viðskipta- og raunvísindasvið - skemman. thesis_traustason… · skóli háskólinn á akureyri...

viðskipta- og raunvísindasvið

Skóli Háskólinn á Akureyri

Svið Viðskipta- og raunvísindasvið

Deild Viðskiptadeild

Námskeið LOK2106 – B.Sc. Ritgerð

Heiti Verkefnis Political Risk and the Iceland – UK Interconnector: Risk Mitigation, Ownership and Dispute Settlement

Verktími Ágúst 2015 – Apríl 2016

Nemandi Andri Dan Traustason

Leiðbeinandi

Prófessor Hilmar Þór Hilmarsson

Fjöldi viðauka 2

Blaðsíðufjöldi 39

Political Risk and the Iceland – UK Interconnector

ii

Yfirlýsingar

Ég lýsi því yfir að ég er höfundur þessa verkefnis og að það er afrakstur eigin

rannsókna.

____________________________________________________

Andri Dan Traustason

Það staðfestist að verkefni þetta fullnægir að mínum dómi kröfum til námsmats

í námskeiðinu LOK2106.

____________________________________________________

Hilmar Þór Hilmarsson


iii

Abstract

The proposed interconnector between Iceland and the United Kingdom

carries numerous different types of risk for Iceland. Ownership of the

interconnector and the infrastructure related to it needs to be settled in a way

that minimizes political risk for the Icelandic nation without sacrificing

national sovereignty over its renewable energy sources. A public-private

partnership project could use various methods to mitigate risk, many of which

are related to ownership and financing. Guarantees and loans provided by IFIs,

such as the European Investment Bank and the Nordic Investment Bank, might

play a fundamental role in that regard. Export credit agencies might also

provide political risk insurance. Other solutions, such as a bilateral legal

agreement and contracts for difference, will also be assessed with regard to the

interconnector. In the event of disputes occurring, the Energy Charter

Organization and ICSID, of the World Bank, might be key players among other

institutions. These solutions would require serious arbitration provisions and

awards would be subject to the New York Convention.

Keywords: Political risk, risk mitigation, cross-border investments,

international business, dispute settlement.


iv

Acknowledgements

Writing a B.Sc. thesis about a complex subject can be stressful at the

best of times. Couple that with the immense work related to applying for

graduate studies and the outcome is something which can hardly be dealt with

without support. My friends, family, fellow students and Professor Hilmarsson

made sure that I had all the support I needed and stood by me every step of the

way.

While working on the thesis, I was given invaluable support from

numerous other parties. Many individuals in the academic community, in

Iceland and abroad, assisted me throughout the research and provided me with

ideas and hints about relevant cases and other sources of information. My

supervisor, Professor Hilmar Þór Hilmarsson, was among those academics and

furthermore, he enabled me to get in contact with many experts which would

otherwise have been out of my reach. These contacts included some of the

most prominent experts within the fields of political risk and renewable energy.

Moreover, Professor Hilmarsson helped me maintain my composure while

writing the articles, enclosed in the thesis, and familiarised me with the system

surrounding academic journals, conferences and the system as a whole. For

that, I am sincerely grateful.

Thank you.

Yours sincerely,



v

Útdráttur

Sæstrengur milli Íslands og Bretlands felur í sér ýmsar tegundir áhættu

fyrir Ísland. Pólitísk áhætta vegur þungt þrátt fyrir að oft sé horft fram hjá

henni í rannsóknum á fýsileika verkefnisins. Eignarhald og fjármögnun

verkefnisins getur haft veruleg áhrif í þessu tilliti og nauðsynlegt er að finna

lausn sem lágmarkar pólitíska áhættu án þess að fórna yfirráðum yfir

verðmætum endurnýtanlegum náttúruauðlindum. Einkaframkvæmdir

(samstarfsverkefni opinberra aðila og einkaaðila, e. PPP) innlendra og erlendra

aðila gætu verið hluti af verkefninu og nýtt sér ýmsar leiðir til áhættustýringar

sem margar hverjar tengjast fjármögnun og eignarhaldi. Tryggingar og lán frá

alþjóðafjármálastofnunum, svo sem Fjárfestingarbanka Evrópu (EIB) og

Norræna Fjárfestingarbankanum (NIB), gætu spilað lykilhlutverk þar að

lútandi. Export credit agencies (stundum kallaðar tryggingadeildir útflutnings)

gætu einnig boðið tryggingar gegn pólitískri áhættu. Aðrar lausnir snúa meðal

annars að tvíhliða fjárfestingarsamningum og mismunasamningum um

raforkusölu milli Íslands og Bretlands. Lokaverkefninu er ætlað að leggja mat á

þessar lausnir og segja til um hversu vel þær eiga við sæstrengsverkefnið. Ef

deilur koma upp eru nokkrar alþjóðastofnanir líklegar til að taka þátt í að leysa

þær. Þar ber einna helst að nefna Energy Charter Treaty og ICSID sem tilheyrir

Alþjóðabankanum. Í samningum um verkefnið er líklegt að tilgreint verði hvar

og hvernig deilumál verða leyst. Niðurstöðum slíkra mála gæti verið framfylgt

með The New York Convention.

Lykilorð: Pólitísk áhætta, áhættustýring, fjárfestingar yfir landamæri,

alþjóðaviðskipti, lausn deilumála.


vi

Table of contents

1 Introduction ............................................................................................................ 1

1.1 Current Research .............................................................................................. 2

1.2 Problem Statement ............................................................................................ 4

1.3 Research Objectives ......................................................................................... 4

1.4 Political Risk ..................................................................................................... 5

1.5 Institutions & Instruments of Political Risk Mitigation .................................. 6

1.6 Methodology ..................................................................................................... 7

1.6.1 Case Studies ........................................................................................................................ 7

1.6.2 Interviews ............................................................................................................................ 8

2 Iceland – UK Interconnector: A Brief Analysis of Possible Political Risk

Mitigation and Dispute Settlement ............................................................................. 9

2.1 Introduction ...................................................................................................... 9

2.2 Methodology ................................................................................................... 10

2.3 Political Risk Mitigation ................................................................................. 11

2.4 The State of Play ............................................................................................. 14

2.5 Dispute Settlement .......................................................................................... 16

2.6 Conclusion and Further Research ................................................................... 18

3 Iceland – UK Interconnector: Is Proper Political Risk Mitigation Possible? 19

3.1 Introduction .................................................................................................... 19

3.2 Possible Solutions ........................................................................................... 22

3.3 Ownership & Financing .................................................................................. 23

3.4 Dispute Settlement .......................................................................................... 28

3.5 Recent Experiences ......................................................................................... 30

3.6 Conclusion and Further Research ................................................................... 32


vii

4 Discussion .............................................................................................................. 34

5 Conclusion ............................................................................................................ 36

6 Practical Value ..................................................................................................... 38

7 References ............................................................................................................. 40

7.1 References: Iceland – UK Interconnector: A Brief Analysis of

Possible Political Risk Mitigation and Dispute Settlement ..................................... 40

7.2 References: Iceland – UK Interconnector: Is Proper Political Risk

Mitigation Possible? ................................................................................................ 44

7.3 References: Introduction ................................................................................. 50

7.3.1 Print Sources ..................................................................................................................... 50

7.3.2 Electronic Sources ............................................................................................................. 51

8 Appendix A .............................................................................................................. i

8.1 Conducted Interviews ........................................................................................ i

8.2 Consultations ..................................................................................................... i

9 Appendix B ............................................................................................................. ii

Table of figures

Figure 1: Possible interconnector scenario ............................................................ 12

Figure 1 .................................................................................................................. 24


viii

Abbreviations

BIT: Bilateral investment treaty

BOT: Build-operate-transfer

CfDs: Contracts for Difference

ECAs: Export credit agencies

ECT: Energy Charter Treaty

EIB: European Investment Bank

ICSID: International Centre for Settlement of Investment Disputes

IFIs: International Financial Institutions

NIB: Nordic Investment Bank

PPAs: Power-purchase agreements

PPP: Public Private Partnership

PRI: Political risk insurance

SCC: Stockholm Chamber of Commerce

UNCITRAL: United Nations Commision on International Trade Law


1

1 Introduction

The viability of the proposed electric interconnector between Iceland

and the United Kingdom has been debated for a long time but the discussion

has intensified in recent years. Countless factors play a role in the project but

this thesis will focus on the effects of political risk. Other factors, such as those

related to environmental and technological issues are also very important but

they will not be assessed in the thesis.

The thesis is mainly composed of two peer-reviewed articles on the

subject, written by the author, Andri Dan Traustason, in cooperation with

Professor Hilmar Þór Hilmarsson as co-author. The first one, titled: Iceland –

UK Interconnector: A brief analysis of possible political risk mitigation and

dispute settlement, was published in the Journal of Applied Management and

Investments and addresses some of the main political risk factors associated

with the proposed interconnector in a brief and concise way. The latter one,

titled: Iceland – UK Interconnector: Is proper political risk mitigation

possible?, was published as part of conference proceedings for the 5th

International Scientific Conference on Project Management in the Baltic

Countries. It covers many of the same issues but does so in a more detailed and

comprehensive manner. Moreover, the author delivered a presentation on the

subject, titled: The Iceland-UK Interconnector: A way to Prosperity or

Political Disaster?, in an open seminar at the University of Akureyri, hosted

by the School of Business and Science, Faculty of Business Administration. An

introduction was given by Professor Hilmarsson and a lively debate took place

during the seminar which might show that although people tend to disregard

political risks in developed countries, they understand its importance when

faced with relevant examples. The presentation was also delivered by Professor

Hilmarsson at the International Finance and Banking Conference – FIBA

2016 and the 5th International Scientific Conference on Project Management

in the Baltic Countries on behalf of both authors. The slides can be found in

Appendix B.

This introductory chapter will cover the origins of the thesis and

provide readers with some insight into current research, methodology and


2

political risk in general. Moreover, chapters outlining the results of the articles

and their practical implementations for the project will be included at the end

of the thesis.

At the time of writing, no critical assessment of political risks in the

proposed interconnector project has been carried out despite its apparent

importance. Therefore, the articles provided valuable information, which was

noted by many prominent members of the energy sector interviewed during the

research.

1.1.1 Current Research

A thorough literature review was conducted by the author for the

purpose of the thesis. The oldest article found on the subject was written in

1954 by Valgarð Thoroddsen, which was the director of RARIK, Iceland State

Electricity, at the time. He concluded that an interconnector between Iceland

and the United Kingdom was technologically impossible. However, it is also

interesting to note that many of the concerns about the project are the same

now as they were then, more than half a century ago. According to the article,

Valgarð had some reservations about the Icelandic infrastructure and Iceland’s

sovereign power over its resources as well as economic stability (Thoroddsen,

1954, pp. 5-7). Another article, published in 1955 in an engineering journal,

also covers the possibility of an interconnector. It specifies similar concerns

with the addition of those related to the price of electricity and opportunity cost

(Gíslason, 1955, pp. 14-16).

Contemporary news, academic and professional articles cover, for the

most part, the same set of concerns. Landsvirkjun, Iceland’s National Power

Company, has compiled a list on their website which covers much of the

available literature on the subject (Landsvirkjun, n.d.a; Landsvirkjun, n.d.b).

This list was included in the literature review. Much of the available literature

seems to focus on technological, financial and environmental factors, although

some very recent publications address political factors to some degree. Some of

the most important sources of information were reports and studies published

by institutions, governments or SOEs related to the project. These included

economic- and legal studies (Hagfræðistofnun Háskóla Íslands, 2013;

Atvinnuvega- og nýsköpunarráðuneytið, 2013b; Atvinnuvega- og

nýsköpunarráðuneytið, 2013a), reports on other interconnectors (National


3

Energy Authority of Iceland et al., 2016) and a number of articles in academic

journals and periodicals, many of which are cited in the thesis. Furthermore,

websites and other electronic sources proved to be crucial sources, mainly

because the project is in its feasibility stage and a limited amount of

information related to it has been published.

Current research on the subject mostly fails to address the effects of

political risk on the proposed interconnector properly. However, there is clear

reason to research the subject in detail because political risk can have a

significant effect on the project. This can be seen in recent cases in the energy

sector, mainly in Europe, which show that policy changes and political risk, in

general, can have a catastrophic effect on the feasibility of investments. These

cases play a fundamental role in the thesis and will be analysed in the enclosed

articles.

Most of the published material about the proposed interconnector

focuses on financial viability, environmental- and technological factors. As

noted before, these factors are important and will have to be assessed before

any significant decision is taken about the interconnector. However, the author

believes that this also applies to political risk factors as recent experiences

show us that they tend to be overlooked despite their importance.


4

1.2 Problem Statement

Political risk tends to be associated with emerging and developing

markets and much of the current research on the subject emphasises this. In the

case of the proposed interconnector, the two countries involved – Iceland and

the United Kingdom – are both developed high income western countries so

political risk plays a somewhat different role than in many other cases related

to it. Risk factors that affect the risk outlook of projects in developing countries

might not do so in western, developed countries. Consequently, the proposed

interconnector might primarily face political risks that are usually not the key

factors in cases related to political risk. Here the key risks are associated with

policy change within a developed country and also possible changes in EU

policy.

The scale of the project is huge for a small economy like Iceland, as the

articles below will cover in more detail, and any disputes originating from

policy changes or other aspects of political risk might have a significant effect

on the outcome of the investment.

Many different solutions might play a role in mitigating risk and

settling disputes if they were to occur. However, their applicability to the

proposed interconnector project will have to be assessed in depth for the right

decisions to be taken.

1.3 Research Objectives

The research carried out for the thesis is intended to analyse political

risk factors Iceland faces in this particular large-scale energy project and assess

the effects they may have. In addition, the viability of some risk mitigation

instruments, ownership scenarios and dispute settlement options is evaluated.

The research questions put forth in the second article, Iceland – UK

Interconnector: Is Proper Political Risk Mitigation Possible, are well suited for

the thesis as a whole and are as follows: ‘Is proper risk mitigation possible for

the Iceland – UK electricity interconnector?’ and ‘What would be possible

venues for dispute settlement?’ The two articles and the chapters that follow


5

outline the major findings of the research and attempt to answer the research

questions.

1.4 Political Risk

There are various definitions of political risk which differ considerably.

For the purpose of this thesis, many definitions were concidered and evaluated

with regard to the problem at hand. Many of the available definitions deal

mainly with emerging markets and developing countries. Therefore, special

attention has to be given to assess if the definitions are relevant or not. One

example of a definition that is hardly relevant to the project at hand is the

following: “The uncertainties that arise from instances of political instability

(such as riots and coups), of poor public policy (such as inflation and currency

crises), and weak institutional frameworks (such as discriminatory regulations

and ineffective legal systems)” (Wagner, 2012, p. 241). It is a prime example

of a definition that applies to emerging markets and as such, it provides a

useful contrast to those that apply to investments between two developed

countries, such as Iceland and the UK. Another definition that is still aimed at

emerging markets is this following, “Risks usually comprising currency

inconvertibility, expropriation, war and insurrection, terrorism, non-

government activists, and legal and administrative approvals” (Delmon, 2009,

p. 598). The last part that deals with legal and administrative approvals is

relevant to the project at hand. In more general terms, political risk can be

defined as “…the probability of disruptions in company operations by political

forces and events” (The World Bank Group [International Finance Corporation

& Multilateral Investment Guarantee Agency], 2012, p. 1).

None of these definitions emphasise regulatory changes enough for the

project at hand. According to Smith (1997, p. 46), the root cause of political

risk is the response of governments to public pressure and changing

circumstances. He differentiates political risk from traditional commercial risk

by saying that relevant uncertainties in the marketplace must be proximately

caused by governments or government agents for it to be considered political

risk. Jeswald W. Salacuse, one of the foremost experts on the subject, has

stated that “A sudden, unexpected change in the rules is a principal form of


6

political risk, perhaps its very essence” (Salacuse, 2010, p. 450). These latter

definitions are appropriate for the thesis because they cover policy- and

regulatory changes in greater detail. It must be noted that it seems unlikely that

a revolution, coup or acts of war will disrupt the relationship between Iceland

and the UK and negatively affect the interconnector’s feasibility. However,

regulatory changes, shifts in renewable energy policies and similar factors are

much more likely to be relevant to the project. For the purpose of the thesis, the

following definition of political risks will be used: Unexpected government

policy changes1 that may adversely affect company operations/projects.

1.5 Institutions & Instruments of Political Risk

Mitigation

The following articles mention a number of different institutions and

instruments that might play a role in mitigating political risk in the proposed

interconnector project. In order to fully understand the possible role of

conventional PRI in the project, a concrete definition of the subject has to be in

place. The author believes that the following is a prime definition of the

concept that is fully congruous with the project at hand.

Political risk insurance (PRI) is a specialized line of insurance that protects traders, investors, and lenders against non-commercial risks that interfere in the successful completion of trade contracts, the ability to own or operate investments successfully, or to service debt under the terms of a loan agreement (Wagner, 2012, p. 97).

Wagner (2012, p. 97) goes on to state that in the “…context of PRI, political

risks are arbitrary or discriminatory actions, taken by home or host

governments, political groups, or individuals, that have an adverse impact on

international trade or investment transactions”. Given the definitions of

political risk, mentioned before, it seems clear that Wagner’s definition of PRI

should comply with the thesis. However, it is unclear to what degree PRI could

be used in the interconnector project as the majority of cover is in developing

countries and its use in western countries is not as common (MIGA, The World

1 In this context, government policy changes can also originate in the European Union, as the United Kingdom is a member state and Iceland is a member of the EEA.


7

Bank Group, 2014, p. 30). National export credit agencies have, despite this,

guaranteed some investments in Iceland, as the articles will clarify further.

International financial institutions, such as the European Investment

Bank and the Nordic Investment Bank, may provide guarantees in addition to

loans (European Investment Bank, n.d.a.; Nordic Investment Bank, 2015).

Therefore, they may be very beneficial in the proposed interconnector project,

as is noted in the following articles. A more detailed account of both

institutions is included in the latter article.

1.6 Methodology

1.6.1 Case Studies

The thesis is mainly based on the review of academic literature, reports

from companies and institutions, including international organizations as well

as interviews and consultations with experts in Iceland and abroad. The

methodology used in the research is the case study method. Compared to other

research methods, a case study enables the researcher to examine the issues

involved in greater depth. According to Yin (2014, p. 105), six sources of

evidence are most commonly used in case studies. These are documentation,

archival records, interviews, direct observations, participant-observation and

physical artefacts. Each of these sources has advantages and disadvantages and

according to Yin (2014, p. 105), one should “…note that no single source has a

complete advantage over all the others. In fact, the various sources are highly

complementary, and a good case study will therefore want to rely on as many

sources as possible”.

Numerous relevant cases for clean energy investments were studied to

provide some insight into the problem at hand. As the proposed interconnector

is unique in terms of scale in general, none of the cases observed can be

directly compared to the project although they were relevant in some ways. For

instance, other interconnectors were looked at, even though they were neither

of the same scale nor type. Different factors of different cases were observed

with certain aspects of the proposed interconnector in mind.


8

1.6.2 Interviews

As one of the most important sources of case study evidence, interviews

are commonly found in case study research. In most such cases, they are in-

depth interviews and as such, they are not rigid surveys but rather guided

conversations (Yin, 2014, p. 110). This was the case in all the interviews

conducted for the purpose of the thesis. Many prominent individuals were

interviewed in order to acquire some insight into the complex political

environment surrounding the proposed interconnector. All these interviews

classify as ‘shorter case study interviews’ rather than ‘Prolonged case study

interviews’.

The vast majority of the information gathered was entirely confidential

as the project is still in the feasibility stage. However, the interviews did

provide an overview of all the information gathered, as many of the

interviewees were able to connect many different sources of information.

Consequently, the interviews were vital for the outcome of the research.


9

2 Iceland – UK Interconnector: A Brief

Analysis of Possible Political Risk

Mitigation and Dispute Settlement2

2.1 Introduction

There is growing debate regarding the feasibility of an electricity

interconnector between Iceland and the United Kingdom. Many different

factors play a role when assessing the feasibility of this project but this article

will mainly focus on the political risks associated as well as ways to mitigate

those risks. Furthermore, ways to seek arbitration and settle disputes will be

reviewed. The article will attempt to answer the following research question:

What are the political risks that Iceland could be confronted with regarding the

Iceland – UK interconnector project and how can they be mitigated?

Large scale energy projects, such as the proposed interconnector, take a

long time to develop and construct. Moreover, the operating lifetime of these

investments can be 20-30 years. Consequently, political risks need to be

assessed with a few decades in mind. Numerous reports and research papers

have been published evaluating the feasibility of the interconnector but after

conducting a literature review the authors did not find any comprehensive

critical assessment of the political risks associated with this project.

Landsvirkjun, Iceland’s national power company, has compiled a

comprehensive list of news as well as reports and other material about the

project on their website (Landsvirkjun, n.d.a; n.d.b) All of this information data

was included in the review.

An interconnector can be defined as “…a cable or overhead line

connecting two separate market or pricing areas” (Turvey, 2006, p. 1457).

