Energy Policy Making in Iceland, With emphasis on geothermal energy utilization

Energy Policy Making
in Iceland
With emphasis on geothermal
energy utilization
Iceland Geothermal Conference
Reykjavík
March 5-8, 2013
Gunnar Tryggvason

1© 2013 KPMG ehf. á Íslandi er aðili að alþjóðlegu neti KPMG, samtökum sjálfstæðra fyrirtækja sem aðild eiga að KPMG International Cooperative (“KPMG International”),
svissnesku samvinnufélagi. Allur réttur áskilinn.
Relationship between energy use and prosperity
 Clear relationship between energy usage and GDP
 But according to a newly issued BP report, GDP growth of the past few decades
is less driven by increase in energy consumption than before.
 Obviously if the two giants continue to grow with the same pace as before,
energy demand will continue to grow.
 Prices are therefore likely to rise and energy security is going to be a bigger
issue in energy policy than before.
 Iceland, Qatar and other countries with stranded power are far off the trend line
due to hydro and geothermal in Iceland and gas in Qatar.
100 1.000 10.000 100.000
GDP/Capita
India
China
USA
Japan
OECD
country
Iceland
and Qatar,
etc.
TJ/year/Capita
0
5
10
15
20
Source: David Roland-Holst, IEA
Energy Policy Making in Iceland
Energy dependency of nations

Energy policy in general
■ Three phases of energy policy
– Phase 1, until 1974: The period of energy abundance
– Phase 2, 1975 - 1985: The Period of energy deficiency
– Phase 3, 1986 - until 2000: The Period of energy balance
Source: “Energy Policy Making: An old Concept or a Modern Challange?”, H.Dougas et.al
■ Nowadays, the energy policy is directed by these three
factors mainly:
– 1: Security of supply
– 2: The competitiveness of the energy market
– 3: Environmental issues
Source: IEA 2012

These 3 elements +1 in Iceland
2: The competitiveness of the energy market
▪ Natural monopoly in distribution and sale of hot water
for house heating.
▪ Oligopoly in sale and distribution of fuel
▪ Oligopoly in electrical generation and sale
▪ Share of government ownership in electrical
generation and heat sale is high. If the companies
are forming economic rent most of it is captured by
the state through ownership.
4: Energy utilization policy
▪ Economical potential much higher than demand
▪ Few examples
• Norway 20 years ago
• Canada (Quebec)
• Middle East (stranded gas)
▪ Should we have an energy utilization policy?
▪ What would it look like?
3: Environmental Issues, mainly share of green energy
▪ The share of green energy in electrical generation in
Iceland is close to 100% - little room for
improvement
▪ The share of green energy in space heating is also
high - some room for improvement
▪ The Icelandic economy is heavily dependent on
international transport and fisheries. Both sectors are
large hydro carbon consumers - a lot of room for
improvement
1: Energy Security
▪ Electrical generation appr. 5 times the need of the
public market. Imported consumables virtually none.
▪ However, all hydrocarbons imported and stocks below
90 days – which is an requested by IEA and the EU

Approach
■ In 2009, the Minister of Industries formed a committee
with the aim of developing a holistic energy policy for
the country.
Main objectives
■ The minister presented the report to parliament in 2011
■ The guiding light of the policy:
The energy needs of the people and business will be secure in the short and long term.
Energy resource utilization shall respect the environment, nature and the characteristics of the country.
The people reap the benefits from resource utilization.
National contribution of the energy industry will be maximized
Energy supply meets the requirements of diverse industries.
Use of imported fossil fuels be reduced as much as possible.
Iceland’s energy needs will be met in a sustainable way,
for the benefit of the people and society.
Key disputes:
Resource rent capture
Shorter utilization permits
Key disputes:
Master plan for Geothermal and
Hydropower Development
Key disputes:
Interconnector (sub sea cabel)

The upside potential
* UK Renewable Energy Roadmap
26
43 43
153
40
LV-average price
to industries
(incl.transmission)
last 5 years*
LV - price offer to
new offtakers*
Offhshore wind
UK***
Iceland +
interconnector **
+70
[USD/MWh]
Source: *) Landsvirkjun, **)McKinsey, ***)The Crown Estate
Cost comparison of new offshore wind in
UK and Icelandic Power [USD/MWh]
■ Power prices in Iceland are low compared to rest of
Europe
■ Member countries of the European Union including
UK have set a challenging goal for the share of
renewables by 2020.
■ The UK believes their target can be reached by
energy delivered from a subset of 8 technologies,
whereby offshore wind plays the greatest role (33-58
TWh/year*)
■ Electricity Market Reform (EMR) is a UK initiative to
stimulate investment in the renewable energy sector.
■ Under the scheme contracts for differences or CfDs
will be available for renewable energy technologies
■ The cost of offshore wind is very high compared to
the current power prices in Iceland.
■ The question remains if and how the difference can
be shared for the benefit of both parties.
“National contribution of the energy industry will be
maximized”

Potential capacity:
700 -1200 MW
Cost (700 MW):
EUR 1,3 – 2,3 bn
Possible COD: 2020
Losses: 5%-6%
Potential interconnector to Europe
The policy concludes that: “Isolation of the Icelandic grid shall be terminated by the
means of interconnection if that appears to be macroeconomic feasible.”

