- Email: [email protected]
Strategic aspects of exploiting geothermal energy for industrial purposes
Geothermics, Vol. 21, No. 5/6, pp. 959-970, 1992.
0375-6505/92 $5.00 + 0.00 P e r g a m o n Press Ltd © 1993 CNR.
Printed in Great Britain.
STRATEGIC ASPECTS OF EXPLOITING GEOTHERMAL ENERGY FOR INDUSTRIAL PURPOSES VILHJ.~,LMUR LODV~KSSON
The National Research Council, Laugavegi 13, Reykjavfk, Iceland
Abstract - Geothermal energy is widely used in Iceland for space heating swimming pools and snow melting systems as well as for greenhouses and soil heating and aquaculture. Its contribution to the standard of living in Iceland is very substantial. The industrial applications are, however, fewer today than anticipated twenty years ago. This paper considers some of the socio-economic reasons for that. Although geothermal energy is generally a cost competitive source of energy, it is site limited and does not by itself provide sufficient economic incentive to attract manufacturing or process industries. This generally requires another, locally available production factor offering further competitive advantage to justify greenfield investments. World economic slow-downs, and structural problems in many process industries after the energy crises of the seventies have reduced interest for investments in energy intensive industries world wide. While public sector initiative motivated by technological possibilities was instrumental for developing geothermal resources in the past, time has now come for private sector initiative, led by market interest, to identify and exploit opportunities for using geothermal energy for industrial purposes. National and local governments must, however, provide the appropriate incentives to stimulate such developments.
INTRODUCTION The author of this paper has been invited to review the Icelandic experience in exploiting geothermal energy as a resource for industrial economic development. The National Research Council (NRC) of Iceland, of which the author is presently the directory, was involved with organizing and securing funds for research and development work in this field for several decades. The NRC was responsible for much of the early work on the geology and drilling for geothermal energy in this country in the forties and early fifties and sponsored a number of technical studies on the potential exploitation for industrial purposes, especially in the sixties and seventies, some of which led to the industrial application we have today. The author was personally involved as a project engineer in some of those studies. As other papers will cover the technical aspects of various applications which have been conceived in Iceland, the author will confine himself to more general questions - that 959
960
V. L # d v ( k s s o n
influence the success or failure of ventures that involve applications of geothermal energy for economic activity in general and industrial production in particular. They can be called the strategic aspects or socio-economic aspects of development, depending on the type of management terminology used. This is therefore not a technical paper. The paper represents only the personal reflection of the author based on some previous experience with geothermal projects, and more in recent years on working with a much wider speclrum of development projects involving new technologies. The experience and the socioeconomic background is of course Icelandic and may not have general, international implications. That must be taken into account by the reader and interpreted by him in view of his own national settings. As the views presented reflect personal experience and subjective evaluation of that experience by the author, he will in the following adopt the f'trst person singular, so as not to give the paper a scientific appearance it does not deserve.
THE SUCCESS OF GEOTHERMAL ENERGY IN ICELAND The Icelandic economy is to a very large degree resource based. It has been one of the fastest growing economies of the world in the post war period. Fig. 1 shows the economic growth together with increasing catches of fish and rapidly expanding use of energy resources. The relative role of geothermal energy and hydro v i s a vis coal and later oil is shown in Fig. 2. This reflects the rapid growth of geothermal applications in the last three decades, especially the seventies and early eighties. CATCHES GNP Mtonne index 125 2.0
ENERGY Mtoe 2.5
2.0 -
-----.....
Gross National Product Catches of fish
/ ' ~'_t 100 .~(,/ ~'! ;
Energy uses
,~ I"~
1.5
i 1.0
....~ ,.l
0.5
.,,.ir ./
v....~,--Cr-
.,~ . . . .
0.0 1900
^ N.;" t
1930
Peat
1950
m
~
l
~-
I j / /
i ff ;~P"
i _/f" /Hydro
u,,
j
~'~-
~
1.6
75
1.2
50
O.8
25
O.4
0
0.0
f
.t, ~ eothermaJ
1970
1990
Figure 1. Development of the Economy and Energy Uses in Iceland 1900 - 1990 The contribution of geothermal energy to the standard of living in Iceland today is enormous, in both economic and quality of life terms, through the quality of housing, the social amenities and environmental quality it has made possible. The availability of
Industrial Purposes for Geothermal Energy
961
100 %
75
50
25
0 1901
1920
1940
1960
1980
1990
Figure 2. Relative Consumption of Energy by Sources 1900 - 1990 geothermal energy in Iceland is now a major determinant for demographic development. Fig. 3 broadly shows the patterns of applications in the country. Those communities where it is available attract new families while those without it loose inhabitants.
~
#--2
---- f
~ Ioa,,tri~pl~t,
Figure 3. Current Utilization of Geothermal Energy in Iceland Even rural communities with ample geothermal energy show strong growth at the cost of those that don't. District heating and geothermal swimming pools with "hot pots" have
962
V. Ltidviksson
become a way of life in modem Iceland. The technical developments in heating, harnessing and in transporting geothermal energy, have provided continued flow of benefits to our society and economy. The money invested both in geothermal R&D and in the infrastructure for its exploitation has in the overwhelming majority of cases paid off handsomely. This must be recognised as the overall evaluation of the role geothermal energy in Iceland over the recent decades, before going into discussing the success and failure analysis of industrial applications in particular. Turning to the role of industrial applications in this overall development, I must confess that it has been less than envisaged by many of us twenty years ago. At that time we had high hopes that the economic attractiveness of geothermal energy could provide an important basis for economic growth as the driving force for various production processes, including large scale industries. Despite some cases of success this has not materialised to the extent hoped, and we can ask us why. What failed, where did we go wrong? What could have been done differently and what can we do to improve the prospects for the future?