This particular interconnector is somewhat special in terms of its scale. It is

estimated to be over 1000km in length and have a transmission capacity of

800-1200MWh DC (Landsvirkjun, n.d.a). Furthermore, it needs a significant

2 Traustason, A. D., & Hilmarsson, H. Þ. (2016). Iceland-UK Interconnector: A Brief Analysis of Possible Risk Mitigation and Dispute Settlement. Journal of Applied Management and Investments, 5(1), 66-74.


10

amount of investment in Iceland to become economically feasible. The total

investment can be roughly divided into three sections as follows:

The interconnector itself along with landing and launching stations in

Iceland and the United Kingdom.

Strengthening of the national grid in Iceland, needed to cope with the

increased flow of electricity due to the interconnector.

The upgrade of current power stations in Iceland, in addition to the

construction of new ones, needed to increase electricity supply.

The total cost of the project has yet to be determined but numerous parties have

come up with some estimates. For instance, according to a report made for the

Ministry of Industry and Innovation (Iceland) the investment needed ranges

from 288 to 553 billion ISK (Hagfræðistofnun Háskóla Íslands, 2013).

Bloomberg New Energy Finance introduced a significantly higher sum of up to

813 billion ISK, or 4.327 billion GBP (as cited in Gíslason, 2014 [using current

exchange rates]). It is clear that regardless of the final cost, investment in the

project will be large, especially for a small economy like in the case of Iceland.

It would amount to a large portion of the country’s gross domestic product,

possible about 30 percent (Sigurðsson, 2014). The United Kingdom, on the

other hand, is one of the largest European economies in terms of GDP (World

Bank, 2015). Therefore it would likely find the investment’s risks more

manageable.

2.2 Methodology

Numerous relevant cases were studied to provide some insight into the

problem at hand. The methodology used in this article is the case study

method. Compared to other research methods, a case study enables the

researcher to examine the issues involved in greater depth. According to Yin

(2009, pp. 103-105) six sources of evidence are most commonly used in case

studies. These are: documentation, archival records, interviews, direct

observations, participant-observation, and physical artefacts. Each of these

sources has advantages and disadvantages and according to Yin one should

“…note that no single source has a complete advantage over all the others. In


11

fact, the various sources are highly complementary, and a good case study will

therefore want to rely on as many sources as possible” (2014, p. 105).

Information from international institutions, government institutions and

companies as well as academic journals played a key role in this article.

Furthermore, leading experts in the field at Harvard Business School, John F.

Kennedy School of Government, Fletcher School of Law and Diplomacy and

the University of Iceland were consulted. They provided valuable comments

and ideas.

2.3 Political Risk Mitigation

Political risks can be defined as “Risks usually comprising currency

inconvertibility, expropriation, war and insurrection, terrorism, non-

government activists, and legal and administrative approvals” (Delmon, 2009,

p. 598). Furthermore, Salacuse states that ”[a] sudden, unexpected change in

the rules[i.e. laws and regulations] is a principal form of political risk, perhaps

its very essence “ (2010, p. 450). Risk associated with changes in policy,

regulation and law is especially important for the interconnector given the

probable importance of Contracts for Difference (CfD). These contracts are

supposed to make investment in renewable energy more attractive by partly

guaranteeing revenue. In practice this has been done in the UK by paying a

variable top-up payment that amounts to the difference between the market

price on a yearly basis and a fixed strike price (Department of Energy and

Climate Change, 2013). The whole project could likely rely on such a scheme.

Landsvirkjun has shown interest in studying those contracts further

(Landsvirkjun, 2013). Although it is not the only supplier of electricity in

Iceland Landsvirkjun, a state owned enterprise, is by far the largest

(Orkustofnun, n.d.). Consequently, any decisions on this project in Iceland are

likely to be influenced by Landsvirkjun in some way, not only because of its

importance as an electricity supplier but also due to its expertise and research

in recent years.

Many other interconnectors rely on other methods to acquire revenue,

sometimes without a long term revenue guarantee. One example is the NorNed

interconnector between Norway and the Netherlands which relies on price


12

variation between energy markets to secure a profit, rather than long term

contracts. Interconnectors of this type are called merchant interconnectors

(Parail, 2009). The scale of the project is huge for Iceland, as noted before, and

it is crucial that the ownership and planning of the project minimise risk for the

Icelandic nation and maintain Iceland’s sovereign power over its clean energy

sources. A possible scenario to mitigate risk can be seen in figure 1.

Figure 1: Possible interconnector scenario

In this scenario the interconnector is operated, owned and financed by a project

company which would most likely be some sort of a public private partnership.

It would not be owned by Landsvirkjun or the government of Iceland. A public

private partnership can be defined as an “…arrangement between public and

private entities for the delivery of infrastructure services and are seen as a way

of raising additional funds for infrastructure investments but more importantly

as a means to extend or leverage better budget funding through efficiency

gains” (Delmon, 2009, p. 7). The PPP would serve as a project company for

the interconnector and be guaranteed by the UK government which might also

provide guarantees for the necessary infrastructure investments in Iceland. In

regard to the construction of new hydro and geothermal power stations in

Iceland, needed to increase supply of electricity, a BOT (build-operate-

transfer), financed by private investors, might be feasible. A BOT is a form of

investment where “…the project is transferred back to the party granting the

concession [in this case the Icelandic government or its SOEs]” (Delmon,

2009, p. 552). The BOT project would pay a fee to the Icelandic government

for the use of resources during the investment’s lifetime. The project company

would arrange a take-or-pay contract with energy suppliers in Iceland.


13

According to Holland and Ashley “…take-or-pay clauses require a purchaser

to pay for a minimum quantity of goods or services [i.e. electricity], whether or

not those goods or services are taken.” (2013, p. 205). The project company

would thus assume the demand risk. A guaranteed minimum amount of

electricity would in turn be transferred via the interconnector to consumers in

the UK at an agreed price. This revenue guarantee could be provided with a

CfD or other means. In addition, the project company would pay a fee to

Landsnet, Iceland’s national grid. These fees need to cover the cost of

investment and acceptable returns. Under the current law, it seems unlikely that

the necessary upgrade of Iceland’s national grid could be financed with foreign

investment (Raforkulög nr. 65 , 27. mars 2003). However, foreign investors

could take part in the upgrade of current power stations.

Two international institutions in particular seem likely take part in

infrastructure financing of this sort. The European Investment Bank has a wide

range of financial instruments on offer and might provide loans and guarantees

to support this project. The bank puts a special emphasis on infrastructure and

climate friendly projects and has already lent close to 780 million EUR in

Iceland, most of which to renewable energy projects in recent years (European

Investment Bank, n.d.a; n.d.b). EIB also provides guarantees which can in turn

lower the cost of financing projects (European Investment Bank, n.d.c).

Another institution, of which Iceland is a founding member and part-owner, the

Nordic Investment Bank, might also play some role in this regard (Nordic

Investment Bank, n.d.). National export credit agencies could provide

guarantees for trade finance related to the project (Dinh & Hilmarsson, 2014;

Goncharuk, 2015).

The scenario in figure 1 could allow the private sector to take part in the

project and thus shift risks from the Icelandic government, its SOEs and the

Icelandic nation to the UK government and the consumers in the UK. Efficient

allocation of risks is key to the success of the project and the UK government

is in the best position to prevent risk events, such as energy policy changes in

the UK that could negatively affect the feasibility of the interconnector, from

occurring. Therefore it should be willing to assume most of the risks involved.

This might seem far-fetched but renewable energy projects seem to have a

momentum and strong political backing in the UK. This can be seen in a recent


14

case where the UK government partly insured a large nuclear energy project

(EDF Energy, 2015). Whether or not they would be willing to do the same for

foreign investment remains unclear. It must be noted that the abovementioned

scenario is only one of numerous possibilities. The project is still in the

feasibility stage so many factors remain unclear. However, it is certain that

Iceland’s comparative advantage lies in its resources – not economic power

and ability to take on risks or provide funding.

2.4 The State of Play

Political and commercial relations between the two countries, Iceland

and the UK, have normally been good. However, there have been some major

exceptions. Perhaps the most prominent ones are the Icesave dispute and the

Cod Wars. The more recent one revolved around Icesave during and following

the 2008 crisis. One of the measures undertaken by the UK was activating the

Anti-terrorism, Crime and Security Act of 2001 (Méndez-Pinedo, 2011)

against Iceland. During the dispute Iceland was largely isolated and without

friends. Major central banks such as the European Central Bank, the Bank of

England and the Federal Reserve refused to assist. The limited support

provided by Nordic Central Banks proved inadequate. This shows that Iceland

cannot rely on “friendly” nations during times of crisis and political disputes

with a larger nation such as the UK (Hilmarsson, 2015). The former conflict,

known as the Cod Wars, occurred between 1952 and 1976 when Iceland

expanded its fishery territories. This led to the intervention of the British Royal

Navy (Hellmann & Herborth, 2008) and an unprecedented act given that both

nations are NATO member states.

Disputes in the energy sector in Europe have occurred in recent years

due to shifts in government policies, for instance in Spain and Germany. These

cases show that energy policies can change fast and have a detrimental effect

on the feasibility of investments in the energy sector. Spain used a support

system of feed-in tariffs and other subsidies to promote renewable energy

generation. The first steps were taken around 1980 and subsequent steps led to

a highly subsidised renewable energy sector (Gonzáles, 2008). What followed

was a huge increase in renewable energy generation (Bridle & Beaton, 2012).


15

Consequently, the cost of the system increased and eventually the Spanish

government introduced policy changes to counter the problem. This included

cutting subsidies and increasing taxation on renewable energy suppliers,

thereby removing one of the main incentives that attracted investors to the

sector in Spain. Consequently, a large number of investor claims versus the

Spanish government were filed for arbitration. Many of these claims used

provisions provided by the Energy Charter Treaty which will be discussed

later in the article (Baltag, 2015; White, 2013; Rucinski & Rodríguez, 2013).

A similar scenario occurred in Germany following the 2011 Fukushima

nuclear disaster. A shift in policy by the German government resulted in the

phase out of nuclear energy, earlier than had been announced before, and

included the immediate shut down of some old reactors. Vattenfall, owned by

the Swedish government, owned two of these reactors and filed for arbitration

before the International Centre for Settlement of Investment Disputes (ICSID)

because of the losses associated. The arbitration is listed under the Energy

Charter Treaty but further details are mostly confidential (Vattenfall AB and

others v. Federal Republic of Germany (ICSID Case No. ARB/12/12))

(Bernasconi-Osterwalder & Brauch, 2014) (ICSID, n.d.a). This case is known

as ‘Vattenfall v Germany II’ because an earlier case, now known as ‘Vattenfall

v Germany I’ had already been settled with the ICSID. That case, much like the

latter, came to because of a policy change. However, the origin of the dispute

lay in conditions set forth by the EU rather than the German government

(ICSID, n.d.b; Bernasconi, 2009; Vattenfall AB and others v. Federal Republic

of Germany (ICSID Case No. ARB/09/6)).

These cases are relevant to the proposed interconnector in many ways.

They show how political risks, in these cases policy changes or even

expropriation, can change the environment which investors entered into and

negatively affect the feasibility of the project. Something similar might very

well occur during a long term project such as the Iceland-UK interconnector.

They also show what possibilities are available for arbitration, although the

outcome is somewhat unclear as many cases are still pending and arbitration

awards in concluded cases are often confidential.


16

2.5 Dispute Settlement

If disputes do occur, numerous different options are available for

arbitration between a PPP/investor and a state. The Energy Charter Treaty,

which has been mentioned before, could possibly be a player in that regard,

due to the fact that both Iceland and the UK have signed the treaty. Although

the genesis of the charter lies in cooperation between Eastern and Western

Europe it spans a much wider range today. Hobér states that the ECT is “…the

only binding multilateral instrument dealing with inter-governmental

cooperation in the energy sector, and contains far-reaching undertakings for

the contracting parties. The ECT includes provisions regarding investment

protection, provision on trade, transit of energy, energy efficiency and

environmental protection and dispute resolution.” (2010, p. 155). Therefore it

seems clear that in the case of disputes, the ECT could prove beneficial. This is

emphasised further by the fact that there is currently no bilateral investment

treaty between Iceland and the UK (Kluwer Law International, 2016). Surely,

many of the factors mentioned above, in addition to financing, ownership and

general operation of the interconnector, will be addressed in a bilateral contract

made especially for the project. The contract could be made between the

energy suppliers and a PPP or other contracting parties including the two states

involved. It might also state where and how disputes should be settled. If

provisions from the ECT are used, a few forms of international arbitration are

available (Hobér, 2010).

Perhaps the most prominent one, the International Centre for Settlement

of Investment Disputes (one of the five institutions of the World Bank), has

already shown its merit in the cases above. Iceland and the UK are both

members (ICSID, n.d.d). It uses a number of instruments for arbitration in

disputes between member states and nationals of other member states, i.e.

investors. It does however, not make procedural rulings. The ICSID website

states that “Independent conciliation commissions and arbitral tribunals

constituted in each case are vested with the power to rule on procedural issues

and resolve the parties’ dispute (ICSID, n.d.e). ICSID keeps a regularly

updated list of cases on their website. A large number of cases are listed with

the ECT as an invoked instrument, many of which are between two developed


17

parties from Western Europe (ICSID, n.d.c). In addition to ICSID, the ECT can

use UNCITRAL and the Arbitration Institute of the Stockholm Chamber of

Commerce to settle disputes (Hobér, 2010). The New York Arbitration

Convention could also prove useful as Iceland and the UK are both members

(The New York Arbitration Convention, n.d.). Further research is needed to

analyse other options available.


18

2.6 Conclusion and Further Research

Given the state of the energy sector in Europe, in addition to historical

relations between Iceland and the United Kingdom, it certainly seems

important to study political risks that may affect the feasibility of the proposed

interconnector. Ownership and financing of the interconnector along with

related infrastructure, may become a predominant risk factors. Contracts for

difference, possibly offered by the UK government, might help improve the

project’s feasibility in addition to mitigating some risk. These contracts might

also increase the project’s vulnerability in the event of regulatory changes in

the UK. The terms of the project have yet to be determined as it is still in the

feasibility stage. A bilateral contract could consider many of the associated

political risks. If disputes occur, a few well recognised organisations offer

international arbitration between PPPs and states, notably the Energy Charter

and ICSID. However, there are numerous other institutions that also offer

arbitration, though they have not been as prominent in recent cases.

This brief analysis has covered some of the ways available to mitigate

political risks related to the proposed interconnector between Iceland and the

UK. There are, of course, many other risk factors associated with the project,

including environmental and technical risks. In addition, legal issues are not

covered in detail. These factors are all subjects that need to be researched

further and in greater detail.


19

3 Iceland – UK Interconnector: Is

Proper Political Risk Mitigation

Possible?3

3.1 Introduction

The proposed interconnector is by no means a new idea (Thoroddsen,

1954; Gíslason, 1955). It has been contemplated for decades but due to various

issues, including technical and financial concerns, it has not been seriously

considered until in recent years. Landsvirkjun, Iceland’s National Power

Company, has compiled a list of reports, news and other literature related to the

proposed interconnector on their website (Landsvirkjun, n.d.a; Landsvirkjun,

n.d.b). A literature review, carried out by the authors, included this list among

other relevant literature. According to this review, the vast majority of articles

on the subject cover the economic and financial aspects of the interconnector as

well as environmental and technical factors. Current research on the subject

therefore apparently fails to address political risks properly, even though

serious incidents have occurred in the history of the two nations. Political and

commercial relations between Iceland and the UK are normally good, as is

usually the case between two western nations, but there have certainly been

some major exceptions. Serious disputes have erupted in the past, for instance

the Cod Wars, when Iceland expanded its fishery territory, (Hellmann &

Herborth, 2008) and more recently, the Icesave dispute when the UK activated

the Anti-terrorism, Crime and Security Act of 2001 against Iceland (Méndez-

Pinedo, 2011). During the Icesave dispute, Iceland was largely isolated and

without friends. Major central banks such as the European Central Bank, the

Bank of England and the Federal Reserve refused to assist. The limited support

provided by Nordic Central Banks proved inadequate. This shows that Iceland

cannot rely on allies during times of crisis and political disputes with a larger

3 Traustason, A. D., & Hilmarsson, H. Þ. (2016). Iceland – UK Interconnector: Is Proper Political Risk Mitigation Possible? Project Management Development – Practice and Perspectives (pp. 350-363). Riga: University of Latvia / Professional Association of Project Managers.


20

nation such as the UK (Hilmarsson, 2015; Goncharuk, 2016). Both disputes

had serious economic and political consequences for Iceland.

Furthermore, numerous disputes have arisen due to shifts in government

policies within the energy sector in Europe in recent years, some of which had

serious consequences for the parties involved. It is therefore clearly important

to assess the political risks involved and contemplate possible solutions.

Because of the large scale and long operating lifetime of the interconnector,

incidents such as those mentioned above cannot be overlooked, and studies that

do not take political risk properly into account are insufficient to make a final

decision about the feasibility of Iceland’s participation in this project.

An electricity interconnector, such as the one in question here can be

defined as “… a cable […] connecting two separate market or pricing areas”

(Turvey, 2006, p. 1457). This kind of energy projects tend to be very large and

with long repayment periods. As a result, they face political risks that may

adversely affect their viability (Bankes, 2012). The investment needed for this

particular project can be roughly divided into three different phases. Those

phases differ considerably in terms of required funding and scale but all must

be taken care of to get the 1000km long 800-1200MWh DC interconnector

operational (Landsvirkjun, n.d.a). The phases are as follows:

Investment needed to upgrade and increase the supply of electricity in

Iceland, including the construction of geothermal and hydro-electric

plants.

Investment related to the strengthening of the national grid and the

construction of launching and landing stations.

Investment to construct the interconnector.

The total amount of investment needed for the interconnector is not

certain but for the last few years, numerous different parties have come up with

estimates. For instance, The Institute of Economic Studies at the University of

Iceland stated that the total investment needed ranged from 288 to 553 billion

ISK (Hagfræðistofnun Háskóla Íslands, 2013). Bloomberg New Energy

Finance suggested a considerably higher estimate of up to 813 billion ISK or

4.327 bnGBP (as cited in Gíslason, 2014 [using current exchange rates]). It


21

seems likely that the total investment will be in excess of 4 bnGBP, of which a

significant portion will be allocated to grid connections and upgrades, power

plants and related infrastructure. Björgvin Skúli Sigurðsson (2014, p. 26),

executive vice president for the Marketing and Business Development division

at Landsvirkjun, notes that although the investment is huge compared to the

Icelandic economy (the average estimate of 553 bnISK is roughly 30% of gross

domestic product) this certainly is not the case for the UK, a much larger

player in the global economy.

The main subject of this article is to analyse the important role of

political risks in this particular energy project and consequently look at

available risk mitigation instruments and venues for dispute settlement.

Moreover, the article will seek ways to answer the following research

questions: Is proper risk mitigation possible for the Iceland – UK electricity

interconnector? What would be possible venues for dispute settlement? While

this article focuses on political risks, numerous other types of risks are

apparent, such as technical, financial, economic and environmental, which are

not the subject of this article.

In an attempt to answer these research questions, information was

collected from many different sources including – but not limited to –

international financial institutions (IFIs), government institutions and state-

owned-enterprises (SOEs). In addition, leading experts within the field at

Harvard Business School, John F. Kennedy School of Government, Fletcher

School of Law and Diplomacy, Landsvirkjun and University of Iceland were

consulted.

Numerous relevant cases for clean energy investments were studied to

provide some insight into the problem at hand. The methodology used is the

case study method. Compared to other research methods, a case study enables

the researcher to examine the issues involved in greater depth. According to

Yin (2014), six sources of evidence are most commonly used in case studies.

These are documentation, archival records, interviews, direct observations,

participant-observation and physical artefacts. Each of these sources has

advantages and disadvantages and according to Yin (2014, p. 105), one should

“…note that no single source has a complete advantage over all the others. In


22

fact, the various sources are highly complementary, and a good case study will

therefore want to rely on as many sources as possible”.

3.2 Possible Solutions

A wide variety of factors affect the risk profile of this project.

Ownership and financing of the interconnector and related infrastructure play a

key role in that regard. This needs to be settled in such a way as to minimize

political risks without compromising an acceptable return for the investment.

Besides solutions related to ownership and financing, preliminary results

suggest a few possible options available for the Iceland – UK interconnector

which also include ways to settle disputes, should they occur:

A well-established power purchase agreement and/or Contracts for

Difference, possibly offered by the UK government, could mitigate some

risks.

Other risk mitigation solutions could include serious arbitration provisions

in the agreement that both parties find appropriate. This could be included

in a bilateral investment treaty between Iceland and the United Kingdom.

Currently, there is no bilateral investment treaty between the countries

(Kluwer Law International, 2016)

Dispute settlement under the Energy Charter Treaty, which Iceland and the

United Kingdom have both ratified (Energy Charter, n.d.a). Dispute

settlement via the International Centre for Settlements of Investment

Disputes (ICSID) of the World Bank, of which Iceland and the United

Kingdom are both members (International Centre for Settlement of

Investment Disputes, n.d.a). Other forums of international arbitration

might also be beneficial. Awards would be subject to the New York

Convention.

