Pressing Energy Matters

20.09.2023Energy Transition

Our CEO on electricity shortage, energy transition and long-term.

Hörður Arnarson
Hörður Arnarson

Pressing Energy Matters

Time and time again, Landsvirkjun has warned against the possibility of a situation we are now facing. The electricity system is running at full capacity, and there is a foreseeable electricity shortage when demand is not met to sustain average growth in industries in Iceland. Let alone the heralded energy transition. The main concern is 2025-26 before a new generation of power stations starts operations.

Landsvirkjun constructed three of the Company’s ten power stations from 2010-2020, i.e., Búðarháls Power Station, Þeistareykir Geothermal Station, and Búrfell Power Station II. The gross installed capacity of the three power stations is 285 MW, with a generation capacity of more than two terawatt hours annually. These power stations increased generation capacity by almost 20%. From this, it is evident that Landsvirkjun diligently developed the country’s electricity system during the second decade of this Century. In general, the generation capacity met demand.

However, demand is rapidly increasing. Households and smaller companies have increased consumption by 5-10 MW annually. Furthermore, innovating customers in food production and data centre services, among others, have introduced large-scale and energy-demanding development plans. Not to mention the all-important energy transition.

Cumbersome and Expensive Licensing Process

For the last few years, Landsvirkjun has emphasised preparing for the next generation of power stations. Several options are open in the energy utilisation category of the Icelandic Master Plan for Nature Protection and Energy Utilisation, and work on the extensive licensing process for each option has already started.

The Company plans to start construction on four projects: Hvammur Power Station, expansion of Þeistareykir Geothermal Station, expansion of Sigalda Power Station, and Búrfellslundur Wind Farm. The flawed licensing process has led to delays for Hvammur Power Station, and disputes regarding income distribution between municipalities and the government have impeded starting the construction of the Búrfellslundur Wind Farm.

Furthermore, Landsvirkjun is preparing other power station options available in the utilisation category of the Master Plan. As an indication of the scope of that development, Landsvirkjun's investment has been between ISK 10 to 20 billion. However, licensing permits - the last phase in the extensive process of constructing a power station - have not yet been applied for.

The cumbersome licensing process in Iceland is not a principle. Now that countries worldwide are trying to mitigate the impact of climate change and speed up renewable energy generation development, it is unfortunate that the red tape is homemade, resulting in Iceland losing its long-standing advantage in renewable energy generation.

This does not mean that Landsvirkjun is suggesting lowering standards for energy generation companies regarding research and preparation work for power station options. As before, our expertise and know-how in that field are available. However, the system needs to be improved; there is no doubt about that.

Energy companies need adequate power station options in the utilisation category of the Master Plan to meet electricity demand for the next 15 years. According to the Icelandic TSO’s (Landsnet) forecast, that is manageable.

Ambitious Climate Objectives

Iceland has set ambitious climate objectives. On the one hand, we are participating in the Parish Agreement, e.g., regarding reducing GHG emissions from land transport and fisheries. On the other hand, Iceland has set the objective to stop using fossil fuels. The possible rate of the energy transition will be governed by more than only access to renewable energy; for the next 10 to 15 years, it will be governed by available technology, the willingness of energy consumers to transition to renewable energy, and the government's support.

A detailed electricity forecast by the TSO estimates energy consumption to increase by six terawatt hours by 2035. Indeed, that is a significant increase, but not as much as many expected. The reason for this is the slow development of the energy transition in international flights and shipping, which will probably primarily occur after 2035.

The TSO expects a dynamic energy transition in land transport, which is essential for Iceland’s climate commitments. However, there must be a consensus for the energy transition, which depends on generous economic incentives. Despite the often-heard rhapsodical statements, financial considerations govern companies’ operational decision-making. The use of green energy must be made the cheapest energy option. Unfortunately, coal and oil are still economically advantageous, and this type of energy generation is subsidised with over USD 600 billion annually worldwide. Therefore, green solutions are often far more expensive than grey ones regarding investment and operations.

The government must change the rules of the game if we are to succeed. We must increase taxes on investment in equipment that uses fossil fuels and further increase taxes on fossil fuels. Furthermore, we must support companies that invest in generating green energy from the beginning and create financial incentives for companies that procure equipment that uses green energy. Forming a clear vision of companies’ long-term financial gain from the energy transition is essential.

Unfortunately, the discourse in Iceland on these matters tends to be superficial, e.g., the possible exemption for Iceland from the EU Emissions Trading System (ETS) in international aviation and shipping, and politicians who promote ETS solutions are accused of going against national concerns. The Guarantee of Origin scheme (GO Certificates), which allows socially responsible electricity consumers to decide if they want to pay extra to support renewable energy generation development, often becomes the target of false information and misrepresentation.

Direct Electrification and Electric Fuel

Using current technology means the energy transition will be a mix of direct electrification, electric fuel, and biofuel. Today, using green fuel is almost non-existent, but many projects involving green energy are in the preparation process.

The government must have a clear long-term vision. Our neighbouring countries have made roadmaps for the energy transition and electric fuel relative to the current technology and climate commitments. These roadmaps are necessary for informed discourse and the foundation for prioritising energy transition projects.

The government plays a vital role in:

  • Deciding if it is necessary to try to close power-intensive industries to meet energy demand for the next 15 years.
  • Ensuring adequate power station options in the energy utilisation category of the Master Plan to meet energy demand for the next 15 years.
  • Ensuring effective licensing processes at institutions and municipalities.
  • Having a clear and realistic schedule and budget for the energy transition for land transport, shipping, and aviation.
  • Creating roadmaps for Iceland's energy transition and electric fuel, regularly updating them to align with new technology.
  • Offering clear financial incentives for companies to start a dynamic energy transition as soon as possible.

If we achieve this, the energy companies will be able to meet energy demand for the energy transition and the growth of industries. Furthermore, Iceland will meet its climate commitment.