THE PROSPECTS FOR INDUSTRIAL PROCESSES Despite the rapid development of geothermal energy for space heating, social amenities and more recently for power generation, only a small fraction of the geothermal potential of Iceland has been harnessed. With the space heating markets now largely saturated, it is no wonder we again pay increased attention to other direct uses which could contribute directly to economic growth, especially as we are suffering economic recession due to a decline in the fisheries. In Fig. 4 I have drawn a modified version of the often referred Lindal diagram (Lindal, 1973 and Gudmundsson et al., 1985) which in fact grew out of the efforts sponsored by the NRC in the early seventies to analyze the possible ways in which geothermal energy could be used to stimulate economic development. It classifies the opportunities according to energy levels and I have added industrial classification on the vertical axis to better indicate the clusters of applications and the possibilities for cascade or multiple use effects. I have also used the concept of temperature range for applications as well as added some of the applications shown by Lienau (Lienau, 1989). In Fig. 5 I have drawn the elements of all modem economic activities which we call production, in the wide sense. These elements are sometimes called production factors by economists. At the core we can put the classical production factors, natural resources (raw material; energy and land) labour and capital. In the outer circles are the less tangible and other "people embodied" factors of production like markets (market access - market knowhow) management (vision-leadership), technology (patents, experience, knowledge and R&D capacity) and finally the externalities of the environment, both the physical environment upon which the process impacts and the political, social and economic environment in which the enterprise must operate. Some scholars of the dynamics of the enterprise economy, would put management at the core of this diagram because of its central role in the dynamics of the economy. The thesis of my paper is basically that understanding the interaction of elements in Fig. 5 is, under the present socio economic conditions, more important for evaluating the criteria for success of a venture within the wide spectrum of technical possibilities shown in Fig. 4,
Industrial Purposes for Geothermal Energy
963
"o c
ii
--o
a)
0
~
,,,
--
1
~o~.~
~! ~ "
"5
--
-
-
<
0
0
~
~o,
~.
-~-
w~-~e -~ -- ~~ - ~~.~
o
I~
~!o _
_
, o.,
e
i-~ -
~
~
~:~J"
-r
~
~
"T
3
--
~
._
.~
8'
--
o
1
r~
c 0
y,
"C
"0
,< IX.
-6~_= 8o
C
'tm ¢'J
,4
964
F. L#dviksson
than accurately predicting the economics of geothermal energy as a resource or understanding the technology used in a particular industrial processes.
t~ /
ENVIRONMENT" \ ~ /
VISIO-NLEADERSHIP ~.
\
//~OR \MARKETS\~ ENERGY /~HNOLOGY/ ] ~ACCESS'~D _~ATENTS/ / ,
X
\-~owHow ~owHow/ / R&D CAPA~ /
~ . .
ENVI~Ro-N M~ENT / EcO.OM,C so¢~_- PO,.TICALJ ( NATIONAL-INTE"NATIONAL ) ~
Figure 5. Elements of Economic Processes
Let~ take a closer look. * The first observation we can make is that while the potentially low cost of geothermal energy is its main economic attraction in industrial processes, we all recognise that this cost applies only near the geothermal site and geothermal energy cannot be transported long distances, especially not the high temperature level energy, which is required in many process industries mentioned in Fig. 4. * Secondly we must realise that process energy is rarely such a major cost factor in any production process that the savings offered by the geothermal alternative alone, can justify a major, green field investment. I think it is unrealistic to make plans for a major industrial process where all other inputs are brought in and products are transported to far off markets. In fact the minimum requirement is that at least one other locally available production factor also provides an economic advantage. Unique or cost attractive raw material is the most common supplement needed in projects that have operated successfully to date. * The third observation I would make is that even if the technical and economic factors appear favourable, the markets for the products and the timing and the approach to market entry is an overwhelmingly important factor in deciding the success or failure of a project idea. * Fourthly, the interaction with global economic and political environment and to a lesser extent the physical environment have had great influence on the feasibility of projects. I think we should recognise that over the last two decades great changes have occurred in the world economy and the world production system, which in many ways have
Industrial Purposes for Geothermal Energy
965
slowed down or reduced investment interest in some of the process industries which we were looking at twenty years ago. Finally I think we must recognise that each development project must be infused with an organisation and management leadership which can combine all the production factors, select the proper technology and relate the project concept realistically to markets and the political and economic environment and steer it through a multitude of hazards. This organisational and management aspects has perhaps been the biggest hurdle here in Iceland because of our small scale industrial structure and limited ability to generate new export industries in other fields than fisheries. This not only applies to geothermally related projects but all other new innovative industries as well. Fishery products were 76.5% of Icelandic exports in 1970. After more than two decades of proclaimed government policies, but perhaps inadequate measures, to promote diversification in the economy the share of export from fisheries in 1991 was 80%. This is not a very encouraging overall result, despite the fact that the "cake" is much bigger today?
