Guðmundur Ingi Ásmundsson, CEO & President
Geir A. Gunnlaugsson, Chairman of the Board
Statement by the President & CEO and the Chairman
Landsnet achieved a good performance in 2015, delivering a profit of ISK 4 billion. Revenue was ISK 16 billion and turnover was up 13% year-on-year. Our transmission tariff for distribution system operators and power-intensive consumers remained unchanged in the year. Transmission was up by 3.6%. The year-on-year increase in revenue is largely due to a rise in the US dollar, whose average exchange rate was up 12.6%.
Strong financial position
Total assets stood at nearly ISK 103 billion at year-end. Fixed assets were revalued during the year, the first such revaluation since 2008. Periodic revaluation had not been carried out earlier because of the high level of uncertainty surrounding the profitability of the company’s revenue cap and thereby its income. After adjusting for calculated income tax, the revaluation result was ISK 18,737 million, which is recognised in equity. Equity at year-end stood at ISK 41,956 million. The equity ratio was 41%.
Interest-bearing liabilities were ISK 47,863 million at year-end, of which approximately 90% were funded in ISK. About 80% of interest-bearing long-term liabilities consists of a start-up loan from the parent company, on which no payments are due until 2020. No payments are due on a large portion of our borrowings, an important factor for our cash position. An agreement was made with the parent company to pay on the loan during the year. Since Landsnet is changing its functional currency, however, it is clear that its debts will be refinanced in the next few years, which is expected to deliver more favourable interest terms.
2015 is the last year for which Landsnet is publishing its annual financial statements in ISK. The Annual Accounts Register has agreed that we will henceforward prepare our financial statements in US dollars.
Landsnet’s financial position is strong. The company is thus well placed to undertake important grid strengthening in the next few years and at the same time pay its owners a reasonable dividend. Therefore, our Board of Directors is proposing to the Annual General Meeting to pay out a dividend this year totalling ISK 400 million, or about 10% of the profit for the financial year 2015.
Further improvements to Landsnet’s operating environment needed
The aims of amendments passed in February 2011 to the Electricity Act included improvements to Landsnet’s operating environment. Under the amendments, Landsnet’s revenue cap was to be decided five years in advance at a time. The first such period under the amended Act covered the years 2011-2015. Unfortunately, these aims were not achieved during the period. A decision on the revenue cap for the period was delayed owing to repeated complaints, so it was not until late 2015 that the 2011-2014 revenue cap was finally determined.
This problem has now been addressed through a review of a government regulation introduced by the Ministry of Industries regarding Landsnet’s allowed rate of return and cost of capital. This has been followed by an effort to determine the revenue cap for 2016-2020.
The experience of the legislative provisions governing the revenue cap shows that further amendments are needed to ensure that Landsnet’s operating environment is fit for purpose in the future. Attention must be paid to the fact that Landsnet is a growing company on which ever-increasing demands are being placed.
What does the Paris Agreement mean for Landsnet’s grid?
Like the road system, the electricity system is one of modern society’s most fundamental infrastructures. Its future development must take account of long-term considerations and the interests of the nation as a whole.
Deficiencies in the system affect many facets of our society, including value creation, and detract from the value of our common energy resources. It is commonly held that Landsnet’s plans to strengthen and develop the grid address primarily the needs of power-intensive industries. The fact is, however, that the current need for grid strengthening is primarily owing to rising general electricity consumption and requirements for increased security of supply.
Signed this past winter, the Paris Agreement sets out an action plan for the global community to limit global warming to well below 2°C above pre-industrial levels, thus mitigating against climate change. This shifts the benchmark for our society and thereby Landsnet’s activities. Electric power will play a key role in achieving targets of clean, renewable energy sources, which raises standards still further for our grid. The Paris Agreement thus poses a challenge for Landsnet and calls for a review of existing benchmarks and criteria.
A decision is needed on the grid’s future
The electricity system’s sustainability will not be achieved without a strong grid based on solutions that reduce environmental impact and are acceptable to society at large.
Our Grid Plan submitted in the summer of 2015 sets out two main options for the grid’s development in the next few years. One of these is to construct a transmission line over Iceland’s central highland plateau. The other is to reconstruct the existing Inter-Regional Transmission Network. An environmental impact assessment (EIA) is in progress for the highlands option and preparations for an EIA of the inter-regional network option are underway.
Naturally, opinion is divided on these two Grid Plan options. Therefore, it is important to complete research into their pros and cons as soon as possible to settle the debate and make an informed decision on the grid’s future development – both from the perspective of societal needs and from an environmental point of view.
Changed appearance of infrastructure part of the consensus
A part of the consensus that needs to be achieved on the electricity system of the future concerns the appearance and development of new electrical power infrastructure.
Landsnet is committed to keeping abreast of technical innovations and utilising these in its activities where feasible to ensure that the grid serves its purpose in the best way possible.
New transmission tower designs have been developed, with the first prototypes scheduled to be erected this year. Our substations are also undergoing a transformation. We are constructing new substations one by one, each of which is specially designed to integrate into its natural settings as seamlessly as possible. Our line routeing also aims to minimise visibility and maximise successful integration into the natural environment. Our expertise in underground cable installation in Icelandic conditions is growing by leaps and bounds as the number of such projects grows. Our innovation in high-tech system management solutions for the electricity system has also opened up opportunities to participate in extensive and interesting pan-European research projects.
Energy trading in the market
The growing number of electricity generators in Iceland, driven by new mini-power stations and other generation, calls for changes in energy trading domestically. To further develop this market, ways must be sought to shape energy trading in Iceland towards overseas practices where electricity is like any other tradable market commodity. This is a delicate task owing to the small size of Iceland’s electricity market.
The real security of supply
Despite a considerable rise in the number of grid disturbances over the past few years and ever-growing risks in the grid’s operation due to increased transmission through the Inter-Regional Transmission Network, calculated outage duration in 2015 was well within the defined limits. Outage minutes numbered just under 27, a figure comparable with that of our Nordic and European peers.
Landsnet is proud to be able to offer such a reliable supply of electricity for priority consumers. However, this indicator does not paint the entire picture. When the quantity of reserve power activated during disturbances and the extent of power curtailments to consumers with interruptible service contracts are taken into account, another picture emerges. It shows that the grid’s performance would have been much poorer without these measures, as the total number of outage minutes in 2015 would have been around 214. This is yet another proof of the necessity of grid strengthening.
A challenge for the future
Icelandic society is at a crossroads. The grid in its current form has reached the limit of its carrying capacity. The need for its further development has become urgent at the same time that demand for electricity is growing at a rapid pace. This poses challenges in terms of building a grid fit for purpose in harmony with society – a grid capable of providing Icelandic homes and businesses with secure access to electricity in years and decades to come.
Ahead is a time of change, new solutions and new challenges. Landsnet is well placed to meet these. We undertook extensive policy reformulation in 2015 to redefine our future vision and policies. On this basis, key priorities and focus areas for the coming years were defined in consultation with our staff. A new organisational structure and redefined values to support our role, future vision and policy were also established. We extend warm thanks to Landsnet’s employees for their contribution to our new ways of working and their excellent work in years past.