Other options that deal with financing, as well as risk mitigation, might

include export credit agencies and investment banks, such as the European

Investment Bank and the Nordic Investment Bank. By providing loans and

guarantees, they might assist in the financing of the project and lower risk

premiums.


23

Ownership and financing of the proposed interconnector, as well as related

infrastructure, has yet to be determined. After these factors are settled and the

terms of the project are agreed, it is crucial that all commitments and

agreements will be honoured by both parties throughout the contract period.

Any large and unexpected changes in the policy, including laws or regulations

of the participating countries, might be detrimental. Such changes are a

principle form of political risk according to Salacuse (2010) and may even be

the essence of it. In more general terms, political risk can be defined as “…the

probability of disruptions in company operations by political forces and

events” (The World Bank Group [International Finance Corporation &

Multilateral Investment Guarantee Agency], 2012).

3.3 Ownership & Financing

As stated before, ownership can have a significant impact on the

project’s political risk profile. Due to the enormous scale of the project, it

seems clear that the Icelandic government and its institutions or SOEs have

neither the capabilities nor the will to invest in the project directly and

consequently take on the risks that follow. In light of these circumstances the

authors believe that a likely outcome is that the project will be a public-private

partnership of some kind. A public-private partnership can be defined as an

"…arrangement between public and private entities for the delivery of

infrastructure services and are seen as a way of raising additional funds for

infrastructure investments but more importantly as a means to extend or

leverage better budget funding through efficiency gains (Delmon, 2009, p. 7).

In fact, numerous private investors – mainly, Atlantic Superconnection

Corporation, Powerbridge LLC and Starwood Energy Group – have been

named as companies showing interest in taking some part in the project

(Eysteinsson, 2015). A possible ownership scenario, incorporating the private

sector, can be seen in figure 1, below.


24

4 Figure 1

According to this scenario (figure 1), the interconnector would be

operated, owned and financed by a project company which would be some sort

of a public-private partnership without the direct involvement of the Icelandic

government or its SOEs. The PPP would serve as a project company for the

interconnector and have a state-guarantee from the UK government that could

be critical for its capital mobilization efforts. Investment-guarantees for

necessary infrastructure in Iceland might also be provided by the UK

government, as was done in a recent project in the UK5. These infrastructure

investments could include the construction of new hydro and geothermal power

stations in Iceland in addition to the upgrade of current utilities. In order to

enable private investors to take part in these investments, a Build-Operate-

Transfer (BOT)6 arrangement might be feasible. To be able to secure a steady

supply of electricity to the UK, the project company would arrange take-or-

pay7 contracts with renewable energy suppliers in Iceland and therefore assume

the demand risk. These take-or-pay arrangements would have a UK

government guarantee.

A guaranteed minimum amount of electricity would, in turn, be

transferred via the interconnector to consumers in the UK at an agreed

minimum price. This revenue guarantee could be provided with a power

purchase agreement, Contracts for Difference or perhaps some other means. In

4 Figure constructed by the authors. 5 The UK government recently provided a 2 billion GBP guarantee for a large nuclear energy project (EDF Energy, 2015). 6 A BOT is a form of investment where "…the project is transferred back to the party granting the concession [in this case the Icelandic government or its SOEs]” (Delmon, 2009, p. 552). 7 According to Holland and Ashley “…take-or-pay clauses require a purchaser to pay for a minimum quantity of goods or services [i.e. electricity], whether or not those goods or services are taken.” (2013, p. 205).


25

addition, the project company would pay a fee to Landsnet, Iceland’s national

grid. These fees need to cover the cost of investment with acceptable returns

and be guaranteed by the UK government. Under the current law, it seems

unlikely that the necessary upgrade of Iceland’s national grid could be financed

with foreign investment (Raforkulög nr. 65 , 27. mars 2003). The scenario in

figure 1 could enable the private sector to take part in the project and thus shift

risks from the Icelandic government, its SOEs and the Icelandic nation to the

UK government and the consumers in the UK. Efficient allocation of risks is

key to the success of the project and the UK government is in the best position

to prevent such political risk events from occurring. Those events could include

energy policy changes in the UK that might negatively affect the feasibility of

the interconnector. Therefore, it should be willing to assume most of the

political risks involved.

Power purchase agreements (PPAs) are frequently used when

participating parties face considerable uncertainty. In some cases, it is unclear

whether supply will meet demand or if the spot prices are high enough to

secure the necessary minimum revenue. These are some of the main reasons

for the use of PPAs in energy projects according to the Public Private

Partnership in Infrastructure Resource Center (n.d.). One might assume this to

be the case with regard to the proposed interconnector. As a very large and

expensive long term project, it might be very sensitive to price changes

whether they stem from increased competition or other risk factors.

In addition to PPAs, it is worth mentioning that the United Kingdom's

Department of Energy and Climate Change offers Contracts for Difference

(CfDs) as part of the Electricity Market Reform programme which is meant to

make investments in renewable energy more attractive. The CfDs are at the

core of the programme and ensure that the generation of energy from

renewable resources is economically feasible by paying the variable difference

between the market price and a fixed price, i.e. the strike price. Consequently,

investor uncertainty is lowered and financing ‘green’ projects becomes cheaper

(Department of Energy and Climate Change, 2013).These contracts were

introduced as part of the Energy Act in 2013 which is “An Act to make

provision for the setting of a decarbonisation target range and duties in

relation to it”(Energy Act 2013, p. 1).


26

The importance of CfDs for the project seems to be considerable.

Landsvirkjun has shown interest in studying these contracts further

(Landsvirkjun, 2013). Although it is not the only supplier of electricity in

Iceland, Landsvirkjun – an SOE – is by far the largest (Orkustofnun, n.d.).

Consequently, any decisions on this project in Iceland are likely to be

influenced by Landsvirkjun in some way, not only because of its importance as

an electricity supplier, but also due to its expertise and research within the

renewable energy sector. Furthermore, other potential investors, such as the

Atlantic Superconnection Corporation, have stated that CfDs play a key role in

the project’s revenue stream (Atlantic Superconnection Corporation, 2014).

One might argue that it is essential for the feasibility of the

interconnector to secure such a contract and the revenue guarantees that follow.

While that may be true, they might also increase the effect of political risks on

the project. The consequences of government action, such as policy changes,

could seriously undermine the feasibility of the interconnector. The likelihood

of these events occurring might be high. In fact, the UK government recently

made changes to its renewables subsidies in order to cut costs (Department of

Energy & Climate Change and The Rt Hon Amer Rudd MP, 2015). It is

essential that any contracts about the project include provisions that cover this

possibility. Despite this, CfDs remain a possibility and might play an integral

role in the first stages of negotiation about the project.

Securing a revenue stream is not the only aspect of getting the project

operational. It must be financed as well. How this will be done is unclear but

preliminary results suggest a few possible options in addition to equity funding

and loans from private investment banks. Some IFIs, such as the European

Investment Bank (EIB) and the Nordic Investment Bank (NIB) provide

financing as well as risk mitigation instruments, i.e. guarantees. The EIB,

which is entirely owned by member states of the European Union, mainly

provides loans but may also provide guarantees. According to Matsukawa &

Habeck (2007, p. 45), the EIB provides the following instruments: “Inside EU:

EIF loan guarantees, microcredit guarantees, equity guarantees, and loan

guarantee. Outside EU: political risk carve-out on guarantees to EIB […];

credit enhancement guarantees by EIB to assist local borrowers to raise funds;

portfolio credit risk sharing with local banks”. These instruments are available


27

to large as well as small projects for private and public beneficiaries.

Guarantees such as those mentioned can be beneficial for projects in addition

to possible loans from the EIB. The benefits mainly stem from lower capital

charges and greater value added (European Investment Bank, n.d.a.). Whether

or not these solutions from the EIB would be available for the interconnector

remains to be seen. Furthermore, it is unclear if the parties involved would

choose to approach the EIB at all. However, it is clear that the EIB has already

financed numerous projects in Iceland for around EUR 780 million, most of

which (EUR 650 million) were associated with renewable energy production

(European Investment Bank, n.d.). The EIB has attached high priority to clean

energy projects in recent years.

Another IFI worth noting is the Nordic Investment Bank. Just as

the EIB, it offers long-term loans and guarantees that can support capital

mobilization. Its main area of operation is the Nordic and Baltic region. The

NIB attaches special emphasis on the development of clean energy projects and

environmentally friendly solutions in general (Nordic Investment Bank, 2015).

One might assume that the export of energy from renewable resources fits the

emphasis well.

In addition to this, national export credit agencies could also take part in

the project and provide guarantees for related trade finance (Dinh &

Hilmarsson, 2014). A recent example of this occurred when Japan Bank for

International Cooperation took part in the financing of a renewable energy

project in Iceland in cooperation with other financial institutions

(Landsvirkjun, 2015).


28

3.4 Dispute Settlement

Where and how disputes can be settled is likely to be included in the

agreements related to the project. This might be a bilateral investment treaty

between Iceland and the UK, which – as noted before – is non-existent at the

moment, or a contract made on an ad hoc basis for the interconnector project.

Numerous forums of international arbitration are available but preliminary

results suggest a few in particular. The Energy Charter Treaty is important in

that regard because the dispute settlement venue depends, to a degree, on

provisions in the treaty. Iceland and the UK have both ratified the treaty so it

will likely affect the project in some ways.

The roots of the Energy Charter Treaty lie in the problem that many

countries faced at the turn of the last century when they themselves lacked

energy resources but other, more politically unstable, countries had an

abundance of resources but needed foreign investment. Consequently, steps

were taken to amend this problem and in 1998, the ECT came into power. The

treaty mainly aims to minimize non-commercial risks and promote investment

within the energy sector (Hobér, 2010; Energy Charter , n.d.b). According to

Hobér (2010, p. 155), the ECT is "…the only binding multilateral instrument

dealing with inter-governmental cooperation in the energy sector, and contains

far-reaching undertakings for the contracting parties. The ECT includes

provisions regarding investment protection, provisions on trade, transit of

energy, energy efficiency and environmental protection and dispute

resolution”. It seems clear that these provisions could be very beneficial in

reducing political risk for the interconnector project.

Dispute settlement under the ECT has taken place numerous times and

the frequency is rising along with increased renown of the treaty and, in turn,

more awareness by investors. The Energy Charter Website mentions three

ways for investors to bring a dispute to arbitration under the treaty.

“the International Centre for the Settlement of Investment Disputes (ICSID - an autonomous international institution with close links to the World Bank); a sole arbitrator or an ad hoc arbitration tribunal established under the rules of the United Nations Commission on International Trade Law (UNCITRAL); or an application to the Arbitration Institute of the Stockholm Chamber of Commerce.” (Energy Charter, n.d.c).


29

According to these options, dispute settlement under the treaty can

work in close relation with ICSID, among other institutions. Hobér (2010)

names numerous cases which have been settled by ICSID under the Energy

Charter Treaty. Arbitral awards set under the treaty are binding and final so

each contracting party has to act accordingly (Energy Charter, n.d.c).

As noted above, both Iceland and the United Kingdom are members of

ICSID and as such have access to arbitration and conciliation services. It uses a

number of instruments for arbitration in disputes between member states and

nationals of other member states, i.e. investors. The ICSID Convention is one

of those instruments and has very wide state support with 159 signatory states

and 151 contracting states (International Centre for Settlement of Investment

Disputes, 2015). The Convention works as a neutral and independent system

that allows ICSID member states and their nationals to settle investment

disputes in a fair manner using a basic arbitration and conciliation framework

provided by the Convention. The ICSID website states that “Independent

conciliation commissions and arbitral tribunals constituted in each case are

vested with the power to rule on procedural issues and resolve the parties’

dispute” (International Centre for Settlement of Investment Disputes, n.d.e). If

the parties involved agree to the ICSID proceedings under the Convention they

accept the arbitration as an exclusive, final and binding solution (International

Centre for Settlement of Investment Disputes, n.d.b.).

The other arbitration venues mentioned – the Arbitration Institute of the

Stockholm Chamber of Commerce and a tribunal set under the United Nations

Commission on International Trade Law (UNCITRAL) – are also valid

options, although they are not used as commonly as ICSID in ECT cases

(Energy Charter, n.d.). UNCITRAL is the “…core legal body of the United

Nations system in the field of international trade law” (UNCITRAL, n.d.a). It

provides arbitration rules which cover state-state as well as investor-state

disputes (UNCITRAL, n.d.b). The Arbitration Institute of the Stockholm

Chamber of Commerce also offers international arbitration services which the

contracting parties of the project might agree to (Arbitration Institute of the

Stockholm Chamber of Commerce, n.d.a; n.d.b). In addition, The Convention

on the Recognition and Enforcement of Foreign Arbitral Awards, somewhat

better known as The New York Convention could be useful by enforcing


30

arbitral awards after disputes are settled, as both Iceland and the UK have

ratified the Convention (New York Arbitration Convention, n.d.a; United

Nations, 1958). Examples of how some of these arbitration options can be used

can be seen in recent cases.

3.5 Recent Experiences

Most cases related to political risk mitigation and dispute settlement are

between developing and developed countries. Because of that, cases between

two developed, high-income countries, are not abundant. However, the number

of disputes within the energy sector in Europe, Spain in particular, has

increased significantly in recent years. Many of these disputes occurred due to

changes in subsidies that were meant to promote investment in renewable

energy. Nathanson (2012) notes that such policy changes are one of the

primary barriers of renewable energy investment.

Spain used a system of subsidies, mainly feed-in tariffs, to promote the

solidification of renewable energy within the country. By implementing a

series of subsidies, Spain continuously strengthened this system. For instance,

renewable energy suppliers were offered a choice of either a fixed total price

(fixed feed-in) or a fixed premium in addition to the market price, much like

the CfDs mentioned before (Gonzáles, 2008). The system was meant to limit

investor risk as well as financing costs by providing security and revenue

guarantees (Río & Gual, 2007). This resulted in a significant increase in

renewable energy generation. Most importantly, solar photovoltaic generation

expanded from 18GWh in 2000 to c.a. 6.4 TWh in 2010 (Bridle & Beaton,

2012). Consequently, the feed-in tariffs became a huge burden on the Spanish

state and the situation was made even worse by unfavourable market

conditions (White, 2013). The policy changes that followed were intended to

close this deficit by reducing subsidies and introducing additional limitations

on renewable energy generators, therewith compromising the rationale that had

attracted investors to the sector. A large number of claims followed, many of

which were filed with ICSID under the ECT (Baltag, 2015; Rucinski &

Rodríguez, 2013). The Energy Charter Secretariat maintains a regularly

updated list of cases where the ECT is an invoked instrument and there are


31

currently 27 listed in Spain (Energy Charter, n.d.). Many of these cases have

yet to be settled and will have to be analysed further at a later point in time.

Similar situations have occurred in other European countries. One

recent case, in particular, received substantial attention. It occurred in Germany

following the 2011 Fukushima nuclear disaster. A shift in policy by the

German government resulted in the phase-out of nuclear energy, earlier than

had been announced before, and included the immediate shut-down of some

old reactors. Vattenfall, owned by the Swedish government, partly owned two

of these reactors and filed for arbitration before ICSID because of the losses

associated. The arbitration is listed under the Energy Charter Treaty but further

details are mostly confidential (Vattenfall AB and others v. Federal Republic of

Germany (ICSID Case No. ARB/12/12)) (Bernasconi-Osterwalder & Brauch,

2014; International Centre for Settlement of Investment Disputes, n.d.a;

Vattenfall AB, 2014; World Nuclear Association, 2015).

These cases from Spain and Germany are only examples of some of the

recent disputes that have occurred within the energy sector in Europe. Of

course, other cases may be relevant, some of which may have occurred outside

of Europe, but they will not be analysed in this article. As the proposed

interconnector is rather unique, with regards to size and other factors, cases

directly related to it are hard to come by. There are, however, other

interconnectors which may provide some comparison for the project.

One energy project that is often mentioned in the discussion

about the Iceland – UK interconnector, is the NorNed interconnector between

Norway and the Netherlands. Commissioned in 2008, the 580km long 700 MW

merchant interconnector depends on price variations between markets to secure

a profit (Nooij, 2011; Parail, 2009). As such, its revenue model is likely to

differ from the Iceland-UK interconnector, which is – as stated before – likely

to rely on revenue guarantees. The NorNed project was a joint venture between

the national electricity grids in Norway and the Netherlands, Statnett and

Tennet respectively. The project was partly financed by the Nordic Investment

Bank. It is therefore clear that although NIB primarily engages in the Nordic

and Baltic region it also participates in projects that have connections outside

this specific area of operations (Nordic Investment Bank, 2007). EIB also took

part in the financing of the NorNed project and financed 50%, even more than


32

NIB. The project matched the EUs emphasis on sustainable energy as well as

the integration of energy markets throughout Europe (European Commission,

2007). NorNed is likely to be financed and operated differently from the

proposed interconnector between Iceland and the UK. However, it highlights

some of the financing options available for the project at hand.

3.6 Conclusion and Further Research

It seems clear that the proposed interconnector between Iceland and the

UK could have access to a variety of risk mitigation instruments, financing

options as well as forums for international arbitration. However, it is rather

unclear which of them are most feasible. This is, to a large extent, due to the

fact that many important decisions regarding the interconnector have yet to be

made. Regardless of these decisions, it certainly seems important to study

political risks and the effects they may have on the feasibility of the proposed

interconnector. The state of the energy sector in Europe, in addition to

historical relations between Iceland and the United Kingdom, shows that it

would be ill-advised not to analyse the effect of political risk factors on this

project in detail.

Ownership and the financing of necessary infrastructure, as well as the

interconnector itself, may be one of the most important risk factors. There are

many possible solutions that may be suitable for the project. The article

showcased one ownership scenario where risk is shifted to the UK away from

the Icelandic public and its government. A public-private partnership played a

key role in that scenario and it is likely that it would be the case in many

scenarios that allow the private sector to take part in the project, including

financing. Regardless of ownership, the project – including infrastructure

upgrades – must be financed. The participation of the European Investment

Bank and the Nordic Investment Bank may be beneficial in that regard. Both of

them offer loans and guarantees that might be available and feasible if the

project company and other parties involved choose to approach them for

participation.


33

A comprehensive power purchase agreement or Contracts for Difference,

possibly offered by the UK government, might partly guarantee revenue and

mitigate certain risks. These contracts might also increase the project’s

vulnerability to regulatory changes in the UK. Recent cases in Europe have

shown that energy reforms and policy changes in general can have a significant

impact on investment feasibility within the sector.

Due to the risk of policy changes occurring, it is imperative that any

agreements about the project address dispute settlement and where it may take

place. If disputes occur, a few well-recognised organisations offer international

arbitration which might be available. Where disputes are settled is, however,

dependant on the parties involved. If the opinions put forth in the article

materialise, the dispute would likely be between a PPP company and a state.

The Energy Charter and ICSID are likely to play a key role in these cases. This

is supported by recent cases from Europe where the ECT was used in ICSID

arbitration of investor-state disputes. However, there are numerous other

institutions that also offer arbitration, though they have not been as prominent

in recent cases. The subjects of this article are only a few of the many factors

that need to be analysed further. The article is largely based on preliminary

results as the project is still in the feasibility stage and many factors remain

unclear.


34

4 Discussion

The proposed interconnector project could, as a whole, have access to a

broad range of solutions to mitigate political risk, settle disputes, and arrange

ownership and financing. This was noted in both the articles before but in order

to take a well-informed decision about the feasibility of the project, all of the

options have to be analysed and discussed in detail.

One of the main points of the articles is that by incorporating the private

sector in the project and operating it as a PPP, risks would be shifted to the

United Kingdom from the Icelandic public and the country as a whole. To

some, it might seem unfair that the United Kingdom assumes most of the risks

involved in the project. However, there are clear reasons for it to do so. If the

project takes place, investments are made and the interconnector is constructed,

in addition to related infrastructure, the United Kingdom has much more

bargaining power than Iceland. This is mainly because most of the investments

would be made in Iceland and the effects of the project would likely be much

more apparent there. Therefore, the Icelandic parties involved – mainly

renewable power suppliers and the electricity transmission operators involved

– would have few choices but to keep supplying electricity even if the prices or

terms negotiated would change for the worse. Another possibility is that

importing electricity through the interconnector would suddenly become

financially unfeasible for the United Kingdom. This could be due to

technological advancements, competition or many other factors.

As noted in the second article, the project might rely on CfDs to counter

this risk. However, it is also pointed out that these contracts might change

during the operational lifetime of the interconnector and therefore expose the

project to policy changes in the United Kingdom. If private parties take part in

the project, a number of venues of international arbitration become available

which would normally not be available in state-state disputes. All of the

dispute settlement venues mentioned in the articles are compatible with

provisions of the Energy Charter Treaty. The treaty would likely apply to the

proposed interconnector project in major aspects. As there is currently no BIT

active between Iceland and the United Kingdom, the importance of the ECT


35

becomes even greater. Some of the arbitration venues available under the treaty

are, as noted before, generally only available in investor-state disputes. This

further emphasises the possible benefits of enabling the private sector to take

part in the project. Examples of some recent disputes that make use of these

venues were given in the articles, mainly the latter one.

