Hjálmar Helgi Rögnvaldsson, Managing Director of Business Development and Power Markets at ON Power, wrote an article published on Vísir today titled "Why has public electricity security not been ensured?" The full article can be read below.

Why has public electricity security not been ensured?

In recent years, electricity security has been much discussed. Low reservoir levels, excess demand, and rising prices in the wholesale market clearly indicate that there is an electricity shortage. There have been calls to ramp up production to ensure long-term electricity security. However, there is nothing in Icelandic legislation that guarantees that energy from new power plants, or those already in operation, reaches the public. Therefore, it is by no means certain that new plants will increase public electricity security. So what can be done?

The proposed solution that disappeared

In June 2022, a working group consisting of all key stakeholders in the energy sector proposed a regulation aimed at ensuring public electricity security. The proposal was based on a supply obligation for electricity producers, where the responsibility would be fairly distributed in proportion to their production during the previous year. This solution would have ensured that the basic needs of the public were always prioritized, regardless of fluctuations in supply and demand.

More detailed discussion of this proposal can be found in the article How do we ensure public electricity security for the future, where it is examined in detail. Despite this clear and fair approach, the proposal has disappeared in the ministry without further discussion or debate in Parliament.

It is surprising that a proposal based on extensive collaboration among stakeholders has not yet received further discussion or treatment. The solution is available and is just as important today as it was two years ago. By reviewing the issue and following up on the proposal, public electricity security could be ensured for the future in a fair and sensible manner.

The role of Landsvirkjun in the public market

Landsvirkjun has pointed out that its share of production for the public has increased significantly since 2021 and is now over 50%, suggesting that this is an unusual increase. What is not mentioned is that this increase is partly due to the company’s share being at a historic low in 2021.

As can be seen in the graph [1], Landsvirkjun’s share was between 50% and 60% until 2020. During the Covid years of 2020 and 2021, the electricity market in Iceland was, like other global markets, in an unusual state, so an increase from 2021 does not necessarily mean that the increase has been abnormal.

No agreement on who should bear responsibility

Most, if not all, companies in the energy market agree that the supply of electricity to the public must be ensured and that the most promising way is to impose some kind of supply obligation on electricity producers. However, not all companies agree on how that obligation or responsibility should be determined.

ON Power believes that the solution proposed by the working group in the summer of 2022 is the best option to resolve the issue, provided that a legal basis for it can be found. The Competition Authority has also supported this view in its statement just over a year ago [2]. This solution ensures that all existing plants participate in this obligation, along with ensuring the involvement of new power plants. With this solution, all electricity producers must consider the public in all their business dealings and arrange their contracts with others so that electricity producers can safeguard the electricity needs of the public when necessary.

Other methods to determine a supply obligation have various shortcomings. One such method that has been proposed involves taking a specific market share into account, i.e., looking at the current market share of companies in this market. Thus, for instance, Landsvirkjun, which produces about 73% of the country’s electricity, would only need to meet 40-55% of the public’s electricity needs; ON Power, producing about 17%, would need to meet 20-30%; and HS Orka, which produces about 7%, would need to meet 5-15%. Such an arrangement neither ensures the participation of new producers in this responsibility nor does it encourage greater emphasis on public needs. On the contrary, this solution could lead producers to avoid serving this market for fear of losing control over part of their production in the future.

Why do some find it more acceptable to determine supply obligations to the public based on current market shares? The simple answer is that some electricity producers may not be able to meet their obligations if they were based on their production ratio. This would likely be because energy that would fall under the obligation has already been sold into other long-term contracts. We should nevertheless not adopt a scheme that would place obligations on other companies with an unfair distribution just because of this.

How can the issue be resolved?

For instance, there could be some kind of adjustment period where electricity producers are given tools to ensure their share without undue costs; here, for instance, the supply obligation could be transferable. This way, electricity producers could negotiate with other producers to take on part of their obligations temporarily and in phases. This would ensure that the public enjoys electricity security now and in the future.

Another option would be to give the "national energy company" an opportunity to live up to that title, thus making Landsvirkjun responsible for ensuring all electricity for the nation. Landsvirkjun possesses nearly all the flexible production capacity in the country, which is indeed needed to meet fluctuations in public electricity use.

It is well past time to take action. Public electricity security is not just sensible – it is essential.

[1] Graph obtained by combining information from: a) writings published by Landsvirkjun in recent years; b) the latest edition of energy data from the National Energy Authority, which shows the production share of all electricity producers for the public, wholesale, and transmission losses back to 2018; c) a report from the University of Iceland's Institute of Economics on security in the public electricity market.

[2] Statement from the Competition Authority regarding the bill to amend the electricity laws (priority electricity) 11 December 2023: https://www.althingi.is/altext/erindi/154/154-1153.pdf