E N E R G Y I N I C E L A N DHistorical Perspective, Present Status, Future Outlook

Management: Helga Barðadóttir

Editors in Chief: Árni Ragnarsson og Þorkell Helgason

Photos: © Oddur Sigurðsson, except bls. 39, Icelandic New Energy

Design & layout: Vilborg Anna Björnsdóttir

Printing: Hjá Guðjón Ó

ISBN 9979-68-137-3

3

ENERGY IN ICELAND

Historical Perspective, Present Status,

Future Outlook

National Energy Authority and Ministries of Industry and Commerce

February 2004

FOREWORD BY THE MINISTER OF INDUSTRY AND COMMERCE

Secure energy production, transmission, and

distribution, is a precondition of modern society

for both industry and private life. Only a few

decades have elapsed since people everywhere in

Iceland obtained secure access to electricity. Today,

we are in a leading position among the nations of

the world, enjoying a secure and plentiful supply

of various sources of energy. We have witnessed a

dramatic change in national energy consumption;

per capita energy consumption in Iceland is now

among the highest in the world. Our country is

rich in clean, renewable energy sources, and most of them are still unharnessed.

Exploitation of these energy sources will serve as the foundation for increased

national welfare in the near future.

During its spring session 2003, the Icelandic parliament Althingi adopted new

legislation on Orkustofnun, the National Energy Authority, emphasizing its role

as an administrative agency. Legislation was also adopted on Iceland GeoSurvey

– a new, independent research institute which was previously the Geoscience

4

Division of Orkustofnun. The new institute will primarily serve the energy

industry with research and consultation in exploration and exploitation of

geothermal resources. For the first time, comprehensive legislation was

adopted covering the production, transmission, distribution, and sale of

electricity, part of which was implemented on 1 July 2003.

To mark this occasion, it was decided to publish a comprehensive overview of

Iceland’s energy resources and energy issues, treating the subject in a wide

context. This work contains a history of energy usage in Iceland, describes the

country’s energy resources, the various uses of energy, production of electricity,

and the energy market. It also looks at future prospects in energy issues, and

places the Icelandic energy situation in an international context.

While this booklet is the first of its kind to be compiled in Iceland, the intent

is to produce a similar survey at two- to three-year intervals. I expect it to be a

valuable contribution of information which can later be improved and

expanded. It presents detailed information that has, hereto, not been accessible

to the public, even in Iceland, and demonstrates the key function of energy in

creating the society we enjoy today.

Valgerður Sverrisdóttir

Minister of Industry and Commerce

5

ContentsForeword by the Minister of Industry and Commerce 4

Contents 6

1. INTRODUCTION 8

2. HISTORICAL SUMMARY OF ENERGY AFFAIRS 10

2.1 New legislation on electrical energy 12

2.2 Master Plan for Utilization of Hydro and

Geothermal Energy Resources 14

3. ENERGY USE AND ENERGY RESOURCES 15

4. PRIMARY ENERGY USE 17

5. UTILIZATION OF GEOTHERMAL ENERGY FOR HEATING 19

6. FUEL USAGE 22

7. GENERATION AND USE OF ELECTRICITY 25

8. POWER INTENSIVE INDUSTRY 29

9. ENERGY PRICES 31

9.1 Electricity 31

9.2 Space heating 33

9.3 Fossil fuels 36

9.4 Foreign comparison 36

10. ICELANDIC ENERGY ISSUES IN AN INTERNATIONAL CONTEXT 38

11. OUTLOOK FOR THE FUTURE 41

11.1 Hydrogen 42

12. SUPPLEMENTARY MATERIAL 43

12.1 Energy units 43

12.2 References 43

12.3 Icelandic websites 44

12.4 Websites on energy in English 45

List of Figures

1. Hydraulic energy derived from precipitation in Iceland 162. Terrestrial energy current through the crust of Iceland 163. Primary energy consumption in Iceland, 1940-2002 184. Sectoral share of geothermal utilization in Iceland, 2001 195. Energy sources used for space heating, 1970-2002 216. Consumption of petroleum products in Iceland, domestic

and use in transportation to and from the country, 1982-2002 237. Share of the main types of petroleum products used in Iceland, 2002 248. Sectoral share of CO2 emissions in Iceland, 2001 249. Total installed capacity of hydro and geothermal power plants

in Iceland. 2610. Installed capacity and electricity generation of the main

power plants 2611. Electricity generation using geothermal energy, 1970 – 2002 2712. Electricity consumption, 2002 28

6

13. Generation and sale of electricity, 1996-2002 2914. Breakedown of electricity sales to energy intensive industry, 2002 3015. Electricity prices to energy intensive industry, (2002 prices) 3116. Retail price of electricity for general consumption, (2002 prices) 3217. Subsidies of electricity for residential heating, 1983-2002 (2002 prices)3418. Comparison of energy prices for residential heating 3519. Fuel prices, (2002 prices) 3620. Gasoline price breakdown in June, 2003 3621. Electricity prices for residential use in Western Europe

1. January, 2003 3722. International comparison of the price of 95 octane gasoline in 2002 3723. Primary energy consumption in the world and in Iceland, 1998 3924. Share of renewables in total energy supply 4025. Map of Iceland 45

List of Tables

Table 1: Consumption of primary energy in Iceland, 2002 17Table 2: Geothermal energy utilization in Iceland, 2001 20Table 3: Electricity generation in Iceland, 2002 27Table 4: Sale of electricity to energy intensive industry, 2002 30Table 5: Prefixes for multiples of units in the SI system 43Table 6: Relationship between the SI system of units and two other units 43

7

INTRODUCTION

During the past century, Iceland was transformed from poverty to plenty. The

harnessing of energy resources and availability of energy for industrial and

public consumption played a major role in this development, and is in fact a

precondition for it.

There were a number of stages along the way, most notably the

mechanisation of fisheries, development of communications infrastructure, and

mechanisation of agriculture. These developments were followed by the

development of general utilities, electrification of towns and rural areas, and

the creation of geothermal district heating services. Thanks to the latter, most

Icelanders can avail themselves of space heating from geothermal sources.

Around and shortly after the middle of the 20th century, efforts began to exploit

the country’s energy resources for large-scale industry. The largest step in this

direction was the construction of the ÍSAL aluminium smelter (now owned by

Alcan) in Straumsvík, just south of Reykjavík, in 1969; and the first hydroelectric

power development of a glacial river in Iceland – the Búrfell power station. As

the end of the 20th century approached, a new era dawned in the growth of

energy-intensive industry in Iceland. The duration of this era is not yet possible

to predict.

8

1

While import and distribution of fuel in Iceland have practically always been

in the hands of private enterprises, energy production and the distribution of

electric and geothermal energy have almost completely been in the public

domain, or carried out by publicly owned corporations. The entire organisation

and legal framework of energy issues have, until now, been built up around this

structure. At the commencement of the present century, new legislation has

been adopted which will introduce competition in electricity generation and

sale. This may result in private enterprise in various areas which currently are

under the auspices of the state or community authorities.

Here, as in so many areas of Icelandic culture, the twentieth century marked

the beginning of developments in energy affairs. This report concentrates

primarily on statistical information on Icelandic energy affairs, generation of

energy and its utilization, commencing with a brief overview of historical

aspects.

9

HISTORICAL SUMMARY OF ENERGY AFFAIRS

Energy has been a human concern ever since early humans learned to use fire

and exploit the energy of animals for bearing and drawing. Later the force of

wind was utilised, to propel sailing ships and windmills, and that of running

water to drive water-wheels. Energy utilization in the modern sense, however,

only began with the industrial revolution and the advent of mechanical power.

Here, as in so many other areas, Icelanders were latecomers to the scene, since

the age of mechanisation did not begin in Iceland until the turn of the 20th

century, with the arrival of steam trawlers, motor-powered fishing boats and

later automobiles.

All of this occurred without much intervention on the part of public

authorities. In electrification and subsequent construction of district heating

installations, however, the state and communities did play a major role.

However, the innovators were individuals. Jóhannes Reykdal built the first

hydroelectric generator in Hafnarfjörður in 1904, after Frímann B. Arngrímsson

had endeavoured in vain to collect support for power development on the river

Elliðaár, just east of the capital. The struggle of the poet and entrepreneur Einar

Benediktsson for power development and power intensive industry is well

10

2

known. Some of the local authorities welcomed the bright future predicted for

electricity, and the first municipal electrical utility, Rafveita Hafnarfjarðar, was

established in 1909. The first major step was taken, however, when Reykjavík

became involved by constructing a power station on the river Elliðaár in 1921,

almost three decades after the original idea was proposed. Exploiting

geothermal energy for household heating also began about a century ago

when a farmer in Mosfellsbær, near Reykjavík, became the first to use hot

spring water for home heating. Shortly after that, in 1911, another farmer in

Reykholtsdalur, West Iceland, installed concrete piping through which steam

flowed to his farmhouse for heating and other household use. The decisive step

in geothermal affairs did not come until 1930, however, when a district heating

system was constructed using hot water from the hot springs of Laugardalur,

Reykjavík, previously used for washing clothes and linens. The newly

constructed primary school Austurbæjarskóli was the first building to be

connected to the heating system. Use of geothermal waters for swimming

instruction began about a century earlier. In 1822-1823, swimming instruction

began at Reykjatjörn in Skagafjörður, North Iceland; in Laugardalur in

Reykjavík; and shortly after that swimming instruction also began in hot spring

water at Reykjanes on Ísafjarðardjúp in the West Fjords.

