ENERGY IN ICELAND

Historical 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 ENERGY IN ICELAND

Historical Perspective, Present Status, Future Outlook

3

National Energy Authority and Ministries of Industry and Commerce February 2004 4

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 5

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 Contents

Foreword 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 6 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 16 2. Terrestrial energy current through the crust of Iceland 16 3. Primary energy consumption in Iceland, 1940-2002 18 4. Sectoral share of geothermal utilization in Iceland, 2001 19 5. Energy sources used for space heating, 1970-2002 21 6. Consumption of petroleum products in Iceland, domestic and use in transportation to and from the country, 1982-2002 23 7. Share of the main types of petroleum products used in Iceland, 2002 24 8. Sectoral share of CO2 emissions in Iceland, 2001 24 9. Total installed capacity of hydro and geothermal power plants in Iceland. 26 10. Installed capacity and electricity generation of the main power plants 26 11. Electricity generation using geothermal energy, 1970 – 2002 27 12. Electricity consumption, 2002 28 7

13. Generation and sale of electricity, 1996-2002 29 14. Breakedown of electricity sales to energy intensive industry, 2002 30 15. Electricity prices to energy intensive industry, (2002 prices) 31 16. Retail price of electricity for general consumption, (2002 prices) 32 17. Subsidies of electricity for residential heating, 1983-2002 (2002 prices)34 18. Comparison of energy prices for residential heating 35 19. Fuel prices, (2002 prices) 36 20. Gasoline price breakdown in June, 2003 36 21. Electricity prices for residential use in Western Europe 1. January, 2003 37 22. International comparison of the price of 95 octane gasoline in 2002 37 23. Primary energy consumption in the world and in Iceland, 1998 39 24. Share of renewables in total energy supply 40 25. Map of Iceland 45

List of Tables

Table 1: Consumption of primary energy in Iceland, 2002 17 Table 2: Geothermal energy utilization in Iceland, 2001 20 Table 3: Electricity generation in Iceland, 2002 27 Table 4: Sale of electricity to energy intensive industry, 2002 30 Table 5: Prefixes for multiples of units in the SI system 43 Table 6: Relationship between the SI system of units and two other units 43 8

1 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. 9

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. 10

2 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 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 11 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 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 12 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, 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, 13 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 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 and Geothermal 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 14 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). 15

3 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, 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 Evaporation

33 43

Glacier flow Stored energy Harnessable energy 64 TWh/a PRECIPITATION in glaciers 285 TWh/a 7600 TWh 16 Flowing Dispersed Ground- water and not water 187 TWh/a harnessable ?? TWh energy 123 TWh/a 22

Groundwater Figure 1. Hydraulic energy derived from precipitation in Iceland

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.

Covered by glaciers 11 TWh/a Volcanism MAGMA Stored energy in 61 TWh/a bedrock 210 Harnessable 0-3 km Geothermal TWh/a Total 27 000 000 TWh energy energy current 70 TWh/a 59 TWh/a Assessable Conduction 6 000 000 TWh 53 TWh/a Harnessable 1 000 000 TWh Conduction to surface 131 TWh/a

Figure 2. Terrestrial energy current through the crust of Iceland 17

4 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 Table 1. Consumption of the impact of the oil price hikes of the primary energy in Iceland, 2002 1970s, which served to accelerate the development of geothermal heating PJ ktoe % systems in Iceland. In 2002, primary Hydro 25,1 599 17,4 energy consumption amounted to 500 GJ Geothermal 78,7 1.880 54,7 Petroleum prod. 35,8 856 24,9 per capita, which ranks among the Coal 4,3 103 3,0 highest in the world. There are a number Total 143,9 3.437 100,0 of reasons for this, in particular the high PJ : petajoule proportion of electricity used in power ktoí: kilotonne of oil equivalent intensive industry, a relatively high 1 ktoe = 0,041868 PJ = 11,63 GWh amount of electricity production from 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.

PJ 140 Relative consumption 100% Coal 120 80% Oil 60% 100 40% Geothermal Coal 80 20% Peat Hydropower Oil 0% 60

40 Geothermal

20 Hydropower 0 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

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

As shown in Table 1, almost 30% of the primary energy used in Iceland is 18 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. 5 UTILIZATION OF GEOTHERMAL ENERGY 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 19 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.

