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Rising from the ashes – Renewable energy in Iceland

Mark Halper

Iceland's volcano reminds us the island is full of renewable power. Now the country is stepping up efforts to land energy-intensive industry. It might also export electricity.

Now for the good news about Iceland: as the infamous volcano has demonstrated, the place is flush with renewable power. Geothermal forces such as those that have fuelled Mt. Eyjafjallajökull, plus the country's vast hydroelectric resources, mean that Iceland could provide the world with a healthy dose of affordable clean energy.

And, in fact, Iceland has a two-pronged plan to do so.

On 21 June, the Icelandic Parliament passed a bill to help lure industry to the island, where companies would tap into a cheap and steady stream of renewables. Iceland is targeting the initiative (see box: Industry on Ice) at energy intensive sectors such as metallurgical, chemical and information technology. It hopes to accelerate its slow draw of companies through earlier one-off deals that most recently included Norwegian web-browser firm Opera, which announced in May that it is locating data operations near Reykjavik. Mobile phone giant Orange is rumoured to be doing the same.

Industry on ice

With renewable power as the draw, the Act on Incentives for Initial Investments in Iceland is now offering foreign companies:

Effective Immediately:
  • A cap on the current 18% corporate tax rate for 10 years. The rate can go down, but not up. Iceland will consider stronger corporate tax incentives in 2013;
  • Various taxes waived, including ‘market fees’ that support trade and tourism, and ‘industrial fees’ that support education and training; and
  • Reduction on property tax up to 30%.
Effective January 2011:
  • Upfront cash to help set up. At first limited to €7.5m per company, will vary yearly; and
  • Employee training.

Conversely, with the aim of sending clean power to Europe, Iceland's state-owned utility, Landsvirkjun, is considering exporting electricity to the UK or the continent via sub-Atlantic high voltage direct current (HVDC) lines.

The two ideas clash politically, as many Icelanders object to exporting power that could otherwise help support industry and generate jobs at home.

But both are rooted in the country's undeniable clean power potential. Iceland currently generates all of its 16 TW from renewable sources, with 75% coming from the hydropower of rivers and melting glaciers, and the balance from geothermal. The country estimates it has enough of both to more than triple its capacity to 50 TW, with much of the increase coming from geothermal – the country straddles two tectonic plates, making it a literal hotbed, as evidenced by the volcano.

“Renewable energy is the primary driver of economic development and foreign direct investment with Iceland,” says Thordur Hilmarsson, Managing Director of Government agency Invest in Iceland. “We have harnessed one third of what is harnessable without conflicting too much with the environment.”

Iceland's electricity is also relatively inexpensive, with rates ranging from roughly US$0.04/kWh for large users to US$0.10/kWh for consumers. And, Iceland's electricity providers lock into rates for up to 20 years – a potentially strong attraction in a world full of volatile fossil fuel based electricity prices.

“In five to 10 years, the rest of the world is going to be crippled under the energy price boom,” says Jeff Monroe, CEO of Verne Global, a Reston, Vancouver, USA-based data centre operator controlled by British health charity Welcome Trust. Verne is constructing a data centre on a former NATO naval base in Reykjanesbær, Iceland. Monroe would not specify exactly how much he is paying for electricity, but said that the rates are about a quarter of what they are in London. The company is close to signing clients from the ‘internet media’, financial services and IT industries, according to the company's CTO Tate Cantrell.

Likewise, Opera is moving into a data centre in Hafnarfjöròur, Iceland, by Icelandic firm Thor Data Center. “The company can offer us energy from 100% renewable sources,” Opera founder Jon Stephenson von Tetzchner said in a statement announcing the deal in May. “In coming years Iceland will be able to provide a more stable supply of energy than most other areas in the world.”

Both Verne and Opera negotiated deals prior to Parliament's June passing of the Act on Incentives for Initial Investments in Iceland.

Hilmarsson says that three additional companies are now close to locating on the North Atlantic island, one each from the ferrosilicium, polysilicon and chemicals industries. He declines to identify them, other than to say that two come from the USA and the other from Europe. The ferrosilicium company notes Hilmarrson, “we hope will break ground later this year,” with the polysilicon company following by “early next year.” The chemicals company will probably finalise its plans at a board meeting in September or October, he says.