THE PREOCCUPATION WITH RESOURCES When pondering why something has not happened the way we expected, it helps to assess the situation realistically and place the blame, if any, correctly in order to draw the proper conclusions. Many of us are, as engineers and natural scientists, fascinated with geothermal energy as a new and relatively clean source of energy, which in some locations can be quite abundant and made available at a competitive price. This techno- economic view can easily divert our attention from even more important factors. We Icelanders are now used to living in the comfort of our "turn the tap" hot water heated homes, and are easily led to think about geothermal energy romantically as an endless, trouble free and practically cost-free resource. The adventure of tapping the hidden energy of the volcanoes and earth's inner magma through the high temperature fields near the neovolcanic zone has contributed to our fascination and perhaps unrealistic expectations. I can freely admit that I have shared these expectations and took part in promoting them. The reality is that geothermal energy is by no means free for the taking and careful planning and preparation is needed to realize its economic potential. In saying this about geothermal energy, we Icelanders should also remember that at the end of the seventies all of us, even the most sober economists and political leaders were confident that Iceland would have a very promising future as an energy rich country with its technologically well proven and documented, hydroelectric resources. Today we face the facts that no new electro-energy-intensive industry has come on stream or been contracted for since 1978, - for 14 years -, despite reasonably consistent efforts to market our resources internationally for much of this period. And we have built and brought into operation new hydroelectric power plants without concrete prospects for new customers. Even today some of our political leaders suggest building more power plants in their unwavering belief that markets will develop. The truth of the matter is that in our enthusiasm for resource development we may have missed the fact that despite all the international talk and turmoil, and national political
966
V. L#dv{ksson
concerns over world energy supply and trade over the last two decades, the relative share of energy in the overall cost of production in the world has decreased, and that with rather short term, but much dramatised exceptions during these two decades, energy has been abundantly available and continues to be relatively inexpensive in the western world. Energy savings through changes in technology as well as successful oil/gas developments brought on stream during times of high energy prices have created an energy glut not foreseen during the seventies and early eighties. The same factors are, in fact, working against geothermal development for industrial uses on a large scale, such as bauxite refming, paper pulping or chemical extraction. Only the economic advantage of geothermal energy is even less clear-cut in such applications than the role of electrical prices in aluminium production, because process technology and investment must usually be adapted to accommodate the site-specific characteristics of geothermal energy. To Icelanders who embraced the idea of a golden future in an energy rich country in a energy hungry world this change in perspective has not yet been fully recognised and accepted. For fourteen years we have been waiting for the next energy intensive industry to come our way. My personal view now is that this obstinate expectation, in fact has in later years probably diverted our attention from other strategies for development, based more on market oriented approaches, human resources and resourcefulness rather than the economic and technical attractiveness of our natural resources alone. Some of the richest nations on earth have very few natural resources, but use their brains and business acumen to make up for that and organise themselves to do so effectively. Other nations have enormous natural resources, but remain poor because they cannot release the creative energies of their people to turn those resources into riches.
SUCCESS AND FAILURES Where and why have we succeeded and where and why have we failed? Due to the predominantly small business nature of the industrial structure in Iceland, which has very limited resources for expensive development work, the government has until now generally had to involve itself quite heavily in projects for developing natural resources which involve technical and economic risk. Projects such as diatomite processing at Lake M2kvatn, seaweed drying at Reykhtlar and salt extraction at Reykjanes were all conceived, not out of market requirement, but on the basis of the site specific natural resources - the unique combination of local raw materials and geothermal energy. Preliminary resource assessments and feasibility studies were conducted by consulting engineers and institutions and paid for by government funds. Ad hoc arrangements, like government committees, or at later stages, nominal preparatory share holding companies with government majority holding were created to manage and oversee the development work. Although market studies were commissioned, often from foreign consultants, no independent marketing strategies were set up for these projects, except looking for foreign partners that could guarantee through a long term contract or share holding partnership, the sale of the products and thus the viability of the project. This strategy worked well in the case of the diatomite plant where the contract arrangements with
Industrial Purposes for Geothermal Energy
967
John's Manville Inc., and later the Manville Corporation have worked satisfactorily, even during times of both initial technical difficulties, and later market depressions, as well as the disruption of earthquakes and volcanic eruptions near the plant. In the case of the seaweed factory the very attractive 10 years sales contract concluded with a Scottish alginates manufacturer was the economic basis for the project. It was unilaterally terminated after four years by a new owner of the Scottish firm, just when initial problems had been solved and the Icelandic company had started to run quite profitably. That company which was formed with Government majority went bankrupt a few years later, and its successor company which is now in private ownership has had difficulty in securing sufficient markets for its products to make the operation financially viable. In both of the above cases, however, geothermal energy was secured by a government agency and provided to the firms at very attractive, essentially, non-commercial terms. In the case of the Salt project at Reykjanes a similar organisational strategy failed. In my opinion for several reasons: 1.
2.
3.
4.
Salt is an inexpensive, highly competitive commodity, and the project was difficult to justify, except on a large enough scale to bring down unit cost far enough to meet the competition. An alternative was to link it directly with downstream industries, chlor alkaline producer or magnesium chloride - magnesium metal production. International markets and/or partners could not be found at sufficient scale to give the project commercial and economic viability. A semi-commercial operation was established to produce fish and food grade salt for the domestic market. A government appointed board of directors for the project embarked on a novel design and risky development work which was financed by government loans and carried full financial costs without realistic risk financing. - The f'mancial cost became a major liability on the project. The novel and untried technology finally adopted for salt crystallisation in the semi commercial production plant failed to give satisfactory technical results with consequent economic disaster to the project. The tragic fact is that the novel technology was unnecessary as conventional processes would have sufficed.
