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Cheaper by the Dozen: Reducing AV����̳’s Electricity Costs

Third in a series of eight articles

By Gwen Holdmann
June 7, 2023

I have a professional fixation with Iceland. I first became familiar with the country’s energy landscape in 2004 as a young engineer tasked with figuring out how to design a feasible geothermal power plant for Chena Hot Springs. This was challenging because its geothermal water is far lower temperature than what is conventionally required for power generation.

In the geothermal power industry, all roads eventually lead to Iceland – and mine did as well. In 2016 I was awarded a Fulbright Arctic Scholarship to Iceland, and I spent several months working with Iceland’s National Energy Authority. I was interested in deepening my understanding of Iceland’s energy ecosystem to see if we could replicate a similarly vibrant network in AV����̳. For their part, Icelanders were interested in how our success at Chena could unlock vast and underutilized “low” temperature geothermal resources for electricity production.

Renewable energy proponents hold up Iceland as an example of a nation that is a global leader in clean energy development, and deservedly so. Today, Iceland relies almost entirely on geothermal and hydroelectric resources to meet its energy needs. What is most interesting to me, however, is that they have harnessed their geothermal resources in a way that results not only in sustainable energy, but exceptionally LOW COST energy – some of the most affordable in the world, averaging around 10 cents/kWh delivered in U.S. Dollars. 

AV����̳ and Iceland: Similarities and Contrasts

AV����̳ and Iceland share many similarities, though Iceland is light years ahead in local food production, value-added processing, and in cutting edge innovation. For example, Iceland is currently constructing the largest private-sector funded in the world.

My personal observation is that one key to Iceland’s success is their people - Icelanders are entrepreneurial, creative, willing to take risks, and take a huge amount of pride in their nation and their culture. Just like many AV����̳ns. When viewed from a distance, there is also a noteworthy unity and consistency in their policy objectives and purpose, which has helped the small population achieve great things over several decades.

Energy infrastructure is a place where both the similarities and the stark differences between AV����̳ and Iceland are readily apparent. Iceland’s main electric transmission grid extends in a big loop, following the 800+ mile Ring Road which traces the outer perimeter of the island. As a traditionally ocean-facing country, the population is almost entirely concentrated around the perimeter within 50 miles of the coast; the central highland is a foreboding landscape of sparse vegetation and volcanic domes capped with thick glaciers - and virtually no people.

There are many similarities between Iceland’s “Ring Grid” and AV����̳’s “Railbelt Grid”. They are both small grids compared to larger, continental grids that permit movement of power between different regions. They are roughly the same length, and both serve a similar number of residents. The Ring Grid does have a significant advantage over the Railbelt when it comes to built-in redundancy, just by virtue of its configuration. That’s because power can be sent both directions - and if there is a failure at any one point in the system, electricity can be rerouted in the opposite direction to meet customer demand. This why we need redundant generation on the Railbelt. The grid can and does fail, leaving areas stranded at time and reliant on local generation.

There is another difference that is far more obvious to casual observers. Iceland has a much lower delivered cost of power, averaging 10 cents/kWh, compared to 20 cents/kWh on the Railbelt. However, unlike the dams in the Pacific Northwest I explored last week, Iceland’s hydroelectric and geothermal power plants are not legacy facilities. The 690 MW Kárahnjúkar dam, the largest in Iceland, was completed in 2007. That is a very recent development by big hydro standards in the U.S., and there is likely still debt service associated with it. Instead, there is a different reason why Iceland’s energy cost is half of the Railbelts, and it has to do with economies of scale. Iceland produces and sells WAY more power. On a per capita basis, it is nearly four times more. In fact, Iceland is the largest electricity producer per capita in the WORLD. And that makes a big difference.