Imported fuels and their use are a major factor in Icelandic energy affairs.

According to trade statistics, coal was first imported early in the 17th century, but

there is no mention of petroleum until 1867. Neither of these energy sources

was, however, imported to a significant extent until this past century. The

utilization and harnessing of energy and electrification occurred in Iceland

decades later than in neighboring countries, although the situation in Iceland

with regard to exploitation of geothermal energy was somewhat different.

The first state initiative in energy affairs appeared in the form of legislation

on various aspects of energy affairs early in the past century. In particular, the

Inland Waters Act, adopted in 1923, is still in force to a large extent. It was

regarded as both necessary and natural for the state to take the initiative in

exploitation of domestic resources, both by carrying out exploration of

potential energy resources, and through direct participation in building up

energy production and distribution facilities. State involvement in hydroelectric

energy research began when the State Engineer, and subsequent Director of

the National Road Administration, had water level gauges set up in twenty

watercourses. In addition to the Road Administration, the Icelandic Research

Council and the State Electrical Inspection also carried out geothermal

exploration and preliminary investigations on power developments for the

state during World War II. The Electricity Act of 1946 provided for the

establishment of a National Electrical Authority (Raforkumálskrifstofan), which

became a reality in 1947. The Director of Electrical Affairs was ultimately

responsible for Iceland State Electricity (Rafmagnsveitur ríkisins), State Electrical

Inspection (Rafmagnseftirlit ríkisins), State Drilling Contractors (Jarðboranir

ríkisins), as well as for hydrological surveys. Geothermal exploration was the

task of the State Drilling Contractors until 1956, when the Geothermal Division

of the National Electrical Authority was established. During this period, the

Director of Electrical Affairs had at his disposal every means to ensure the state’s

11

leading role in the development of power production in Iceland.

During the period 1965-1967, the state’s entire involvement in the energy

sector was reorganised. The motivation behind this was, in particular,

hydropower development for power intensive industry in the spirit of Einar

Benediktsson. It was for this purpose that the National Power Company,

Landsvirkjun, was established in the summer of 1965, with the adoption of Act

No. 59/1965, with equal ownership by the state and the City of Reykjavík. The

construction of the Búrfell hydropower plant on the river Þjórsá followed in its

wake. This was the first Icelandic power development of a glacial river.

A new, comprehensive Energy Act, No. 58/1967, entered into force on 1 July

1967. It covered both electrical power production and utilization of geothermal

energy, as well as electrical utilities, district heating utilities and drilling. The

National Electrical Authority was abolished and a new institution, Orkustofnun,

the National Energy Authority, took over its role, with the exception of

supervision of operations of Iceland State Electricity, as this became an

independent institution. The State Drilling Contractors were subsequently

transformed into a limited-liability company, Iceland Drilling Company, at the

beginning of 1986.

Organisational changes were made to Orkustofnun at the beginning of 1997.

Research activities were separated from the institution’s consulting and

administrative functions, the Energy Administration Division, and entrusted to

two financially separate operational units, the Hydrological Service Division and

the Geoscience Division. This separation was subsequently reinforced with the

adoption of two new Acts, No. 87/2003 and No. 86/2003, making Orkustofnun’s

geological and geothermal research unit an independent institute, ÍSOR-

Iceland GeoSurvey. The Hydrological Service Division is still a unit at

Orkustofnun. These changes represent a major step in separating advice to the

government on energy issues, on the one hand, from research services provided

in a competitive environment, on the other. These Acts entered into force on 1

July 2003. On that same day, a new Electrical Energy Act, No. 65/2003, also came

into force.

2.1 New legislation on electrical energy

The Electricity Act, No. 65/2003, is based on EU Directive No. 96/92, concerning

common rules for the internal market in electricity, but is broader in scope, since

it comprises comprehensive legislation on the generation, transmission,

distribution and sale of electricity. The Act deals with various areas which were

previously treated in various Acts, including the Inland Waters Act, No. 15/1923;

the Energy Act, No. 58/1967; the Act on Electric Generating Stations, No.

60/1981; and Acts on individual energy enterprises. The Electrical Energy Act

will be implemented in stages.

According to the stated objectives of the Electrical Energy Act, it is intended

to encourage an economical electricity system, thereby strengthening Icelandic

industry as well as regional development. To reach this goal, it is intended to

create a competitive environment for the generation and sale of electricity,

12

encourage efficiency and cost-effective transmission and distribution of

electricity, ensure the security of the electricity system and interests of

consumers, and promote utilization of renewable energy sources.

The generation and sale of electricity are, according to the Act, competitive

activities. These activities are, however, subject to public licences, which must be

issued based on objective, transparent and assessable considerations. Licences

to construct and operate power generating stations have, up until now, been

subject to the approval of the Icelandic parliament, Althingi. The Electricity Act

makes the granting of such a licence now exclusively an administrative decision.

Distribution utilities have had exclusive rights to distribute and sell electricity in

their area of operation. According to the Electrical Energy Act, they will retain

their exclusive rights to distribution, but the sale of electricity will be gradually

de-regulated. As of 1 January 2007, sale of electricity will be fully de-regulated.

Transmission and distribution will continue to be based on concessions.

Access to the transmission and distribution network must be open to all users,

based on previously published tariffs adopted by the companies. Extensive

obligations are placed on transmission and distribution companies to construct

the electricity system so as to ensure its security and cost-effectiveness. In

carrying out their activities, they must offer equal treatment to all parties. More

detailed rules apply to the operations of these companies than those previously

in force. The transmission of electricity is to be carried out by a separate,

independently managed, enterprise. This provision does not come into effect,

however, until 1 July 2004. Until that time, electricity transmission and

operation of the system will be in the hands of Landsvirkjun, The National

Power Company, and the transmission system thus limited to the company’s

system.

Orkustofnun is entrusted with supervision of transmission and distribution

enterprises and is, for instance, expected to establish an income framework

upon which the enterprises’ tariffs must be based. The Act specifies what can be

included as operating expense; and Orkustofnun shall establish an income

framework corresponding to this, while at the same time making certain

demands for increased cost efficiency. At the same time, the Act regulates the

potential return on capital invested in the operations.

The electricity distribution system starts where the transmission system ends.

Distribution utilities operating at the time the Act enters into force shall retain

their previous rights to construct and operate distribution systems. The same

tariff shall apply for distribution of electricity in each pre-defined tariff area.

The possibility of more than one tariff area applying in the operating area of a

distribution utility is not excluded, but the boundaries of the areas are to be

determined by the Minister of Industry and Commerce.

Orkustofnun is to supervise concession activities, i.e. the transmission and

distribution of electricity, while the generation and sale of electricity is under

the surveillance of the competition authorities, just like any other competitive

activity. A special Appeals Committee in Electrical Affairs is to examine disputes

arising due to administrative decisions by Orkustofnun.

The generation, distribution and sale of electricity can be carried out by one

enterprise, but separate accounts must be kept for each area of activity. If an

13

enterprise has activities not connected with electricity, the accounting of these

activities must be kept separate. Orkustofnun shall monitor compliance with

the legal provisions on the separation of different activities.

Finally, the Act contains general provisions on granting of licences, such as

procedures, tariffs, etc. as well as miscellaneous provisions, such as how the

keeping of separate accounts must be carried out.

2.2 Master Plan for Utilization of Hydro andGeothermal Energy Resources

In 1999, the government took the initiative of reassessing in detail Iceland’s

electricity development potential in a Master Plan for Utilization of Hydro and

Geothermal Energy Resources.

The objective of the Master Plan is to evaluate and compare various options

of proposed power development schemes at the same time, and discuss the

impacts they might have on the natural and cultural heritage, the environment,

other resources, and regional development. This is done at an early stage in the

preparatory process, before too much effort has gone into preparation, and

while there is still sufficient time to choose between the various projects. This

preliminary assessment of impacts can help energy enterprises to choose

between power generating options and provide indications as to how original

ideas can be altered to avoid the damaging impacts without sacrificing cost-

efficiency to any great extent. It can also reveal project locations where the

protection value is so high, that people may want to protect the area through

legislation. Thirdly, it can be of use to planning authorities in land-use planning.