One can also argue whether the predominantly technically oriented management board setup for the project by the ministry of industry, was appropriate for the commercial aspects of the project. This project as a whole went through many stages of research and development and is the most complicated of the above mentioned three. It was by far the most expensive in terms of development work, both in terms of geothermal field research and drilling work, and the technical development work on the exploitation side. The initial work on this project preceded the development of the neighbouring Svartsengi field for Hitaveita Sudurnesja and considerably influenced the methods for assessment of and drilling in high temperature geothermal areas. The company, Saga Salt Ingredients A/S, which recently has been formed to produce specialized salt from this resource and is now majority owned by foreign investors, has brought in very important market links that were previously missing, but in turn can build technically on the experience gathered both in Svartsengi and at Reykjanes. Of course this company does not carry the previous investment burden of the geothermal drill holes or the
968
V. Ltidv{ksson
existing buildings. It has therefore every reason to become a success, possibly providing a much needed stepping stone in the further development of this geothermal area at Reykjanes for industrial purposes. Aquaculture is a field where geothermal heat has played an important role in recent years, mainly in salmon farming and salmon ranching. The production of smolt in one year or even less from hatching, is now feasible and cuts down the price of smolt production greatly. However, the use of geothermal heat in on-growing of fish to market size has not been implemented, partly because of insufficient research and practical experience with growing salmon under conditions of totally controlled environment. Further biological know-how must be acquired before full benefit can be expected. Horticultural production in a controlled environment (light, temperature, CO2, nutrients, etc.) for large scale export, as opposed to small inland markets, was one of the ideas studied by the NRC in the early seventies. Later a feasibility study for producing chrysanthemum cuttings was made by an Icelandic-Dutch group of private investors in co-operation with the City of Reykjavik and with backup from the NRC. The project was found interesting and probably viable, but somewhat risky due to uncertainty about production results under artificial lighting and controlled conditions, and due to the variability in the product market. The project idea was abandoned but later research work shows that in fact higher production rates can be realised than had been assumed in the study. Similar large scale horticultural projects have now been established elsewhere. One of the limitations for this project now, however, may be the lack of air freight transport capacity to relevant markets. That same slructural limitation affects many other possibilities of fresh product exports from Iceland. Several other projects were studied at the preliminary feasibility stage such as bauxite processing (Bayer process) paper pulp processing, and heavy water production. All of these were abandoned due to lack of economic and/or market prospects, but not due to technical considerations. The bauxite processing also met scepticism due to fear for environmental impact from its waste stream. More recently several projects involving exploitation of geothermal energy have been started by private entrepreneurs through new companies. A very successful example of a new venture is the laminated structural wood manufacturer at Fltidir, which has been able to capture a relatively large latent market for structural wood, including long span beams for industrial, commercial and athletic buildings. Geothermal energy is not a major cost factor here, but important enough to justify an unconventional, rural location. But the key to the success is the quality of the product and successful market capture. I remember great scepticism of this project when it started. Another is the production of CO2 for horticultural uses. This is a by-product of a geothermal field in Grh-nsnes, south Iceland. Less successful were the attempts at processing fish meal at Reykjanes and drying fish and fish heads for the pet market and or African markets. The fish meal factory failed commercially, as I understand due to difficulty in securing reliable and sufficient raw material supply to the rather remote site and was underfinanced to meet disruptions. The drying of fish heads and fish is done apparently successfully in several locations but a stronger export marketing effort and better access to reliable raw material supply is probably needed to realise the full potential in this area. A number of other applications can be found in Iceland, such as bread making (bread cooking - rather than baking), concrete curing and cleaning and washing operations in various industries. The economic importance of geothermal energy in these operations is
Industrial Purposes for Geothermal Energy
969
relatively small and does not determine their economic success, although it provides operational convenience and environmental friendliness. SO WHAT ARE THE LESSONS? It is always very easy to be wise afterwards, but considering the small home markets, the financially weak enterprises and underdeveloped fmancial markets in Iceland, it is difficult to say that we could or should have done things much differently in the past. Many would criticise too much government involvement and politically motivated or bureaucratically unrealistic approach to commercialisation of project ideas. - Personally, I cannot see there were any realistic alternatives except not having made the attempts to develop the above described project ideas. The later privately led ventures have certainly not been any more successful commercially than the earlier, technically much riskier government led projects. Today, however, the situation is different in that much more is known about the technical aspects of geothermal energy in this country, both low temperature and high temperature fields. Ways have been developed to control all the major technical problems associated with the exploitation geothermal energy. The risks are thus much lower on the technical side today. Investors can proceed now with primary concern for the marketing and commercial aspects of their ventures. A new important element is that there has been rapid progress over the last 5-10 year in Icelandic professional business management and marketing. Bringing decades of persistent inflation under control, decontrolling financial markets and establishing an emerging venture capital market are also very important elements of the new premises for development. Personally, however, the author would like to see more deliberate steps taken by the government or the local communities which have access or rights to important geothermal resources to promote and help private investors with developing their project ideas. This could be done by several means such as the following: 1.
2.
3.
Financial support for development should be provided on one hand through increased direct grants to risky research projects and on the other hand through tax incentives to innovation companies that have invested in R&D and intend to follow up on their results. - This is a general recommendation from the NRC to our government to promote knowledge based innovation in our country. In several locations geothermal steam and/or hot water could be made available as a utility in conjunction with other utilities and suitable land, in order to facilitate private investment in the business and market aspects of the project. A realistic but also strategic pricing policy with careful regional and local planning is needed to attract investors. Examples are the geothermal areas along the Reykjanes-Hengill range, the southern lowlands and in the Oxarfj6rdur-Hfisav/k area. Special attention should be given to the possibilities of cascade effects between energy utilities (geothermal power, district heating) based on high temperature areas, and industrial and agricultural uses of low grade heat. This is likely to give by far the most profitable overall economic effects, but needs close cooperation between public agencies and the private investors. Aquaculture is an industry that could greatly benefit from access to large volumes of low grade geothermal waters from cascade projects. "Bathing experiences" and health spas in connection with tourism (like the "Blue
970
.
V. L~idv{ksson
Lagoon" - with many variations due to different natural settings) is also a viable and realistic field of future growth, partly in connection with cascade effects. On the technological side we should take much more notice of the opportunities offered by the interaction between geothermal energy and other technological fields such as food processing (freezing, drying, canning), bio-technology (fermentation and separation processes), materials technology (hydrothermal processing of structural and electro-active ceramics). I expect that future opportunities for using geothermal heat will increasingly come from new product ideas in these fields rather than "energy motivated" ideas that geothermal specialists will dream up. So R&D in other fields is very important in this respect. The potential for uses in aquaculture and horticulture is nowhere fully realised, partly because too little experience and biological knowledge is available about the optimum conditions for growth of each potential species and the way their environment should be controlled.
CONCLUSION There is no question in my mind that geothermal energy will continue to be an important resource base for economic development in Iceland. The technological, environmental and cost advantages of geothermal energy as compared to other energy sources remain important, and may in fact further increase in value if the concern for increasing CO 2 in the atmosphere leads to economic measures to discourage the use of fossil fuels. It will not, however, be sufficient by itself to stimulate growth of industrial applications. From now on it will depend more on our abilities in business and marketing and on our competence in other technical fields than geothermal technology as such. Last but not the least it will require fn-m cooperation between the public and the private sector to realise individual projects.
REFERENCES Lindal, B. (1973) Industrial and other applications of geothermal energy, Geothermal energy: a review of research and development, UNESCO, Paris, Earth Sciences, 12. Gudmundsson, J. S., et al. (1985) The Lindal Diagram. Geothermal Resources Council. Transactions, 9 Part I, pp.15-19. Lienau, P.J. (1989) Industrial applications, Geothermal direct use engineering and design guidebook, GeoHeat Center, Oregon Institute of Technology, Chapter 17, pp. 297-317.
