Iceland Channels Volcanoes to Win Europe's Energy-Supply Rac

Europeans left stranded at airports last year as an Icelandic volcano spewed ash across the continent may soon benefit from the power that seethes beneath the remote north Atlantic island.

Iceland is doing a feasibility study into building a 1,170- kilometer (727-mile) power cable to Scotland to send some of its untapped potential 18 terawatt-hours of geothermal and hydropower -- that’s enough for 5 million European homes. The project has the full backing of the government, Industry Minister Katrin Juliusdottir said in an interview.

“Icelanders live with earthquakes and volcanic activity but the benefits are that now we can monetize these powers,” said Valdimar Armann, an economist at Reykjavik-based asset manager GAMMA, who estimates annual clean-energy exports could reach about a tenth of the island’s $12 billion economy.

The island is trying to emerge from Europe’s biggest banking meltdown this century to restyle itself as one of the European Union’s main sources of renewable energy. The power cable, which would be the longest of its kind ever built, would come as the EU strives to reach its target of 20 percent clean energy by 2020. In about 20 years, Iceland’s energy revenue per capita may rival that in Norway, where oil income has made its $540 billion sovereign wealth fund the world’s second-biggest, Armann said.

The U.K. day-ahead spot price values 18 terawatt hours at 828 million pounds ($1.33 billion), according to data available on Bloomberg. Landsvirkjun, a state-owned utility that produces 75 percent of Iceland’s electricity, is driving the feasibility study for the $2.1 billion power-cable project.

Investors Upbeat

Investors are already more upbeat about Iceland’s prospects of recovery. The cost of insuring against an Icelandic default fell below Spain’s on Feb. 11, credit default swaps show. The island, the world’s fifth-richest per capita in 2007, still has a long way to go before it can restore its former wealth. Its 2008 banking crisis sent the krona down 80 percent against the euro offshore and shaved almost a fifth off disposable incomes the following year.

Iceland may also be unable to realize its geothermal dreams without some foreign investment. It costs $300 million to $400 million to generate each terawatt hour, according to Ragna Sara Jonsdottir, a spokeswoman at Landsvirkjun.

The government estimates that 75 percent of Iceland’s potential energy is undeveloped. Hydropower, fueled by the island’s glaciers, accounts for about 73 percent of electricity production, with geothermal generating about 27 percent. About 39 percent of the available geothermal energy, which taps the earth’s heat, is used to make electricity.