This preliminary assessment will not replace the detailed assessment required by

legislation on environmental impact assessments, but it should reduce the

probability of the final assessment putting a halt to a planned power project,

and reduce the risk taken by energy enterprises in their preparations.

The number of technically feasible hydroelectric power projects has been

estimated at just over 60, together with over 40 geothermal generating plants.

A decision was made to give priority, in the first phase evaluation of ideas, to

those projects involving development of glacial highland rivers; geothermal

projects close to inhabited regions on the Reykjanes peninsula; in the

Þingeyjarsýsla districts of Northeast Iceland; as well as in the area of the

Torfajökull ice cap. The conclusions of the first phase, concerning 19

hydropower projects and 24 geothermal plants in 10 geothermal areas, were

submitted in the autumn of 2003. Landvernd, the National Association for the

Protection of the Icelandic Environment, has been entrusted with organising

consultation with power companies, associations and the public, and

disseminating information, for instance, through public information meetings

and a website for the Master Plan (www.landvernd.is/natturuafl).

14

15

ENERGY USE AND ENERGY RESOURCES

By international comparison, energy use in Iceland is in a class by itself. Per

capita energy consumption is practically the highest known, and the proportion

of this provided by renewable energy sources is greater than in other countries.

Nowhere else does geothermal energy play a greater role in energy supply, as

Iceland is among those nations with the highest utilization of this energy

resource, not only per capita but in absolute terms. In addition to geothermal

energy, energy supply in Iceland is based on hydropower and imported fossil

fuels. The share of domestic energy sources has grown significantly in recent

decades and in 2002, amounted to over 70% of the total energy consumption.

Geothermal energy is generally classified as a renewable resource. This is

based on the fact that geothermal sources are steadily renewed, although this

renewal takes place at a varying rate depending upon the nature of the

geothermal reservoir. In energy production from hot dry rock, which is in fact

not practiced in Iceland, the renewal of the energy source is so gradual based

on a timescale of human activity that it is scarcely possible to refer to this as a

renewable energy source. In all other instances, geothermal energy is a

sustainable energy source in the sense that utilization can be maintained for a

very long period if the production rate is kept within certain limits.

Despite the fact that Iceland possesses extensive unexploited energy reserves,

3

these are not unlimited. Only very rough estimates are available on the size of

these energy reserves, resulting in considerable uncertainty when it comes to

assessing to what extent they can be harnessed with regard to what is

technically possible, cost-efficient, and environmentally desirable. The

estimated figures generally proposed for hydropower potential are 30 TWh

annually, and for electricity production from geothermal resources 20 TWh

annually, totalling 50 TWh per year. This is after deducting the resources which

are unlikely to be developed for environmental reasons. In 2002, electricity

production in Iceland amounted to around 17% of this estimated harnessable

energy. Current utilization of geothermal energy for heating and other direct

uses is considered to be only a small fraction of what this resource can provide.

Figures 1 and 2 show the sources of Iceland’s primary hydro and geothermal

power, respectively. Figure 1 shows that the precipitation falling on the country

has an enormous energy potential where it falls, which is subsequently reduced

by evaporation and the movement of glaciers. In addition, about one-half is

distributed widely, and does not end up as an exploitable source of energy.

However, almost one-quarter remains, from which it is considered technically

possible to produce 64 TWh annually. As previously mentioned, it is generally

estimated that about one-half of this energy can be utilised in a cost-effective

and environmentally friendly manner, taking into account the experiences of

other countries in recent decades.

16

Conductionto surface131 TWh/a

Volcanism61 TWh/aGeothermalenergy70 TWh/a

Covered by glaciers 11 TWh/a

Harnessableenergy current59 TWh/a

Stored energy inbedrock0-3 kmTotal 27 000 000 TWh

Assessable6 000 000 TWhHarnessable1 000 000 TWh

MAGMA210TWh/a

Conduction53 TWh/a

Evaporation

Groundwater

PRECIPITATION285 TWh/a

Storedenergyin glaciers7600 TWh

Ground-water?? TWh

33 43

Glacier flow

Harnessable energy 64 TWh/a

Dispersedand notharnessableenergy123 TWh/a

Flowingwater187 TWh/a

22

Figure 1. Hydraulic energy derived from precipitation in Iceland

Figure 2. Terrestrial energy current through the crust of Iceland

17

PRIMARY ENERGY USE

All energy originates from natural sources and in such form is referred to as

primary energy. Primary energy generally has to be transformed into a form

which is more suitable for its final use, such as electricity for instance. In this

transformation, a portion of the energy is generally lost, as is also the case in its

transmission and distribution. As a result, only part of the primary energy ends

up as utilisable energy to consumers. Primary energy use in Iceland, classified by

source for 2002, is shown in Table 1.

Figure 3 shows how this usage has developed since 1940, and clearly shows

the impact of the oil price hikes of the

1970s, which served to accelerate the

development of geothermal heating

systems in Iceland. In 2002, primary

energy consumption amounted to 500 GJ

per capita, which ranks among the

highest in the world. There are a number

of reasons for this, in particular the high

proportion of electricity used in power

intensive industry, a relatively high

amount of electricity production from

Table 1. Consumption ofprimary energy in Iceland, 2002

PJ ktoe %Hydro 25,1 599 17,4Geothermal 78,7 1.880 54,7Petroleum prod. 35,8 856 24,9Coal 4,3 103 3,0Total 143,9 3.437 100,0PJ : petajoulektoí: kilotonne of oil equivalent1 ktoe = 0,041868 PJ = 11,63 GWh

4

geothermal energy, and substantial energy consumption for fishing and

transportation. In addition, more energy is required for space heating than in

most other countries due to the climate. On the other hand, for this same

reason, it is practically never necessary to cool homes and buildings.

As shown in Table 1, almost 30% of the primary energy used in Iceland is

imported and slightly more than 70% is domestic, renewable energy. The major

share of imported energy, around 90% of the petroleum, is used for fishing and

transportation. It has not been technically possible nor feasible to utilise

domestic energy in these sectors of the economy. This may change, however,

e.g. if the possibility for using hydrogen as an energy carrier becomes a reality.

Standard calculation methods published by the World Energy Council (WEC)

are used to calculate primary energy consumption based on data of energy

consumed. According to these methods, the primary energy consumed in

producing electricity from geothermal energy is ten times the electricity

produced, which means that the efficiency of the generation process is 10%.

When electricity is generated by hydropower, however, the primary energy is

calculated as equal to the electricity generated. This shows that primary energy

does not necessarily give an accurate picture of how much energy is produced

by power plants. When geothermal energy is utilised for heating, as for

instance in district heating utilities, the primary energy is calculated as the

energy extracted by cooling the water to 15°C.

18

0

20

40

60

80

100

120

140PJ

Hydropower

Geothermal

Oil

Coal

Relative consumption

0%

20%

40%

60%

80%

Hydropower

Geothermal

Oil

Coal

Peat

100%

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 20001940

Figure 3. Primary energy consumption in Iceland, 1940-2002

19

UTILIZATION OF GEOTHERMALENERGY FOR HEATING

As has previously been mentioned, geothermal sources account for just over

half of Icelanders’ primary energy needs. From the earliest times, geothermal

energy has been used for bathing and washing. Late in the 19th century,

experiments began with utilising geothermal energy in market gardening; and

early in the 20th century geothermal sources were first used to heat

greenhouses. Around the same time, utilization of geothermal energy for

heating swimming pools and buildings began; and today space heating is the

largest component in utilization of geothermal energy in Iceland.

Figure 4 gives a breakdown of the utilization of geothermal energy in 2001.

These percentages are for energy utilised rather than primary energy. Direct use

of geothermal energy that year, i.e. for heating, totalled around 23,800

terajoules (TJ), which corresponds to 6,600 GWh. In addition, electricity

production amounted to 1,451 GWh. As Figure 4 shows, the 60% share of space

heating was by far the greatest, followed by electricity production, accounting

for 18%. Table 2 gives a more detailed breakdown of the utilization.

The following section briefly examines individual aspects of geothermal

exploitation other than for electricity production, which will be discussed

specifically in Chapter 7.

Utilization of geothermal energy for space heating on a large scale began

with the laying of hot water piping from the hot springs of Laugardalur in

Reykjavík in 1930. The formal operations of Reykjavík District Heating, now

Reykjavík Energy, began in 1943. Following the oil price hikes of the 1970s, the

government took the initiative in expanding district heating utilities, with the

result that the share of geothermal energy in space heating increased from 43%

in 1970 to 87% in 2001. This development is illustrated in Figure 5.