0375-6505/92 $5.00 + 0.00 P e r g a m o n Press Ltd © 1993 CNR.
Printed in Great Britain.
STRATEGIC ASPECTS OF EXPLOITING GEOTHERMAL ENERGY FOR INDUSTRIAL PURPOSES VILHJ.~,LMUR LODV~KSSON
The National Research Council, Laugavegi 13, Reykjavfk, Iceland
Abstract - Geothermal energy is widely used in Iceland for space heating swimming pools and snow melting systems as well as for greenhouses and soil heating and aquaculture. Its contribution to the standard of living in Iceland is very substantial. The industrial applications are, however, fewer today than anticipated twenty years ago. This paper considers some of the socio-economic reasons for that. Although geothermal energy is generally a cost competitive source of energy, it is site limited and does not by itself provide sufficient economic incentive to attract manufacturing or process industries. This generally requires another, locally available production factor offering further competitive advantage to justify greenfield investments. World economic slow-downs, and structural problems in many process industries after the energy crises of the seventies have reduced interest for investments in energy intensive industries world wide. While public sector initiative motivated by technological possibilities was instrumental for developing geothermal resources in the past, time has now come for private sector initiative, led by market interest, to identify and exploit opportunities for using geothermal energy for industrial purposes. National and local governments must, however, provide the appropriate incentives to stimulate such developments.
INTRODUCTION The author of this paper has been invited to review the Icelandic experience in exploiting geothermal energy as a resource for industrial economic development. The National Research Council (NRC) of Iceland, of which the author is presently the directory, was involved with organizing and securing funds for research and development work in this field for several decades. The NRC was responsible for much of the early work on the geology and drilling for geothermal energy in this country in the forties and early fifties and sponsored a number of technical studies on the potential exploitation for industrial purposes, especially in the sixties and seventies, some of which led to the industrial application we have today. The author was personally involved as a project engineer in some of those studies. As other papers will cover the technical aspects of various applications which have been conceived in Iceland, the author will confine himself to more general questions - that 959
960
V. L # d v ( k s s o n
influence the success or failure of ventures that involve applications of geothermal energy for economic activity in general and industrial production in particular. They can be called the strategic aspects or socio-economic aspects of development, depending on the type of management terminology used. This is therefore not a technical paper. The paper represents only the personal reflection of the author based on some previous experience with geothermal projects, and more in recent years on working with a much wider speclrum of development projects involving new technologies. The experience and the socioeconomic background is of course Icelandic and may not have general, international implications. That must be taken into account by the reader and interpreted by him in view of his own national settings. As the views presented reflect personal experience and subjective evaluation of that experience by the author, he will in the following adopt the f'trst person singular, so as not to give the paper a scientific appearance it does not deserve.
THE SUCCESS OF GEOTHERMAL ENERGY IN ICELAND The Icelandic economy is to a very large degree resource based. It has been one of the fastest growing economies of the world in the post war period. Fig. 1 shows the economic growth together with increasing catches of fish and rapidly expanding use of energy resources. The relative role of geothermal energy and hydro v i s a vis coal and later oil is shown in Fig. 2. This reflects the rapid growth of geothermal applications in the last three decades, especially the seventies and early eighties. CATCHES GNP Mtonne index 125 2.0
ENERGY Mtoe 2.5
2.0 -
-----.....
Gross National Product Catches of fish
/ ' ~'_t 100 .~(,/ ~'! ;
Energy uses
,~ I"~
1.5
i 1.0
....~ ,.l
0.5
.,,.ir ./
v....~,--Cr-
.,~ . . . .
0.0 1900
^ N.;" t
1930
Peat
1950
m
~
l
~-
I j / /
i ff ;~P"
i _/f" /Hydro
u,,
j
~'~-
~
1.6
75
1.2
50
O.8
25
O.4
0
0.0
f
.t, ~ eothermaJ
1970
1990
Figure 1. Development of the Economy and Energy Uses in Iceland 1900 - 1990 The contribution of geothermal energy to the standard of living in Iceland today is enormous, in both economic and quality of life terms, through the quality of housing, the social amenities and environmental quality it has made possible. The availability of
Industrial Purposes for Geothermal Energy
961
100 %
75
50
25
0 1901
1920
1940
1960
1980
1990
Figure 2. Relative Consumption of Energy by Sources 1900 - 1990 geothermal energy in Iceland is now a major determinant for demographic development. Fig. 3 broadly shows the patterns of applications in the country. Those communities where it is available attract new families while those without it loose inhabitants.
~
#--2
---- f
~ Ioa,,tri~pl~t,
Figure 3. Current Utilization of Geothermal Energy in Iceland Even rural communities with ample geothermal energy show strong growth at the cost of those that don't. District heating and geothermal swimming pools with "hot pots" have
962
V. Ltidviksson
become a way of life in modem Iceland. The technical developments in heating, harnessing and in transporting geothermal energy, have provided continued flow of benefits to our society and economy. The money invested both in geothermal R&D and in the infrastructure for its exploitation has in the overwhelming majority of cases paid off handsomely. This must be recognised as the overall evaluation of the role geothermal energy in Iceland over the recent decades, before going into discussing the success and failure analysis of industrial applications in particular. Turning to the role of industrial applications in this overall development, I must confess that it has been less than envisaged by many of us twenty years ago. At that time we had high hopes that the economic attractiveness of geothermal energy could provide an important basis for economic growth as the driving force for various production processes, including large scale industries. Despite some cases of success this has not materialised to the extent hoped, and we can ask us why. What failed, where did we go wrong? What could have been done differently and what can we do to improve the prospects for the future?
