1

Deregulation, Environmental and Planning Policy in the Icelandic

Renewable Energy SystemA paper and presentation by

Egill Benedikt Hreinsson

Department of Electrical and Computer Engineering,

University of Iceland, Reykjavik, Iceland

The International Conference on CLEAN ELECTRICAL POWER - Renewable Energy Resources Impact, Capri – Italy,

May 21st - 23rd, 2007

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Introduction

• Iceland uses renewable, geothermal and hydro energy resources

• No European market participation via a HVDC cable interconnection

• High investment in Energy Intensive Industry• Market challenges for deregulation

–No short term cost signals–Deregulation challenges with diversity and no

conventional thermal backup

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The Scope of the Paper and Presentation

• The evolving Icelandic power and energy sector from a technical and market perspective (Section II).

• Policy issues in modeling and planning philosophy (Section III).

• Sustainability, efficiency and environmental issues (Section IV).

• Resource rent, resource access and future market based bulk energy sales (Section V).

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The evolving Icelandic power and energy sector from a technical and market

perspective (Section II).

5

The Present Icelandic Renewable Based Power System (generation, transmission and EII).

Laxá 28 MW

Sog 90 MW

Blanda150 MW

Krafla 60 MW

EnergyIntensiveIndustry (EII)Substation

132/220 kV TransmissionLines (existing/future)Geothermal

Power generation:Hydro power

Búrfell270MW

Bjarnarflag3 MW

Nesjavellir 60 MWSultartangi 120 MW

Hrauneyjar 210 MWCentury Aluminum

FeSi

Sigalda 150 MWAlcan

AlcoaReyðarfjörður

Kárahnjúkar 690 MW

Reykjanes 100 MW

Vatnsfell 90 MW

Svartsengi 45 MW

Hellisheiði 120 MW

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The Icelandic Generation System and EII load with Possible Future Expansions

Laxá 28 MW

Sog 90 MW

Blanda150 MW

Krafla I 60 MW

EnergyIntensiveIndustry (EII)Geothermal

Power generation:Hydro power

Búrfell270MW

Bjarnarflag I 3 MW

Nesjavellir 60 MWSultartangi 120 MW

Hrauneyjar 210 MW

CenturyAluminum FeSi

Sigalda 150 MW

Alcan

AlcoaReyðarfjörður

Kárahnjúkar 690 MW

Reykjanes I 100 MW

Vatnsfell 90 MW

Svartsengi 45 MW

Hellisheiði I 120 MW

ExistingFuture/Planned

Hvammur 80 MW

Holt 50 MW

Urriðafoss 120 MW

Hellisheiði II 300 MW

Reykjanes II 50 MW

Krafla II 40 MWKrafla III 120 MW

Þeistareykir 120 MWGjástykki 40 MW

Bjarnarflag II 80 MW

Hágöngur 120 MW

Búðarháls 75 MW

Keilisnes

Húsavík

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Capacity and estimated electrical energy generation 2005 and 2010

50

40

30

10

0

32%

TWh/year

20

100%

16

2010

16 TWh/year

17%

2005

8.5 TWh/year

8.5

65%

35%

Geothermal

Hydro Energy intensive industry

General market

21%

General market

79%

Energy intensive industry

Source: Landsvirkjun/Þorsteinn Hilmarsson

8Hydro Geothermal Peat Coal Oil

0

20

40

60

80

100

120

140

160

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

PJ

(pet

ajou

le)

0%

20%

40%

60%

80%

100%

1900 1920 1940 1960 1980 2000

Fractional Breakdown by Primary Resource

Primary Energy Use in Iceland and Resource Substitution 1900 - 2003

1 petajoule = 1015 joule = 0,278 TWhSource: Landsvirkjun, Orkustofnun, Reykjavik, 2004

900

11

22

33

44

55

66

77Au

stra

liaAu

stra

lia

Uni

ted

Stat

esU

nite

d St

ates

Ger

man

yG

erm

any

Den

mar

kD

enm

ark

Finl

and

Finl

and

Sout

h Af

rica

Sout

h Af

rica

Gre

at

Gre

at B

ritta

inBr

ittai

n

Japa

nJa

pan

Ital

yIt

aly

New

Zea

land

New

Zea

land

Swed

enSw

eden

Fran

ceFr

ance

Chin

aCh

ina

Nor

way

Nor

way

Icel

and

Icel

and

Tons per year per capita

Source: Landsvirkjun/Þorsteinn Hilmarsson

CO2 emissions per capita by electricity generation in several countries

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From 2001 Iceland has the highest aluminum production (in kg per capita per year) in the world

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Use of electrical energy per capita

kWh/year/capita

Source: Landsvirkjun, ÞorsteinnHilmarsson/NationMaster.com 2003

0

5.000

10.000

15.000

20.000

25.000

30.000

Icel

and

No r

way

Finl

and

Swe d

en

A ust

ral ia

New

Zea

l an d

J ap a

n

F ra n

c e

Den

mar

k

Ge r

man

y

Ital

y

Sout

h Af

ri ca

Chin

a

40.000

45.000

50.000Forecast for 2010

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Krafla geothermal power plant (60 MW)