In recent years, utilization of geothermal energy for space heating has

increased mainly as a result of the population increase in the capital area. Most

prominent among recent district heating utilities in towns is that of

Stykkishólmur, West Iceland, which came into service at the end of 1999. A

heating utility at Drangsnes in Northwest Iceland was taken into service at

about the same time, and in the town of Búðardalur and the surrounding

districts of West Iceland about a year later. In addition, a number of small

Electricity generation 18,0%

Space heating 59,4%

Swiming pools 4,1%

Greenhouses 3,2%

Industry 5,5%Snow melting 4,0%

Fish farming 5,8%

Figure 4. Sectoral share of geothermal utilization in Iceland, 2001

5

heating utilities have been

established in rural areas. There are

some 200 small, rural utilities of

this type in Iceland. As the result of

changing settlement patterns, and

the continuing search for

geothermal sources in the so-called

“cold” areas of Iceland, the share

of geothermal energy in space

heating can be expected to exceed

90% in the near future.

In Iceland, there are about 160

swimming pools in operation, 130 of which use geothermal heat. While most of

these pools are open to the public, this figure also includes pools belonging to

schools and other institutions. Based on their surface area, 89% of the pools are

heated by geothermal sources, 7% by electricity, and 4% by burning oil. The

share of the capital area is approx. 29% of the total area of all swimming pools

in the country. Swimming pool attendance has increased in recent years; and in

2002 it was the equivalent of 15 visits each year by every Icelander. A new,

middle-sized swimming pool uses as much hot water as is needed to heat 80-

100 single-family dwellings.

Geothermal energy has been utilised to a limited extent for melting snow,

with this usage increasing during the last two decades. The total area of snow

melting systems installed in Iceland is around 740,000 m2 and their energy

20

Table 2. Geothermal energy utilization in Iceland, 2001

Geothermal utilizationTJ/Yr GWh %

Space heating 17.223 4.784 59,4Electricity generation 5.224 1.451 18,0Industry 1.600 444 5,5Swimming pools 1.200 333 4,1Greenhouses 940 261 3,2Fish farming 1.680 467 5,8Snow melting 1.150 320 4,0Total 29.017 8.060 100

21

consumption approximately 320 GWh annually. Over half of this energy comes

from used, return water from space heating systems.

Apart from space heating, one of the oldest and most important usages of

geothermal energy in Iceland is for greenhouse heating. In 2002, there was a

total of 195,000 m2 of greenhouse area. Of this, 55% is used for growing

vegetables and 45% for flowers. The increasing use of electric lighting in recent

years has lengthened the growing season and improved greenhouse utilization.

This development has been encouraged by state subsidies on electricity for

lighting.

Use of geothermal energy in aquaculture has been considerable in recent

years. Despite a reduction in the number of fish farming operations, total

production has increased and amounted to some 4,000 tonnes of fish in 2002.

Geothermal energy is used primarily in smolt farming.

The diatomite plant at Lake Mývatn uses more direct geothermal energy than

any other industrial enterprise in Iceland. The plant, which has been

operational since 1967, produces some 27,000 tonnes of diatomite annually.

Each year the plant uses some 220,000 tonnes of geothermal steam under 10

bar pressure, primarily for drying. The seaweed product manufacturer

Thorverk, at Reykhólar in West Iceland, also uses geothermal heat directly in its

production. The plant produces 2,000-4,000 tonnes of rockweed and kelp meal

annually, using 28 l/sec of 107°C hot water in its production. A salt production

plant was operated on the Reykjanes peninsula for a number of years but its

operation has been intermittent. Since 1986, a facility at Hæðarendi in

Grímsnes, South Iceland, has produced carbon dioxide (CO2) from geothermal

fluid. The plant uses approximately 6 l/sec of fluid and produces some 2,000

tonnes annually. The production is used in greenhouses, for manufacturing

carbonated beverages and in other food industries. Among the other uses of

geothermal energy is drying of fish, which is carried out in many areas of

Iceland.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1970 1975 1980 1985 1990 1995 2000

OilElectricity

Geothermal 87%

11,5%1,5%

Figure 5. Energy sources used for space heating, 1970-2002

FUEL USAGE

From the time of the country’s settlement in the 9th century until well into the

20th century, Icelanders burned wood, peat, seaweed and sheep dung, and

these fuels were the only sources of energy available. A limited amount of coal

was imported as early as the 17th century; and petroleum, as previously

mentioned, is not known to have been imported until 1867. There was no

substantial importation of fuel, however, until the 20th century, with the arrival

of coal-burning steam trawlers to the country. Later, fishing vessels began to use

kerosene motors, and were followed by automobiles burning gasoline.

Figure 6 shows how Icelandic consumption of petroleum products has

developed since 1982. A breakdown is given for the principal classifications of

petroleum use. The figures include both domestic usage and use in

international transport, as well as fuel purchased by Icelandic airline companies

abroad, which amounts to 60% of their fuel consumption. During this period,

the increase in consumption of petroleum products has averaged 1.7%

annually. Some 90% of oil consumption in 2002 was used for transportation and

fishing. Of the total consumption of petroleum products in 2002, which was

856,000 tonnes (36,260 TJ), domestic consumption accounted for 599,000

tonnes (25,340 TJ) while 257,000 tonnes (10,920 TJ) were used by Icelandic

enterprises for international transportation. The major share of the petroleum

22

6

products classified as “other” in Figure 6 has been used for space heating,

which accounted for 4,200 tonnes in 2002.

During the past two decades, there have been major changes in aircraft fuel

consumption, which is primarily jet fuel used for international transportation.

During the period 1987-1990, this consumption dropped substantially following

the acquisition by Icelandair of new and more fuel-efficient aircraft, while in

more recent years consumption has increased once more with increasing

international flights.

23

0

50

100

150

200

250

300

Thousandtons

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Fishing vessels

Automobilesand equipments Airplanes

Cargo ships

Industry

Other

Figure 6. Consumption of petroleum products in Iceland, domestic anduse in transportation to and from the country, 1982-2002

In 2002, coal consumption amounted to a total of 149,000 tonnes. By far the

largest consumer is Icelandic Alloys Ltd. at Grundartangi, West Iceland, which

uses about 90% of the imported coal. Most of the remaining coal is used by

Iceland Cement Ltd.

Compared to other fuels consumption, use of gas is insubstantial, amounting

to only 2,050 tonnes in 2002. Gas consumption has, however, increased

considerably in recent years, primarily as a result of increased power intensive

industry, which uses some 30% of the gas. Other consumption is divided

between household use (38%), services (22%) and manufacturing (10%).

Due to the probable impact of greenhouse gases on climate, the nations of

the world have signed agreements to restrict emissions of these gases. Some

82% of greenhouse gas emissions in Iceland are carbon dioxide (CO2). By far the

greatest share thereof, almost 70%, comes from the burning of fossil fuels. This

shows the significance of fossil fuel consumption in connection with

greenhouse gas emissions. During the period 1990-2001, total annual emissions

of greenhouse gases in Iceland rose from 2.9 million tonnes to 3.1 million

tonnes of CO2 equivalents annually, or by 10%. These figures do not include

emissions from international transport of goods and passengers, in accordance

with international rules. Figure 8 shows the sectoral share of CO2 emission in

Iceland 2001. Emissions of CO2 come from industry (40%), transportation (32%),

fishing vessels (25%), residential (1%), and other sources (2%). In 2001,

emissions from power intensive industry amounted to around 870,000 tonnes

of CO2 equivalents, which is about 82% of manufacturing emissions and around

28% of total emissions. This includes both emissions from burning fossil fuels

and from manufacturing processes.

24

Transportationand equipments 32%

Residential 1%

Industry 40%

Fishing vessels25%

Other 2%

Figure 7. Share of the main types of petroleum products used in Iceland, 2002

Fuel oil17%

Gasoil45%

Jet fuel21%

Gasoline17%

Figure 8. Sectoral share of CO2 emissions in Iceland, 2001

25

GENERATION AND USE OF ELECTRICITY

Electrification in Iceland began at the turn of the 20th century. The first

generating station serving the public was a 9 kW hydropower plant built by

Jóhannes Reykdal in Hafnarfjörður in 1904. During the first decades of the

century, various local authorities had generating stations set up. The major

turning point was, however, the construction of a hydropower plant by the

Town of Reykjavík on the river Elliðaár, the first stage of which was built in

1921. This was followed in the 1930s by hydropower plants at Ljósafoss on the

river Sog in South Central Iceland, and the river Laxá in the Þingeyjarsýsla

district in the northeast. Electricity consumption grew rapidly during the post-

WWII years, not least due to an increased use of electricity for cooking. It was

not, however, until the 1950s that a good number of new hydroelectric plants

were built and the existing ones expanded. Figure 9 shows the development of

hydropower plants since the middle of the previous century. Plants producing

more than 5 MW are indicated especially.