In an added green touch, the ferrosilicium and polysilicon companies are likely to locate aside each other in an industrial park designed to accommodate businesses that can make use of each others' products and by-products. Iceland is encouraging such arrangements.

Iceland's effort to recruit industrial companies is also reaching out to China, a country well known for carbon-belching manufacturing. At China's invitation, Hilmarsson will attend the World Investment Forum in Xiamen this September, after which he will tour five Chinese cities to pitch Iceland as a place to relocate.

“We'd like to introduce ourselves and start a dialogue,” says Hilmarsson. “We're doing this for the first time (with China) so we're also listening. We're not hard selling.”

In China, like in other countries, Iceland will pitch to energy intensive industries, but with an eye towards those that have inherently clean processes.

“We are rather picky on what kinds of industry we like to attract,” he says. “We like to attract industry that by nature is clean tech forced to use fossil fuel.” Besides ferrosilicium, polysilicon and chemical, Hilmarsson notes that likely candidates could also come from the carbon fibre business, and possibly, from steel. “We've had inquiries from other parts of the world for recycling of steel – re-melting, those kinds of things.”

Iceland is also promoting its shipping accessibility to both Europe and North America, and its favoured nation status with those areas. “We are approaching companies that are targeting Europe and the USA,” he notes.

Foreign direct investment is not new to Iceland. The country has three foreign-owned aluminium smelters. Rio Tinto Alcan has operated there for over 40 years, Century Aluminum since 1998, and Alcoa since around 2007.

The smelters use about 80% of Iceland's electricity, which is one reason why the country is not sure it wants to attract more aluminium business. One new smelter alone could require the construction of a 650 MW generating plant, and would undermine efforts to diversify the economy. Aluminium is already the country's leading export with about 40% of export revenues, having superseded fish.

Another argument against more aluminium says Hilmarsson, is that the production process emits significant amounts of carbon, although aluminium production with clean energy emits far less carbon than does fossil fuel based smelting.

Meanwhile, with all that green power and potential, Iceland's state-owned electricity provider, Landsvirkjun is stepping up the long-considered possibility of exporting clean electricity via sub-Atlantic HVDC lines.

“We are looking into the feasibility of connecting Iceland to Europe,” says Edvard Gudnason, Landsvirkjun's Head of Sales and Marketing. Ideas for exporting electricity from Iceland have circulated for decades, but have long been considered unfeasible for both technical and cost reasons.

A study in 2000 by Landsvirkjun determined that a 1200 km connection to Peterhead, Scotland, would be technically feasible, but that costs were prohibitive.

But Landsvirkjun now believes that a connection to Peterhead or to a continental location might be economically viable after all because the world's growing green ethos could attract users and investors. Landsvirkjun estimates it would cost about US$1.2 billion to lay a 700-800 MW line to Peterhead. The company has conducted early discussions with grid companies including Holland's TenneT regarding possible funding. The world's longest undersea cable cost €600 million to run 580 km from Norway to Holland in 2008, according to Swiss engineering giant ABB, one of the leaders of that project.

The plan to export electricity continues to stir up local opposition.

“The speculation on exporting electricity is still very shallow,” says Arni Sigfússon, the Mayor of Reykjanesbær, where Verne is locating. “It is like producing raw material but instead of creating value at home, we export it to value makers in other countries. I am an advocate of producing value and jobs from our electricity at home.”

Electricity exports, notes Hilmarsson, “will continue to be considered, but politically it is not considered to be the best option for the energy policy because of economic development.”

And then there's another intriguing possibility. With all those renewable resources, wouldn't it make sense to establish Iceland as the headquarters of the elusive hydrogen economy? Couldn't Iceland help mitigate the conundrum that extracting hydrogen requires more energy than hydrogen can produce? Hilmarsson says that hydrogen's explosiveness – remember the Hindenburg – will prevent any major export from Iceland. But the island nation is indeed using its green electricity to crack hydrogen from water and test it for vehicles.

One thing seems certain: one way or another, Iceland's power should one day be known for more that hurtling volcanic ash into the skies.

Renewable Energy Focus
Volume 11, Issue 5, September-October 2010, Pages 60-61

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Geothermal  •  Other marine energy and hydropower  •  Policy, investment and markets