Declining Price of Electricity
The consumer price of electricity in Iceland has declined by 34% in real terms since 1 January 2005.
Einar Mathiesen, Managing Director of Landsvirkjun's energy division, addresses the development of the price of energy in an article published in the newspaper Morgunblaðið on 24 September 2009.
Declining Price of Electricity
Now that almost five years have passed since the energy system's marketisation, it is interesting to look back and review the development of the retail market price of electricity, but leaving aside for the time being the price of electricity to large-scale industry. In the general market, Landsvirkjun acts exclusively as a wholesale seller of electricity to retailers who resell it to final users. In fact, Landsvirkjun is the only systematic supplier of electricity on a wholesale basis in Iceland. Landsvirkjun's competitors generate electricity for their own retail companies.
New Electricity Act
A new Electricity Act entered fully into force on 1 January 2005. The Act covers electricity generation, transmission, distribution and trading in electricity. The Act's purpose is to promote the development of an economically advantageous electricity system in support of the country's economy and regional development. At the same time, Article 1 of the Act states:
“... that for this purpose shall: create the prerequisites for competition in the generation and trading of electricity, with such limitations as may be necessary for the secure delivery of electricity and other public interests...”
The Act changed Landsvirkjun's position chiefly in three ways. In the first place, the Act provided for the establishment of a special transportation company for handling the transfer of electricity. In the second place, Landsvirkjun's obligation to deliver energy to public power companies was abolished and, in the third place, room was made for competition in the generation and sale of electricity.
The composition of an electricity bill
A review of the average final user's electricity bill in the retail market shows that the share of electricity generation is 33.4%, transport costs are 16.6%, distribution costs are 27.7%, the retailer's share is 4.1%, and value added tax amounts to 18.2%. Thus, the monopoly part, i.e. transport and distribution, accounts for 44.3% and the competition part for 37.5%. Thus, the share of transport and distribution weighs more heavily in the composition of an average electricity bill than does the price of electricity itself.
Wholesale price development since 1 January 2005
Landsvirkjun is the only generating company in Iceland that publishes its wholesale price list. In view of the company's high wholesale market share, it may therefore be said, with a large measure of exaggeration, that, at any given time, other market participants price their product in light of Landvirkjun's pricing. Landvirkjun's average wholesale price has declined in real terms by 34% since 1 January 2005.
The reason for the decline in price may be traced back to the company's price policy, but some of Landsvirkjun's wholesale contracts contain a built-in 2% annual real price reduction. Landsvirkjun is authorised to increase contract prices in step with the increase in the consumer price index. However, the company has not fully utilised this provision with the result that the retail price of electricity has declined. At present, an average household's electricity bill is in many cases comparable with the household's outlays on internet access.
The development of Landvirkjun's wholesale electricity price is reflected in the results of a price survey conducted by Samorka on the cost of electricity to households in the Nordic countries at the beginning of this year. The survey's conclusion was that electricity for households was cheapest in Iceland, or only about one quarter of its cost in Denmark.
By promoting a declining price of electricity in the retail market in a responsible manner, Landsvirkjun is laying a foundation for an improved quality of life in Icelandic society.