In terms of capital mobilisation, ownership is also very important.

Although it is unclear to what degree private investors and governments could

finance the project, it seems likely that the two IFIs mentioned in the articles,

EIB and NIB, would take some part in the project, as they have done in other

renewable energy projects. The author did not contact these IFIs with enquiries

about this possibility, as it is unlikely that any clear answers could have been

given at this stage. However, their prior participation in similar projects is

evident, both in Iceland and abroad.


36

5 Conclusion

Due to the enormous scale of the proposed interconnector, in addition to

related infrastructure investments, any financial gains or losses are likely to be

huge. This is particularly the case for the smaller country involved, i.e. Iceland.

As noted in the articles, the two countries participating in the project have very

different capabilities and consequently their ability to assume risk also varies

greatly. The United Kingdom, as the much larger economy, is in a better

position to assume the political risks involved in the project. Moreover, it is

likely to be in a position to prevent many of those risk events from occurring in

the first place. This is not only true for political risk – mainly policy changes –

but also for demand risk and price volatility. CfDs or similar contracts, which

are likely to be fundamental for the feasibility of the interconnector, mitigate

these latter risk factors to some degree. However, they might also expose the

project further to policy changes. To counter this, it is important that any

agreements made address this. Furthermore, international treaties such as the

ECT include some provisions which may be of use in that regard.

Due to the absence of a BIT between Iceland and the United Kingdom,

the importance of the ECT is emphasised further. IFIs, such as the EIB and

NIB, may also be of use as they offer risk mitigation instruments, such as

guarantees, in addition to loans. ECAs could also be of use as they provide

political risk insurance and other instruments which may be feasible in the

proposed interconnector project.

In the event of disputes, the ECT might again be of use as it can be used

as an invoked instrument in a number of venues of international arbitration.

ICSID of the World Bank has commonly been used in recent cases, but other

venues, such as the SCC arbitration institute and a tribunal set under

UNCITRAL rules have also been used. The articles did not assess the

feasibility of each of these options, but both Iceland and the UK should have

access to all of them. Where, and how, disputes would be settled is likely to be

included in agreements about the project.

One of the main reasons for this research being conducted was to assess

if political risks could be properly mitigated in this particular interconnector

project, as the research questions put forth in the introduction indicate.


37

Although many factors are still unclear, the author believes that political risks

can be adequately mitigated if some major risk factors are minimised. A PPP

that enables the private sector to take part in the project could be an integral

component of a solution that minimises those risk factors. One possible

scenario, which the author believes manages to properly mitigate political

risks, is detailed further in the ‘Practical Value’ chapter that follows.

As mentioned before, the thesis mainly addresses political risks the

proposed interconnector project may be exposed to. However, it must be noted

that other risk factors, unrelated to political risks, may be at least equally

important. These other risk factors, in addition to political risk, must be

research further to assess the feasibility of the proposed interconnector project

comprehensively.


38

6 Practical Value

The scenario proposed in the articles showcased one way to mitigate

political risks in the interconnector project. In this specific scenario, this is

done by shifting risks from Iceland to the United Kingdom and the consumer.

By implementing take-or-pay contracts between renewable energy suppliers

and a project company with a state guarantee from the United Kingdom,

demand risk can be minimised. A revenue guarantee would also be provided by

the UK government, either via CfDs or other forms. In terms of capital

mobilisation, state guarantees from the United Kingdom would likely help

facilitate the flow of investment and lower the cost of capital. These guarantees

could apply to the project company, revenue and infrastructure investments.

Furthermore, the private sector might be able to take part in the project via

BOT projects. In any case, IFIs such as the EIB and NIB are likely to take

some part in the project.

When assessing the feasibility of a project that spans such a long time,

maybe up to half a century, it is important to take necessary precautions to

properly deal with disputes if they were to occur. It is therefore important to

study some of the available venues of international arbitration, such as ICSID,

the SCC arbitration institute and a tribunal set under UNCITRAL rules. As

noted before, all of these venues are compatible with the ECT, which may play

a significant role in the project. Although the articles did not assess the

viability of each option individually, knowing which options are available

should certainly provide significant practical value for the next steps of the

interconnector project. Moreover, examples of these venues being used in

relevant cases were studied in the articles to showcase the applicability of these

options.

The thesis outlined some of the most important political risk mitigation

options available to the proposed interconnector project. As such, it is valuable

for the next steps of the project. The details of each option will not be included

in this chapter, but many of them were assessed in a more thorough manner in

the enclosed articles. Judging from a literature review, an open seminar,

conference presentations and interviews with high-ranking officials and


39

academics, the effects of political risk on the project have not been assessed to

this degree until now.


40

7 References

7.1 References: Iceland – UK Interconnector:

A Brief Analysis of Possible Political Risk

Mitigation and Dispute Settlement

Baltag, C., 2015. What's New with the Energy Charter Treaty. [Online] Available at: http://kluwerarbitrationblog.com/2015/06/13/whats-new-with-the-energy-charter-treaty/ [Accessed 8 1 2016].

Bernasconi, N., 2009. Background paper on Vattanfall v. Germany arbitration, s.l.: International Institute for Sustainable Development.

Bernasconi-Osterwalder, N. & Brauch, M. D., 2014. The State of Play in Vattenfall v. Germany II: Leaving the German public in the dark, s.l.: International Institute for Sustainable Development.

Bridle, R. & Beaton, C., 2012. Assessing the Cost-Effectiveness of Renewable Energy Deployment Subsidies: Solar PV in Germany and Spain, s.l.: International Institute for Sustainable Development.

Delmon, J., 2009. Private sector investment in infrastructure: Project finance, PPP projects and risk. 2 ed. Alphen Aan Den Rijn: Kluwer Law International & The World Bank.

Department of Energy and Climate Change, 2013. Investing in renewable technologies – CfD contract terms and strike prices, s.l.: s.n.

Dinh, T. Q. & Hilmarsson, H. Þ., 2014. How can ECAs help solve funding challenges for capital intensive projects in emerging market economics?. Journal of Applied Economics: Systematic Research, 8(1), pp. 79-95.

EDF Energy, 2015. Hinkley Point C. [Online] Available at: http://www.edfenergy.com/energy/nuclear-new-build-projects/hinkley-point-c [Accessed 11 1 2016].

European Investment Bank, n.d.a. Projects. [Online] Available at: http://www.eib.org/projects/index.htm [Accessed 11 1 2016].

European Investment Bank, n.d.b. Iceland. [Online] Available at: http://www.eib.org/projects/regions/efta/iceland/index.htm [Accessed 11 1 2016].

European Investment Bank, n.d.c. Guarantees & Securitisation. [Online] Available at: http://www.eib.org/products/blending/guarantees/index.htm [Accessed 11 1 2016].


41

Gíslason, G. R., 2014. Samkeppnishæfur Sæstrengur. [Online] Available at: http://www.vb.is/frettir/samkeppnishaefur-saestrengur/101710/ [Accessed 2 1 2016].

Goncharuk, A. G., 2015. Food Business and Food Security Challenges in Research. Journal of Applied Management and Investment, 4(4), pp. 223-230.

Gonzáles, P. d. R., 2008. Ten years of renewable electricity policies in Spain: An analysis of successive feed-in tariff reforms. Energy Policy, 36(8), pp. 2917-2929.

Hagfræðistofnun Háskóla Íslands, 2013. Þjóðhagsleg áhrif sæstrengs (Report nr. C13:02), s.l.: s.n.

Hellmann, G. & Herborth, B., 2008. Fishing in the mild West: democratic peace and militarised interstate disputes in the transatlantic community. Review of International Studies, 34(3), pp. 481-506.

Hilmarsson, H. Þ., 2015. The Collapse of the Icelandic Banking System and the Inaction of the International Community. Journal of Applied Management and Investment , 4(3), pp. 156-162.

Hobér, K., 2010. Investment Arbitration and the Energy Charter Treaty. Journal of International Dispute Settlement , 1(1), pp. 153-190.

Holland, B. & Ashley, P. S., 2013. Enforceability of Take-or-Pay Provisions in English Law Contracts - Revisited. Journal of Energy & Natural Resources Law, 31(2), pp. 205-218.

ICSID, n.d.a. Case Details: Case No. ARB/12/12. [Online] Available at: https://icsid.worldbank.org/apps/icsidweb/cases/Pages/casedetail.aspx?caseno=ARB/12/12 [Accessed 10 1 2016].

ICSID, n.d.b. Case Details: Case No. ARB/09/6. [Online] Available at: https://icsid.worldbank.org/apps/ICSIDWEB/cases/Pages/casedetail.aspx?CaseNo=ARB/09/6 [Accessed 10 1 2016].

ICSID, n.d.c. Cases. [Online] Available at: https://icsid.worldbank.org/apps/ICSIDWEB/cases/ [Accessed 11 1 2016].

ICSID, n.d.d. Database of ICSID Member States. [Online] Available at: https://icsid.worldbank.org/apps/ICSIDWEB/about/Pages/Database-of-Member-States.aspx [Accessed 11 1 2016].

ICSID, n.d.e. Process Overview. [Online] Available at: https://icsid.worldbank.org/apps/ICSIDWEB/process/Pages/Overview.aspx [Accessed 11 1 2016].


42

Kluwer Law International, 2016. Bilater Investment Treaties (BITs): Iceland. [Online] Available at: http://www.kluwerarbitration.com/CommonUI/BITs.aspx?country=Iceland [Accessed 11 1 2016].

Landsvirkjun, 2013. Haustfundur 2013. [Online] Available at: http://www.landsvirkjun.is/Media/PPT_haustfundur2013_131113_OK_small.pdf [Accessed 12 1 2016].

Landsvirkjun, n.d.a. Submarine Cable to Europe. [Online] Available at: http://www.landsvirkjun.com/ResearchDevelopment/Research/SubmarineCabletoEurope/

Landsvirkjun, n.d.b. Sæstrengur. [Online] Available at: http://www.landsvirkjun.is/rannsoknirogthroun/throunarverkefni/saestrengur/

Méndez-Pinedo, M. E., 2011. The icesave Dispute in the Aftermath of the Icelandic Financial Crisis: Revisiting the Principles of State Liability, Prohibition of State Aid and Non-discrimination in Euopean Law. European Journal of Risk Regulation, 2(3), pp. 356-372.

Nordic Investment Bank, n.d.. NIB in Brief. [Online] Available at: http://annual.nib.int/2014/about-nib/nib-in-brief [Accessed 11 1 2016].

Orkustofnun, n.d. Raforkuvinnsla eftir framleiðanda 2014. [Online] Available at: http://www.orkustofnun.is/yfirflokkur/raforkutolfraedi/raforkutolfraedi-2014/raforkuvinnsla-eftir-framleidanda-2014/ [Accessed 9 1 2016].

Parail, V., 2009. Can Merchant Interconnectors Deliver Lower and More Stable Prices? The Case of NorNed. IDEAS Working Paper Series from RePEc (Cambridge Working Papers in Economics), pp. 1-50.

Raforkulög nr. 65 (27. mars 2003).

Rucinski, T. & Rodríguez, J. E., 2013. Exclusive: Foreign investors set to sue Spain over energy reform. Reuters, 14 February.

Salacuse, J. W., 2010. The Emerging Global Regime for Investment. Harvard International Law Journal, 51(2), pp. 427-473.

Sigurðsson, B. S., 2014. Viðskiptatækifæri sæstrengs: Breytingar í orkumálum Evrópu. Þjóðmál, pp. 22-28.

The New York Arbitration Convention, n.d. Countries. [Online] Available at: http://www.newyorkconvention.org/countries [Accessed 11 1 2016].


43

Turvey, R., 2006. Interconnector Economics. Energy Policy, Volume 34, pp. 1457-1472.

White, T., 2013. Spain Power Deficit Widens 46% as Steps to Close Gap Founder. Bloomberg, 25 April.

World Bank, 2015. Gross domestic product 2014. [Online] Available at: http://databank.worldbank.org/data/download/GDP.pdf [Accessed 8 1 2016].

Yin, R. K., 2014. Case Study Research: Design and Methods. 5 ed. Thousand Oaks, California: Sage Publications, Inc..


44

7.2 References: Iceland – UK Interconnector:

Is Proper Political Risk Mitigation

Possible?

1. Arbitration Institute of the Stockholm Chamber of Commerce, n.d.a. Arbitration. [Online] Available at: http://sccinstitute.com/dispute-resolution/arbitration/ [Accessed 6 2 2016].

2. Arbitration Institute of the Stockholm Chamber of Commerce, n.d.b. Dispute Resolution Services. [Online] Available at: http://sccinstitute.com/dispute-resolution/ [Accessed 6 2 2016].

3. Atlantic Superconnection Corporation, 2014. Atlantic Superconnection Corporation: response to Ofgem consultation on the future of electricity interconnection: Proposal to roll out a cap and floor regime to near term projects. [Online] Available at: https://www.ofgem.gov.uk/sites/default/files/docs/2014/08/atlantic_superconnection_response_cap_and_floor_near_term_projects_consultation.pdf [Accessed 3 2 2016].

4. Baltag, C., 2015. What's New with the Energy Charter Treaty. [Online] Available at: http://kluwerarbitrationblog.com/2015/06/13/whats-new-with-the-energy-charter-treaty/ [Accessed 8 1 2016].

5. Bankes, N., 2012. Decarbonising the Economy and International Investment Law. Journal of Energy & Natural Resources Law, 30(4), pp. 497-510.

6. Bernasconi-Osterwalder, N. & Brauch, M. D., 2014. The State of Play in Vattenfall v. Germany II: Leaving the German public in the dark, s.l.: International Institute for Sustainable Development.

7. Bridle, R. & Beaton, C., 2012. Assessing the Cost-Effectiveness of Renewable Energy Deployment Subsidies: Solar PV in Germany and Spain, s.l.: International Institute for Sustainable Development.

8. Delmon, J., 2009. Private sector investment in infrastructure: Project finance, PPP projects and risk. 2 ed. Alphen Aan Den Rijn: Kluwer Law International & The World Bank.

9. Department of Energy & Climate Change and The Rt Hon Amer Rudd MP, 2015. Changes to renewables subsidies. [Online] Available at: https://www.gov.uk/government/news/changes-to-renewables-subsidies [Accessed 3 2 2016].

10. Department of Energy and Climate Change, 2013. Investing in renewable technologies – CfD contract terms and strike prices, s.l.: s.n.


45

11. Dinh, T. Q. & Hilmarsson, H. Þ., 2014. How can ECAs help solve funding challenges for capital intensive projects in emerging market economics?. Journal of Applied Economics: Systematic Research, 8(1), pp. 79-95.

12. EDF Energy, 2015. Hinkley Point C. [Online] Available at: http://www.edfenergy.com/energy/nuclear-new-build-projects/hinkley-point-c [Accessed 11 1 2016].

13. Energy Charter , n.d.b. What we do: Investment - Overview. [Online] Available at: http://www.energycharter.org/what-we-do/investment/overview/ [Accessed 18 12 2015].

14. Energy Charter, n.d.a. Constituency of the Energy Charter Conference: Members of the Energy Charter Conference. [Online] Available at: http://www.energycharter.org/who-we-are/members-observers/ [Accessed 17 12 2015].

15. Energy Charter, n.d.c. What we do: Use of the Dispute Settlement Mechanisms. [Online] Available at: http://www.energycharter.org/what-we-do/dispute-settlement/use-of-the-dispute-settlement-mechanisms/ [Accessed 18 12 2015].

16. Energy Charter, n.d.. Investment Dispute Settlement Cases. [Online] Available at: http://www.energycharter.org/what-we-do/dispute-settlement/investment-dispute-settlement-cases/ [Accessed 8 1 2016].

17. European Commission, 2007. The European Investment Bank finances NorNed - the submarine power cable linking the Netherlands and Norway. [Online] Available at: http://europa.eu/rapid/press-release_BEI-07-118_en.htm?locale=en [Accessed 18 12 2015].

18. European Investment Bank, n.d.a.. Guarantees & Securitisation. [Online] Available at: http://www.eib.org/products/blending/guarantees/index.htm [Accessed 18 12 2015].

19. European Investment Bank, n.d.. Iceland. [Online] Available at: http://www.eib.org/projects/regions/efta/iceland/index.htm [Accessed 18 12 2015].

20. Eysteinsson, Æ. Þ., 2015. Bandarísk stórfyrirtæki vilja leggja sæstreng til Íslands - funduðu með ráðherrum í síðustu viku. [Online] Available at: http://kjarninn.is/frettir/bandarisk-storfyrirtaeki-vilja-leggja-saestreng-til-islands-fundudu-med-radherrum-i-sidustu-viku/ [Accessed 21 11 2015].

21. Gíslason, G. R., 2014. Samkeppnishæfur Sæstrengur. [Online] Available at: http://www.vb.is/frettir/samkeppnishaefur-saestrengur/101710/ [Accessed 2 1 2016].


46

22. Gíslason, J., 1955. Vatnsafl Íslands, útflutningur á raforku og stóriðja. Tímarit Verkfræðingafélag Íslands, 40(1), pp. 9-16.

23. Goncharuk, A. G., 2016. Banking Sector Challenges in Research. Journal of Applied Management and Investment, 5(1), pp. 34-39.

24. Gonzáles, P. d. R., 2008. Ten years of renewable electricity policies in Spain: An analysis of successive feed-in tariff reforms. Energy Policy, 36(8), pp. 2917-2929.

25. Hagfræðistofnun Háskóla Íslands, 2013. Þjóðhagsleg áhrif sæstrengs (Report nr. C13:02), s.l.: s.n.

26. Hellmann, G. & Herborth, B., 2008. Fishing in the mild West: democratic peace and militarised interstate disputes in the transatlantic community. Review of International Studies, 34(3), pp. 481-506.

27. Hilmarsson, H. Þ., 2015. The Collapse of the Icelandic Banking System and the Inaction of the International Community. Journal of Applied Management and Investment , 4(3), pp. 156-162.

28. Hobér, K., 2010. Investment Arbitration and the Energy Charter Treaty. Journal of International Dispute Settlement, 1(1), pp. 153-190.

29. Holland, B. & Ashley, P. S., 2013. Enforceability of Take-or-Pay Provisions in English Law Contracts - Revisited. Journal of Energy & Natural Resources Law, 31(2), pp. 205-218.

30. International Centre for Settlement of Investment Disputes, 2015. 2015 Annual report. [Online] Available at: https://icsid.worldbank.org/apps/ICSIDWEB/resources/Documents/ICSID_AR15_ENG_CRA-highres.pdf [Accessed 17 12 2015].

31. International Centre for Settlement of Investment Disputes, n.d.a. Case Details: Case No. ARB/12/12. [Online] Available at: https://icsid.worldbank.org/apps/icsidweb/cases/Pages/casedetail.aspx?caseno=ARB/12/12 [Accessed 10 1 2016].

32. International Centre for Settlement of Investment Disputes, n.d.a. Database of ICSID Member States. [Online] Available at: https://icsid.worldbank.org/apps/ICSIDWEB/about/Pages/Database-of-Member-States.aspx [Accessed 11 1 2016].

33. International Centre for Settlement of Investment Disputes, n.d.b.. Process Overview. [Online] Available at: https://icsid.worldbank.org/apps/ICSIDWEB/process/Pages/Overview.aspx [Accessed 11 1 2016].


47

34. International Centre for Settlement of Investment Disputes, n.d.e. Process Overview. [Online] Available at: https://icsid.worldbank.org/apps/ICSIDWEB/process/Pages/Overview.aspx [Accessed 11 1 2016].

35. Kluwer Law International, 2016. Bilater Investment Treaties (BITs): Iceland. [Online] Available at: http://www.kluwerarbitration.com/CommonUI/BITs.aspx?country=Iceland [Accessed 11 1 2016].

36. Landsvirkjun, 2013. Haustfundur 2013. [Online] Available at: http://www.landsvirkjun.is/Media/PPT_haustfundur2013_131113_OK_small.pdf [Accessed 12 1 2016].

37. Landsvirkjun, 2015. Landsvirkjun semur um lán frá Japan vegna Þeistareykjavirkjunar. [Online] Available at: http://www.landsvirkjun.is/fyrirtaekid/fjolmidlatorg/frettir/frett/landsvirkjun-semur-um-lan-fra-japan-vegna-theistareykjavirkjunar/ [Accessed 5 2 2016].

38. Landsvirkjun, n.d.a. Submarine Cable to Europe. [Online] Available at: http://www.landsvirkjun.com/ResearchDevelopment/Research/SubmarineCabletoEurope/

39. Landsvirkjun, n.d.b. Sæstrengur. [Online] Available at: http://www.landsvirkjun.is/rannsoknirogthroun/throunarverkefni/saestrengur/

40. Matsukawa, T. & Habeck, O., 2007. Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments, Washington DC: The International Bank for Reconstruction and Development.

41. Méndez-Pinedo, M. E., 2011. The icesave Dispute in the Aftermath of the Icelandic Financial Crisis: Revisiting the Principles of State Liability, Prohibition of State Aid and Non-discrimination in Euopean Law. European Journal of Risk Regulation, 2(3), pp. 356-372.