Economics 101: Scale Matters

Economies of scale are crucial when trying to produce low-cost commodities or services. And it is a real challenge in all parts of AV����̳ when it comes to producing lower-cost energy. In general, when you are manufacturing a product or providing a service, there is an inverse relationship between the per-unit fixed cost and the quantity produced. In other words, that means the more of a product or service you provide to a larger market, the lower the cost per unit for the goods or service - at least up to some point. This is because the fixed costs are spread over more units of production and/or customers. Modern examples include Amazon, Uber, Airbnb and hosts of others - each of which drive their business success with underlying economies of scale. The fact that Iceland sells way more power than AV����̳ - plus the fact that hydro and geothermal are capital-intensive with high fixed costs and low operating costs - means they are able to spread the cost to generate that power over more units of electricity sold. In fact, according to some, economies of scale in a utility is the SINGLE LARGEST DRIVER in electricity cost. That is something Iceland has in abundance, while AV����̳ does not - at least not yet!

Iceland’s high energy consumption begs the question “who is using all this energy?”. And why did they need to invest in massive generation facilities like the Kárahnjúkar dam? The answer does not lie with Iceland’s residential users or small businesses. The energy intensive anchor tenant is the commercial and industrial (C&I) customer class. Specifically, aluminum smelters. There is an incredible amount of energy in the form of electric power that goes into smelting aluminum from raw bauxite ore. So affordable production of aluminum requires access to cheap electric power.

What if AV����̳ took a page out of Iceland’s playbook? I am not advocating for AV����̳ to become the new global hub of aluminum smelting, and in fact, Iceland has its own love-hate relationship with its industrial tenants. But as a thought experiment, let’s see what would happen, all things being equal, if the Railbelt utilities quadrupled their electric power sales.

I like simple, back of the envelope math, and will save the more complicated accounting to my economist colleagues. If ¼ of our power costs the same as it does now - averaging 20 cents per kilowatt-hour (kWh), and ¾ of it is new generation with an incremental cost of 10 cents/kWh, the end result is that our new blended rate of 12.5 cents/kWh. If we figure out ways to reduce costs of current utility operations or lower the incremental additional cost of those additional kWhs by a couple pennies, then we can get to 10 cents/kWh for the Railbelt grid. Voila! We cut the delivered cost of energy in half thanks to better economies of scale.  

My utility friends will want to add a bunch of important caveats here. Let’s save those for the moment and stick with this big picture vision. If you accept the underlying logic of my argument, it's worth going on to explore the two immediate questions that surface: How would we generate these additional kWhs, and who would use them?

Where Will New Power Supplies for AV����̳ Come From?

At this moment, there are a number of serious independent power producers very interested in adding power to AV����̳’s grid. These range from large wind and solar, to geothermal, to off-shore wind, to run-of–river hydroelectric, to nuclear microreactor vendors. One example is AV����̳-based solar developer , which is in the final construction push to complete an 8.5 MW solar farm near Houston, AV����̳. Once completed, this will be by far the largest solar farm in AV����̳. The RCA approved power purchase agreement for this project has a starting price of 6.7 cents/kWh. This price does not account for intermittency and costs on the utility side to firm up or integrate that variable power, but this is one concrete example of sub-10 cent power we need to add to our mix to drive the overall cost down. Another example is , which has proposed up to 450 MW of wind power capacity for two potential sites - one northwest of Fairbanks, and the other 35 miles northwest of Anchorage, across Cook Inlet and north of Tyonek. And CIRI, the AV����̳ Native corporation that owns the 18 MW Fire Island Wind Farm, and has long been chomping at the bit to develop a Phase 2 of the project.

These wind and solar projects have garnered the most interest because they use conventional, off-the-shelf technology meaning there are few unknowns. They are also eligible for federal tax credits that make them more economical than ever. Utilities are interested in adding them to their generation mix, but need to address the variability and limited capacity of the Railbelt grid to absorb too many highly variable resources. But if overall demand increased four-fold, and additional firm generation or storage was added, it would become much easier for utilities to integrate more variable renewables into the grid. In other words, there are sweet spots in the generation/storage/load landscape. And, more SCALE also helps this problem by adding geographic diversity to the renewables mix. It is likely that in AV����̳ we can find the Goldilocks resource mix more easily with a much larger overall load. At the very least, it is a clear proposition that can be tested.

