This article attempts to answer a series of inquiries received regarding the comparative energy cost for industrial customers in Iceland versus EU. There is a lack of information regarding this, mostly resulting from secrecy and non-disclosure from leading Icelandic energy authorities. As a result, information on wholesale prices from Statistics Iceland on the two leading energy firms, Landsvirkjun and Rarik, ends 2004 while statistics on electricity for households continues through 2009. Eurostat does not include Iceland in its statistics on electricity prices which demands that these figures be generated through other means.
The approach used to estimate wholesale prices on electricity to industrial customers was to add the wholesale prices of Landsvirkjun and Rarik together and divide by the sum of Reykjavik Energy and Rarik (electricity for households). This produced a reverse mark-up between 0.427186631 to 0.445170516 between 1998 and 2004 where the wholesale prices stop. The reverse mark-up for 2004 (0.442794802) was then applied to electricity for households prices 2005 to 2008. That was step 1.
Step 2 was filling in figures for 2009 to compare to Eurostat data. The method employed was calculating the price changes between the years using electricity for household prices and applying the latest value, 7.55%, as basis for price increase 2009. This is within range of actual inflation. Step 3 involved converting the figures to euros. The crossrate used was derived from the Central Bank of Iceland using the exchange rate index annual average mid-rate. Given the nature of wholesale price on electricity, each deal is priced differently so this approach is as accurate as any other used to determine estimated energy prices for industrial use.
Iceland’s price competitive position
As the ISK (local currency) strengthened, energy grew more expensive compared to the EU. Still, and with the ISK at peak strength, energy levels in Iceland were far below the Big 4 (EU, Germany, France and the UK) and considerably below Central Europe (IceStat definition of Central Europe is Belgium, Ireland, Luxembourg, Netherlands, and Austria). Once the ISK collapsed with the Icelandic economy, the competitive advantage increased significantly.
Between 2001 – 2007, the ISK was strong with a EUR/ISK crossrate of around 87 (with a dip 2005 where it reached 78). The mid-rate 2007 was 87.6011. In 2008, the mid-rate had risen to 127.4551 and in 2009 to 172.6674. In short, Icelandic electricity had become cheaper if paid for in euros, first by 31.3% between 2008 compared to 2007, and then by 26.2% between 2009 and 2008. Between 2009 and 2007, the price had dropped by 49.3% or nearly half. Deals entered into by the aluminum companies (Rio Tinto Alcan, Alcoa and Century Aluminum) lock the energy rates to price on aluminum and so have not benefited from the situation as they would have had they opted for the market rate.
Locating an energy intensive operation in Iceland is highly cost-effective. Compared to Germany, France, Italy and the UK, it makes financial sense to establish such an operation here. Logistically speaking, it also makes sense as moving goods from Iceland to the EU or US is faster than from either region to the other.
With real estate value (including land) at bargain prices with the possibility of government subsidized labor, taking a serious look at this country is advisable. The technical infrastructure is strong, there is far greater stability here than in many EU regions, and there is no real risk of the ISK suddenly climbing to 2001 – 2007 heights; the country is simply too leveraged. A move to establish a large energy intensive plant here that creates 400 jobs or more once completed will be met favorably. From a marketing standpoint, the company in question could also label its products under the green, renewable energy tag which greatly improves image. We know there is a lot of interest here right now (just see the latest currency swap agreement between Iceland and China). The time to move in is now.