42. Nathanson, R. A., 2012. The Revocation of Clean-Energy Investment Economic-Support Systems as indirect Expropriation Post-Nykomb: A Spanish Case Analysis. Iowa Law Review, 98(863), pp. 863-904.

43. New York Arbitration Convention, n.d.a. List of contracting states. [Online] Available at: http://www.newyorkconvention.org/list+of+contracting+states [Accessed 6 2 2016].

44. Nooij, M. d., 2011. Social cost-benefit analysis of electricity interconnector investment: A critical appraisal. Energy Policy, Volume 39, pp. 3096-3105.


48

45. Nordic Investment Bank, 2007. New subsea link a sustainability showcase. [Online] Available at: http://www.nib.int/news_publications/cases_and_feature_stories/new_subsea_link_a_sustainability_showcase [Accessed 18 12 2015].

46. Nordic Investment Bank, 2015. Annual Report 2014. [Online] Available at: http://www.nib.int/filebank/a/1425933453/594634fd57e820fabc7eed56fd348aff/4379-NIB_Annual_Report_2014.pdf [Accessed 18 12 2015].

47. Parail, V., 2009. Can Merchant Interconnectors Deliver Lower and More Stable Prices? The Case of NorNed. IDEAS Working Paper Series from RePEc (Cambridge Working Papers in Economics), pp. 1-50.

48. Public Private Partnership in Infrastructure resource Center, n.d.. Power Purchase Agreements (PPAs) and Energy Purchase Agreements (EPAs). [Online] Available at: http://ppp.worldbank.org/public-private-partnership/sector/energy/energy-power-agreements/power-purchase-agreements#where_appropriate [Accessed 18 12 2015].

49. Raforkulög nr. 65 (27. mars 2003).

50. Río, P. d. & Gual, M. A., 2007. An integrated assessment of the feed-in tariff system in Spain. Energy Policy, 35(2), pp. 994-1012.

51. Rucinski, T. & Rodríguez, J. E., 2013. Exclusive: Foreign investors set to sue Spain over energy reform. Reuters, 14 February.

52. Salacuse, J. W., 2010. The Emerging Global Regime for Investment. Harvard International Law Journal, 51(2), pp. 427-473.

53. Sigurðsson, B. S., 2014. Viðskiptatækifæri sæstrengs: Breytingar í orkumálum Evrópu. Þjóðmál, pp. 22-28.

54. The World Bank Group [International Finance Corporation & Multilateral Investment Guarantee Agency], 2012. Political Risk: The Missing Link in Understanding Investment Climate Reform?. Investment Climate - In practice, Volume 20.

55. Thoroddsen, V., 1954. Flutningur raforku milli landa: Hvaða möguleikar eru á útflutningi raforku frá Íslandi?. Alþýðublaðið, Volume 42, pp. 5-7.

56. Turvey, R., 2006. Interconnector Economics. Energy Policy, Volume 34, pp. 1457-1472.

57. UNCITRAL, n.d.a. About UNCITRAL. [Online] Available at: http://www.uncitral.org/uncitral/en/about_us.html [Accessed 6 2 2016].

58. UNCITRAL, n.d.b. UNCITRAL Arbitration Rules. [Online] Available at:


49

http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/2010Arbitration_rules.html [Accessed 6 2 2016].

59. United Nations, 1958. Convention on the Recognition and Enforcement of Foreign Arbitral Awards, s.l.: United Nations.

60. Vattenfall AB, 2014. Why Vattenfall is taking Germany to court. [Online] Available at: http://corporate.vattenfall.com/press-and-media/news/2014/why-vattenfall-is-taking-germany-to-court/ [Accessed 2 4 2016].

61. White, T., 2013. Spain Power Deficit Widens 46% as Steps to Close Gap Founder. Bloomberg, 25 April.

62. World Nuclear Association, 2015. Nuclear Power in Germany. [Online] Available at: http://www.world-nuclear.org/info/Country-Profiles/Countries-G-N/Germany/ [Accessed 7 1 2016].

63. Yin, R. K., 2014. Case Study Research: Design and Methods. 5 ed. Thousand Oaks, California: Sage Publications, Inc..


50

7.3 References: Introduction

7.3.1 Print Sources

Atvinnuvega- og nýsköpunarráðuneytið. (2013a). Raforkustrengur til Evrópu: Niðurstöður og tillögur ráðgjafarhóps iðnaðar- og viðskiptaráðherra.

Atvinnuvega- og nýsköpunarráðuneytið. (2013b). Greinagerð um lögfræðileg málefni vegna sæstrengs til Evrópu.

Delmon, J. (2009). Private sector investment in infrastructure: Project finance, PPP projects and risk (2 útg.). Alphen Aan Den Rijn, The Netherlands: Kluwer Law International & The World Bank.

Gíslason, J. (1955). Vatnsafl Íslands, útflutningur á raforku og stóriðja. Tímarit Verkfræðingafélag Íslands, 40(1), pp. 9-16. Retrieved 11 21, 2015, from http://timarit.is/view_page_init.jsp?issId=348208

Hagfræðistofnun Háskóla Íslands. (2013). Þjóðhagsleg áhrif sæstrengs (Report nr. C13:02). Retrieved 29. 12 2015 from https://www.atvinnuvegaraduneyti.is/media/saestrengur-til-evropu/Skyrsla-HHI-26-juni-2013.pdf

MIGA, The World Bank Group. (2014). World Investment and Political Risk 2013. MIGA, The World Bank Group. doi:10.1596/978-1-4648-0039-9

National Energy Authority of Iceland; The Arctic University of Norway; Danish Energy Agency; Faroese Earth and Energy Directorate; Shetland Island Council - Economic Development Service; Greenland Innovation Centre. (2016). North Atlantic Energy Network.

Salacuse, J. W. (2010). The Emerging Global Regime for Investment. Harvard International Law Journal, 51(2), 427-473.

Smith, W. (1997). Covering Political and Regulatory Risks: Issues and Options for Private Infrastructure Arrangements. In T. Irwin, M. Klein, G. E. Perry, & M. Thobani, Dealing with Public Risk in Private Infrastructure. Washington D.C.: The International Bank for Reconstruction and Development / THE WORLD BANK.

The World Bank Group [International Finance Corporation & Multilateral Investment Guarantee Agency]. (2012). Political Risk: The Missing Link in Understanding Investment Climate Reform? Investment Climate - In practice, 20. Retrieved 12 17, 2015, from https://www.wbginvestmentclimate.org/uploads/In%20Practice%20-Political%20Risk.pdf

Thoroddsen, V. (1954). Flutningur raforku milli landa: Hvaða möguleikar eru á útflutningi raforku frá Íslandi? Alþýðublaðið, 42, pp. 5-7. Retrieved 11 21, 2015, from http://m.timarit.is/view_page_init.jsp?pageId=1098612

Traustason, A. D., & Hilmarsson, H. Þ. (2016). Iceland – UK Interconnector: Is Proper Political Risk Mitigation Possible? Project Management Development – Practice and Perspectives (pp. 350-363). Riga: University of Latvia / Professional Association of Project Managers.


51

Traustason, A. D., & Hilmarsson, H. Þ. (2016). Iceland-UK Interconnector: A Brief Analysis of Possible Risk Mitigation and Dispute Settlement. Journal of Applied Management and Investments, 5(1), 66-74.

Wagner, D. (2012). Managing country risk: a practitioner's guide to effective cross-border risk analysis. Boca Raton, Florida, United States of America: CRC Press / Taylor & Francis Group.

Yin, R. K. (2014). Case Study Research: Design and Methods (5 ed.). Thousand Oaks, California: Sage Publications, Inc.

7.3.2 Electronic Sources

European Investment Bank. (n.d.a.). Guarantees & Securitisation. Retrieved 12 18, 2015, from http://www.eib.org/products/blending/guarantees/index.htm

Landsvirkjun. (n.d.a). Submarine Cable to Europe. Retrieved from Landsvirkjun: http://www.landsvirkjun.com/ResearchDevelopment/Research/SubmarineCabletoEurope/

Landsvirkjun. (n.d.b). Sæstrengur. Retrieved from Landsvirkjun: http://www.landsvirkjun.is/rannsoknirogthroun/throunarverkefni/saestrengur/

Nordic Investment Bank. (2015). Annual Report 2014. Retrieved 12 18, 2015, from http://www.nib.int/filebank/a/1425933453/594634fd57e820fabc7eed56fd348aff/4379-NIB_Annual_Report_2014.pdf


i

8 Appendix A

8.1 Conducted Interviews

1. Björgvin Skúli Sigurðsson, Executive Vice President: Marketing and

Business Development Divison. Landsvirkjun sf. Conducted January 6,

2016 in Reykjavík, Iceland.

2. Ingvi Már Pálsson, LL.M, Director General: Department of Industry and

Energy, Ministry of Industries and Innovation. Conducted February 12,

2016 in Reykjavík, Iceland.

3. Erla Björk Þorgeirsdóttir, Manager – Master plan: Energy Generation,

National Energy Authority. Conducted February 12, 2016 in Reykjavík,

Iceland.

4. Sverrir Jan Norðfjörð, Executive Vice President, Development &

Technology, Landsnet (Icegrid). Conducted February 12, 2016 in

Reykjavík, Iceland.

8.2 Consultations

1. Pétur Dam Leifsson, Senior Lecturer, School of Social Sciences - Faculty

of Law University of Iceland. Conducted January 6, 2016 in Reykjavík,

Iceland.

2. Gylfi Zoega, Professor, School of Social Sciences - Faculty of

Economics, University of Iceland. Conducted January 6, 2016 in

Reykjavík, Iceland.


ii

9 Appendix B

This appendix contains the published articles as they appear in their original

format in addition to slides used in a presentation on the subject. The

presentation was originally delivered in an open seminar at the University of

Akureyri, hosted by the School of Business and Science, Faculty of Business

Administration. Some related material, such as marketing material and excerpts

from conference programmes, is also included in the appendix.

66

ICELAND-UK INTERCONNECTOR:

A BRIEF ANALYSIS OF POSSIBLE POLITICAL RISK

MITIGATION AND DISPUTE SETTLEMENT

Andri Dan Traustason, Student

Hilmar Þór Hilmarsson, PhD, Professor

School of Business and Science

University of Akureyri, Iceland

Introduction

There is growing debate regarding the feasibility of an electricity interconnector

between Iceland and the United Kingdom. Many different factors play a role when

assessing the feasibility of this project, but this article will mainly focus on the political

risks associated as well as ways to mitigate those risks. Furthermore, ways to seek

arbitration and settle disputes will be reviewed. The article will attempt to answer the

following research question: What are the political risks that Iceland could be

confronted regarding the Iceland – UK interconnector project and how can they be

mitigated?

Large scale energy projects, such as the proposed interconnector, take a long

time to develop and to construct. Moreover, the operating lifetime of these investments

can be of 20-30 years. Consequently, political risks need to be assessed with a few

decades in mind. Numerous reports and research papers have been published

evaluating the feasibility of the interconnector, but after conducting a literature review,

the authors did not find any comprehensive critical assessment of the political risks

associated with this project. Landsvirkjun, Iceland’s national power company has

compiled a comprehensive list of news as well as reports and other material about the

project on their website (Landsvirkjun, n.d.a; n.d.b) All of this information data was

included into the review. An interconnector can be defined as “…a cable or overhead

line connecting two separate market or pricing areas” (Turvey, 2006, p. 1457). This

particular interconnector is somewhat special in terms of its scale. It is estimated to be

over 1000km in length and have a transmission capacity of 800-1200MWh DC

(Landsvirkjun, n.d.a). Furthermore, it needs a significant amount of investment in

Iceland to become economically feasible. The total investment can be roughly divided

into three sections as follows:

the interconnector itself along with landing and launching stations in Iceland

and the United Kingdom.

strengthening of the national grid in Iceland, needed to cope with the increased

flow of electricity due to the interconnector.

the upgrade of current power stations in Iceland, in addition to the construction

of new ones, needed to increase electricity supply.

The total cost of the project has yet to be determined, but numerous parties have

come up with some estimates. For instance, according to a report made for the Ministry

of Industry and Innovation (Iceland) the investment needed ranges from 288 to 553

billion ISK (Hagfræðistofnun Háskóla Íslands, 2013). Bloomberg New Energy Finance

introduced a significantly higher sum of up to 813 billion ISK, or 4.327 billion GBP

(as cited in Gíslason, 2014 [using current exchange rates]). It is clear that regardless of

the final cost, investment into the project will be large, especially for a small economy

67

like in the case of Iceland. It would amount to a large portion of the country’s GDP,

possibly about 30 percent (Sigurðsson, 2014). The United Kingdom, on the other hand,

is one of the largest European economies in terms of GDP (World Bank, 2015).

Therefore, it would likely find the investment’s risks more manageable.

Methodology

Numerous relevant cases were studied to provide some insight into the problem

at hand. The methodology used in this article is the case study method. Compared to

other research methods, a case study enables the researcher to examine the issues

involved in greater depth. According to Yin (2009) six sources of evidence are most

commonly used in case studies. These are: documentation, archival records, interviews,

direct observations, participant-observation, and physical artefacts. Each of these

sources has advantages and disadvantages, and, according to Yin, one should “…note

that no single source has a complete advantage over all the others. In fact, the various

sources are highly complementary, and a good case study will therefore want to rely

on as many sources as possible” (2014). Information from international institutions,

government institutions and companies as well as academic journals played a key role

in this article. Furthermore, leading experts in the field at Harvard Business School,

John F. Kennedy School of Government, Fletcher School of Law and Diplomacy and

the University of Iceland were consulted. They provided valuable comments and ideas.

Political Risk Mitigation

Political risks can be defined as “Risks usually comprising currency

inconvertibility, expropriation, war and insurrection, terrorism, non-government

activists, and legal and administrative approvals” (Delmon, 2009, p. 598).

Furthermore, Salacuse states that ”(a) sudden, unexpected change in the rules (i.e. laws

and regulations) is a principal form of political risk, perhaps its very essence “ (2010,

p. 450). Risk associated with changes in policy, regulation and law is especially

important for the interconnector given the probable importance of Contracts for

Difference (CfD). These contracts are supposed to make investment into renewable

energy more attractive by partly guaranteeing revenue. In practice this has been done in

the UK by paying a variable top-up payment that amounts to the difference between

the market price on a yearly basis and a fixed strike price (Department of Energy and

Climate Change, 2013). The whole project could likely rely on such a scheme.

Landsvirkjun has shown interest in studying those contracts further (Landsvirkjun,

2013). Although it is not the only supplier of electricity in Iceland Landsvirkjun, a state

owned enterprise, is by far the largest (Orkustofnun, n.d.). Consequently, any decisions

on this project in Iceland are likely to be influenced by Landsvirkjun in some way, not

only because of its importance as an electricity supplier, but also due to its expertise

and research in recent years.

Many other interconnectors rely on other methods to acquire revenue, sometimes

without a long term revenue guarantee. One example is the NorNed interconnector

between Norway and the Netherlands which relies on price variation between energy

markets to secure a profit, rather than long term contracts. Interconnectors of this type

are called merchant interconnectors (Parail, 2009). The scale of the project is huge for

Iceland, as noted before, and it is crucial that the ownership and planning of the project

minimise risk for the Icelandic nation and maintain Iceland’s sovereign power over its

68

clean energy sources. A possible scenario to mitigate risk can be seen in Figure 1.

Figure 1. Possible Interconnector Scenario

In this scenario the interconnector is operated, owned and financed by a project

company, which would most likely be some sort of a public private partnership. It

would not be owned by Landsvirkjun or the government of Iceland. A public private

partnership can be defined as an “…arrangement between public and private entities

for the delivery of infrastructure services and are seen as a way of raising additional

funds for infrastructure investments but more importantly as a means to extend or

leverage better budget funding through efficiency gains” (Delmon, 2009, p. 7). The

PPP would serve as a project company for the interconnector and be guaranteed by the

UK government which might also provide guarantees for the necessary infrastructure

investments in Iceland.

In regard to the construction of new hydro and geothermal power stations in

Iceland, needed to increase supply of electricity, a BOT (build-operate-transfer),

financed by private investors, might be feasible. A BOT is a form of investment where

“…the project is transferred back to the party granting the concession (in this case the

Icelandic government or its SOEs)” (Delmon, 2009, p. 552). The BOT project would

pay a fee to the Icelandic government for the use of resources during the investment’s

lifetime. The project company would arrange a take-or-pay contract with energy

suppliers in Iceland.

According to Holland and Ashley (2013, p. 205) “…take-or-pay clauses require

a purchaser to pay for a minimum quantity of goods or services (i.e. electricity),

whether or not those goods or services are taken”. The project company would thus

assume the demand risk. A guaranteed minimum amount of electricity would in turn be

transferred via the interconnector to consumers in the UK at an agreed price. This

revenue guarantee could be provided with a CfD or other means. In addition, the

project company would pay a fee to Landsnet, Iceland’s national grid. These fees need

to cover the cost of investment and acceptable returns. Under the current law, it seems

unlikely that the necessary upgrade of Iceland’s national grid could be financed with

foreign investment (Raforkulög, 2003). However, foreign investors could take part in

the upgrade of current power stations.

Two international institutions in particular seem likely take part in infrastructure

financing of this sort. The European Investment Bank has a wide range of financial

instruments to offer and might provide loans and guarantees to support this project.

The bank puts a special emphasis on infrastructure and climate friendly projects and

has already lent close to 780 million EUR in Iceland, most of which went to renewable

energy projects recently (European Investment Bank, n.d.a; n.d.b). EIB also provides

guarantees which can in turn lower the cost of financing projects (European Investment

69

Bank, n.d.c). Another institution, of which Iceland is a founding member and part-

owner, the Nordic Investment Bank might also play some role in this regard (Nordic

Investment Bank, n.d.). National export credit agencies could provide guarantees for

trade finance related to the project (Dinh and Hilmarsson, 2014; Goncharuk, 2015).

The scenario in figure 1 could allow the private sector to take part in the project

and thus shift risks from the Icelandic government, its SOEs and the Icelandic nation to

the UK government and the consumers in the UK. Efficient allocation of risks is key to

the success of the project and the UK government is in the best position to prevent risk

events, such as energy policy changes in the UK that could negatively affect the

feasibility of the interconnector, from occurring. Therefore it should be willing to

assume most of the risks involved. This might seem far-fetched but renewable energy

projects seem to have a momentum and strong political backing in the UK. This can be

seen in a recent case, where the UK government partly insured a large nuclear energy

project (EDF Energy, 2015). Whether or not they would be willing to do the same for

foreign investment remains unclear. It must be noted that the abovementioned scenario

is only one of numerous possibilities. The project is still in the feasibility stage so

many factors remain unclear. However, it is certain that Iceland’s comparative

advantage lies in its resources – not economic power and ability to take on risks or

provide funding.

The State of Play

Political and commercial relations between the two countries, Iceland and the

UK, have normally been good. However, there have been some major exceptions.

Perhaps the most prominent ones are the Icesave dispute and the Cod Wars. The more

recent one revolved around Icesave during and following the 2008 crisis. One of the

measures undertaken by the UK was activating the Anti-terrorism, Crime and Security

Act of 2001 (Méndez-Pinedo, 2011) against Iceland. During the dispute Iceland was

largely isolated and without friends. Major central banks such as the European Central

Bank, the Bank of England and the Federal Reserve refused to assist. The limited

support provided by Nordic Central Banks proved inadequate. This shows that Iceland

cannot rely on “friendly” nations during times of crisis and political disputes with a

larger nation such as the UK (Hilmarsson, 2015). The former conflict, known as the

Cod Wars, occurred between 1952 and 1976 when Iceland expanded its fishery

territories. This led to the intervention of the British Royal Navy (Hellmann and

Herborth, 2008) and an unprecedented act given that both nations are NATO member

states.

Disputes in the energy sector in Europe have occurred in recent years due to

shifts in government policies, for instance in Spain and Germany. These cases show

that energy policies can change fast and have a detrimental effect on the feasibility of

investments in the energy sector. Spain used a support system of feed-in tariffs and

other subsidies to promote renewable energy generation. The first steps were taken

around 1980 and subsequent steps led to a highly subsidised renewable energy sector

(Gonzáles, 2008). What followed was a huge increase in renewable energy generation

(Bridle and Beaton, 2012). Consequently, the cost of the system increased and

eventually the Spanish government introduced policy changes to counter the problem.

This included cutting subsidies and increasing taxation on renewable energy suppliers,

thereby removing one of the main incentives that attracted investors to the sector in

70

Spain. Consequently, a large number of investor claims versus the Spanish government

were filed for arbitration. Many of these claims used provisions provided by the

Energy Charter Treaty which will be discussed later in the article (Baltag, 2015; White,

2013; Rucinski and Rodríguez, 2013).