The construction of the Búrfell power plant in 1969, to supply power to the

aluminium smelter in Straumsvík, marks a major watershed. Since that time,

electricity production for energy-intensive industry has increased greatly, and in

2002 it amounted to some 65% of total production. This has required quite a

7

number of major power plants, including the Blanda power plant, taken into

service in 1991, and five plants in the region of the rivers Þjórsá and Tungná in

the Central Highlands. The total installed capacity of the country’s major plants,

together with electricity generation in 2002, is shown in Figure 10. That same

year, the total installed capacity of all public power generating stations was

1,470 MW. Of this, 1,150 MW were from hydropower stations, 200 MW from

geothermal power stations, and 120 MW from diesel generators which are

primarily intended to ensure a back-up power supply.

26

Ljósafoss

0

200

400

600

800

1.000

1.200

1.400

1.600

1930 1940 1950 1960 1970 1980 1990 2000 2010

MW

Steingrímsstöð

Blanda

Hrauneyjafoss

Sigalda

Búrfell

Nesjavellir

Búrfell

Sultartangi

Svartsengi

Vatnsfell

Nesjavellir

Krafla

Krafla

Írafos

Laxá

LaxáLagarfoss

Svartsengi

Mjólká

Figure 9. Total installed capacity of hydro and geothermal power plants in Iceland

0 500 1.000 1.500 2.000 2.500 3.000

Other power plants

Andakíll

Lagarfoss

Mjólká

Ljósafoss

Steingrímsstöð

Vatnsfell

Laxá

Írafoss

Svartsengi

Krafla

NesjavellirSigalda

Blanda

Sultartangi

Hrauneyjafoss

Búrfell

Electricity generation (GWh)

Installed capacity 31. 12. 2002Electricity generation 2002

100 200150 25050Installed capacity (MW)

3000

Figure 10. Installed capacity and electricity generation of the main power plants

27

In the summer of 2003, construction

began on the Kárahnjúkar power

plant, harnessing the highland rivers

Jökulsá á Dal and Jökulsá í Fljótsdal in

connection with the building of an

aluminium smelter in Reyðarfjörður,

in the East Fjords. The installed

capacity of the plant will be 690 MW

and its estimated production 4,540

GWh annually.

Total electricity generation in 2002 amounted to 8,411 GWh, or some 29,300

kWh per capita. Since 2001, per capita electricity consumption in Iceland has

been greater in Iceland than in any other country, a position previously held by

Norway for many years.

A breakdown of electricity production by energy source in 2002 is shown in

Table 3. Right from the beginning, hydropower has provided by far the greatest

share of electricity generated in Iceland. During the period 1987-2002,

electricity consumption in Iceland doubled.

There was some diesel-powered electricity production during the immediate

post-WWII years; and again from 1965 until 1984, when a transmission line

connecting the entire country was completed. Since that time, petroleum fuel-

burning generators have been used almost exclusively as back-up power

sources.

Electricity generation using geothermal energy has increased significantly in

recent years, as is shown in Figure 11. The installed capacity of geothermal

power plants now totals some 200 MW. The oldest geothermal power plant,

taken into service in 1969, is at Námafjall (3 MW). The capacity of the Krafla

power plant in Northeast Iceland, which has been in service since 1977, was

expanded in 1997 from 30 to 60 MW, and preparations are underway to

increase the plant’s output by an additional 40 MW in the next stage. There are

also plans for building a new plant in the Krafla area. At Svartsengi, south of

Reykjavík, a new 30 MW turbine was installed at the end of 1999, bringing the

Table 3. Electricity generationin Iceland, 2002

GWh %Hydropower 6.973 82,9Geothermal 1.433 17,0Diesel 5 0,1Total 8.411 100,0

0

200

400

600

800

1.000

1.200

1.400

1.600

1970 1975 1980 1985 1990 1995 2000

Electricity generation(GWh/year)

Svartsengi 46,4 MW

Krafla 60 MWBjarnarflag 3,2 MW

Nesjavellir 90 MW

Húsavík 2 MW

Figure 11. Electricity generation using geothermal energy, 1970-2002

28

total electricity generating capacity of the plant to 46 MW. Electricity

production at Nesjavellir, east of Reykjavík, began at the end of 1998, using two

30 MW turbines; and in 2001 the plant was enlarged to a capacity of 90 MW

with the installation of a third turbine. At Húsavík, in Northeast Iceland,

electricity generation using geothermal energy began around mid-year 2000,

when a Kalina binary-fluid 2 MW generator was taken into service, among the

first in the world of its kind. It utilises hot water cooling from 120°C down to

80°C and satisfies about three-quarters of the electricity needs of the town of

Húsavík. Part of the hot water leaving the generating plant is used by the

district heating system for public heating.

Geothermal plants are generally operated at full capacity for a longer period

each year than the hydropower plants. This is because it is advisable to operate

geothermal steam plants as base load providers, while allowing the

hydropower plants with water reservoirs to handle the fluctuations in the

market.

Sales of electricity in Iceland in 2002, with a breakdown by type of usage, are

shown in Figure 12. It is clearly indicated that use for aluminium production is

overweighing other classifications. Figure 12 does not show electric heating

separately, but instead it is spread over various classifications. In 2002, the

amount of electricity used directly for space heating was about 359 GWh. In

addition, district heating utilities using electric boilers used some 160 GWh for

heating water in their central plants, so that total use of electricity for space

heating was some 519 GWh.

Figure 13 shows the development of electricity generation in Iceland since

1966, giving a breakdown between general consumption and power intensive

industry. Power intensive industry includes users purchasing more than 100

GWh of electricity per year, which are the three enterprises listed in Table 4.

Electricity consumption by power intensive industry has doubled in the past six

years and accounted in 2002 for 65% of total electricity consumption. Use by

power intensive industry during this period increased by an amount equal to all

electricity generation for general consumption in 1997.

0 500 1.000 1.500 2.000 2.500 3.000 3.500 4.000 4.500

Agriculture

Food industry

Chemical industry

Ferrosilicon industry

Aluminium industry

Other industries

Utilities

Public commerce

Other private services

Residential consumption

Iceland defence force

Other

GWh/year

Figure 12. Electricity consumption, 2002

POWER INTENSIVE INDUSTRY

The development of energy resources for use in energy-intensive industry got a

relatively late start in Iceland. While major rivers in the Nordic countries and

continental Europe were developed, in many instances for use in energy-

intensive industry, rivers and geothermal regions in Iceland were practically

untouched, with the exception of a few small hydroelectric generating plants

which local authorities built to provide electricity to the general public through

local distribution grids.

The pioneer venture in energy-intensive industry in Iceland was the

construction of Áburðarverksmiðjan, The State Fertiliser Plant at Gufunes, just

outside of Reykjavík, which began operation in 1953. At the beginning of the

1960s, there was extensive discussion on the need to diversify exports and to

utilise the country’s energy resources. At this time, exports were based almost

exclusively on fishing and fish processing. Under such circumstances, it was only

natural that attention should be directed at other natural resources, the

country’s unharnessed energy potential.

The aluminium industry which was growing rapidly at that time, was an

attractive option. Following a number of investigations and discussions with

several foreign aluminium producers, the Icelandic government signed an

agreement in 1966 with the Swiss company Alusuisse for the construction of an

aluminium smelter (ÍSAL, now owned by Alcan) with an annual production

capacity of 60,000 tonnes. Iceland would construct a hydropower plant to

provide power for the smelter. Following the conclusion of this agreement, the

first stage of the Búrfell power plant, with a capacity of 110 MW, was taken into

service in 1969, followed by the second stage adding another 110 MW.

The impact of energy-intensive industry on energy resource utilization can be

clearly seen in 1970, the first year that the ÍSAL smelter was operated at full

capacity. That year, power intensive industry consumed almost half of the

electricity produced in Iceland and several years later slightly more than half.

That same year, the diatomite plant Kísiliðjan hf. was established at Lake

29

Losses and in-plant consumption

Nordic Aluminum

Icelandic AlloysAlcan Iceland/ÍSALThe State Fertiliser PlantGeneral consumption

0

2.000

3.000

5.000

7.000

8.000

9.000GWh/year

1.000

4.000

6.000

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Figure 13. Generation and sale of electricity, 1966-2002

8

Mývatn to process

diatomite from the

lakebed. Access to a

steady supply of inex-

pensive geothermal

energy made the plant

internationally com-

petitive.

Íslenska járnblendifélagið, the ferrosilicon plant, Icelandic Alloys Ltd., was

established in 1975 by the Icelandic state in co-operation with foreign parties.

In 1999, the plant was expanded, increasing annual production from 70,000 to

115,000 tonnes.