THE PROSPECTS FOR INDUSTRIAL PROCESSES Despite the rapid development of geothermal energy for space heating, social amenities and more recently for power generation, only a small fraction of the geothermal potential of Iceland has been harnessed. With the space heating markets now largely saturated, it is no wonder we again pay increased attention to other direct uses which could contribute directly to economic growth, especially as we are suffering economic recession due to a decline in the fisheries. In Fig. 4 I have drawn a modified version of the often referred Lindal diagram (Lindal, 1973 and Gudmundsson et al., 1985) which in fact grew out of the efforts sponsored by the NRC in the early seventies to analyze the possible ways in which geothermal energy could be used to stimulate economic development. It classifies the opportunities according to energy levels and I have added industrial classification on the vertical axis to better indicate the clusters of applications and the possibilities for cascade or multiple use effects. I have also used the concept of temperature range for applications as well as added some of the applications shown by Lienau (Lienau, 1989). In Fig. 5 I have drawn the elements of all modem economic activities which we call production, in the wide sense. These elements are sometimes called production factors by economists. At the core we can put the classical production factors, natural resources (raw material; energy and land) labour and capital. In the outer circles are the less tangible and other "people embodied" factors of production like markets (market access - market knowhow) management (vision-leadership), technology (patents, experience, knowledge and R&D capacity) and finally the externalities of the environment, both the physical environment upon which the process impacts and the political, social and economic environment in which the enterprise must operate. Some scholars of the dynamics of the enterprise economy, would put management at the core of this diagram because of its central role in the dynamics of the economy. The thesis of my paper is basically that understanding the interaction of elements in Fig. 5 is, under the present socio economic conditions, more important for evaluating the criteria for success of a venture within the wide spectrum of technical possibilities shown in Fig. 4,
Industrial Purposes for Geothermal Energy
963
"o c
ii
--o
a)
0
~
,,,
--
1
~o~.~
~! ~ "
"5
--
-
-
<
0
0
~
~o,
~.
-~-
w~-~e -~ -- ~~ - ~~.~
o
I~
~!o _
_
, o.,
e
i-~ -
~
~
~:~J"
-r
~
~
"T
3
--
~
._
.~
8'
--
o
1
r~
c 0
y,
"C
"0
,< IX.
-6~_= 8o
C
'tm ¢'J
,4
964
F. L#dviksson
than accurately predicting the economics of geothermal energy as a resource or understanding the technology used in a particular industrial processes.
t~ /
ENVIRONMENT" \ ~ /
VISIO-NLEADERSHIP ~.
\
//~OR \MARKETS\~ ENERGY /~HNOLOGY/ ] ~ACCESS'~D _~ATENTS/ / ,
X
\-~owHow ~owHow/ / R&D CAPA~ /
~ . .
ENVI~Ro-N M~ENT / EcO.OM,C so¢~_- PO,.TICALJ ( NATIONAL-INTE"NATIONAL ) ~
Figure 5. Elements of Economic Processes
Let~ take a closer look. * The first observation we can make is that while the potentially low cost of geothermal energy is its main economic attraction in industrial processes, we all recognise that this cost applies only near the geothermal site and geothermal energy cannot be transported long distances, especially not the high temperature level energy, which is required in many process industries mentioned in Fig. 4. * Secondly we must realise that process energy is rarely such a major cost factor in any production process that the savings offered by the geothermal alternative alone, can justify a major, green field investment. I think it is unrealistic to make plans for a major industrial process where all other inputs are brought in and products are transported to far off markets. In fact the minimum requirement is that at least one other locally available production factor also provides an economic advantage. Unique or cost attractive raw material is the most common supplement needed in projects that have operated successfully to date. * The third observation I would make is that even if the technical and economic factors appear favourable, the markets for the products and the timing and the approach to market entry is an overwhelmingly important factor in deciding the success or failure of a project idea. * Fourthly, the interaction with global economic and political environment and to a lesser extent the physical environment have had great influence on the feasibility of projects. I think we should recognise that over the last two decades great changes have occurred in the world economy and the world production system, which in many ways have
Industrial Purposes for Geothermal Energy
965
slowed down or reduced investment interest in some of the process industries which we were looking at twenty years ago. Finally I think we must recognise that each development project must be infused with an organisation and management leadership which can combine all the production factors, select the proper technology and relate the project concept realistically to markets and the political and economic environment and steer it through a multitude of hazards. This organisational and management aspects has perhaps been the biggest hurdle here in Iceland because of our small scale industrial structure and limited ability to generate new export industries in other fields than fisheries. This not only applies to geothermally related projects but all other new innovative industries as well. Fishery products were 76.5% of Icelandic exports in 1970. After more than two decades of proclaimed government policies, but perhaps inadequate measures, to promote diversification in the economy the share of export from fisheries in 1991 was 80%. This is not a very encouraging overall result, despite the fact that the "cake" is much bigger today?
THE PREOCCUPATION WITH RESOURCES When pondering why something has not happened the way we expected, it helps to assess the situation realistically and place the blame, if any, correctly in order to draw the proper conclusions. Many of us are, as engineers and natural scientists, fascinated with geothermal energy as a new and relatively clean source of energy, which in some locations can be quite abundant and made available at a competitive price. This techno- economic view can easily divert our attention from even more important factors. We Icelanders are now used to living in the comfort of our "turn the tap" hot water heated homes, and are easily led to think about geothermal energy romantically as an endless, trouble free and practically cost-free resource. The adventure of tapping the hidden energy of the volcanoes and earth's inner magma through the high temperature fields near the neovolcanic zone has contributed to our fascination and perhaps unrealistic expectations. I can freely admit that I have shared these expectations and took part in promoting them. The reality is that geothermal energy is by no means free for the taking and careful planning and preparation is needed to realize its economic potential. In saying this about geothermal energy, we Icelanders should also remember that at the end of the seventies all of us, even the most sober economists and political leaders were confident that Iceland would have a very promising future as an energy rich country with its technologically well proven and documented, hydroelectric resources. Today we face the facts that no new electro-energy-intensive industry has come on stream or been contracted for since 1978, - for 14 years -, despite reasonably consistent efforts to market our resources internationally for much of this period. And we have built and brought into operation new hydroelectric power plants without concrete prospects for new customers. Even today some of our political leaders suggest building more power plants in their unwavering belief that markets will develop. The truth of the matter is that in our enthusiasm for resource development we may have missed the fact that despite all the international talk and turmoil, and national political
966
V. L#dv{ksson
concerns over world energy supply and trade over the last two decades, the relative share of energy in the overall cost of production in the world has decreased, and that with rather short term, but much dramatised exceptions during these two decades, energy has been abundantly available and continues to be relatively inexpensive in the western world. Energy savings through changes in technology as well as successful oil/gas developments brought on stream during times of high energy prices have created an energy glut not foreseen during the seventies and early eighties. The same factors are, in fact, working against geothermal development for industrial uses on a large scale, such as bauxite refming, paper pulping or chemical extraction. Only the economic advantage of geothermal energy is even less clear-cut in such applications than the role of electrical prices in aluminium production, because process technology and investment must usually be adapted to accommodate the site-specific characteristics of geothermal energy. To Icelanders who embraced the idea of a golden future in an energy rich country in a energy hungry world this change in perspective has not yet been fully recognised and accepted. For fourteen years we have been waiting for the next energy intensive industry to come our way. My personal view now is that this obstinate expectation, in fact has in later years probably diverted our attention from other strategies for development, based more on market oriented approaches, human resources and resourcefulness rather than the economic and technical attractiveness of our natural resources alone. Some of the richest nations on earth have very few natural resources, but use their brains and business acumen to make up for that and organise themselves to do so effectively. Other nations have enormous natural resources, but remain poor because they cannot release the creative energies of their people to turn those resources into riches.