A similar scenario occurred in Germany following the 2011 Fukushima nuclear

disaster. A shift in policy by the German government resulted in the phase out of

nuclear energy, earlier than had been announced before, and included the immediate

shut down of some old reactors. Vattenfall, owned by the Swedish government, owned

two of these reactors and filed for arbitration before the International Centre for

Settlement of Investment Disputes (ICSID) because of the losses associated. The

arbitration is listed under the Energy Charter Treaty, but further details are mostly

confidential (Vattenfall AB and others v. Federal Republic of Germany (ICSID Case

No. ARB/12/12)) (Bernasconi-Osterwalder and Brauch, 2014) (ICSID, n.d.a). This case

is known as ‘Vattenfall v Germany II’ because an earlier case, now known as

‘Vattenfall v Germany I’ had already been settled with the ICSID. That case, much like

the latter, came to because of a policy change. However, the origin of the dispute lay in

conditions set forth by the EU rather than the German government (ICSID, n.d.b;

Bernasconi, 2009; Vattenfall AB and others v. Federal Republic of Germany (ICSID

Case No. ARB/09/6)).

These cases are relevant to the proposed interconnector in many ways. They

show how political risks, in these cases policy changes or even expropriation, can

change the environment which investors entered into and negatively affect the

feasibility of the project. Something similar might very well occur during a long term

project such as the Iceland-UK interconnector. They also show what possibilities are

available for arbitration, although the outcome is somewhat unclear as many cases are

still pending and arbitration awards in concluded cases are often confidential.

Dispute Settlement

If disputes do occur, numerous different options are available for arbitration

between a PPP/investor and a state. The Energy Charter Treaty, which has been

mentioned before, could possibly be a player in that regard, due to the fact that both

Iceland and the UK have signed the treaty. Although the genesis of the charter lies in

cooperation between Eastern and Western Europe it spans a much wider range today.

Hobér states that the ECT is “…the only binding multilateral instrument dealing

with inter-governmental cooperation in the energy sector, and contains far-reaching

undertakings for the contracting parties. The ECT includes provisions regarding

investment protection, provision on trade, transit of energy, energy efficiency and

environmental protection and dispute resolution.” (2010, p. 155). Therefore it seems

clear that in the case of disputes, the ECT could prove beneficial. This is emphasised

further by the fact that there is currently no bilateral investment treaty between Iceland

and the UK (Kluwer Law International, 2016). Surely, many of the factors mentioned

above, in addition to financing, ownership and general operation of the interconnector,

will be addressed in a bilateral contract made especially for the project. The contract

could be made between the energy suppliers and a PPP or other contracting parties

including the two states involved. It might also state where and how disputes should be

settled. If provisions from the ECT are used, a few forms of international arbitration

are available (Hobér, 2010).

71

Perhaps the most prominent one, the International Centre for Settlement of

Investment Disputes (one of the five institutions of the World Bank), has already

shown its merit in the cases above. Iceland and the UK are both members (ICSID,

n.d.d). It uses a number of instruments for arbitration in disputes between member

states and nationals of other member states, i.e. investors. It does however, not make

procedural rulings. The ICSID website states that “Independent conciliation

commissions and arbitral tribunals constituted in each case are vested with the power

to rule on procedural issues and resolve the parties’ dispute (ICSID, n.d.e). ICSID

keeps a regularly updated list of cases on their website. A large number of cases are

listed with the ECT as an invoked instrument, many of which are between two

developed parties from Western Europe (ICSID, n.d.c). In addition to ICSID, the ECT

can use UNCITRAL and the Arbitration Institute of the Stockholm Chamber of

Commerce to settle disputes (Hobér, 2010). The New York Arbitration Convention

could also prove useful as Iceland and the UK are both members (The New York

Arbitration Convention, n.d.). Further research is needed to analyse other options

available.

Conclusion and Further Research

Given the state of the energy sector in Europe, in addition to historical relations

between Iceland and the United Kingdom, it certainly seems important to study

political risks that may affect the feasibility of the proposed interconnector. Ownership

and financing of the interconnector along with related infrastructure may become

predominant risk factors. Contracts for difference, possibly offered by the UK

government, might help improve the project’s feasibility in addition to mitigating some

risk. These contracts might also increase the project’s vulnerability in the case of

regulatory changes in the UK. The terms of the project have yet to be determined as it

is still in the feasibility stage. A bilateral contract could consider many of the

associated political risks. If disputes occur, a few well recognised organisations offer

international arbitration between PPPs and states, notably the Energy Charter and

ICSID. However, there are numerous other institutions that also offer arbitration,

though they have not been as prominent in recent cases.

This brief analysis has covered some of the ways available to mitigate political

risks related to the proposed interconnector between Iceland and the UK. There are, of

course, many other risk factors associated with the project, including environmental

and technical risks. In addition, legal issues are not covered in detail. These factors are

all subjects that need to be researched further and in greater detail.

References

Baltag, C. (2015), What's New with the Energy Charter Treaty, available at:

http://kluwerarbitrationblog.com/2015/06/13/whats-new-with-the-energy-

charter-treaty (accessed January 8, 2016).

Bernasconi, N. (2009), Background paper on Vattanfall v. Germany arbitration, s.l.,

International Institute for Sustainable Development, Winnipeg.

Bernasconi-Osterwalder, N. and Brauch, M.D. (2014), The State of Play in Vattenfall

v. Germany II: Leaving the German public in the dark, s.l., International Institute

for Sustainable Development, Winnipeg.

Bridle, R. and Beaton, C. (2012), Assessing the Cost-Effectiveness of Renewable

72

Energy Deployment Subsidies: Solar PV in Germany and Spain, s.l.:

International Institute for Sustainable Development, Winnipeg.

Delmon, J. (2009), Private sector investment in infrastructure: Project finance, PPP

projects and risk, Kluwer Law International, The World Bank.

Department of Energy and Climate Change (2013), Investing in renewable

technologies – CfD contract terms and strike prices, s.l.: s.n.

Dinh, T.Q. and Hilmarsson, H.Þ. (2014), “How can ECAs help solve funding

challenges for capital intensive projects in emerging market economics?”,

Journal of Applied Economics: Systematic Research, Vol. 8 No. 1, pp. 79-95.

EDF Energy (2015), Hinkley Point C., available at: http://www.edfenergy.com

/energy/nuclear-new-build-projects/hinkley-point-c (accessed January 11, 2016).

European Investment Bank (n.d.a.), Projects, available at: http://www.eib.org

/projects/index.htm (accessed January 11, 2016).

European Investment Bank (n.d.b.), Iceland, available at: http://www.eib.org

/projects/regions/efta/iceland/index.htm (accessed January 11, 2016).

European Investment Bank (n.d.c.), Guarantees and Securitisation, available at:

http://www.eib.org/products/blending/guarantees/index.htm (accessed January

11, 2016).

Gíslason, G.R. (2014), Samkeppnishæfur Sæstrengur, available at: http://www.vb.is

/frettir/samkeppnishaefur-saestrengur/101710/ (accessed January 11, 2016).

Goncharuk, A.G. (2015), “Food Business and Food Security Challenges in Research”,

Journal of Applied Management and Investments, Vol. 4 No. 4, pp. 223-230.

Gonzáles, P.d.R. (2008), “Ten years of renewable electricity policies in Spain: An

analysis of successive feed-in tariff reforms”, Energy Policy, Vol. 36 No. 8, pp.

2917-2929.

Hagfræðistofnun Háskóla Íslands (2013), Þjóðhagsleg áhrif sæstrengs, Report No.

C13:02, s.l., s.n.

Hellmann, G. and Herborth, B. (2008), “Fishing in the mild West: democratic peace

and militarised interstate disputes in the transatlantic community”, Review of

International Studies, Vol. 34 No. 3, pp. 481-506.

Hilmarsson, H.Þ. (2015), “The Collapse of the Icelandic Banking System and the

Inaction of the International Community”, Journal of Applied Management and

Investments, Vol. 4 No. 3, pp. 156-162.

Hobér, K. (2010), “Investment Arbitration and the Energy Charter Treaty”, Journal of

International Dispute Settlement , Vol. 1 No. 1, pp. 153-190.

Holland, B. and Ashley, P.S. (2013), “Enforceability of Take-or-Pay Provisions in

English Law Contracts – Revisited”, Journal of Energy and Natural Resources

Law, Vol. 31 No. 2, pp. 205-218.

ICSID (n.d.a.), Case No. ARB/12/12, available at: https://icsid.worldbank.org

/apps/icsidweb/cases/Pages/casedetail.aspx?caseno=ARB/12/12 (accessed

January 10, 2016).

ICSID (n.d.b.), Case No. ARB/09/6, available at: https://icsid.worldbank.org

/apps/ICSIDWEB/cases/Pages/casedetail.aspx?CaseNo=ARB/09/6 (accessed

January 10, 2016).

ICSID (n.d.c.), Cases, available at: https://icsid.worldbank.org/apps/ICSIDWEB/cases/

(accessed January 10, 2016).

ICSID (n.d.d.), Database of ICSID Member States, available at:

73

https://icsid.worldbank.org/apps/ICSIDWEB/about/Pages/Database-of-Member-

States.aspx (accessed January 11, 2016).

ICSID (n.d.e.), Process Overview, available at: https://icsid.worldbank.org

/apps/ICSIDWEB/process/Pages/Overview.aspx (accessed January 11, 2016).

Kluwer Law International (2016), Bilater Investment Treaties (BITs): Iceland,

available at: http://www.kluwerarbitration.com/CommonUI/BITs.aspx?

country=Iceland (accessed January 11, 2016).

Landsvirkjun (2013), Haustfundur 2013, available at: http://www.landsvirkjun.is

/Media/PPT_haustfundur2013_131113_OK_small.pdf (accessed January 11,

2016).

Landsvirkjun (n.d.a.), Submarine Cable to Europe, available at:

http://www.landsvirkjun.com/ResearchDevelopment/Research/SubmarineCablet

oEurope/ (accessed January 11, 2016).

Landsvirkjun (n.d.b), Sæstrengur, available at: http://www.landsvirkjun.is

/rannsoknirogthroun/throunarverkefni/saestrengur/ (accessed January 11, 2016).

Méndez-Pinedo, M.E. (2011), “The icesave Dispute in the Aftermath of the Icelandic

Financial Crisis: Revisiting the Principles of State Liability, Prohibition of State

Aid and Non-discrimination in Euopean Law” European Journal of Risk

Regulation, Vol. 2 No. 3, pp. 356-372.

Nordic Investment Bank (n.d.), NIB in Brief, available at:

http://annual.nib.int/2014/about-nib/nib-in-brief (accessed January 11, 2016).

Orkustofnun (n.d.), Raforkuvinnsla eftir framleiðanda 2014, available at:

http://www.orkustofnun.is/yfirflokkur/raforkutolfraedi/raforkutolfraedi-2014

/raforkuvinnsla-eftir-framleidanda-2014/ (accessed January 11, 2016).

Parail, V. (2009), “Can Merchant Interconnectors Deliver Lower and More Stable

Prices? The Case of NorNed”, Working Paper No. 0947, Cambridge Working

Papers in Economics, Faculty of Economics, University of Cambridge.

Raforkulög (2003), Laga nr. 65, 27 mars, available at: https://notendur.hi.is

/egill/raforkul_med_breytingum.pdf (accessed January 11, 2016).

Rucinski, T. and Rodríguez, J.E. (2013) “Exclusive: Foreign investors set to sue Spain

over energy reform”, Reuters, February 14.

Salacuse, J.W. (2010), “The Emerging Global Regime for Investment”, Harvard

International Law Journal, Vol. 51 No. 2, pp. 427-473.

Sigurðsson, B.S. (2014), “Viðskiptatækifæri sæstrengs: Breytingar í orkumálum

Evrópu”, Þjóðmál, pp. 22-28.

The New York Arbitration Convention (n.d.), Countries, available at:

http://www.newyorkconvention.org/countries (accessed January 11, 2016).

Turvey, R. (2006), “Interconnector Economics”, Energy Policy, Vol. 34, pp. 1457-

1472.

White, T. (2013), “Spain Power Deficit Widens 46% as Steps to Close Gap Founder”,

Bloomberg, April 25.

World Bank (2015), Gross domestic product 2014, available at:

http://databank.worldbank.org/data/download/GDP.pdf (accessed January 11,

2016).

Yin, R.K. (2014), Case Study Research: Design and Methods, Sage Publications,

Thousand Oaks, California.

74

ICELAND-UK INTERCONNECTOR:

A BRIEF ANALYSIS OF POLITICAL RISK

MITIGATION AND POSSIBLE DISPUTE SETTLEMENT


Hilmar Þór Hilmarsson University of Akureyri, Iceland

Abstract

The proposed interconnector between Iceland and the United Kingdom carries

numerous and different types of risks for Iceland. This article focuses on political risk.

Ownership of the interconnector and related infrastructure needs to be settled in a way

that minimizes political risk for the Icelandic nation without sacrificing national

sovereignty over its clean energy sources. A public-private partnership could use

various methods to mitigate risk. International institutions, such as the Energy Charter

Organization and the International Centre for Settlement of Investment Disputes (part

of the World Bank Group) could provide a basis for international arbitration in the

event of dispute. Other solutions, such as bilateral legal agreements and contracts for

difference, are also assessed with regard to the interconnector in addition to some

financing options.

Keywords: political risk, risk mitigation, cross-border investments, cross-border

financing, international business

Project Management Development – Practice and Perspectives Fifth International Scientific Conference on Project Management in the Baltic Countries

April 14-15, 2016, Riga, University of Latvia

350 Andri Dan Traustason, Hilmar Þór Hilmarsson

ICELAND – UK INTERCONNECTOR:

IS PROPER POLITICAL RISK MITIGATION POSSIBLE?

Andri Dan Traustason, University of Akureyri, School of Business and Science

Faculty of Business Administration, Akureyri, Iceland, [email protected]

Hilmar Þór Hilmarsson, University of Akureyri, School of Business and Science | Faculty of

Business Administration, Akureyri, Iceland, [email protected]

Abstract The proposed interconnector between Iceland and the United Kingdom carries numerous different

types of risk for Iceland. Ownership of the interconnector and the infrastructure related to it needs to be

settled in a way that minimizes political risk for the Icelandic nation without sacrificing national

sovereignty over its renewable energy sources. A public-private partnership project could use various

methods to mitigate risk, many of which are related to ownership and financing. Guarantees and loans

provided by IFIs, such as the European Investment Bank and the Nordic Investment Bank, might play a

key role in the mobilisation of capital. Export credit agencies might also support trade finance. Other

solutions, such as a bilateral legal agreement and contracts for difference, will also be assessed with

regard to the interconnector. In the event of disputes occurring, the Energy Charter Organization and

ICSID, of the World Bank, might be key players among other institutions. This would require serious

arbitration provisions in those agreements and awards would be subject to the New York Convention.

Keywords: Political risk, risk mitigation, cross-border investments, international business, dispute

settlement.

JEL Code: P48, F50, G28, G32, F23.

Introduction

The proposed interconnector is by no means a new idea (Thoroddsen, 1954; Gíslason,

1955). It has been contemplated for decades but due to various issues, including technical and

financial concerns, it has not been seriously considered until in recent years. Landsvirkjun,

Iceland’s National Power Company, has compiled a list of reports, news and other literature

related to the proposed interconnector on their website (Landsvirkjun, n.d.a; Landsvirkjun,

n.d.b). A literature review, carried out by the authors, included this list among other relevant

literature. According to this review, the vast majority of articles on the subject cover the

economic and financial aspects of the interconnector as well as environmental and technical

factors. Current research on the subject therefore apparently fails to address political risks

properly, even though serious incidents have occurred in the history of the two nations. Political

and commercial relations between Iceland and the UK are normally good, as is usually the case

between two western nations, but there have certainly been some major exceptions. Serious

disputes have erupted in the past, for instance the Cod Wars, when Iceland expanded its fishery

territory, (Hellmann & Herborth, 2008) and more recently, the Icesave dispute when the UK

activated the Anti-terrorism, Crime and Security Act of 2001 against Iceland (Méndez-Pinedo,

2011). During the Icesave dispute, Iceland was largely isolated and without friends. Major

central banks such as the European Central Bank, the Bank of England and the Federal Reserve

refused to assist. The limited support provided by Nordic Central Banks proved inadequate.

This shows that Iceland cannot rely on allies during times of crisis and political disputes with a

mailto:[email protected]

mailto:[email protected]



Andri Dan Traustason, Hilmar Þór Hilmarsson 351

larger nation such as the UK (Hilmarsson, 2015; Goncharuk, 2016). Both disputes had serious

economic and political consequences for Iceland.

Furthermore, numerous disputes have arisen due to shifts in government policies within

the energy sector in Europe in recent years, some of which had serious consequences for the

parties involved. It is therefore clearly important to assess the political risks involved and

contemplate possible solutions. Because of the large scale and long operating lifetime of the

interconnector, incidents such as those mentioned above cannot be overlooked, and studies that

do not take political risk properly into account are insufficient to make a final decision about the

feasibility of Iceland’s participation in this project.

An electricity interconnector, such as the one in question here can be defined as “… a

cable […] connecting two separate market or pricing areas” (Turvey, 2006, p. 1457). This kind

of energy projects tend to be very large and with long repayment periods. As a result, they face

political risks that may adversely affect their viability (Bankes, 2012). The investment needed

for this particular project can be roughly divided into three different phases. Those phases differ

considerably in terms of required funding and scale but all must be taken care of to get the

1000km long 800-1200MWh DC interconnector operational (Landsvirkjun, n.d.a). The phases

are as follows:

Investment needed to upgrade and increase the supply of electricity in

Iceland, including the construction of geothermal and hydro-electric plants.

Investment related to the strengthening of the national grid and the construction

of launching and landing stations.

Investment to construct the interconnector.

The total amount of investment needed for the interconnector is not certain but for the last

few years, numerous different parties have come up with estimates. For instance, The Institute

of Economic Studies at the University of Iceland stated that the total investment needed ranged

from 288 to 553 billion ISK (Hagfræðistofnun Háskóla Íslands, 2013). Bloomberg New Energy

Finance suggested a considerably higher estimate of up to 813 billion ISK or 4.327 bnGBP (as

cited in Gíslason, 2014 [using current exchange rates]). It seems likely that the total investment

will be in excess of 4 bnGBP, of which a significant portion will be allocated to grid

connections and upgrades, power plants and related infrastructure. Björgvin Skúli Sigurðsson

(2014, p. 26), executive vice president for the Marketing and Business Development division at

Landsvirkjun, notes that although the investment is huge compared to the Icelandic economy

(the average estimate of 553 bnISK is roughly 30% of gross domestic product) this certainly is

not the case for the UK, a much larger player in the global economy.

The main subject of this article is to analyse the important role of political risks in this

particular energy project and consequently look at available risk mitigation instruments and

venues for dispute settlement. Moreover, the article will seek ways to answer the following

research questions: Is proper risk mitigation possible for the Iceland – UK electricity

interconnector? What would be possible venues for dispute settlement? While this article

focuses on political risks, numerous other types of risks are apparent, such as technical,

financial, economic and environmental, which is not the subject of this article.

In an attempt to answer these research questions, information was collected from many

different sources including – but not limited to – international financial institutions (IFIs),

government institutions and state-owned-enterprises (SOEs). In addition, leading experts within

the field at Harvard Business School, John F. Kennedy School of Government, Fletcher School

of Law and Diplomacy, Landsvirkjun and University of Iceland were consulted.




Numerous relevant cases for clean energy investments were studied to provide some

insight into the problem at hand. The methodology used is the case study method. Compared to

other research methods, a case study enables the researcher to examine the issues involved in

greater depth. According to Yin (2014), six sources of evidence are most commonly used in

case studies. These are documentation, archival records, interviews, direct observations,

participant-observation and physical artefacts. Each of these sources has advantages and

disadvantages and according to Yin (2014, p. 105), one should “…note that no single source

has a complete advantage over all the others. In fact, the various sources are highly

complementary, and a good case study will therefore want to rely on as many sources as

possible”.

Possible solutions

A wide variety of factors affect the risk profile of this project. Ownership and financing

of the interconnector and related infrastructure play a key role in that regard. This needs to be

settled in such a way as to minimize political risks without compromising an acceptable return

for the investment. Besides solutions related to ownership and financing, preliminary results

suggest a few possible options available for the Iceland – UK interconnector which also include

ways to settle disputes, should they occur:

A well-established power purchase agreement and/or Contracts for Difference,

possibly offered by the UK government, could mitigate some risks.

Other risk mitigation solutions could include serious arbitration provisions in

the agreement that both parties find appropriate. This could be included in a bilateral

investment treaty between Iceland and the United Kingdom. Currently, there is no

bilateral investment treaty between the countries (Kluwer Law International, 2016)

Dispute settlement under the Energy Charter Treaty, which Iceland and the

United Kingdom have both ratified (Energy Charter, n.d.a). Dispute settlement via the

International Centre for Settlements of Investment Disputes (ICSID) of the World Bank,

of which Iceland and the United Kingdom are both members (International Centre for

Settlement of Investment Disputes, n.d.a). Other forums of international arbitration

might also be beneficial. Awards would be subject to the New York Convention.

Other options that deal with financing, as well as risk mitigation, might include

export credit agencies and investment banks, such as the European Investment Bank

and the Nordic Investment Bank. By providing loans and guarantees, they might assist

in the financing of the project and lower risk premiums.

