Electricity Security of Supply in Iceland

April 2017

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How to ensure long-term security of electricity supply in an economic manner while preserving environmental goals is a relevant concern nowadays in Iceland. The country’s unique characteristics increase the complexity of the challenge. First, almost one hundred percent of its electricity comes from renewable energy sources (primarily hydro and geothermal), and it has no nuclear, coal, or gas infrastructure. Second, Iceland nowadays is an isolated system with a transmission network disconnected from the rest of the world, which impedes any participation in electricity trade. In addition, the ageing transmission network frequently reaches its tolerance limits, as it must accommodate increasing loads from both the energy-intensive industry and the general demand.

This study –a collaborative effort by researchers from the MIT Energy initiative and the Institute for Research in Technology (IIT) at Comillas University– addressed some of the most relevant issues in Iceland with respect to electric energy security. Presently, demand growth (including the possible arrival of additional large electricity consumers) and the time required to build new generation power plants are creating concerns about the country’s future security of supply. In particular, three areas of concern were investigated in this project:

  1. Adequate generation capacity and energy. Presently, there is no shortage of capacity, but the lack of sound and clear investment signals and specific regulatory mechanisms concerning security of supply, as well as the increased emphasis on environmental protection, is discouraging required investments that are critical for the future.
  2. Adequate transmission capacity. The Regional Ring Network is becoming obsolete. In 2014, inter-regional power flow exceeded security-monitoring limits 28% of the time. Moreover, the options under consideration for strengthening the main grid face environmental concerns.
  3. Firm generation capacity and energy. Hydro accounts for 71% of total electricity generation and its firmness depends on hydro inputs, weather conditions, and reservoir management decisions. Shortcomings in regulatory instruments regarding firmness and adequacy commitments are creating concerns among participants.

As stressed throughout this study, a reliable power supply results from a combination of security, firmness, and adequacy under the guidance of a strategic energy policy. First, this work proposed the requirements for a future approach to address security of electricity supply and then the regulatory measures to enhance it within the Icelandic context. Then, a quantitative assessment — based on a high quality optimization model of the Icelandic electric power system — examined the various alternatives that the country is considering for enhancing security of supply economically and sustainably. Alternatives included transmission expansion; utilization of diesel backup in critical areas of the system; geothermal, hydro and wind generation expansion; natural gas power generation units; industrial demand response; and interconnection by a subsea cable to the United Kingdom.

Results of this study are expected to help initiate discussions about how to address existing practices that can compromise the electricity security of supply in Iceland, as well as inform the various stakeholders about the benefits and costs of the different alternatives being discussed for the evolving Icelandic system.

MITEI Authors

Ignacio Pérez-Arriaga Research Affiliate

Sloan School of Management

Pablo Duenas Martinez Research Scientist

MIT Energy Initiative

Karen Tapia-Ahumada Former Research Scientist

MIT Energy Initiative

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