Energy market reform options in Iceland

The National Power Company of Iceland, Landsvirkjun, asked Copenhagen Economics to to assess the Icelandic energy market, with a focus on security of supply and the value from its natural energy resources, and suggest potential elements for reform.

Iceland is a relatively small and isolated region with abundant access to cheap natural energy resources. While historically these energy resources have not been in high demand, this has been changing. Power intensive consumers have located in Iceland, and higher demand is foreseen. While this is a positive situation for Iceland, it also raises some questions.

Based on an analysis of the Icelandic energy markets, including interviews with a range of stakeholders, we have identified two main focus points for potential improvement of energy market regulation in Iceland:

• The security of supply for households and small- and medium-sized enterprises (SMEs) has been deteriorating, and is likely to deteriorate further in the coming years.
• There is potential to obtain higher value to the Icelandic community from energy resources, without reducing Iceland’s attractiveness as a location for power intensive consumers, and while ensuring that the trade-off between energy and environmental objectives is fully taken into account.

We identified five areas for policy reform which could constitute a strong reform package for the future energy policy of Iceland. This includes options for taxing natural resource rents and energy market design reform.