Construction of the Norðurál aluminium smelter (Nordic Aluminum) at

Grundartangi, West Iceland, which is owned by the US company Columbia

Ventures Corporation, began in 1997 and the plant commenced operation in

1998. To begin with, it produced 60,000 tonnes annually. A second phase, which

became operational in 2001, expanded the plant and increased its annual

production capacity to 90,000 tonnes.

In 1997, an expansion of the ÍSAL plant in Straumsvík was also completed,

bringing the annual production capacity of that plant to 162,000 tonnes.

Efforts to increase energy-intensive industry during the 1980s were

unsuccessful, especially due to depressed aluminium markets. It was not until

1995 that things began to move once more in the direction of further energy-

intensive industrial projects. Development since that time has been rapid. The

interest of and demand by foreign parties for electricity to support power

intensive industry has grown substantially, and decisions have been taken to

greatly increase aluminium production in Iceland during the first decade of the

21st century. This includes the building of an aluminium smelter in Reyðarfjörður

with an annual production capacity of approx. 322,000 tonnes, the

enlargement of Norðurál at Grundartangi to produce as much as 300,000

tonnes, and the further expansion of the ÍSAL plant to produce 200,000 tonnes

annually, with the possibility of still further expansion there later in this same

decade. These plans are naturally dependent upon the provision of sufficient

electricity at a competitive price within this same time frame.

It is government policy to continue to exploit natural resources, to ensure

continuing prosperity in Iceland. Increased sales of energy to power intensive

industry appear to be the only visible possibility to do so in the near future. This

calls for continuing research into power development options.

30

Icelandic Alloys 19,9%

Nordic Aluminum 26,6%

Alcan Iceland/ÍSAL 53,5%

Company Year Electricity salenames established GWh %Alcan Iceland/ÍSAL 1969 2.785 53,5Icelandic Alloys 1979 1.039 19,9Nordic Aluminum 1998 1.385 26,6Total 5.209 100,0

Table 4. Sale of electricity to power intensive industry, 2002

Figure 14. Breakdown of electricity sales to energy intensive industry, 2002

ENERGY PRICES

9.1 Electricity

Electricity which is sold or delivered to a purchaser is either firm electricity or

secondary electricity, with the price dependent upon the type of energy

concerned.

Firm electricity (secure electricity) is the energy which can be obtained from

the power-generating network despite natural fluctuations in water supply.

The assumption is that at most once in 100 years the system will not be able to

deliver the equivalent of firm electricity.

Secondary electricity (formerly referred to as non-firm electricity) is the

electrical energy which the power generating system can deliver at any time in

excess of firm electricity. This electricity is available in the summertime and in

winters when waters are not at their lowest level. It could be said that

secondary electricity is also temporarily available when a new generating plant

becomes operational with capacity considerably exceeding energy needs.

Delivery of secondary electricity cannot be ensured at all times, which is why it

is sold on the condition that it may be cut back and for a lower price than is paid

for firm electricity.

Two enterprises dominate the electricity wholesale market in Iceland:

Landsvirkjun, which has an overwhelming share of the market; and Iceland

State Electricity (Rarik). The proportion of secondary electricity in Landsvirkjun’s

total electricity sales has been 10-17% during the past decade, and 34-42% of

Rarik’s sales. The proportion of secondary energy sold has a major impact on the

average price.

Landsvirkjun is the only enterprise in Iceland which sells electricity directly to

power intensive industrial enterprises. As of 2002, there were three such

enterprises in Iceland: Alcan Iceland, formerly ÍSAL, 2,785 GWh; Icelandic Alloys

Ltd., 1,039 GWh; and Nordic Aluminum 1,385 GWh (figures are for 2002

consumption). The State Fertiliser Plant, which was previously in this group, has

31

9

0,0

0,2

0,4

0,6

0,8

1,0

1,2

1,4

1,6

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

The State Fertiliser Plant

Alcan Iceland/ÍSAL

Icelandic Alloys

ISK/kWh

Energy intensive industry average

Figure 15. Electricity prices to power intensive industry, (2002 prices)

greatly reduced its energy purchases and is thus no longer defined as a power

intensive industrial enterprise, as the definition is based on consumption of at

least 100 GWh annually.

Based on fixed price levels, the average price paid by power intensive

industrial enterprises for electricity has fluctuated considerably during the past

decade, as is evident from Figure 15. The reason is that the price is linked by

special agreements to market prices for products. The price of energy to ÍSAL,

for instance, has been dependent upon world market prices for aluminium and

the USD exchange rate. From 1995 onwards, Landsvirkjun ceased to report the

32

0

2

4

6

8

10

12

14

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

ISK/kWh

Rarik (Iceland State Electricity)

Orkuveita Reykjavíkur(Reykjavík Energy)

Figure 16. Retail price of electricity for general consumption, (2002 prices)

average price of electricity sold to individual power intensive industrial

customers in its annual reports, which is why this is shown only for 1990-1994.

In 2002, the average price to power intensive industry was ISK 1.25 per kWh.

Electricity is sold at various different tariffs in the retail market depending

upon what sort of use is involved. The general use rate, i.e. use by households,

retail stores, institutions, etc., includes almost 20% of Rarik’s electricity sales and

more than half of Reykjavík Energy’s electricity sales. The development of the

retail electricity price, as reflected in the general use rate charged by Rarik and

Reykjavík Energy during the past decade, is shown in Figure 16, with VAT

included in the price. Allowing for adjustment based on the Consumer Price

Index (CPI), the retail price for electricity at the general use rate has dropped

slightly during the 1990s.

9.2 Space heating

District heating utilities in Iceland can be divided roughly into two groups: the

ones utilising geothermal energy, as is most common, and the heating utilities

using electricity or petroleum fuel to heat water in boilers. Most heating

utilities exploiting geothermal energy sell hot water by measured use (m3). A

few still use a tariff system based on maximum flow restriction (litres per

minute). The electrically heated utilities, on the other hand, sell hot water

based on amount and energy (ISK per kWh). Due to their varying sales

arrangements, it is difficult to compare heating costs of the different utilities.

33

Making specific assumptions as to the typical user, however, makes it possible to

calculate the price of energy from individual utilities. The results show that

there is a sizeable difference in space heating costs and energy prices

depending upon the heating utility, or from ISK 0.50-2.80 per kWh, depending

upon the utility concerned. It should be pointed out that this difference may

not reflect the real difference in cost of heating, since this can be affected by

various other factors, e.g. energy conservation measures by those persons

paying high energy prices.

As previously mentioned, the share of geothermal energy in space heating in

Iceland is around 87%. In the areas served by three electric utilities, however,

space heating is to a considerable extent provided directly by electricity. These

utilities are Rarik, the West Fjord Power Company, and Rafveita Reyðarfjarðar.

Based on 32,887 kWh, which is the estimated consumption used in calculating

price indices, energy price to consumers for direct electric heating, as of 1

August 2003, was ISK 2.66 per kWh from Rarik and ISK 2.54 per kWh from the

West Fjord Power Company, including VAT.

Since 1982, electricity for residential heating has been subsidised by the state

and energy enterprises. The purpose of this is to equalise energy costs

throughout Iceland; the subsidies are paid to regions which cannot avail

themselves of geothermal heating. This applies to areas served by Rarik, the

West Fjords, Westman Islands and Reyðarfjörður in the East Fjords. Electricity is

subsidised through the energy enterprises, and benefits both people using

electric heating directly as well as those whose hot water comes from district

heating utilities using electric boilers.

On 8 May 2002, an Act on Subsidised Residential Heating Costs entered into

force. Prior to this, there had been no legislation providing for the disposition

of these funds or how supervision of their usage should be carried out. For this

reason, it was considered pressing to establish a legal basis for the subsidies.

The main requirement for a subsidy is that a building be a residential dwelling

located outside of the regions served by district heating utilities utilising

geothermal energy. The dwelling must also have permanent residents.

Commercial or industrial buildings, as well as vacation homes, are excluded. The

Act also introduces a subsidy for housing heated with fuel oil where there are

34

0

100

200

300

400

500

600

700

800

900

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Million ISK

Hitaveita Rangæinga

Rafveita Reyðarfjarðar

Bæjarveitur Vestmannaeyja

Orkubú Vestfjarða

Rafmagnsveitur ríkisins

Rafveita Siglufjarðar

Hitaveita Seyðisfjarðar

Hitaveita Hafnar

Figure 17. Subsidies of electricity for residential heating, 1983-2002 (2002 prices)

no other options available. Another innovation in the Act is to provide subsidies

for electricity from small, privately-owned power plants and heat pumps, with

certain conditions.

