Renewable Energy Resources in Iceland -- Environmental Policy and Economic Value

Iceland enjoys an abundance of indigenous renewable energy resources in hydroelectricity and geothermal energy. In a country with no fossil fuel resources, fuel-based electricity generation is virtually non-existent. In fact, the electric power system already utilizes renewable energy resources to the greatest extent of almost any country in the world when compared to the size of its economy and population. Although Iceland’s renewable resources of hydroelectricity and of geothermal energy are mainly utilized for electricity generation they are also used for direct space heating. In this paper we will review the scope and dynamics of these resources in the past present and future. Furthermore, Iceland’s power system is presently enjoying one of the highest growth rates of any country. The growth has recently come primarily from new hydroelectric projects and, to some extent, geothermal projects but linked with new aluminium production. This has for a long time been considered the most important means of realizing the economic rent of these resources by “exporting energy resources in the form of aluminium”. The future growth in generation may come from other types of extended demand, such as hydrogen production or direct export of renewable electrical energy through a HVDC submarine cable. The economic value of these renewable resources is perhaps at the threshold of exploding to new heights, since global energy prices in general have increased rapidly in recent years and may be expected to do so in the near and far future. In particular, electricity generated from renewable emission free sources may be expected to become of even more value, considering any emission quotas offsetting the difference from thermally generated electricity as the underlying resources. With abundance of renewable energy, Iceland is a case where these energy resources have to be brought to a market to gain their value through market prices and bringing Economic Rent (ER) to their owners. In this paper the ER for Iceland’s renewable resources is estimated by assuming a local market reference price or a HVDC link facilitating trading in a larger UK market because of the limited size of the local electricity market. Finally, the paper investigates recent and expected price developments in the UK and Iceland, from which the ER is estimated assuming an HVDC connector with associated cost but with two way electricity exchanges.