■ Current price level of electrical power does not indicate
a high resource rent being generated by the hydro or
geothermal power plants.
■ This can change if prices start to rise, either by
increased competition between energy intensive users
or by introduction of an Interconnector.
■ A newly issued report by McKinsey indicates that
Iceland might be able to capture resource rent from
renewable energy amounting to 4-6% of GDP if such
interconnector is installed.
■ Norway for example imposes resource rent taxation on
the hydro sector
■ The policy concludes that: “Iceland should prepare a
resource rent taxation in the power industry in order
to be prepare for rising price levels”.
Resource Rent Taxation
“The people reap the benefits from resource
utilization.”

Permit duration
Permit duration
■ According to current legislation, the government may
grant third parties utilization permits for up to 65 years.
■ The parliament was working on a bill which would
shorten permit duration to 40 years for hydro and 30
years for geothermal.
■ Majority of the energy policy committee proposed:
– Permit duration will be shortened to 25 to 30 years
with possibility of extension.
– One member against.
■ Power company objections.
– The head of a local power company predicted the
end of geothermal utilization if the duration is altered
■ Obviously investors contemplating resource utilization
must see capital returns within permit duration.
Considerations for duration decision making
1. Investment payback period
 Higher energy prices allow shorter duration
2. Re-sale market and scrap value
 Scrap value of power plant close to 0% of renovation
cost
 Scrap value of a ship is close to 100% of renovation
cost
3. Existence of active permit market
 If both the resource and means of production are
localized, there will be no such market, as is the case
with geothermal and hydro power plants
 If the resource is not localized and a large number of
players are active, as is the case with emissions
allowances, a near perfect market may exist.
 The same could apply to fishing quotas as the means
of production (ships) are mobile.
“The people reap the benefits from resource
utilization.”

Permit duration- a theoretical example
Main Assumptions
Installed Capacity 1 MW
Spec.construction cost 2.500 USD/MW
Utilization time 8.300 h/year
O&M 2,0% of investment
Depreciation 4,0% per year

-1.200.000
-1.000.000
-800.000
-600.000
-400.000
-200.000
0
200.000
400.000
-4 -3 -2 -1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
USD
Cash flow of theoretical power plant
Constr.
time
Operation time -->
Main Assumptions

-4.000.000
-2.000.000
0
2.000.000
4.000.000
6.000.000
8.000.000
10.000.000
12.000.000
-1.200.000
-1.000.000
-800.000
-600.000
-400.000
-200.000
0
200.000
400.000
-4 -3 -2 -1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
USD
USD
0%, 35 USD/MWh
Constr.
time
Operation time -->
12 years
Main Assumptions

-4.000.000
-2.000.000
0
2.000.000
4.000.000
6.000.000
8.000.000
10.000.000
12.000.000
-1.200.000
-1.000.000
-800.000
-600.000
-400.000
-200.000
0
200.000
400.000
-4 -3 -2 -1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
USD
USD
0%, 35 USD/MWh
8%, 35 USD/MWh
Constr.
time
Operation time -->
12 years
30 years
Main Assumptions

-4.000.000
-2.000.000
0
2.000.000
4.000.000
6.000.000
8.000.000
10.000.000
12.000.000
-1.200.000
-1.000.000
-800.000
-600.000
-400.000
-200.000
0
200.000
400.000
-4 -3 -2 -1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
USD
USD
8%, 200 USD/MWh
0%, 35 USD/MWh
8%, 35 USD/MWh
Constr.
time
Operation time -->
3 years
12 years
30 years
Main Assumptions

Geothermal resource permit duration- example
-3.000.000
-2.500.000
-2.000.000
-1.500.000
-1.000.000
-500.000
0
-1.200.000
-1.000.000
-800.000
-600.000
-400.000
-200.000
0
200.000
400.000
600.000
800.000
-4 -3 -2 -1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
USD
USD
Sjóðstreymiímyndaðrar jarðvarmavirkjunar,byggða í þremur áföngum með 5 ára millibili
Cautious geothermal utilization
Geothermal power plant built in stages
Years often pass between stages
Short duration might hinder such utilization schemes
Cash flow of theoretical geothermal power plant built in 3 phases with 5 year interval