The funding allocated for these subsidies has grown substantially in recent

years, and in 2003 an estimated ISK 847 million will be used for this purpose. In

addition, Landsvirkjun and Rarik give their customers a special discount, so that

the total annual amount of the subsidies could be around ISK 1 billion. Since

they began in 1982, the national government has devoted the equivalent of ISK

11 billion to subsidies, at 2003 price levels. Figure 17 shows the annual heating

subsidies during this period and gives a breakdown by energy enterprise.

Subsidies from the National Treasury of the tariff-interrupted daytime heating

amounted to ISK 2.23 per kWh in 2003 and were paid for as much as 50,000

kWh per year. The subsidy on the electricity tariff for farming amounted to ISK

1.59 per kWh and was paid for as much as 70,000 kWh per year. The maximum

subsidy is thus the same for both tariffs.

The share of fuel oil in residential heating in Iceland has been drastically

reduced, from around 45% in 1973 to about 1.5% in 2002. The energy cost for

heating with fuel oil at mid-year 2003 was around ISK 4.90 per kWh.

Figure 18 shows a summary of energy prices for residential heating, including

VAT. The summary shows that generally, the country’s geothermal district

heating utilities offer the lowest prices for residential heating. Electrically

powered utilities and direct use of electricity for heating are at similar prices as

the most expensive geothermal heating methods. Only a small portion of the

homes heated with oil fulfill the requirements for subsidies (e.g. on the island

Grímsey and a few other smaller locations); here the energy price paid by

consumers is the same as paid for electric heating. Oil heating without subsidy

is substantially more expensive than other options.

An examination of developments in energy prices for residential heating,

corrected for price index variations, over the past decade reveals that there

have been no great changes during this period, if fluctuations in oil prices are

excluded. Energy prices from the more expensive geothermal heating utilities

and for electric heating, which have been fairly similar, have decreased

somewhat in recent years, however. The energy cost of heating with gasoil has

35

0 1 2 3 4 5

Geothermal - low price

Geothermal - average price/Reykjavík

Geothermal - high price

District heatingfrom electric boilers

Electrical heating

Oil heating,subsidised

Oil heating,not subsidised

ISK/kWh

Figure 18 Comparison of energy prices for residential heating

fluctuated greatly. Previously, heating with oil was even cheaper than the prices

of the more expensive geothermal heating utilities, but ever since 1996 it has

been considerably more expensive.

9.3 Fossil fuels

Crude oil prices on the world market have fluctuated greatly in recent years.

Following considerable price drops in 1997 and 1998, the price more than

tripled over the following two years. These fluctuations have naturally been

reflected in oil prices in Iceland. Figure 19 shows the annual average prices for

oil and gasoline at 2002 prices. The composition of the gasoline price at the

pump in Iceland in June 2003 is shown in Figure 20, when a litre of 95-octane

gasoline cost ISK 95.30.

9.4 Foreign comparison

Figure 21 shows a comparison of electricity prices for residential use in Western

Europe. It is based on data from Eurelectric, the union of the electricity industry

in Europe. It assumes that annual consumption is 3,500 kWh. It should be

pointed out that, in the Eurelectric data, information from Norway, Sweden

and Finland, for instance, is lacking. In this comparison, the price of electricity

36

Share of the oilcompany (distrib.,markup, etc.) 17,4%

Excise tax 11,0%

Equlaization freight rate 0,4%

VAT 19,7%

Special tax 30,0%

Import price 23,0%

Figure 20. Gasoline price breakdown in June, 2003

0

20

40

60

80

100

120

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

98-octane gasoline

95-octane gasoline

GasoilMarine diesel

Diesel fuel

Fuel oil

Price(ISK/I)

Figure 19. Fuel prices, (2002 prices)

in Iceland is second-lowest. Only in Greece is the price lower. The high price in

Denmark is noteworthy, and is the result of high taxation. A similar comparison

of industrial electricity prices reveals that the price in Iceland is close to the

average of the other European countries.

Figure 22 shows an international comparison of the price for 95-octane

gasoline in 2002. The data come from the International Energy Agency (IEA),

with the exception of the data for Iceland which were calculated especially,

since Iceland was not included in the IEA data. Figure 22 shows that gasoline

prices in Iceland are among the highest in any OECD country. Only in Norway is

the price of gasoline higher.

37

Switzerland

Spain

Greece

Iceland

France

Denmark

Italy

Ireland

N. Ireland

Netherlands

Germany

Belgium

Portugal

Luxembourg

0 5 10 15 20ISK/kWh

Price excluding taxesTaxes

NorwayIceland

UKNetherlands

DenmarkFinland

GermanyItaly

FranceSwedenOECD-Europe

Belgium

Ireland

Poland

OECD

SpainAustria

HungaryTurkey

SwitzerlandPortugal

Czech Republic

LuxembourgGreece

Mexico

USANew Zealand

0,0 0,2 0,4 0,6 0,8 1,0 1,2 1,4USD$/l

Price excluding taxes

Taxes

Figure 21. Electricity prices for residential use in Western Europe 1. January, 2003

Figure 22. International comparison of the price of 95-octane gasoline in 2002

ICELANDIC ENERGY ISSUES INAN INTERNATIONAL CONTEXT

As was mentioned earlier, per capita energy consumption in Iceland is among

the highest in the world. In 1998, global primary energy consumption was 68.7

GJ per capita on average, while primary energy consumption in Iceland was

401.5 GJ per capita. That same year, primary energy consumption among that

portion of mankind living in industrialised nations was 176.0 GJ per capita, and

for people in developing countries 31.8 GJ per capita. That year, Icelanders

consumed 2.3 times as much energy per capita as did the average person in an

industrialised nation, 12.6 times more than the average person in a developing

country, and 5.9 times that of the average person in the world as a whole. Since

1998, per capita consumption has increased yet more and amounted to some

500 GJ per capita in 2002, as previously mentioned.

The breakdown of primary energy from energy sources in Iceland also differs

considerably from that elsewhere, as shown in Figure 23 (source IEA). Only the

share of petroleum products consumed is similar to that of the world as a

whole. Some energy resources, such as natural gas, nuclear energy and

renewable fuels, i.e. firewood and other biofuels, are not utilised. Hydropower

provides a much larger proportion of the energy used in Iceland than is

generally the case. The most unique aspect, however, is the use of geothermal

38

10

energy. Its share in Icelandic energy consumption in 1998 was over one hundred

times more than in the world as a whole, as it provided almost one-half of the

country’s primary energy that year. Nowhere else in the world is the share of

geothermal energy anywhere near that which it is in Iceland.

In 1998, the share of renewable energy sources in primary energy supply of

the world was 13.8% and that of non-renewable energy resources, primarily

fossil fuels, 86.2%. For Iceland, the picture was practically the opposite in 2002.

Here, the share of renewable energy resources was 72.1% and that of non-

renewable resources 27.9%.

39

0

5

10

15

20

25

30

35

40

45

50

Coal Oil Naturalgas

Nuclear HydroCombustiblerenewables

Geothermal

Share in total primaryenergy, %

WorldIceland

23,0

2,1

36,5

30,5

20,1

6,6

2,3

17,9

11,0

0,4

49,5

Figure 23. Primary energy consumption in the world and in Iceland, 1998

The fact that the global share of energy from renewable resources was even

this high, however, is primarily due to renewable fuels: firewood, other

combustible biomass, and animal dung, which together comprise 11% of this

13.8% share. These are the principal energy sources of the majority of humans,

who live in developing countries where these sources of energy are over-

exploited. Their current utilization is not sustainable in the long term. This is

not the case for the utilization of Icelandic energy resources, which can be

greatly increased without depletion.

40

Renewables Non-renewables

World Iceland

Figure 24. Share of renewables in total energy supply

OUTLOOK FOR THE FUTURE

According to forecasts from the Iceland Energy Forecast Committee, general

consumption of electricity in Iceland will increase by close to 2% annually for

the next two to three decades. The development of overall electricity

consumption depends mainly on whether the expansion of power intensive

industry continues in Iceland, as this already accounts for almost two-thirds of

total electricity consumption. Domestic consumption of petroleum products is

expected to increase by only 5% by the year 2030, while during the same

period, consumption of petroleum products for international transport will

increase by over 80%. There is no foreseeable increase in utilization of

geothermal energy for space heating, beyond that resulting from population

increase and movement. Production of electricity from geothermal sources is

likely to continue to increase, but this depends upon the development of

demand for electricity, and therefore on the expansion of power intensive

industry.

As previously mentioned, Iceland still has plenty of unharnessed energy. This

applies both to energy resources for electricity generation and space heating.

Since Icelanders are few in number, the nation’s general needs for increased

energy grow slowly. Utilization of its energy potential on a major scale must

thus be based on specific use.