SUCCESS AND FAILURES Where and why have we succeeded and where and why have we failed? Due to the predominantly small business nature of the industrial structure in Iceland, which has very limited resources for expensive development work, the government has until now generally had to involve itself quite heavily in projects for developing natural resources which involve technical and economic risk. Projects such as diatomite processing at Lake M2kvatn, seaweed drying at Reykhtlar and salt extraction at Reykjanes were all conceived, not out of market requirement, but on the basis of the site specific natural resources - the unique combination of local raw materials and geothermal energy. Preliminary resource assessments and feasibility studies were conducted by consulting engineers and institutions and paid for by government funds. Ad hoc arrangements, like government committees, or at later stages, nominal preparatory share holding companies with government majority holding were created to manage and oversee the development work. Although market studies were commissioned, often from foreign consultants, no independent marketing strategies were set up for these projects, except looking for foreign partners that could guarantee through a long term contract or share holding partnership, the sale of the products and thus the viability of the project. This strategy worked well in the case of the diatomite plant where the contract arrangements with
Industrial Purposes for Geothermal Energy
967
John's Manville Inc., and later the Manville Corporation have worked satisfactorily, even during times of both initial technical difficulties, and later market depressions, as well as the disruption of earthquakes and volcanic eruptions near the plant. In the case of the seaweed factory the very attractive 10 years sales contract concluded with a Scottish alginates manufacturer was the economic basis for the project. It was unilaterally terminated after four years by a new owner of the Scottish firm, just when initial problems had been solved and the Icelandic company had started to run quite profitably. That company which was formed with Government majority went bankrupt a few years later, and its successor company which is now in private ownership has had difficulty in securing sufficient markets for its products to make the operation financially viable. In both of the above cases, however, geothermal energy was secured by a government agency and provided to the firms at very attractive, essentially, non-commercial terms. In the case of the Salt project at Reykjanes a similar organisational strategy failed. In my opinion for several reasons: 1.
2.
3.
4.
Salt is an inexpensive, highly competitive commodity, and the project was difficult to justify, except on a large enough scale to bring down unit cost far enough to meet the competition. An alternative was to link it directly with downstream industries, chlor alkaline producer or magnesium chloride - magnesium metal production. International markets and/or partners could not be found at sufficient scale to give the project commercial and economic viability. A semi-commercial operation was established to produce fish and food grade salt for the domestic market. A government appointed board of directors for the project embarked on a novel design and risky development work which was financed by government loans and carried full financial costs without realistic risk financing. - The f'mancial cost became a major liability on the project. The novel and untried technology finally adopted for salt crystallisation in the semi commercial production plant failed to give satisfactory technical results with consequent economic disaster to the project. The tragic fact is that the novel technology was unnecessary as conventional processes would have sufficed.
One can also argue whether the predominantly technically oriented management board setup for the project by the ministry of industry, was appropriate for the commercial aspects of the project. This project as a whole went through many stages of research and development and is the most complicated of the above mentioned three. It was by far the most expensive in terms of development work, both in terms of geothermal field research and drilling work, and the technical development work on the exploitation side. The initial work on this project preceded the development of the neighbouring Svartsengi field for Hitaveita Sudurnesja and considerably influenced the methods for assessment of and drilling in high temperature geothermal areas. The company, Saga Salt Ingredients A/S, which recently has been formed to produce specialized salt from this resource and is now majority owned by foreign investors, has brought in very important market links that were previously missing, but in turn can build technically on the experience gathered both in Svartsengi and at Reykjanes. Of course this company does not carry the previous investment burden of the geothermal drill holes or the
968
V. Ltidv{ksson
existing buildings. It has therefore every reason to become a success, possibly providing a much needed stepping stone in the further development of this geothermal area at Reykjanes for industrial purposes. Aquaculture is a field where geothermal heat has played an important role in recent years, mainly in salmon farming and salmon ranching. The production of smolt in one year or even less from hatching, is now feasible and cuts down the price of smolt production greatly. However, the use of geothermal heat in on-growing of fish to market size has not been implemented, partly because of insufficient research and practical experience with growing salmon under conditions of totally controlled environment. Further biological know-how must be acquired before full benefit can be expected. Horticultural production in a controlled environment (light, temperature, CO2, nutrients, etc.) for large scale export, as opposed to small inland markets, was one of the ideas studied by the NRC in the early seventies. Later a feasibility study for producing chrysanthemum cuttings was made by an Icelandic-Dutch group of private investors in co-operation with the City of Reykjavik and with backup from the NRC. The project was found interesting and probably viable, but somewhat risky due to uncertainty about production results under artificial lighting and controlled conditions, and due to the variability in the product market. The project idea was abandoned but later research work shows that in fact higher production rates can be realised than had been assumed in the study. Similar large scale horticultural projects have now been established elsewhere. One of the limitations for this project now, however, may be the lack of air freight transport capacity to relevant markets. That same slructural limitation affects many other possibilities of fresh product exports from Iceland. Several other projects were studied at the preliminary feasibility stage such as bauxite processing (Bayer process) paper pulp processing, and heavy water production. All of these were abandoned due to lack of economic and/or market prospects, but not due to technical considerations. The bauxite processing also met scepticism due to fear for environmental impact from its waste stream. More recently several projects involving exploitation of geothermal energy have been started by private entrepreneurs