A clear message in international marketing

Landsvirkjun strives to offer its current and prospective customers the most competitive terms in Europe through long-term energy contracts. Landsvirkjun’s steerable, renewable energy sources give the Company a clear advantage over its competitors who are generally reliant on unpredictable wind and solar energy and volatile fuel markets. Long-term energy contracts enable businesses to minimise risk factors, and electricity generated from 100% renewable resources is rapidly becoming an important component in international business.

Landsvirkjun offers prospective clients power purchase contracts that focus on the key term “energy for the future”. This means contracts on market terms with an emphasis on the following aspects:

• The most competitive energy prices in Europe

• 100% renewable energy

• Reliable long-term energy contracts

There are growing requirements worldwide with regard to reducing greenhouse gas emissions and the need to ensure continued energy security has led to an increased interest in renewable energy resources. The changing energy environment has created feasible conditions for a variety of industries in Iceland and Landsvirkjun has been active in promoting Iceland as an advantageous location for international, energy- intensive industries.

New clients in the silicon metal industry

In 2014, Landsvirkjun signed contracts with two new clients in the metallurgical grade metal industry: United Silicon hf. and PCC.

Landsvirkjun entered into a memorandum of understanding on the main components of power purchase agreements with a number of companies in 2014. Landsvirkjun hopes to complete these agreements in 2015, depending on opportunities and circumstances. Landsvirkjun has also entered into discussions with a number of other companies and will follow up on these in the coming months. The international economic climate was better in 2014 than in previous years and this has presented a variety of new opportunities. The demand for energy contracts with Landsvirkjun has now surpassed the available supply of energy and the coming years will present a number of opportunities for increased energy sales.

Rio Tinto Alcan Iceland and Landsvirkjun review their power contract

In 2014, Rio Tinto Alcan Iceland and Landsvirkjun agreed on a modified power supply agreement to better reflect the power requirements of ISAL, Rio Tinto Alcan’s aluminium plant at Straumsvik. Landsvirkjun and Rio Tinto Alcan Iceland had previously signed a power contract in 2010 for power delivery extending to 2036. Landsvirkjun built the Búðarhals Hydropower Station in order to fulfil the contract and Rio Tinto Alcan increased its investment to be able to produce higher valued products and increase the capacity of the plant. Increased production capacity was only partially realised and the plant was not able to utilise the full power source provided by Landsvirkjun, according to the 2010 power contract.

The agreement between Landsvirkjun and Rio Tinto Alcan consists of three parts:

• Rio Tinto Alcan agrees to return 35 MW of unused power to Landsvirkjun.

• Rio Tinto Alcan retains the option, for the next few years, to reclaim power for its needs and to increase its power consumption up to a maximum of 422 MW.

• Rio Tinto Alcan will pay Landsvirkjun US$17 million to cover the costs incurred by Landsvirkjun by building the Búðarhals Hydropower Station sooner than required.

The modified agreement is beneficial for both companies, as it gives Landsvirkjun increased scope to attract new customers while at the same time preserving Rio Tinto Alcan's options for continued growth.

Increased demands within the wholesale market

In 2005, Landsvirkjun signed twelve year contracts with a number of wholesale clients and these contracts will run out in 2017. Last year, Landsvirkjun reviewed the format of these contracts with a view to developing and introducing improved versions of these for its clients. The first improvements will be implemented in 2015.

New industries create increased demand within the Icelandic electricity market.

There was increased demand for energy within the wholesale market in 2014. This can be attributed to the expansion of the data center industry in Iceland as well as the increased electrification of fish meal factories in recent years.

Power supply reductions

Electricity generation in Iceland is reliant on weather conditions which fluctuate between years and the outlook for Landsvirkjun’s water budget was poorer between 2013 and 2014 than that of previous years. Consequently, Landsvirkjun took advantage of the allowances for a reduction in supply within its contracts and reduced its supply by 290 GWh (when compared with previous projections). Further information on the reduction to supply can be found in the chapter on energy generation in 2014 and detailed information on energy extraction in a closed hydropower system can be found in the chapter: How much water do we have?

Connecting with the European electricity network

In 2014, the sub-sea cable project, connecting Iceland and the UK, was one of the projects entered into the ten year plan at ENTSO-E, the European network of transmission system operators for electricity. KPMG identified the project as one of the one hundred most interesting industrial projects worldwide. The sub-sea cable project would open up opportunities to take advantage of Iceland‘s valuable, steerable energy generation which is difficult to utilise within the closed Icelandic electricity system.

Energy prices in the UK fluctuate and electricity is more expensive during the day than it is during the evening and night. A sub-sea cable could therefore provide the UK with much needed energy when demand is high and Iceland could buy energy from the UK when demand is low. The cable would increase efficiency in the utilisation of natural resources, improve energy security and reduce operational risks for energy producers. The sub-sea cable would facilitate the direct export of electrical energy and would be profitable for Icelandic society.

Detailed information on the connection of the Icelandic electricity network to the UK can be found in the chapter on the Sub-Sea Cable.