, electricity consumption per capita is already, by far the highest in the world, exceeding the OECD average by a factor of almost 7. In spite of this extensive development, there is still room for further expansion, since only about a third of the available economical resources have been tapped. The remainder includes geothermal and hydro projects, categorized for environmental restrictions in the preservation and on-hold categories of the Master Plan (MP), as discussed further in the paper. In addition, almost all wind resources are completely untapped.This paper assesses the potential economic benefit of marketing the renewable electricity of Iceland directly by export in larger markets, as opposed to selling them locally to the EII, which in the past has been the beneficiary of tapping these resources in this isolated power system. However, with maturing submarine link technology, it may well be economical to transmit and integrate these energy resources into EU or UK markets, thereby realizing the economic rent of these resources.The assessment in principle is twofold. (1) First, a one-way, constant bulk transfer to the United Kingdom (UK) is possible, assuming purchase agreements with prices comparable to those paid to renewable or nuclear generators by the UK government in recent years. (2) Secondly a flexible transfer is briefly discussed, where the power flow may even alternate to and from Iceland and be variable, in line with market prices in the UK or hydro conditions on the Icelandic side. The paper estimates numerically the benefits in the first case, as the income from energy sales, minus the cost of generation and transmission across a submarine HVDC link to the UK or EU markets. The 2nd case remains to be investigated.The main results are that the total economic rent is comparable to the total Icelandic state tax income per year, or around 2 - 5 Billion US$ per year, with fully developed hydro and geothermal schemes in Iceland, as further specified below. The question, who will reap these benefits, in addition to the resource owners, is an open one.