Ownership and financing of the proposed interconnector, as well as related infrastructure,

has yet to be determined. After these factors are settled and the terms of the project are agreed, it

is crucial that all commitments and agreements will be honoured by both parties throughout the

contract period. Any large and unexpected changes in the policy, including laws or regulations

of the participating countries, might be detrimental. Such changes are a principle form of

political risk according to Salacuse (2010) and may even be the essence of it. In more general

terms, political risk can be defined as “…the probability of disruptions in company operations

by political forces and events” (The World Bank Group [International Finance Corporation &

Multilateral Investment Guarantee Agency], 2012).




Ownership & Financing

As stated before, ownership can have a significant impact on the project’s political risk

profile. Due to the enormous scale of the project, it seems clear that the Icelandic government

and its institutions or SOEs have neither the capabilities nor the will to invest in the project

directly and consequently take on the risks that follow. In light of these circumstances the

authors believe that a likely outcome is that the project will be a public-private partnership of

some kind. A public-private partnership can be defined as an "…arrangement between public

and private entities for the delivery of infrastructure services and are seen as a way of raising

additional funds for infrastructure investments but more importantly as a means to extend or

leverage better budget funding through efficiency gains (Delmon, 2009, p. 7). In fact, numerous

private investors – mainly, Atlantic Superconnection Corporation, Powerbridge LLC and

Starwood Energy Group – have been named as companies showing interest in taking some part

in the project (Eysteinsson, 2015). A possible ownership scenario, incorporating the private

sector, can be seen in figure 1, below.

Figure 1. A possible ownership scenario, incorporating the private sector

Source: Authors’ construction

According to this scenario (figure 1), the interconnector would be operated, owned and

financed by a project company which would be some sort of a public-private partnership

without the direct involvement of the Icelandic government or its SOEs. The PPP would serve

as a project company for the interconnector and have a state-guarantee from the UK government

that could be critical for its capital mobilization efforts. Investment-guarantees for necessary

infrastructure in Iceland might also be provided by the UK government, as was done in a recent

project in the UK45

. These infrastructure investments could include the construction of new

hydro and geothermal power stations in Iceland in addition to the upgrade of current utilities. In

order to enable private investors to take part in these investments, a Build-Operate-Transfer

(BOT)46

arrangement might be feasible. To be able to secure a steady supply of electricity to the

UK, the project company would arrange take-or-pay47

contracts with renewable energy

45

The UK government recently provided a 2 billion GBP guarantee for a large nuclear energy project

(EDF Energy, 2015). 46

A BOT is a form of investment where "…the project is transferred back to the party granting the

concession [in this case the Icelandic government or its SOEs]” (Delmon, 2009, p. 552). 47

According to Holland and Ashley “…take-or-pay clauses require a purchaser to pay for a minimum

quantity of goods or services [i.e. electricity], whether or not those goods or services are taken.” (2013, p.

205).




suppliers in Iceland and therefore assume the demand risk. These take-or-pay arrangements

would have a UK government guarantee.

A guaranteed minimum amount of electricity would, in turn, be transferred via the

interconnector to consumers in the UK at an agreed minimum price. This revenue guarantee

could be provided with a power purchase agreement, Contracts for Difference or perhaps some

other means. In addition, the project company would pay a fee to Landsnet, Iceland’s national

grid. These fees need to cover the cost of investment with acceptable returns and be guaranteed

by the UK government. Under the current law, it seems unlikely that the necessary upgrade of

Iceland’s national grid could be financed with foreign investment (Raforkulög nr. 65 , 27. mars

2003). The scenario in figure 1 could enable the private sector to take part in the project and

thus shift risks from the Icelandic government, its SOEs and the Icelandic nation to the UK

government and the consumers in the UK. Efficient allocation of risks is key to the success of

the project and the UK government is in the best position to prevent such political risk events

from occurring. Those events could include energy policy changes in the UK that might

negatively affect the feasibility of the interconnector. Therefore, it should be willing to assume

most of the political risks involved.

Power purchase agreements (PPAs) are frequently used when participating parties face

considerable uncertainty. In some cases, it is unclear whether supply will meet demand or if the

spot prices are high enough to secure the necessary minimum revenue. These are some of the

main reasons for the use of PPAs in energy projects according to the Public Private Partnership

in Infrastructure Resource Center (n.d.). One might assume this to be the case with regard to the

proposed interconnector. As a very large and expensive long term project, it might be very

sensitive to price changes whether they stem from increased competition or other risk factors.

In addition to PPAs, it is worth mentioning that the United Kingdom's Department of

Energy and Climate Change offers Contracts for Difference (CfDs) as part of the Electricity

Market Reform programme which is meant to make investments in renewable energy more

attractive. The CfDs are at the core of the programme and ensure that the generation of energy

from renewable resources is economically feasible by paying the variable difference between

the market price and a fixed price, i.e. the strike price. Consequently, investor uncertainty is

lowered and financing ‘green’ projects becomes cheaper (Department of Energy and Climate

Change, 2013).These contracts were introduced as part of the Energy Act in 2013 which is “An

Act to make provision for the setting of a decarbonisation target range and duties in relation to

it”(Energy Act 2013, p. 1).

The importance of CfDs for the project seems to be considerable. Landsvirkjun has

shown interest in studying these contracts further (Landsvirkjun, 2013). Although it is not the

only supplier of electricity in Iceland, Landsvirkjun – an SOE – is by far the largest

(Orkustofnun, n.d.). Consequently, any decisions on this project in Iceland are likely to be

influenced by Landsvirkjun in some way, not only because of its importance as an electricity

supplier, but also due to its expertise and research within the renewable energy sector.

Furthermore, other potential investors, such as the Atlantic Superconnection Corporation, have

stated that CfDs play a key role in the project’s revenue stream (Atlantic Superconnection

Corporation, 2014).

One might argue that it is essential for the feasibility of the interconnector to secure such

a contract and the revenue guarantees that follow. While that may be true, they might also

increase the effect of political risks on the project. The consequences of government action,

such as policy changes, could seriously undermine the feasibility of the interconnector. The




likelihood of these events occurring might be high. In fact, the UK government recently made

changes to its renewables subsidies in order to cut costs (Department of Energy & Climate

Change and The Rt Hon Amer Rudd MP, 2015). It is essential that any contracts about the

project include provisions that cover this possibility. Despite this, CfDs remain a possibility and

might play an integral role in the first stages of negotiation about the project.

Securing a revenue stream is not the only aspect of getting the project operational. It must

be financed as well. How this will be done is unclear but preliminary results suggest a few

possible options in addition to equity funding and loans from private investment banks. Some

IFIs, such as the European Investment Bank (EIB) and the Nordic Investment Bank (NIB)

provide financing as well as risk mitigation instruments, i.e. guarantees. The EIB, which is

entirely owned by member states of the European Union, mainly provides loans but may also

provide guarantees. According to Matsukawa & Habeck (2007, p. 45), the EIB provides the

following instruments: “Inside EU: EIF loan guarantees, microcredit guarantees, equity

guarantees, and loan guarantee. Outside EU: political risk carve-out on guarantees to EIB

[…]; credit enhancement guarantees by EIB to assist local borrowers to raise funds; portfolio

credit risk sharing with local banks”. These instruments are available to large as well as small

projects for private and public beneficiaries. Guarantees such as those mentioned can be

beneficial for projects in addition to possible loans from the EIB. The benefits mainly stem from

lower capital charges and greater value added (European Investment Bank, n.d.a.). Whether or

not these solutions from the EIB would be available for the interconnector remains to be seen.

Furthermore, it is unclear if the parties involved would choose to approach the EIB at all.

However, it is clear that the EIB has already financed numerous projects in Iceland for around

EUR 780 million, most of which (EUR 650 million) were associated with renewable energy

production (European Investment Bank, n.d.). The EIB has attached high priority to clean

energy projects in recent years.

Another IFI worth noting is the Nordic Investment Bank. Just as the EIB, it offers long-

term loans and guarantees that can support capital mobilization. Its main area of operation is the

Nordic and Baltic region. The NIB attaches special emphasis on the development of clean

energy projects and environmentally friendly solutions in general (Nordic Investment Bank,

2015). One might assume that the export of energy from renewable resources fits the emphasis

well.

In addition to this, national export credit agencies could also take part in the project and

provide guarantees for related trade finance (Dinh & Hilmarsson, 2014). A recent example of

this occurred when Japan Bank for International Cooperation took part in the financing of a

renewable energy project in Iceland in cooperation with other financial institutions

(Landsvirkjun, 2015).

Dispute Settlement

Where and how disputes can be settled is likely to be included in the agreements related

to the project. This might be a bilateral investment treaty between Iceland and the UK, which –

as noted before – is non-existent at the moment, or a contract made on an ad hoc basis for the

interconnector project. Numerous forums of international arbitration are available but

preliminary results suggest a few in particular. The Energy Charter Treaty is important in that

regard because the dispute settlement venue depends, to a degree, on provisions in the treaty.

Iceland and the UK have both ratified the treaty so it will likely affect the project in some ways.

The roots of the Energy Charter Treaty lie in the problem that many countries faced at




the turn of the last century when they themselves lacked energy resources but other, more

politically unstable, countries had an abundance of resources but needed foreign investment.

Consequently, steps were taken to amend this problem and in 1998, the ECT came into power.

The treaty mainly aims to minimize non-commercial risks and promote investment within the

energy sector (Hobér, 2010; Energy Charter , n.d.b). According to Hobér (2010, p. 155), the

ECT is "…the only binding multilateral instrument dealing with inter-governmental cooperation

in the energy sector, and contains far-reaching undertakings for the contracting parties. The

ECT includes provisions regarding investment protection, provisions on trade, transit of energy,

energy efficiency and environmental protection and dispute resolution”. It seems clear that these

provisions could be very beneficial in reducing political risk for the interconnector project.

Dispute settlement under the ECT has taken place numerous times and the frequency is

rising along with increased renown of the treaty and, in turn, more awareness by investors. The

Energy Charter Website mentions three ways for investors to bring a dispute to arbitration under

the treaty.

“the International Centre for the Settlement of Investment Disputes

(ICSID - an autonomous international institution with close links to

the World Bank); a sole arbitrator or an ad hoc arbitration tribunal

established under the rules of the United Nations Commission on

International Trade Law (UNCITRAL); or an application to the

Arbitration Institute of the Stockholm Chamber of Commerce.”

(Energy Charter, n.d.c).

According to these options, dispute settlement under the treaty can work in close relation

with ICSID, among other institutions. Hobér (2010) names numerous cases which have been

settled by ICSID under the Energy Charter Treaty. Arbitral awards set under the treaty are

binding and final so each contracting party has to act accordingly (Energy Charter, n.d.c).

As noted above, both Iceland and the United Kingdom are members of ICSID and as such

have access to arbitration and conciliation services. It uses a number of instruments for

arbitration in disputes between member states and nationals of other member states, i.e.

investors. The ICSID Convention is one of those instruments and has very wide state support

with 159 signatory states and 151 contracting states (International Centre for Settlement of

Investment Disputes, 2015). The Convention works as a neutral and independent system that

allows ICSID member states and their nationals to settle investment disputes in a fair manner

using a basic arbitration and conciliation framework provided by the Convention. The ICSID

website states that “Independent conciliation commissions and arbitral tribunals constituted in

each case are vested with the power to rule on procedural issues and resolve the parties’

dispute” (International Centre for Settlement of Investment Disputes, n.d.e). If the parties

involved agree to the ICSID proceedings under the Convention they accept the arbitration as an

exclusive, final and binding solution (International Centre for Settlement of Investment

Disputes, n.d.b.).

The other arbitration venues mentioned – the Arbitration Institute of the Stockholm

Chamber of Commerce and a tribunal set under the United Nations Commission on

International Trade Law (UNCITRAL) – are also valid options, although they are not used as

commonly as ICSID in ECT cases (Energy Charter, n.d.). UNCITRAL is the “…core legal body

of the United Nations system in the field of international trade law” (UNCITRAL, n.d.a). It




provides arbitration rules which cover state-state as well as investor-state disputes (UNCITRAL,

n.d.b). The Arbitration Institute of the Stockholm Chamber of Commerce also offers

international arbitration services which the contracting parties of the project might agree to

(Arbitration Institute of the Stockholm Chamber of Commerce, n.d.a; n.d.b). In addition, The

Convention on the Recognition and Enforcement of Foreign Arbitral Awards, somewhat better

known as The New York Convention could be useful by enforcing arbitral awards after disputes

are settled, as both Iceland and the UK have ratified the Convention (New York Arbitration

Convention, n.d.a; United Nations, 1958). Examples of how some of these arbitration options

can be used can be seen in recent cases.

Recent experiences

Most cases related to political risk mitigation and dispute settlement are between

developing and developed countries. Because of that, cases between two developed, high-

income countries, are not abundant. However, the number of disputes within the energy sector

in Europe, Spain in particular, has increased significantly in recent years. Many of these

disputes occurred due to changes in subsidies that were meant to promote investment in

renewable energy. Nathanson (2012) notes that such policy changes are one of the primary

barriers of renewable energy investment.

Spain used a system of subsidies, mainly feed-in tariffs, to promote the solidification of

renewable energy within the country. By implementing a series of subsidies, Spain continuously

strengthened this system. For instance, renewable energy suppliers were offered a choice of

either a fixed total price (fixed feed-in) or a fixed premium in addition to the market price, much

like the CfDs mentioned before (Gonzáles, 2008). The system was meant to limit investor risk

as well as financing costs by providing security and revenue guarantees (Río & Gual, 2007).

This resulted in a significant increase in renewable energy generation. Most importantly, solar

photovoltaic generation expanded from 18GWh in 2000 to c.a. 6.4 TWh in 2010 (Bridle &

Beaton, 2012). Consequently, the feed-in tariffs became a huge burden on the Spanish state and

the situation was made even worse by unfavourable market conditions (White, 2013). The

policy changes that followed were intended to close this deficit by reducing subsidies and

introducing additional limitations on renewable energy generators, therewith compromising the

rationale that had attracted investors to the sector. A large number of claims followed, many of

which were filed with ICSID under the ECT (Baltag, 2015; Rucinski & Rodríguez, 2013). The

Energy Charter Secretariat maintains a regularly updated list of cases where the ECT is an

invoked instrument and there are currently 27 listed in Spain (Energy Charter, n.d.). Many of

these cases have yet to be settled and will have to be analysed further at a later point in time.

Similar situations have occurred in other European countries. One recent case, in

particular, received substantial attention. It occurred in Germany following the 2011 Fukushima

nuclear disaster. A shift in policy by the German government resulted in the phase-out of

nuclear energy, earlier than had been announced before, and included the immediate shut-down

of some old reactors. Vattenfall, owned by the Swedish government, partly owned two of these

reactors and filed for arbitration before ICSID because of the losses associated. The arbitration

is listed under the Energy Charter Treaty but further details are mostly confidential (Vattenfall

AB and others v. Federal Republic of Germany (ICSID Case No. ARB/12/12)) (Bernasconi-

Osterwalder & Brauch, 2014; International Centre for Settlement of Investment Disputes, n.d.a;

Vattenfall AB, 2014; World Nuclear Association, 2015).

These cases from Spain and Germany are only examples of some of the recent disputes




that have occurred within the energy sector in Europe. Of course, other cases may be relevant,

some of which may have occurred outside of Europe, but they will not be analysed in this

article. As the proposed interconnector is rather unique, with regards to size and other factors,

cases directly related to it are hard to come by. There are, however, other interconnectors which

may provide some comparison for the project.

One energy project that is often mentioned in the discussion about the Iceland – UK

interconnector, is the NorNed interconnector between Norway and the Netherlands.

Commissioned in 2008, the 580km long 700 MW merchant interconnector depends on price

variations between markets to secure a profit (Nooij, 2011; Parail, 2009). As such, its revenue

model is likely to differ from the Iceland-UK interconnector, which is – as stated before – likely

to rely on revenue guarantees. The NorNed project was a joint venture between the national

electricity grids in Norway and the Netherlands, Statnett and Tennet respectively. The project

was partly financed by the Nordic Investment Bank. It is therefore clear that although NIB

primarily engages in the Nordic and Baltic region it also participates in projects that have

connections outside this specific area of operations (Nordic Investment Bank, 2007). EIB also

took part in the financing of the NorNed project and financed 50%, even more than NIB. The

project matched the EUs emphasis on sustainable energy as well as the integration of energy

markets throughout Europe (European Commission, 2007). NorNed is likely to be financed and

operated differently from the proposed interconnector between Iceland and the UK. However, it

highlights some of the financing options available for the project at hand.

Conclusion and further research

It seems clear that the proposed interconnector between Iceland and the UK could have

access to a variety of risk mitigation instruments, financing options as well as forums for

international arbitration. However, it is rather unclear which of them are most feasible. This is,

to a large extent, due to the fact that many important decisions regarding the interconnector have

yet to be made. Regardless of these decisions, it certainly seems important to study political

risks and the effects they may have on the feasibility of the proposed interconnector. The state

of the energy sector in Europe, in addition to historical relations between Iceland and the United

Kingdom, shows that it would be ill-advised not to analyse the effect of political risk factors on

this project in detail.

Ownership and the financing of necessary infrastructure, as well as the interconnector

itself, may be one of the most important risk factors. There are many possible solutions that may

be suitable for the project. The article showcased one ownership scenario where risk is shifted to

the UK away from the Icelandic public and its government. A public-private partnership played

a key role in that scenario and it is likely that it would be the case in many scenarios that allow

the private sector to take part in the project, including financing. Regardless of ownership, the

project – including infrastructure upgrades – must be financed. The participation of the

European Investment Bank and the Nordic Investment Bank may be beneficial in that regard.

Both of them offer loans and guarantees that might be available and feasible if the project

company and other parties involved choose to approach them for participation.

A comprehensive power purchase agreement or Contracts for Difference, possibly

offered by the UK government, might partly guarantee revenue and mitigate certain risks. These

contracts might also increase the project’s vulnerability to regulatory changes in the UK. Recent

cases in Europe have shown that energy reforms and policy changes in general can have a




significant impact on investment feasibility within the sector.

Due to the risk of policy changes occurring, it is imperative that any agreements about

the project address dispute settlement and where it may take place. If disputes occur, a few well-

recognised organisations offer international arbitration which might be available. Where

disputes are settled is, however, dependant on the parties involved. If the opinions put forth in

the article materialise, the dispute would likely be between a PPP company and a state. The

Energy Charter and ICSID are likely to play a key role in these cases. This is supported by

recent cases from Europe where the ECT was used in ICSID arbitration of investor-state

disputes. However, there are numerous other institutions that also offer arbitration, though they

have not been as prominent in recent cases. The subjects of this article are only a few of the

many factors that need to be analysed further. The article is largely based on preliminary results

as the project is still in the feasibility stage and many factors remain unclear.

References Arbitration Institute of the Stockholm Chamber of Commerce, n.d.a. Arbitration. [Online] Available at:

http://sccinstitute.com/dispute-resolution/arbitration/ [Accessed 6 2 2016].

Arbitration Institute of the Stockholm Chamber of Commerce, n.d.b. Dispute Resolution Services.

[Online] Available at: http://sccinstitute.com/dispute-resolution/ [Accessed 6 2 2016].

Atlantic Superconnection Corporation, 2014. Atlantic Superconnection Corporation: response to Ofgem

consultation on the future of electricity interconnection: Proposal to roll out a cap and floor

regime to near term projects. [Online] Available at:

https://www.ofgem.gov.uk/sites/default/files/docs/2014/08/atlantic_superconnection_response_cap

_and_floor_near_term_projects_consultation.pdf [Accessed 3 2 2016].

Baltag, C., 2015. What's New with the Energy Charter Treaty. [Online] Available at:

http://kluwerarbitrationblog.com/2015/06/13/whats-new-with-the-energy-charter-treaty/ [Accessed

8 1 2016].

Bankes, N., 2012. Decarbonising the Economy and International Investment Law. Journal of Energy &

Natural Resources Law, 30(4), pp. 497-510.

Bernasconi-Osterwalder, N. & Brauch, M. D., 2014. The State of Play in Vattenfall v. Germany II:

Leaving the German public in the dark, s.l.: International Institute for Sustainable Development.

Bridle, R. & Beaton, C., 2012. Assessing the Cost-Effectiveness of Renewable Energy Deployment

Subsidies: Solar PV in Germany and Spain, s.l.: International Institute for Sustainable

Development.

Delmon, J., 2009. Private sector investment in infrastructure: Project finance, PPP projects and risk. 2

ed. Alphen Aan Den Rijn: Kluwer Law International & The World Bank.

Department of Energy & Climate Change and The Rt Hon Amer Rudd MP, 2015. Changes to renewables

subsidies. [Online] Available at: https://www.gov.uk/government/news/changes-to-renewables-

subsidies [Accessed 3 2 2016].

Department of Energy and Climate Change, 2013. Investing in renewable technologies – CfD contract

terms and strike prices, s.l.: s.n.

Dinh, T. Q. & Hilmarsson, H. Þ., 2014. How can ECAs help solve funding challenges for capital

intensive projects in emerging market economics?. Journal of Applied Economics: Systematic

Research, 8(1), pp. 79-95.

