New companies have entered the electricity market in recent years, resulting in rapidly increased competition. In the wake of this beneficial development, households and companies now enjoy lower energy prices.
The Icelandic electricity market can broadly speaking be divided into two categories: the international- and the domestic market. The international electricity market is made up of large industrial consumers, where the Icelandic power companies compete with other international power companies for the trade of e.g., data centres and aluminium smelts. The competition in this market is fierce and has increased in the recent years, along with lowered cost of electricity production with renewable energy sources. Icelandic entities trade with each other in the domestic market, which can be divided into different sub-markets. The largest part of trade in the domestic open market is on the retail side, where electricity for households, services, production, etc., is traded. Another example would be wholesale power marketers, where providers of electricity transmission and distribution acquire the power and services needed to carry out their obligations.
Eight Providers in Electricity Retailing
Eight electricity providers operate in the Icelandic retail electricity market: Orkusalan, Orka náttúrunnar, HS Orka, Fallorka, Orkubú Vestfjarða, Íslensk orkumiðlun, Orka heimilanna, and Straumlind. Half of those companies are privately owned, and three of them were established in the last four years. Presumably, this trend will continue and more companies will see opportunities in electricity retailing. Major changes have taken place over a few years, as until recently only six electricity providers were operating in Iceland, all of them owned by public entities.
The increased number of electricity providers has elevated competition in the market. Large consumers in the open market usually invite bids for their electricity purchases to get the lowest price. With growing number of electricity providers and better energy prices, such calls for bids are on the increase. As an example, the number of bidders has increased, as has the supply on offer in Landsnet‘s (Icegrid) regular calls for bids due to electricity transmission losses. Offers for two- to threefold the quantity requested by Landsnet are not unusual. Before the increase in the number of energy providers, fewer bids were offered for a lower volume, and sometimes the bids did not even reach the asked volume.
The greater number of energy providers and the streamlined bids‘ structure have contributed to increased competition in the electricity market, resulting in lower prices to the consumer. The lowest price for electricity on offer to households has decreased by 20% at constant prices from year end 2018 to 2021. Lately, examples of accepted quotes by business enterprises and municipalities have resulted in lowering of electricity prices, similar to that for households. The price for electricity transmission losses to Landsnet has also decreased considerably during the period, but the price in the wholesale market is typically lower than that in the open market for business enterprises and households. Lower distribution costs result in lower cost of electricity for consumers in Iceland.
Competition has increased in recent years with the entrance of new companies, resulting in lower price for electricity in the domestic electricity markets, regardless of sector. However, it is worth noting that approximately one third of the total electricity bill for households is for the electricity, the rest, or two thirds, is comprised of taxes which are levied on electricity sales, plus disbursement to the electricity supplier for transmisson and distribution. The price of the component of the electricity bill, not affected by competition, has not changed or even increased in recent years.
Continuing This Journey
Landsvirkjun has made changes to the product supply and the arrangement of transactions to facilitate entry of new companies to the market. The electronic part of transactions has been increased, as well as flexibility of the timing of deals. These improvements are in line with the government‘s Energy Policy, where it is stated that the energy markets are to be open, with increased functionality and competition.
Consequently, Landsvirkjun has contributed to improving the business environment, for the benefit of its large consumers and the people of Iceland. We will continue on this journey.