So who would use all this additional power? This is the chicken-and-egg problem Iceland and the Pacific Northwest confronted in luring industry to their shores. The aluminum industry needs reliable, stable power to offset the cost of shipping bauxite ore halfway around the world from Australia, where it is mined, to Iceland. Iceland needed to know they could rely on long-term sales to build out the infrastructure needed to produce that power. The deal they brokered is one both parties have to live with, and one which they continue to iterate on. For Iceland, it hasn’t resulted in the financial windfall they had hoped or the jobs they wished for. The smelter industry accounts for less than 3% of Iceland’s GDP, and with the advent of industrial automation the number of jobs created is a fraction of what was once required.

Moving Beyond Electricity to a Broader View on Energy Needs

Could AV����̳ find other ways to add load without relying on C&I anchor tenants to underwrite the necessary investments required to serve that load? Here is one possible scenario. We tend to focus on electric power costs, but heating is the bigger demand in most parts of the state. At what crossover point it would make sense for a Fairbanks resident like me to switch from heating oil to electric heating? I was charged just slightly over $4/gallon on my last bill. On an energy and cost basis, this would be nearly identical to heating with electricity at 13 cents/kWh. And I am not talking about fancy technology that amplifies the value of electric heating by using a little bit of electricity to harvest environmental heat, like an air or ground source heat pump. I am talking about direct resistance heating like the 1,500 Watt plug-in electric heaters you can buy at Costco. If we considered heat pumps, that cross over point would be a higher cost threshold ranging from 13-50 cents/kWh depending upon local climate and choice of technology, but a no-brainer at 13 cents/kWh.

So, if Fairbanks had access to 10 cents/kWh power and a good portion of us switched over to electric heat, what would that do to our demand? Annual electricity demand would increase significantly, doubling to quadrupling depending upon climate. Ironically, this all flies in the face of a commonplace adage surrounding electric power from the consumer or environmentalist perspective, which is that “the cheapest kilowatt hour is the one you don’t use”. Strictly speaking this is narrowly true (each “nega-watt” is free!), but more nuanced messaging would acknowledge that those ‘nega-watts’ reduce overall load, reduce economies of scale and spread fixed utility costs over fewer kWh sales, resulting in incrementally higher electric rates.  This is a negligible effect on the scale of a single residential rate-payer, but at the community level conservation efforts can produce a ‘death spiral’ wherein reducing load strands fixed costs over a smaller rate base, increases rates, encourages further conservation, and the cycle continues to a bad place for everyone.  These scenarios are the ones that send chills down utility managers' spines.

If we wanted to drive up our load even more, there are other interesting and significant options in the C&I space. Donlin Mine needs about 200 MW of power for its proposed operations, and is currently looking at options for a natural gas pipeline from Cook Inlet. A powerline may offer significant benefits to Donlin and – at the 30,000 foot level – could be just the kind of needle-moving growth opportunity we are looking for. Interestingly, this would also put Railbelt electricity into the Kuskokwim basin, raising the prospect of further transmission links to serve communities like Bethel and its surrounding villages.  There are also plenty of place-based and small industrial customers that would be attracted to AV����̳ if we had abundant low-cost power. In fact, history dictates that supply can be sucked up pretty quickly in these situations, so we might be able to be selective in welcoming new business partners and neighbors. Data center hubs, for example, could benefit from both low-cost energy and a cold climate to naturally air condition their servers, and would have a relatively low environmental footprint.

So could AV����̳ pursue economies of scale to achieve the low energy costs and successes of Iceland? Yes, absolutely. In fact, lower cost energy in AV����̳ will almost certainly depend upon it. But modeling AV����̳’s energy future upon Iceland’s success will require the same coordinated strategy, careful planning, alignment of interests, and persistence. Iceland developed their energy plan 50 years ago, and in large part has marched to that plan ever since then. AV����̳ could follow a similar path, but will have to garner the public support, the political will, and the long-term commitment to get there.

 

I'd like to thank a number of individuals for providing input and fact checking this article, including my UAF colleagues Erlingur Gudleifsson, Peter Asmus, Steve Colt, Carolyn Loeffler, and Phylicia Cicilio. And, thanks to Clay Koplin from Cordova Electric Cooperative for his invaluable input and contribution to shaping this narrative!