EDF Energy, 2015. Hinkley Point C. [Online] Available at: http://www.edfenergy.com/energy/nuclear-

new-build-projects/hinkley-point-c [Accessed 11 1 2016].

Energy Charter , n.d.b. What we do: Investment - Overview. [Online] Available at:

http://www.energycharter.org/what-we-do/investment/overview/ [Accessed 18 12 2015].




Energy Charter, n.d.a. Constituency of the Energy Charter Conference: Members of the Energy Charter

Conference. [Online] Available at: http://www.energycharter.org/who-we-are/members-

observers/ [Accessed 17 12 2015].

Energy Charter, n.d.c. What we do: Use of the Dispute Settlement Mechanisms. [Online] Available at:

http://www.energycharter.org/what-we-do/dispute-settlement/use-of-the-dispute-settlement-

mechanisms/ [Accessed 18 12 2015].

Energy Charter, n.d.. Investment Dispute Settlement Cases. [Online] Available at:

http://www.energycharter.org/what-we-do/dispute-settlement/investment-dispute-settlement-cases/

[Accessed 8 1 2016].

European Commission, 2007. The European Investment Bank finances NorNed - the submarine power

cable linking the Netherlands and Norway. [Online] Available at: http://europa.eu/rapid/press-

release_BEI-07-118_en.htm?locale=en [Accessed 18 12 2015].

European Investment Bank, n.d.a.. Guarantees & Securitisation. [Online] Available at:

http://www.eib.org/products/blending/guarantees/index.htm [Accessed 18 12 2015].

European Investment Bank, n.d.. Iceland. [Online] Available at:

http://www.eib.org/projects/regions/efta/iceland/index.htm [Accessed 18 12 2015].

Eysteinsson, Æ. Þ., 2015. Bandarísk stórfyrirtæki vilja leggja sæstreng til Íslands - funduðu með

ráðherrum í síðustu viku. [Online] Available at: http://kjarninn.is/frettir/bandarisk-storfyrirtaeki-

vilja-leggja-saestreng-til-islands-fundudu-med-radherrum-i-sidustu-viku/ [Accessed 21 11 2015].

Gíslason, G. R., 2014. Samkeppnishæfur Sæstrengur. [Online] Available at:

http://www.vb.is/frettir/samkeppnishaefur-saestrengur/101710/ [Accessed 2 1 2016].

Gíslason, J., 1955. Vatnsafl Íslands, útflutningur á raforku og stóriðja. Tímarit Verkfræðingafélag Íslands,

40(1), pp. 9-16.

Goncharuk, A. G., 2016. Banking Sector Challenges in Research. Journal of Applied Management and

Investment, 5(1), pp. 34-39.

Gonzáles, P. d. R., 2008. Ten years of renewable electricity policies in Spain: An analysis of successive

feed-in tariff reforms. Energy Policy, 36(8), pp. 2917-2929.

Hagfræðistofnun Háskóla Íslands, 2013. Þjóðhagsleg áhrif sæstrengs (Report nr. C13:02), s.l.: s.n.

Hellmann, G. & Herborth, B., 2008. Fishing in the mild West: democratic peace and militarised interstate

disputes in the transatlantic community. Review of International Studies, 34(3), pp. 481-506.

Hilmarsson, H. Þ., 2015. The Collapse of the Icelandic Banking System and the Inaction of the

International Community. Journal of Applied Management and Investment , 4(3), pp. 156-162.

Hobér, K., 2010. Investment Arbitration and the Energy Charter Treaty. Journal of International Dispute

Settlement, 1(1), pp. 153-190.

Holland, B. & Ashley, P. S., 2013. Enforceability of Take-or-Pay Provisions in English Law Contracts -

Revisited. Journal of Energy & Natural Resources Law, 31(2), pp. 205-218.

International Centre for Settlement of Investment Disputes, 2015. 2015 Annual report. [Online] Available

at: https://icsid.worldbank.org/apps/ICSIDWEB/resources/Documents/ICSID_AR15_ENG_CRA-

highres.pdf [Accessed 17 12 2015].

International Centre for Settlement of Investment Disputes, n.d.a. Case Details: Case No. ARB/12/12.

[Online] Available at:

https://icsid.worldbank.org/apps/icsidweb/cases/Pages/casedetail.aspx?caseno=ARB/12/12

[Accessed 10 1 2016].

International Centre for Settlement of Investment Disputes, n.d.a. Database of ICSID Member States.

[Online] Available at: https://icsid.worldbank.org/apps/ICSIDWEB/about/Pages/Database-of-

Member-States.aspx [Accessed 11 1 2016].

International Centre for Settlement of Investment Disputes, n.d.b.. Process Overview. [Online] Available

at: https://icsid.worldbank.org/apps/ICSIDWEB/process/Pages/Overview.aspx [Accessed 11 1

2016].




International Centre for Settlement of Investment Disputes, n.d.e. Process Overview. [Online] Available

at: https://icsid.worldbank.org/apps/ICSIDWEB/process/Pages/Overview.aspx [Accessed 11 1

2016].

Kluwer Law International, 2016. Bilater Investment Treaties (BITs): Iceland. [Online] Available at:

http://www.kluwerarbitration.com/CommonUI/BITs.aspx?country=Iceland [Accessed 11 1 2016].

Landsvirkjun, 2013. Haustfundur 2013. [Online] Available at:

http://www.landsvirkjun.is/Media/PPT_haustfundur2013_131113_OK_small.pdf [Accessed 12 1

2016].

Landsvirkjun, 2015. Landsvirkjun semur um lán frá Japan vegna Þeistareykjavirkjunar. [Online]

Available at: http://www.landsvirkjun.is/fyrirtaekid/fjolmidlatorg/frettir/frett/landsvirkjun-semur-

um-lan-fra-japan-vegna-theistareykjavirkjunar/ [Accessed 5 2 2016].

Landsvirkjun, n.d.a. Submarine Cable to Europe. [Online] Available at:

http://www.landsvirkjun.com/ResearchDevelopment/Research/SubmarineCabletoEurope/

Landsvirkjun, n.d.b. Sæstrengur. [Online] Available at:

http://www.landsvirkjun.is/rannsoknirogthroun/throunarverkefni/saestrengur/

Matsukawa, T. & Habeck, O., 2007. Review of Risk Mitigation Instruments for Infrastructure Financing

and Recent Trends and Developments, Washington DC: The International Bank for Reconstruction

and Development.

Méndez-Pinedo, M. E., 2011. The icesave Dispute in the Aftermath of the Icelandic Financial Crisis:

Revisiting the Principles of State Liability, Prohibition of State Aid and Non-discrimination in

Euopean Law. European Journal of Risk Regulation, 2(3), pp. 356-372.

Nathanson, R. A., 2012. The Revocation of Clean-Energy Investment Economic-Support Systems as

indirect Expropriation Post-Nykomb: A Spanish Case Analysis. Iowa Law Review, 98(863), pp.

863-904.

New York Arbitration Convention, n.d.a. List of contracting states. [Online] Available at:

http://www.newyorkconvention.org/list+of+contracting+states [Accessed 6 2 2016].

Nooij, M. d., 2011. Social cost-benefit analysis of electricity interconnector investment: A critical

appraisal. Energy Policy, Volume 39, pp. 3096-3105.

Nordic Investment Bank, 2007. New subsea link a sustainability showcase. [Online] Available at:

http://www.nib.int/news_publications/cases_and_feature_stories/new_subsea_link_a_sustainabilit

y_showcase [Accessed 18 12 2015].

Nordic Investment Bank, 2015. Annual Report 2014. [Online] Available at:

http://www.nib.int/filebank/a/1425933453/594634fd57e820fabc7eed56fd348aff/4379-

NIB_Annual_Report_2014.pdf [Accessed 18 12 2015].

Parail, V., 2009. Can Merchant Interconnectors Deliver Lower and More Stable Prices? The Case of

NorNed. IDEAS Working Paper Series from RePEc (Cambridge Working Papers in Economics),

pp. 1-50.

Public Private Partnership in Infrastructure resource Center, n.d.. Power Purchase Agreements (PPAs)

and Energy Purchase Agreements (EPAs). [Online] Available at: http://ppp.worldbank.org/public-

private-partnership/sector/energy/energy-power-agreements/power-purchase-

agreements#where_appropriate [Accessed 18 12 2015].

Raforkulög nr. 65 (27. mars 2003).

Río, P. d. & Gual, M. A., 2007. An integrated assessment of the feed-in tariff system in Spain. Energy

Policy, 35(2), pp. 994-1012.

Rucinski, T. & Rodríguez, J. E., 2013. Exclusive: Foreign investors set to sue Spain over energy reform.

Reuters, 14 February.

Salacuse, J. W., 2010. The Emerging Global Regime for Investment. Harvard International Law Journal,

51(2), pp. 427-473.

Sigurðsson, B. S., 2014. Viðskiptatækifæri sæstrengs: Breytingar í orkumálum Evrópu. Þjóðmál, pp. 22-

28.




The World Bank Group [International Finance Corporation & Multilateral Investment Guarantee

Agency], 2012. Political Risk: The Missing Link in Understanding Investment Climate Reform?.

Investment Climate - In practice, Volume 20.

Thoroddsen, V., 1954. Flutningur raforku milli landa: Hvaða möguleikar eru á útflutningi raforku frá

Íslandi?. Alþýðublaðið, Volume 42, pp. 5-7.

Turvey, R., 2006. Interconnector Economics. Energy Policy, Volume 34, pp. 1457-1472.

UNCITRAL, n.d.a. About UNCITRAL. [Online] Available at:

http://www.uncitral.org/uncitral/en/about_us.html [Accessed 6 2 2016].

UNCITRAL, n.d.b. UNCITRAL Arbitration Rules. [Online] Available at:

http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/2010Arbitration_rules.html

[Accessed 6 2 2016].

United Nations, 1958. Convention on the Recognition and Enforcement of Foreign Arbitral Awards, s.l.:

United Nations.

Vattenfall AB, 2014. Why Vattenfall is taking Germany to court. [Online] Available at:

http://corporate.vattenfall.com/press-and-media/news/2014/why-vattenfall-is-taking-germany-to-

court/ [Accessed 2 4 2016].

White, T., 2013. Spain Power Deficit Widens 46% as Steps to Close Gap Founder. Bloomberg, 25 April.

World Nuclear Association, 2015. Nuclear Power in Germany. [Online] Available at: http://www.world-

nuclear.org/info/Country-Profiles/Countries-G-N/Germany/ [Accessed 7 1 2016].

Yin, R. K., 2014. Case Study Research: Design and Methods. 5 ed. Thousand Oaks, California: Sage

Publications, Inc..

INTERNATIONAL FINANCE

AND

BANKING CONFERENCE

FI BA 2016 (XIV edition)

March 24-26, 2016, Bucharest, Romania

Organized by

FACULTY OF FINANCE AND BANKING from Bucharest University of Economic Studies

in collaboration with

SIF BANAT-CRISANA

Romanian Association of Finance and Banking – RoFIBA (Asociatia Romana de Finante - Banci –RoFIBA)

Center of Financial and Monetary Research (CEFIMO) (Centrul de Cercetări Financiar-Monetare CEFIMO)

www.fin.ase.ro/FIBA2016

FACULTY OF FINANCE,

AND BANKING

09.00 – 12.45 Session 3

Macroeconomic stability and banking Location: Department of Finance

Room 3209

Session Chair:

Professor Petre BREZEANU, Ph.D. – Faculty of Finance and Banking, Bucharest University of Economic Studies, Romania Lecturer Bogdan MURĂRAȘU, PhD. – Faculty of Finance and Banking, Bucharest University of Economic Studies, Romania

Secretary: Simona MAȘCU, PhD. – Bucharest University of Economic Studies, Romania

1. International spillovers of ECB’s unconventional

monetary policy: the effect on Central and

Eastern Europe

Discussant: Presenter of paper no. 2

Klara HALOVA, PhD. – CSOB, Prague, Czech Republic Associate Professor Roman HORVATH, PhD. – Charles University, Prague and IOS, Regensburg, Czech Republic

2. Output comovement between EU New Member

States and the Euro Zone


Lecturer Bogdan MURĂRAȘU, PhD. – Faculty of Finance and Banking, Bucharest University of Economic Studies, Romania Alina BOBAȘU, PhD. – Bucharest University of Economic Studies, Romania

3. The Iceland-UK interconnector: political risk

mitigation and dispute settlement


Andri Dan TRAUSTASON – B.Sc Student in Business Administration, Iceland Professor Hilmar Þór HILMARSSON, Ph.D. – School of Business and Science, University of Akureyri, Iceland

4. The role of fiscal policies in the relation between

public governance and economic performance at

the EU level

Discussant: Lecturer Georgiana CRETAN, Ph.D. – Faculty of Finance and Banking, Bucharest University of Economic Studies, Romania

Cristina VLAD, PhD. Student – Bucharest University of Economic Studies, Romania Birol IBADULA, PhD. Student – Bucharest University of Economic Studies, Romania Professor Petre BREZEANU, Ph.D. – Faculty of Finance and Banking, Bucharest University of Economic Studies, Romania

11.00 – 11.15 Coffee break Location: Department of Money and Banking

5. The impact of macroeconomic factors on non-

performing loans in Romania: a time series

analysis


Simona MAȘCU, PhD. – Bucharest University of Economic Studies, Romania Marușa PESCU (BECA) , PhD. –“Ovidius” University of Constanta, Romania

6. The incidence of the liquidation of three

commercial banks in the economic and financial

activity of banking system in Moldova


Irina FRUNZĂ, PhD. Student – Academy of Economic Studies of Moldova, Republic of Moldova

7. An essay regarding the real exchange rate: review

on definitions and influencers

Discussant: Simona MAȘCU, PhD. – Bucharest University of Economic Studies, Romania

Dana HAULICA, PhD. Student – Bucharest University of Economic Studies, Romania

12.45 – 15.00 Lunch

Location: Cafeteria located in the Moxa Complex Address: Mihail Moxa Street no. 5-7, District 1, Bucharest

Fr

ida

y, 2

5 M

arc

h 2

01

6

Project Management Development – Practice and Perspectives Fifth International Scientific Conference on Project Management in the Baltic

Countries

CONFERENCE PROGRAMME

ISSN 2256-0513

Project Management Development – Practice and Perspectives

April 14-15, 2016 Riga, University of Latvia

Professional Association of Project Managers

2

The aim of the conference is to discuss results of scientific research in project management issues, to establish new contacts and networking between professionals involved in project management as well as enhance the capacity of project managers. The conference programme includes opening plenary session, parallel sessions. All abstracts are reviewed by two reviewers and papers included in the conference proceedings are double blind reviewed. Conference language is English.

The work of the conference will be organised in the 4 parallel sessions: 1. Education, Social Aspects and Personnel in Project Management

Session chairs: Prof. Ruta Čiutiene,

Prof. Biruta Sloka

Prof. Inesa Vorončuka

2. New Directions in Project Management

Session chairs: Prof. Arvi Kuura,

Prof. (emer.) Dr. Žaneta Ilmete,

Prof. José Ramon Otegi Olaso

3. Quantitative Methods and Technologies in Project Management

Session chairs: Prof. Wolfgang Tysak,

Prof. Marco Sampietro, 4. Practical Project Management

Session chairs: Prof. Carsten Wolff,

Prof. (emer.) Dr.Rolf A. Lundin

3

Detailed Programme of the Conference

Thursday, April 14, 2016 17.30 – 20.00 Registration for the conference, Raiņa bulv. 19, lobby 18.00 – 20.00 Welcome Cocktail, Raiņa bulv. 19, hosted by Prof. Indriķis Muižnieks, Rector of University of Latvia

Friday, April 15, 2016 9.00 – 10.00 Registration for the conference Raiņa bulv. 19, lobby 10.00 – 12.00 Plenary Session, Raiņa bulv. 19, Lielā aula (Great Aula) Session chairs: Prof. Juris Krūmiņs (Latvia), Prof.Carsten Wolff (Germany)

Conference opening: Prof. Indriķis Muižnieks, Rector of University of Latvia Prof. (emer.) Žaneta Ilmete, President of Professional Association of Project Managers

Presentations

Prof. Gilbert Silvius (The Netherlands) Social Project Management?

Prof. (emer.) Rolf Lundin (Sweden) Projects and Rituals: Exploring Some Connections?

Andri Dan Traustason, Prof. Hilmar Þór Hilmarsson (Iceland) Iceland – UK

Interconnector: Is Proper Political Risk Mitigation Possible?

12.00 – 14.00 Lunch , Aspazijas bulv. 5 14.00 – 15.30 Parallel Sessions, Aspazijas bulv. 5 15.30 – 16.00 Coffee Break, Aspazijas bulv. 5 16.00 – 17.30 Parallel Sessions, Aspazijas bulv. 5 17.30 – 18.00 Conference conclusions and future prospects, Aspazijas bulv. 5, 322

Session chairs

19.00 – 22.00 Reception Hosted by Prof. (emer.) Žaneta Ilmete, President of Professional Association of Project Managers, Latvia

The Iceland-UK InterconnectorA way to Prosperity or Political Disaster?

Andri Dan Traustason & Professor Hilmar Þór Hilm

arssonSchool of Science & Business, Faculty of Business Adm

inistrationUniversity of Akureyri

Agenda

Scale of the project &

investment

Political risk factors

Possible solutions

Recent cases

Dispute settlem

ent

Conclusions

Scale of the projectN

umerous separate but related projects

The interconnector itself w

ill...... be over 1000km

in length.... have a transm

ission capacity of 800-1200MW

hDC

.

The upgrade of current pow

er stations in Iceland, in addition to the construction of new

ones.

Strengthening of the Icelandic national grid.

Landing and launching stations.

Investment needed

Has yet to be determ

ined.

Estim

ates cover a wide range (288 –

813 billion ISK

)

Likely in excess of £4 billion

Huge num

ber for Iceland but manageable for the U

K30-40%

vs. <1%

of GD

P

Political risk

Wide range of definitions that cover…

…expropriation

…w

ar & insurrection

…leg

al & ad

min

istrative app

rovals

…and m

ore

Salacuse

states that ”[a] sudden, unexpected change in the rules[i.e. law

s and

regu

lation

s] is a principal form of political

risk, perhaps its very essence “

Possible risk factorsC

ontracts for difference might play a key role

Partly guarantee long-term

revenue

Changes in policy, regulations and law

.

Could be necessary

Could be detrim

ental!

How

will the U

K change in half a century?

In or out of the EU

?W

ill the EU

exist at all?

Risk mitigation

Bilateral investm

ent treaties could be of use.

None of Iceland‘s 11 B

ITs are with the U

K

Ow

nership is crucial.

A public-private partnership m

ight be feasible

Financing of the project is closely related

European Investm

ent Bank

Nordic Investm

ent Bank

Operated, ow

ned and financed by a project company (P

PP

) + S

tate-guarantee(U

K)

Take-or-pay contracts with renew

able energy suppliersB

uild-operate-transfer power stations

Paym

ents to cover infrastructure investments

Risk allocation

The U

K is in a m

uch better position to accept risk.

Additionally, it can prevent risk events from

occurring.

Political backing in the U

K is apparent.

Recent case concerning E

DF

Energy.

Iceland’s comparative advantage lies in its resources

-not econom

ic power or capital m

obilization

Can disputes occur?

Recent cases have show

n that disputes can –and are likely to

occur at some point.

Subsidies in S

pain.

Nuclear energy in G

ermany.

Policy changes can have a catastrophic effect on feasibility.

Dispute settlement

The E

nergy Charter T

reaty

International Centre for S

ettlement

of Investment D

isputes

Other institutions and conventions

ConclusionT

he results of this research are preliminary.

Clear reason to study this subject further.

Most risk factors are still unclear.

Ow

nership & R

isk allocationD

ispute Settlem

entB

ITs, Take-or-pay, BO

T etc.

These factors need to be addressed to facilitate capital m

obilization

This is only one of m

any possibilities.

Thank you!Andri Dan Traustason [email protected] andridt@gm

ail.com

Hilmar Þór Hilm

arssonhilm

[email protected]

11.45 – 12.45 Friday, February 19th, 2016Classroom M102, University of Akureyri

Open seminar in businessadministration

The feasibility of an electricity interconnector between Iceland and the UK has been regularly assessed over the last 30 years. The proposed interconnector carries numer-ous types of risk for Iceland, including political risks that have not been critically assessed.

The proposed interconnector would be capital intensive and its construction and operational time would span a period of a few decades. What are the political risks involved? Can those risks be managed for such a long period of time? Are there any venues for dispute settlement? Is this project a way to prosperity or political disaster for Iceland?

Iceland-UK Interconnector: A Way to Prosperity or Political Disaster? Andri Dan Traustason BSc Student in Business Administration – Management and Finance

The seminar will be in English and the agenda will be as follows:

1. Introduction: Guðmundur Kristján Óskarsson, Head of Faculty of Business Administration2. The project in a local and a global context: Hilmar Þór Hilmarsson, Professor3. Presentation: Andri Dan Traustason, B.Sc. Student4. Questions and answers