‘Icelink’ needs political consensus

The president of Iceland can remember a time when his country was among the poorest in Europe, dependent on imported oil and coal for energy. There were few streetlights and people did not heat their houses overnight.

In the next few weeks, Iceland’s parliament will decide whether to let the UK draw on this bounty through a 1,000km undersea cable. If built, it will be longest in the world. The idea has been around for decades but it is only recently that cable technology has been up to the task. It would require the biggest investment in the nation’s history: £2.7-£3 billion on generation and network upgrades in Iceland, on top of the estimated £1.3 billion cost of the interconnector.

The mood at an Icelandic Energy Summit in London is cautious. The president speaks of a “moral duty” for Iceland to share its renewable energy resource with others, as well as there being a business case. Melting sea ice and receding glaciers mean Icelanders “don’t have to go to international conferences to hear about climate change, we can see it”. However, he stresses the Icelink project is only one option on the table and there must be a “national decision” to go ahead, not just a political one.

The scheme needs political consensus, agrees Hörður Arnason, chief executive of Landsvirkjun, Iceland’s national power generation company. Even if it gets the green light this month, the cable is  eight or nine years off commissioning, so cross-party backing will be vital to keep it going. “If there is a 50:50 view, we shouldn’t go ahead,” says Arnason. “We should only go ahead if there is 80-90 per cent support in parliament. If there was political risk as well [as construction and regulatory risk], that would kill the project.”

Charles Hendry MP, the former energy minister who has done most to promote the link from the UK side, concurs that it is for Iceland to choose. “There is a tremendous resource, but it belongs solely to the people of Iceland,” he says, adding that if they decided that they did want to sell their power: “We would be your most enthusiastic partners in that process.”

The benefits of the link for the UK are clear. It would provide 1GW of 100 per cent renewable electricity, which could contribute to national renewable and emissions reduction goals. At present, Iceland’s hydro power stations are designed to run constantly, but they could be adapted to provide flexible generation to back up intermittent UK wind. The “best guess” levelised cost of that power is £107/MWh, comparable with biomass power from converted coal plant and cheaper than offshore wind by some margin.

The main foreseeable objection from the UK side is that the cable would support a foreign industry rather than providing jobs for British workers. It seems unlikely the UK public would get worked up enough over it to present significant opposition, however.

In Iceland, the political challenge is far greater. Consumers have historically benefitted from cheap power, and exposure to competing demand from Europe could put their prices up, as happened in Norway. Arnason says domestic price rises are “quite likely, although not as much as people worry about”. A doubling in the wholesale price would roughly translate to a 20 per cent bump in household prices.

There is also a history of popular resistance to hydro power projects, which can involve dramatic changes to the landscape.

Despite these impacts, a committee formed a year ago to scrutinise the project, including representatives of environmental and consumer groups, concluded it was worth going ahead with further exploratory studies. Members recognised the wider economic and climate change benefits to be found.

Politics aside, the next most pressing issue is how the cable will make a financial return. There is reportedly no shortage of investor interest, but such an ambitious infrastructure project cannot go ahead without guarantees. The UK government has laid the groundwork for overseas renewable generators to be eligible for contracts for difference (CfDs), which guarantee a certain power price. However, there have been no specific assurances that this scheme would get a CfD. Perhaps unsurprisingly, given the huge workload associated with Electricity Market Reform at the moment, no serving UK energy minister attended the summit.

The coming parliamentary debate is critical. If Icelandic MPs embrace the concept, it could be the start of a beautiful friendship. If they opt for delay, both sides will look for easier options.