through new companies. A very successful example of a new venture is the laminated structural wood manufacturer at Fltidir, which has been able to capture a relatively large latent market for structural wood, including long span beams for industrial, commercial and athletic buildings. Geothermal energy is not a major cost factor here, but important enough to justify an unconventional, rural location. But the key to the success is the quality of the product and successful market capture. I remember great scepticism of this project when it started. Another is the production of CO2 for horticultural uses. This is a by-product of a geothermal field in Grh-nsnes, south Iceland. Less successful were the attempts at processing fish meal at Reykjanes and drying fish and fish heads for the pet market and or African markets. The fish meal factory failed commercially, as I understand due to difficulty in securing reliable and sufficient raw material supply to the rather remote site and was underfinanced to meet disruptions. The drying of fish heads and fish is done apparently successfully in several locations but a stronger export marketing effort and better access to reliable raw material supply is probably needed to realise the full potential in this area. A number of other applications can be found in Iceland, such as bread making (bread cooking - rather than baking), concrete curing and cleaning and washing operations in various industries. The economic importance of geothermal energy in these operations is
Industrial Purposes for Geothermal Energy
969
relatively small and does not determine their economic success, although it provides operational convenience and environmental friendliness. SO WHAT ARE THE LESSONS? It is always very easy to be wise afterwards, but considering the small home markets, the financially weak enterprises and underdeveloped fmancial markets in Iceland, it is difficult to say that we could or should have done things much differently in the past. Many would criticise too much government involvement and politically motivated or bureaucratically unrealistic approach to commercialisation of project ideas. - Personally, I cannot see there were any realistic alternatives except not having made the attempts to develop the above described project ideas. The later privately led ventures have certainly not been any more successful commercially than the earlier, technically much riskier government led projects. Today, however, the situation is different in that much more is known about the technical aspects of geothermal energy in this country, both low temperature and high temperature fields. Ways have been developed to control all the major technical problems associated with the exploitation geothermal energy. The risks are thus much lower on the technical side today. Investors can proceed now with primary concern for the marketing and commercial aspects of their ventures. A new important element is that there has been rapid progress over the last 5-10 year in Icelandic professional business management and marketing. Bringing decades of persistent inflation under control, decontrolling financial markets and establishing an emerging venture capital market are also very important elements of the new premises for development. Personally, however, the author would like to see more deliberate steps taken by the government or the local communities which have access or rights to important geothermal resources to promote and help private investors with developing their project ideas. This could be done by several means such as the following: 1.
2.
3.
Financial support for development should be provided on one hand through increased direct grants to risky research projects and on the other hand through tax incentives to innovation companies that have invested in R&D and intend to follow up on their results. - This is a general recommendation from the NRC to our government to promote knowledge based innovation in our country. In several locations geothermal steam and/or hot water could be made available as a utility in conjunction with other utilities and suitable land, in order to facilitate private investment in the business and market aspects of the project. A realistic but also strategic pricing policy with careful regional and local planning is needed to attract investors. Examples are the geothermal areas along the Reykjanes-Hengill range, the southern lowlands and in the Oxarfj6rdur-Hfisav/k area. Special attention should be given to the possibilities of cascade effects between energy utilities (geothermal power, district heating) based on high temperature areas, and industrial and agricultural uses of low grade heat. This is likely to give by far the most profitable overall economic effects, but needs close cooperation between public agencies and the private investors. Aquaculture is an industry that could greatly benefit from access to large volumes of low grade geothermal waters from cascade projects. "Bathing experiences" and health spas in connection with tourism (like the "Blue
970
.
V. L~idv{ksson
Lagoon" - with many variations due to different natural settings) is also a viable and realistic field of future growth, partly in connection with cascade effects. On the technological side we should take much more notice of the opportunities offered by the interaction between geothermal energy and other technological fields such as food processing (freezing, drying, canning), bio-technology (fermentation and separation processes), materials technology (hydrothermal processing of structural and electro-active ceramics). I expect that future opportunities for using geothermal heat will increasingly come from new product ideas in these fields rather than "energy motivated" ideas that geothermal specialists will dream up. So R&D in other fields is very important in this respect. The potential for uses in aquaculture and horticulture is nowhere fully realised, partly because too little experience and biological knowledge is available about the optimum conditions for growth of each potential species and the way their environment should be controlled.
CONCLUSION There is no question in my mind that geothermal energy will continue to be an important resource base for economic development in Iceland. The technological, environmental and cost advantages of geothermal energy as compared to other energy sources remain important, and may in fact further increase in value if the concern for increasing CO 2 in the atmosphere leads to economic measures to discourage the use of fossil fuels. It will not, however, be sufficient by itself to stimulate growth of industrial applications. From now on it will depend more on our abilities in business and marketing and on our competence in other technical fields than geothermal technology as such. Last but not the least it will require fn-m cooperation between the public and the private sector to realise individual projects.
REFERENCES Lindal, B. (1973) Industrial and other applications of geothermal energy, Geothermal energy: a review of research and development, UNESCO, Paris, Earth Sciences, 12. Gudmundsson, J. S., et al. (1985) The Lindal Diagram. Geothermal Resources Council. Transactions, 9 Part I, pp.15-19. Lienau, P.J. (1989) Industrial applications, Geothermal direct use engineering and design guidebook, GeoHeat Center, Oregon Institute of Technology, Chapter 17, pp. 297-317.