Iceland seeks UK funding for subsea cable project

The Blue lagoon at the Svarsengi geothermal plant. Iceland enjoys the cheapest electricity prices in Europe thanks to abundant geothermal energy, wind and hydropower. Photograph: Kim Hart/Robert Harding /REX/Rex Features

Iceland's president Olafur Grimsson is expected this week to call on the British government to provide financial support for the construction of a £4.3bn subsea electricity cable – which will be the longest in the world – linking his country to the UK's electricity grid.

The ambitious project, drawing on hydro geothermal and wind power generation, could deliver five terawatt-hours a year to Britain at a cost 15% lower than offshore wind, according to Iceland's state-owned electricity firm Landsvirkjun.

Grimsson's presence at a conference in London on Friday, arranged by Landsvirkjun and the British-Iceland chamber of commerce, underlines the seriousness with which the project is being taken. The two governments have been exploring proposals for a cable after signing amemorandum of understanding last May. However, before the contract can be put out to tender the huge cost will have to be underwritten by British taxpayers.

Iceland enjoys the cheapest electricity prices in Europe thanks to abundant geothermal energy, wind and especially hydropower from glacial meltwater. The industry generates more than 12 gigawatt hours of electricity, about five times the demand from Iceland's 317,000 population.

In recent decades Iceland has sought to exploit these resources by welcoming specialist power-intensive industries to its shores, particularly aluminium producers such as Rio Tinto and Alcoa. A handful of large aluminium processing plants absorb more than 70% of electricity generated in Iceland.

But as the aluminium market has suffered in recent years Iceland has sought to diversify. Bjorgvin Sigurdsson, director of business development at Landsvirkjen, said a subsea cable – which would be 10,000km long and sunk to depths of 1,000 metres – could meet 1.5% of UK electricity demand.

Unfortunately, this new source of power will not come quickly enough to alleviate the forecast squeeze on UK electricity supply which Ofgem predicts will increase the risk of blackouts by 2015. The subsea cable from Iceland would not be commissioned until 2022.

Nevertheless, the project appeals to the UK as the highly reliable potential energy in Iceland's hydro dams is seen as neatly dovetailing with Britain's expanding, but unpredictable, wind power generation.

As wind has become an increasing component of UK electricity generation, those tasked with matching UK supply with demand are increasingly facing a difficulty when usage spikes at times of when wind speeds drop. Few sources of generation, other than hydropower, can be brought on-stream at short notice to cover for lulls in wind.

A successful deal on the pipelines would do much to repair Anglo-Icelandic relations, which hit a low in the wake of the 2008 Icesave scandal, during which the Icelandic government refused to honour a promise to guarantee the deposits of hundreds of thousands of UK savers when the bank behind Icesave, Landsbanki, failed.

Grimsson played a major role in blocking two agreements between the Icelandic government and the UK to reach a financial settlement of the Icesave dispute. On both occasions he put the agreements out to a national referendum and they were overwhelmingly defeated. Ultimately the UK's efforts to force Icelandic taxpayers to honour the promise were defeated in the European courts.

In April, Iceland elected as prime minister Sigmundur David Gunnlaugsson, a nationalist figure who had campaigned fiercely against an Icesave settlement. His comments during the election campaign has left some in Iceland concerned that his perceived rough approach to foreign investors risks leaving the country starved of investment capital.