67Potential Geothermal
and hydro sites
Masterplan for Hydropower and Geothermal Development in Iceland
Energy resource utilization shall
respect the environment, nature and
the characteristics of the country

Number of sites in each category
Hydro Geoth. Total GWh
Exploitation category 2 14 16 8.484
"In waiting" category 22 9 31 12.533
Protection category 11 9 20 11.339
Total: 35 32 67 32.356
Masterplan results from the second phase
■ On May 11, 2011 Althingi approved Act No. 48/2011,
on a plan for Protection and Development of Energy
Resources.
■ The goal of the legislations is to “ensure that the
utilization of regions with possible power projects is
based on long-term considerations and a
comprehensive evaluation of Interests..”.
■ After a debate in the parliament in January the
majority voted in favor of a parliamentary resolution
whereby the following categorization of the potential
sites was decided:
■ The minority was in favor of more exploitation.
■ Out of the 16 sites put into the Exploitation category
in this round, 14 are geothermal.
■ The result indicates that Iceland is moving to a new
geothermal era.
■ These 14 geothermal sites do not include
geothermal projects in construction (3) or extension
of existing geothermal plants.

Why KPMG?
Leading international advisor
KPMG Global
KPMG is a global network of professional firms providing Audit, Tax and Advisory
services. Worldwide there are 140,000 professionals working together in 146
countries.
Our approach to relationships and service delivery helps clients across the globe
exploit new opportunities, improve performance, manage risk and enhance value
for both shareholders and stakeholders alike.
We pride ourselves on our bright, motivated and committed team of experienced
advisers and our hands on approach to solving complex business issues.
KPMG Iceland
KPMG in Iceland has been a part of the KPMG International team since 1985. The
Icelandic offices have 230 employees, which makes KPMG the largest knowledge
based company in Iceland.
Audit
KPMG
Tax Advisory
Corporate
Finance
Transaction
Services
Restructuring
Services
Forensic
Accounting
Risk Advisory
Services
Accounting
Advisory
Services
Business
Performance
Services
Internal Audit
Services
IT Advisory (inc.
IRM)

Why KPMG?
Partnership approach and competitive fee proposal
Source: Thomson Reuters SDC
2010 No. of deals
1 KPMG 321
2. PwC 253
3. Deloitte 241
3. Morgan Stanley 236
5. Goldman Sachs & Co 230
5. Lazard 224
7. Rothschild 213
8. JP Morgan 197
9. Credit Suisse 189
10 IMAP 180
2007 No. of deals
1. KPMG 507
2. PwC 384
3. JP Morgan 322
4. Citi 319
4 UBS 319
6 Deloitte 308
7 Rothschild 307
8 Morgan Stanley 277
8 E&Y LLP 277
2008 No. of deals
1. KPMG 483
2. PwC 387
3. UBS 293
4. JP Morgan 285
5. Rothschild 282
6. Deloitte 272
7.
Bank of America Merrill
Lynch
264
8. Citi 253
2009 No. of deals
1. KPMG 287
2. PwC 255
3 Rothschild 196
4 JP Morgan 191
5 Goldman Sachs & Co 175
6 Credit Suisse 174
7 Morgan Stanley 171
8 Lazard 170
9 Deutsche Bank AG 167
10 UBS 165
2011 No. of deals
1 KPMG 360
2. PricewaterhouseCoopers 270
5. Ernst & Young LLP 226
5. Rothschild 205
7. JP Morgan 195
8. UBS 194
9. Credit Suisse 189
10
Bank of America Merrill
Lynch
179
We are a leading M&A advisor for Mid Market (<US$1bn) completed deals by volume globally

© 2013 KPMG ehf. á Íslandi er aðili að alþjóðlegu neti KPMG,
samtökum sjálfstæðra fyrirtækja sem aðild eiga að KPMG International
Cooperative (“KPMG International”), svissnesku samvinnufélagi. Allur
réttur áskilinn.
Nafn, kennimark og “cutting through complexity” eru skráð vörumerki
KPMG International Cooperative (“KPMG International”).

Energy Policy Making in Iceland, With emphasis on geothermal energy utilization

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Energy Policy Making in Iceland, With emphasis on geothermal energy utilization

Similar to Energy Policy Making in Iceland, With emphasis on geothermal energy utilization (20)

More from Iceland Geothermal

More from Iceland Geothermal (20)

Recently uploaded

Recently uploaded (20)

Energy Policy Making in Iceland, With emphasis on geothermal energy utilization