Effectiveness of Public Financial Support in an Electricity Transmission Project between Iceland and the UK

Abstract

The feasibility of the project called IceLink is now being examined, which entails laying 800–1,200 MW high-voltage direct current (HVDC) submarine cables over 1,000 km and transmitting over 5 TWh per annum. This project will meet the growing demand in Europe for electricity derived from renewable energy sources, though there exists a relatively high degree of potential risks (e.g., financial risk due to the lingering affect of the financial crisis). This study aims to examine the effectiveness of public financial support for the project by using a quantitative analysis as well as discussing public financial support as a possible measure to fill the viability gap. The simulation results imply that the project is unfeasible unless there is public financial support. In the light of the public nature of the project and its promotion of green power, public financial support may be acceptable. It can thus be said that public financial support will be effective for this project. Also, the sensitivity analysis results show break-even points for three major parameters:—WACC, wholesale power price, and CAPEX—to NPV. Furthermore, the corresponding public financial supports—concessional loans provided by public financial institutions, applying for the feed-in tariff (FiT) system in the UK, and receiving a government subsidy for initial investment—are discussed as potential measures to fill the viability gap. In order to have a feasible project, it is essential to introduce one or more effective measures of public financial support.