13

N

0 10 km Mýrdals-jökull

Þjórsá

Hvítá

Tungnaá

Vatnsfell90 MW

Hella

Hvolsvöllur

Sultartangi120 MW Hrauneyjafoss

210 MW Sigalda150 MW

Urriðafoss125 MW

Hvammur80 MW

Holt50 MW

Torfa-jökull

Búðarháls90 MW

Búrfell270 MW

Þóris-vatn

Tindfjalla-jökull

HydroReseroirGeothermal

DamCanalTunnel

In o

pera

tion

Plan

ned

Þjór

sá

HeklaNýr

vegur

Hydro Sites in the South West of Iceland

Source: Landsvirkjun, ÞorsteinnHilmarsson

14Source: Landsvirkjun, ÞorsteinnHilmarsson

Bird’s View of Hydro site prior to construction

15Holt 50 MW

Modified Bird’s View of Hydro site afterconstruction with reservoir and power house

Source: Landsvirkjun, ÞorsteinnHilmarsson

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Sigalda Station (150 MW)

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Hálslón reservoir

Snæ-fell

Eyja-bakkar

Jökulsá á Dal

Power house

Kelduárlón reservoir

Fjarðaál Aluminum Smelter

Egilsstaðir

Reyðarfjörður

FL 3 og 4 high voltage lines2x220 kV

Laga

rfljót

Þrándar-jökull

Mývatn

V a t n a j ö k u l l glacier

Brúarjökull

Jöku

lsáá Fjöllum

Ódáðahraun

Jökuldals-heiði

Krafla60 MW

Bjarnarflag3 MW

Héraðs-flói

Brúar-öræfi

Vestur-öræfi

Askja

Herðu-breið

Krep

pa

Kverkfjöll Hraun

Dyngjujökull

Ufsarlón reservoir

Kröflulína 2 high voltage line132 kV

132 kV

132 kV

Kárahnjúkar Hydroelectric Project690 MW

Kára-hnjúkar

Headrace tunnels

Jöku

lsáí F

ljótsd

al

N

Kárahnjúkar dam

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Installed capacity 690 MWFirm energy 4.6 TWh/yearHead 600 mHeight of dam 200 mTunnels 73 kmConstruction period 2003-2008

Installed capacity 690 MWFirm energy 4.6 TWh/yearHead 600 mHeight of dam 200 mTunnels 73 kmConstruction period 2003-2008

Kárahnjúkar project in figuresKárahnjúkar project in figures

Source: Landsvirkjun, ÞorsteinnHilmarsson

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Kárahnjúkar dam and Hálslón reservoir

7. nóv. 2006 Source: Landsvirkjun, ÞorsteiHilmarsson

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A photographer’s impression of Kárahnjúkar dam

18. nóv. 2006Source: Landsvirkjun, ÞorsteinnHilmarsson

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The Fjardaral Alcoa Aluminum smelter in Reydarfjordur(Shown under construction in August 2006)

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Power sector characteristics

• The first wave of deregulation • Partial unbundling• Public ownership• Rapid development of EII• Few market participants

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Policy issues in modeling and planning philosophy

• Complicated renewable system–Time and space interdependencies–No short term cost signals–Unique projects with different costs and rents

• Market power–Reservoirs bring market–Sharing of river with multiple firms operating in the

same river

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Sustainability, efficiency and environmental issues

• Long term geothermal energy inflow– More research is needed to determine the long term energy

inflow into underground geothermal reservoirs

• Energy Efficiency and Combined High Heat vs. Low Heat Generation– With electricity generation as the primary application a lot of

thermal energy is wasted in geothermal stations

• Energy Sales through an HVDC Connection– Transactions could be in both directions based an packets of

energy to utilize the flexibility and response time of emission free hydro with reservoirs and geothermal energy

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Sustainability, efficiency and environmental issues

• The Image of Hydroelectric Power in Iceland – Concerns have been raised by environmentalists on how

sustainable and environmentally friendly hydro- and geothermal projects are.

– Less attention is paid to their emission free characteristics• Artistic Inputs and the Image of Electric Power

– Artistic inputs could enhance the image of hydroelectric power– Artistic input could help with the visual pollution of transmission

lines• Renewable Energy, Tourism and Iceland’s Image

– Environmentalists have questioned the linking of clean power with (EII) Energy Intensive Industry, such as aluminum smelters

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Artistically Designed Electric Power Transmission Towers in Finland

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An artist’s rendering of the linking of transmission towers with Icelandic folklore by representing trolls and elves. These may also be engaged in Tugs-Of-War Could this mitigate the visual impact of transmission lines?