Snow melting 4,0% Swiming pools 4,1% Industry 5,5% Electricity generation 18,0% Fish farming 5,8%

Greenhouses 3,2%

Space heating 59,4%

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

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 20

Table 2. Geothermal energy heating utilities have been utilization in Iceland, 2001 established in rural areas. There are

Geothermal utilization some 200 small, rural utilities of TJ/Yr GWh % this type in Iceland. As the result of Space heating 17.223 4.784 59,4 changing settlement patterns, and Electricity generation 5.224 1.451 18,0 the continuing search for Industry 1.600 444 5,5 geothermal sources in the so-called Swimming pools 1.200 333 4,1 Greenhouses 940 261 3,2 “cold” areas of Iceland, the share Fish farming 1.680 467 5,8 of geothermal energy in space Snow melting 1.150 320 4,0 heating can be expected to exceed Total 29.017 8.060 100 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 100% 90% 80% 70% 60% Geothermal 87% 50% 40% 30% 20% Oil 10% Electricity 11,5% 0% 1,5% 1970 1975 1980 1985 1990 1995 2000 Figure 5. Energy sources used for space heating, 1970-2002 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. 21 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. 22

6 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 23

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.

Thousand tons 300

250 Fishing vessels

200 Automobiles and equipments Airplanes 150

100 Cargo ships Industry 50 Other 0 1995 1996 1998 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1997 1999 2000 2001 2002 Figure 6. Consumption of petroleum products in Iceland, domestic and use 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.

Fuel oil Gasoline 17% 17%

Gasoil Jet fuel 45% 21%

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

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 24 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.

Transportation Fishing vessels Other 2% and equipments 32% 25%

Residential 1% Industry 40%

Figure 8. Sectoral share of CO2 emissions in Iceland, 2001 25

7 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 MW 1.600

Vatnsfell 1.400 Nesjavellir Sultartangi 1.200 Svartsengi Nesjavellir Búrfell 1.000 Krafla Blanda 800 Hrauneyjafoss Svartsengi 600 Sigalda Lagarfoss Krafla Mjólká 400 Laxá Írafos Búrfell Steingrímsstöð 200 Ljósafoss Laxá 0 1930 1940 1950 1960 1970 1980 1990 2000 2010

Figure 9. Total installed capacity of hydro and geothermal power plants in Iceland Installed capacity (MW) 0 50 100150 200 250 300 Búrfell 26 Hrauneyjafoss Sultartangi Blanda Sigalda Nesjavellir Krafla Svartsengi Írafoss Laxá Vatnsfell Steingrímsstöð Installed capacity 31. 12. 2002 Electricity generation 2002 Ljósafoss Mjólká Lagarfoss Andakíll

Other power plants 0 500 1.000 1.500 2.000 2.500 3.000 Electricity generation (GWh)

Figure 10. Installed capacity and electricity generation of the main power plants 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. In the summer of 2003, construction Table 3. Electricity generation began on the Kárahnjúkar power in Iceland, 2002 plant, harnessing the highland rivers Jökulsá á Dal and Jökulsá í Fljótsdal in GWh % connection with the building of an Hydropower 6.973 82,9 Geothermal 1.433 17,0 aluminium smelter in Reyðarfjörður, Diesel 5 0,1 in the East Fjords. The installed Total 8.411 100,0 capacity of the plant will be 690 MW and its estimated production 4,540 GWh annually.

Electricity generation (GWh/year) 1.600 Húsavík 2 MW 1.400

1.200 Nesjavellir 90 MW 1.000

800

600

400

200 Krafla 60 MW Bjarnarflag 3,2 MW Svartsengi 46,4 MW 27 0 1970 1975 1980 1985 1990 1995 2000 Figure 11. Electricity generation using geothermal energy, 1970-2002

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 Agriculture Food industry Chemical industry Ferrosilicon industry Aluminium industry Other industries Utilities Public commerce Other private services Residential consumption Iceland defence force Other 0 500 1.000 1.500 2.000 2.500 3.000 3.500 4.000 4.500 GWh/year

Figure 12. Electricity consumption, 2002

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

28 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. 8 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 29 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

GWh/year 9.000 Losses and in-plant consumption 8.000 Nordic Aluminum 7.000 Icelandic Alloys Alcan Iceland/ÍSAL 6.000 The State Fertiliser Plant 5.000 General consumption

4.000

3.000

2.000 1.000

0 1982 1970 1978 1966 1972 1974 1976 1980 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 1968

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

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 Table 4. Sale of electricity to power intensive Mývatn to process industry, 2002 diatomite from the Company Year Electricity sale lakebed. Access to a names established GWh % steady supply of inex- Alcan Iceland/ÍSAL 1969 2.785 53,5 Icelandic Alloys 1979 1.039 19,9 pensive geothermal Nordic Aluminum 1998 1.385 26,6 energy made the plant Total 5.209 100,0 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.

