Iceland Seeks Second Power Cable Study to Tap European Markets

Iceland will order a second study on building a power cable to Scotland after a feasibility report showed a wide disparity in the profitability of the project.

There’s a “considerable degree of uncertainty” with an estimated range of 4 billion kronur ($32 million) to 76 billion kronur in expected annual export revenue, Industry Minister Ragnheidur Elin Arnadottir said in an interview in Reykjavik.

“A divide that large can’t be used as the basis for a firm decision, although it makes for a good first step in information gathering,” she said.

The volcanic island has been considering building a link to broader European markets to harness its untapped power reserves and create another export source as it seeks to emerge from its 2008 financial and economic collapse. The link would be the longest of its kind, stretching a potential 1,170 kilometers (727 miles).

Iceland may take another step toward the European energy market by the end of the year and the plan will also need to be discussed at the Cabinet level and by parliament before any final decisions are made, according to Arnadottir.

“A decision on the next step will be taken in the coming weeks, although I’m a little skeptical when it comes to putting down a timeframe,” she said.

Plugging In

The government estimates that 75 percent of Iceland’s energy is undeveloped. Hydropower from its glaciers accounts for about 73 percent of electricity production and the rest is generated from geothermal sources. About 39 percent of the available geothermal energy, which taps the earth’s heat, is used to make electricity.

The island produced 17.2 terawatt-hours of electricity last year, of which 79 percent went to power three aluminum smelters and a ferrosilicon smelter. Output could be doubled, or tripled, depending on whether Iceland exploits environmentally sensitive areas, the National Energy Authority estimates.

“If Iceland wants to build a 700-megawatt or 1,100-megawatt cable to the U.K. or other European countries, we have to realize the potential environmental impact such a project may have,” said Arnadottir. “It’s not just a question of plugging the cable into the next available socket.”

The U.K. month-ahead spot price values 17 terawatt-hours at 794 million pounds ($1.2 billion), according to data available on Bloomberg. Landsvirkjun, a state-owned utility that produces 75 percent of Iceland’s electricity, estimates it would cost $300 million to $400 million to build capacity for each extra terawatt-hour.

Connecting the national grid to Europe will have to be done “slowly and cautiously” and not risk taxpayers money, according to Arnadottir.

“Constructing a submarine sea cable to the U.K. is a risky investment of an unprecedented size for Iceland,” she said. “It’s completely unacceptable to undertake a project of this magnitude with a guarantee from Icelandic taxpayers.”

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