12. July 2016

Kvika researches economic feasibility of an interconnector between Iceland and the UK

Kvika CEO Sigurður Atli Jónsson delivered a report to Minister of Industry and Commerce Ragnheiður Elín Árnadóttir today containing the results of a study of the economic feasibility of an interconnector between Iceland and the UK. The work on the in-depth report prepared by Kvika for the Ministry of Industries and Innovation began about a year ago. During the research for this large-scale project, Kvika called in collaborators with a wide-range of expertise, including a consulting firm specialising in international energy in Europe.

Kvika leads a group of experts

The report was prepared by Kvika experts, who consulted experts from Pöyry, one of the most respected consulting firms in the energy field in Europe, as well as from BBA Legal and the risk and investment consulting firm Analytica.

Kvika CEO Sigurður Atli Jónsson led the steering group, whose other members were Sigurður Hannesson (Managing Director of asset management at Kvika), Magnús Bjarnason (Managing Director of corporate finance at Kvika), Dr. Gareth Davis (Director at Pöyry), and Michel Martin (consultant with Pöyry).

During the course of the study, an enormous body of data was collected, and comments, opinions, and feedback were requested from stakeholders and a diverse group of people with expert knowledge of the topic.

Interconnector to the UK economically sound

The macroeconomic costs and benefits of an interconnector between Iceland and the UK were researched in depth. The results of the study show that the project could prove economical for both countries and generate combined net benefit for the two counties in the amount of EUR 2.9bn, or about ISK 400bn. The net benefit to Iceland is estimated at about EUR 1.4bn, or about ISK 200bn, and the project would positively affect GDP by about 1.2-1.6% annually, which is considered a lasting positive impact. The results are subject to a number of assumptions, including that the British will provide substantial financial support for the project on the basis of a strategy for reduction of greenhouse gas emissions, that sufficient energy resources will be available in Iceland, and that an agreement can be reached between the two countries on an economical business model for the project.

Without mitigating measures, laying an interconnector to the UK could lead to higher electricity prices in Iceland by about 0.85-1.74 kr/kWh. The average household would pay an additional 350-710 kr. per month for electricity. A possible mitigating measure would be to place electricity in a lower value addition category, which would eliminate the impact of the interconnector on electricity prices.

It is assumed that the interconnector will be 1,200 km long and that its up-time will be 92% over its economic lifetime. The new supply of electricity in Iceland is projected to come from the “appropriate for development” category of the Master Plan, but adjustments have been made for uncertainty about size and geothermal power permits. Expansions would be made to power plants already in operation, and energy sources not included in the Government's 2nd master plan have been included, such as small hydropower plants and low-temperature geothermal plants. Where these energy sources are insufficient, it has also been assumed that land-based wind energy will be used as well.