November 1, 2012 / 5:06 PM / in 5 years

Green energy exports key to Iceland's growth -McKinsey

LONDON, Nov 1 (Reuters) - Iceland should explore exporting renewable power to Europe via a subsea cable as part of a strategy for broad-based growth to recover from its ruinous banking crash, according to consultants McKinsey & Co.

Iceland risks slipping back into external deficit if it does not address the fundamental economic shortcomings exposed by the crisis, notably low productivity. This would threaten living standards and might delay the removal of capital controls imposed after the banking system collapsed in 2008.

“With this outlook, Iceland could remain trapped in a vicious cycle of sustained capital controls, high capital cost, low investments and low economic growth,” McKinsey said in a report.

However, with its ample natural resources and small population, Iceland is very well placed to implement a successful growth strategy that enjoys broad political support.

An interconnector to Europe would enable Iceland to increase the “resource rents” - or excess profits - that it reaps from its abundant supplies of hydropower and geothermal energy.

Britain agreed with Iceland in May to examine options for building an 1,800 km (1,125 mile) underwater cable to tap the island’s green power..

McKinsey said Iceland could also link up with other markets.

The consultancy calculated Iceland’s current resource rent from low-cost energy at just 1 percent of GDP.

With an interconnector, this could jump to 5 percent of GDP, approaching the 6 percent resource rent that Norway extracts from its oil fields.

McKinsey estimated that Iceland could export green energy to Britain at an all-in price in 2020 that was some 60 euros per megawatt hour cheaper than offshore wind power. It could share these savings with its cable partner.

“Iceland should act swiftly to substantiate and eventually realise this potential. Clean Icelandic energy can contribute to renewable targets in Northern Europe, but delays will invite competition from other renewable energy technologies such as wind energy and solar power, which have rapidly reducing cost levels,” McKinsey said.

Sharing out the windfall profits fairly would be essential, as would building support among the population for the expansion of new generation capacity.

Iceland has harnessed only 20-25 percent of the available hydro and geothermal energy up to now. Projects that could almost double current capacity by 2025 are being held up on environmental and economic grounds, McKinsey said. (Reporting by Alan Wheatley; Editing by Anthony Barker)

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