Jónína Magnúsdóttir (Ninný), Original work, dated February 22, 2007 (www.ninny.is)

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The Blue Lagoon in Iceland is an example of a spin-off operation from geothermal generation

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Artistic input, such as this piece by ÓlafurElíasson in the abandoned Turbine Hall of the Tate Modern Museum in London could enhance the image of hydroelectric power in “live” power stations

Artistic input

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Resource rent

Project cost

Power/Energy/Project capacity (for instance inMW or GWh/year, accumulated)

Demand curve

Supply curve

Unit cost or price (forinstance in €/MWh)

Taxted rentUntaxted rent

Market price

Projectsize

Proj

ect

Econ

omic

Ren

t

In a market environment, resource prices are based on the marginal cost of last and most costly resource to participate in the market supply. The difference between the market price and resource cost is the economic resource rent which may or may not be taxed.

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Resource rent, resource access and future market based bulk energy sales

• Resource rent { }1

( ) ( ) ( )N

i i i i i ii

R f V x C x T x=

= − −∑

where R is the resource rent, ( )i iV x is the discounted market

value of project #i with energy generation ix , (or alternatively

the cost of the long run back stop supply), ( )i iC x is thegeneration cost and ( )i iT x is the transmission cost of bringingthe resource to the market. All cost factors are discounted cost.The function, { }f z z= , if z > 0, otherwise { } 0f z = . N is the

number of potential projects.

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Conclusions

• Iceland is blessed with clean renewable energy …• The resource image has been questioned with linked to heavy

EII and a damaged natural environment• The private and public ownership raised concerns about

economic rent• Competitive environment difficult to implement• Market will gradually align to other electricity markets • Green energy benefits are likely to emerge• This will jeopardize the position of EII• The efficiency and long term input to geothermal reservoirs

raises concerns on sustainability

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References• Jonsson, O.P. “Mánudagsmorið”, Morgunblaðið

(Newspaper), Reykjavik (Iceland) September 18, 2005 (In Icelandic, www.mbl.is)

• Thorgeirsdottir, S. “Klisjur og draumsýnir um Ísland”, Morgunblaðið (Newspaper), Reykjavik

• Jónína Magnúsdóttir (Ninný), Original work, dated February 22, 2007 (www.ninny.is)

• Ambec, S. and Y. Sprumont, Sharing a River. Journal of Economic Theory, 2002. 107(2): p. 453-462.

• Amundsen, E.S.A., Christian, Rent Taxes on Norwegian Hydropower Generation. Energy Journal, 1992. 13(1).

• Rothman, M.P., Measuring and apportioning rents from hydroelectric power developments, World Bank, Washington, D.C., 2000

• Gardarsson, S.M. and Elíasson, J. Influence of Climate Warming on Hálslón Reservoir sediment filling. Nordic Hydrology. Vol. 37(3) pp 235–245. 2006

• Jonsson, B., Gardarsson, S.M. and Elíasson, J., Kárahnjúkavirkjun, langtímaþróun rensslis ogmiðlunar. Árbók VFÍ, Reykjavik (Iceland), 2005, pp 253-259 (In Icelandic)

• Hreinsson, E.B.: Economies of Scale and Optimal Selection of Hydroelectric Projects. Proc. of the IEEE/IEE DRPT2000 Conference, City University, London, (U.K.) April 4th -7th, 2000

• Hreinsson, E.B.: Supply Adequacy Issues in Renewable Energy and Hydro-Based Power Systems, Proc. of 2006 International Conference on Power System Technology, 22nd -26th October, 2006, Chongqing, China.

• Hreinsson, E.B., Helgason, T. and Sophusson, F.: "Planning and Utilization of Geothermal and Hydroelectric Resources in Iceland". A proceedings paper presented at the ENERGEX 2000, Las Vegas, Nevada, USA, July 23rd - 28th, 2000

• Hreinsson, E.B.: “Raforkuútflutningur frá Íslandi meðnotkun jafnstraums. Almennar tæknilegar forsendur". (Energy Export from Iceland by a Submarine Cable. General Technology Conditions.) Annals of the Association of Engineers in Iceland 1992/93. pp 238-253 (In Icelandic)

• Magnason, A. S.: Draumalandið (The Dream Country), (Book) Mál og Menning Publishers, Reykjavík (Iceland), March 2006 (In Icelandic).

• Björnsson, S.: Orkugeta jarðhita (Geothermal Energy Capacity). Proc. of the 2006 Icelandic Energy Conference, Reykjavik (Iceland), October 12th – 13th, 2006, pp. 332-342. (In Icelandic).

• Olsen, A.: Jarðgufuvirkjanir (Geothermal Power Stations). Proc. of the 2006 Icelandic Energy Conference, Reykjavik (Iceland), October 12th – 13th, 2006, pp. 351-356. (In Icelandic).

http://www.hi.is/~egill

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Thank you very much for your kind attention!

http://www.hi.is/~egill