While power-intensive industry first began in Iceland with the operation of

the State Fertiliser Plant, just after the mid-20th century, it only really took off

41

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with the ÍSAL aluminium smelter, which began operation in 1969. In 2002,

about two-thirds of all electricity generated in Iceland was used by power

intensive industry and current plans provide for as much as tripling the output

of this power intensive industry. From a technical perspective, it is possible to

proceed even farther along this course.

Ideas of laying a submarine cable to the UK or the European continent have

been under consideration for almost half a century. While this is feasible

technically, such a cable would be at least twice as long as the longest

submarine cable laid up to now. According to rough estimates, such a cable

would be very expensive, and would cost about as much as the building of the

power plants to supply it with energy. Since the lifetime of such a cable would

be shorter than that of the power plants, the cost of electricity would more

than double in transport via the cable. On the other hand, there is growing

demand for “green energy” in Europe, and if buyers are willing to pay more for

such than for other electricity, the laying of such a cable could be economically

feasible. In addition, such a connection would reinforce the Icelandic electricity

grid.

11.1 Hydrogen

Electricity can be used in various ways to produce fuel, but here in Iceland the

particular focus is on hydrogen. In recent decades, the feasibility of such

production has been examined at regular intervals, but the results have shown

that it is not yet cost-effective. As this new century begins, however,

developments in utilising hydrogen as an energy carrier appear to be

proceeding apace. This is particularly true of the development of fuel cells,

which can convert the energy in hydrogen directly into electricity. Acting on

proposals from a committee established by the Minister of Industry and

Commerce, the company Icelandic New Energy Ltd. was founded. Icelandic

parties – energy enterprises, the New Business Venture Fund and the State –

own a majority in the company. The European Union (EU) has shown great

interest in hydrogen research, and provided ISK 200 million for a project

involving an experiment using three hydrogen-powered buses in Reykjavík. The

Icelandic state has also provided substantial funding for the project, as have the

large corporations DaimlerChrysler, Norsk Hydro and Shell Hydrogen. In April

2003, a hydrogen fuelling station was formally opened, which provides the

public access to hydrogen for automobiles. This station is also intended to serve

the city buses which arrived in Iceland in October 2003. It is evident that

replacing traditional fuels with hydrogen is a complex process, which could take

decades even after its advantages have been proven. Rapid technological

development, however, may change this picture, making it sensible and cost-

effective to propel vehicles and the fishing fleet with domestically produced

fuel within the space of a few decades. The policy statement of the government

which took office in May 2003 states that it will aim at progressing further in

hydrogen utilization; and that in the future, Icelandic energy consumption shall

be based on renewable energy sources, thus becoming sustainable.

42

SUPPLEMENTARY MATERIAL

12.1 Energy units

The International System of Units (SI) is the

mandatory system of measurement in

Iceland. In this system, the basic energy unit

is a joule (J) and the basic unit of power a

watt (W). The power unit watt is an energy

unit per second, 1 W = 1 J per second.

Multiples and sub-multiples of these units

are denoted by prefixes as shown in Table 5.

It is customary to denote electrical energy

using the derived unit Watt-hour (Wh) or

multiples of this. The relationship between a Wh and a J is: 1 Wh = 3.6 kJ.

Generally speaking, one Wh with a prefix is equivalent to 3.6 J with the next

higher prefix. In other words, 1 GWh = 3.6 TJ and 1 TWh = 3.6 PJ. Table 6 shows

the relationship between the basic unit of the SI system for energy, the joule (J),

with kilowatt hours (kWh) and the equivalent energy of one kilotonne of

petroleum (kilotonne of oil equivalent, ktoe), a unit which is not part of the SI

system, but is commonly used in discussion of energy issues. The figures show

the equivalents of the units on the left in the units of the columns.

12.2 References

1. Elíasson, E.T. & Ingólfsson, P. (Eds). (2003). Multiple Integrated Uses of Geothermal

Resources. Proceedings of the International Geothermal Conference, IGC-2003, Reykjavík

14-17 September 2003. Reykjavík: Geothermal Association of Iceland.

2. Iðnaðar- og viðskiptaráðuneytið (Ministry of Industry and Commerce). (1998). Álit

samstarfsnefndar um orkurannsóknaáætlun (Opinion of the Co-operation Committee on

an Energy Research Programme). Rit 98-8. Reykjavík: Iðnaðar- og viðskiptaráðuneytið.

3. Orkuspárnefnd (The Icelandic Energy Forecast Committee). (2000). Raforkuspá 2000-

2025 (Electricity forecast 2000-2025). Orkustofnun report, OS-2000/063. Reykjavík:

Orkustofnun.

4. Orkuspárnefnd (The Icelandic Energy Forecast Committee) (2001). Eldsneytisspá 2001-

2030 (Fuel forecast 2001-2030). Orkustofnun report, OS-2001/040. Reykjavík:

Orkustofnun.

5. Orkuþing 2001. Orkumenning á Íslandi: grunnur til stefnumótunar (Energy culture in

Iceland: the foundation for policy). Address and posters at the Energy Conference 11-13

October 2001. (2001). Reykjavík: Samorka.

43

Table 5. Prefixes for multiplesof units in the SI system

Prefix Abbreviations Multiple of base unit

Exa E 1018

Peta P 1015

Tera T 1012

Giga G 109

Mega M 106

Kilo k 103

12

J kWh ktoeJ 1,0000 2,7778 * 10-7 2,3885 * 10-14

kWh 3,6000 * 106 1,0000 8,5985 * 10-8

ktoe 4,1868 * 1013 1,1630 * 107 1,0000

Table 6. Relationship between the SI system ofunits and two other units

6. Ragnarsson, A. (2000). Geothermal Development in Iceland 1995-2000. In Eduardo

Iglesias et al (Eds.), Proceedings of the World Geothermal Congress 2000, Kyushu-

Tohoku, Japan, 28 May to 10 June 2000. Skopje, Macedonia: International Geothermal

Association.

7. Rist, S. (1956). Íslenzk vötn 1 (Icelandic Fresh Waters I). Reykjavík: Raforkumála-stjóri,

Vatnamælingar.

8. Rist, S. (1990). Vatns er þörf (Water is needed). Reykjavík: Bókaútgáfa Menn-ingarsjóðs.

9. Stefánsson, V. & Elíasson, E.B. (1997). Samnýting orkulinda. Erindi flutt á afmælisráð-

stefnu Orkustofnunar “Orkuvinnsla í sátt við umhverfið” í október 1997 (Joint utili-

sation of energy resources. Address delivered at an anniversary conference of Orku-

stofnun, “Energy Production in Harmony with the Environment” in October 1997).

Orkustofnun report, OS-98005. Reykjavík: Orkustofnun.

10. Þórðarson, S. (1998). Auður úr iðrum jarðar: saga hitaveitna og jarðhitanýtingar á

Íslandi (Riches from the bowels of the earth: the history of district heating utilities and

utilization of geothermal energy in Iceland). Reykjavík: Hið íslenska bókmenntafélag.

1.2 Icelandic websites

National Energy Authority (Orkustofnun): www.os.is

Ministry of Industry and commerce (Iðnaðar- og viðskiptaráðuneyti):

www.idnadarraduneyti.is

Invest in Iceland Agency, energy field (Fjárfestingastofa): www.invest.is

Sudurnes Regional Heating (Hitaveita Suðurnesja): www.hs.is

Icelandic NewEnergy Ltd (Íslensk Nýorka): www.newenergy.is

Iceland GeoSurvey (Íslenskar orkurannsóknir - Isor): www.isor.is

Iceland Drilling Co. Ltd (Jarðboranir hf.): www.jardboranir.is

The National Power Company (Landsvirkjun): www.lv.is

West Fjord Power Company (Orkubú Vestfjarða): www.ov.is

Reykjavík Energy (Orkuveita Reykjavíkur): www.or.is

Master Plan for Hydro and Geothermal Resources in Iceland:

www.landvernd.is/natturuafl/

Federation of district Heating, Electricity utilities and Waterworks (Samorka):

www.samorka.is

1.3 Websites on energy in English

Eurelectric: www.eurelectric.org

International Energy Agency (IEA): www.iea.com

World Energy Council (WEC): www.worldenergy.org

Energy Information Administration: www.eia.doe.gov

European Energy Network: www.fz-juelich.de/ptj/projekte/index.php?index=886

The Directorate-General for Energy and Transport:

www.europa.eu.int/comm/dgs/energy---_transport/index_en.html

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25. Map of Iceland

Arnarhváll - 150 Reykjavík - IcelandTel.: +354 545 8500 - postur@ivr.stjr.is

www.idnadarraduneyti.is

Grensásvegur 9 - 108 Reykjavík - IcelandTel.: +354 569 6000 - os@os.is

www.orkustofnun.is

February 2004

National Energy Authority