Nordic Aluminum 26,6%

30

Icelandic Alloys 19,9% Alcan Iceland/ÍSAL 53,5%

Figure 14. Breakdown of electricity sales to energy intensive industry, 2002 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. 9 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: 31 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.

ISK/kWh 1,6

1,4 Alcan Iceland/ÍSAL Energy intensive industry average 1,2

1,0 The State Fertiliser Plant 0,8 Icelandic Alloys 0,6

0,4

0,2

0,0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

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

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 32

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.

ISK/kWh 14 Rarik (Iceland State Electricity) 12

10 Orkuveita Reykjavíkur (Reykjavík Energy) 8

6

4

2

0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

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

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 33 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. 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 34 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

Million ISK 900

800

700 Hitaveita Rangæinga Rafveita Reyðarfjarðar 600 Bæjarveitur Vestmannaeyja 500 Orkubú Vestfjarða Rafmagnsveitur ríkisins 400 Rafveita Siglufjarðar 300 Hitaveita Seyðisfjarðar Hitaveita Hafnar 200

100

0 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Figure 17. Subsidies of electricity for residential heating, 1983-2002 (2002 prices) Geothermal - low price

Geothermal - average price/ Reykjavík

Geothermal - high price

District heating from electric boilers

Electrical heating

Oil heating, subsidised

Oil heating, not subsidised

012345 ISK/kWh Figure 18 Comparison of energy prices for residential heating

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 35 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 Price (ISK/I) 120 98-octane gasoline 100

95-octane gasoline 80

60 Diesel fuel 40

Gasoil 20 Marine diesel Fuel oil 0 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Figure 19. Fuel prices, (2002 prices)

VAT 19,7% Import price 23,0%

Excise tax 11,0% Share of the oil company (distrib., Equlaization freight rate 0,4% 36 markup, etc.) 17,4% Special tax 30,0%

Figure 20. Gasoline price breakdown in June, 2003

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 Greece Iceland Price excluding taxes Taxes Spain

Switzerland France Luxembourg

Portugal

Ireland

N. Ireland Belgium Germany

Netherlands Italy

Denmark 0 5 10 15 20 ISK/kWh Figure 21. Electricity prices for residential use in Western Europe 1. January, 2003

USA New Zealand Price excluding taxes OECD Mexico Taxes Greece 37 Luxembourg Poland Czech Republic Spain Austria Ireland Switzerland Portugal Hungary Turkey Belgium OECD-Europe Sweden France Italy Germany Finland Denmark Netherlands UK Iceland Norway

0,0 0,2 0,4 0,6 0,8 1,0 1,2 1,4 USD$/l Figure 22. International comparison of the price of 95-octane gasoline in 2002 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. 38

10 ICELANDIC ENERGY ISSUES IN AN 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 39

Share in total primary energy, % 50 49,5

45 World 40 Iceland 36,5 35 30,5 30

25 23,0 20,1 20 17,9 15 11,0 10 6,6 5 2,1 2,3 0,4 0 Coal Oil Natural Nuclear Hydro Geothermal gas Combustible renewables Figure 23. Primary energy consumption in the world and in Iceland, 1998 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%. World Iceland

Renewables Non-renewables

Figure 24. Share of renewables in total energy supply

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 41

11 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 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

42 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. 12 SUPPLEMENTARY MATERIAL

12.1 Energy units Table 5. Prefixes for multiples The International System of Units (SI) is the of units in the SI system mandatory system of measurement in Prefix Abbreviations Multiple of Iceland. In this system, the basic energy unit base unit is a joule (J) and the basic unit of power a watt (W). The power unit watt is an energy Exa E 1018 unit per second, 1 W = 1 J per second. Peta P 1015 12 Multiples and sub-multiples of these units Tera T 10 Giga G 109 are denoted by prefixes as shown in Table 5. Mega M 106 It is customary to denote electrical energy Kilo k 103 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 43 the equivalents of the units on the left in the units of the columns.

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

JkWhktoe J 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 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. 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 44 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 25. Map of Iceland

45 National Energy Authority Grensásvegur 9 - 108 Reykjavík - Iceland Arnarhváll - 150 Reykjavík - Iceland Tel.: +354 569 6000 - [email protected] Tel.: +354 545 8500 - [email protected] www.orkustofnun.is www.idnadarraduneyti.is

February 2004