Leigjendavandinn: The Tenant Problem in Geothermal Leasing Christopher Mathews Thesis of 60 ECTS credits Master of Science (M.Sc.) in Sustainable Energy Science June 2017 ii Leigjendavandinn: The Tenant Problem in Geothermal Leasing Thesis of 60 ECTS credits submitted to the School of Science and Engineering at Reykjavík University in partial fulfillment of the requirements for the degree of Master of Science (M.Sc.) in Sustainable Energy Science June 2017 Supervisors: Dr. Guðni A. Jóhannesson Director-General, National Energy Authority, Iceland Eiríkur Elís Þorláksson Professor of Law, Reykjavík University, Iceland Examiner: Harpa Þórunn Pétursdóttir Attorney, BBA, Iceland iv Copyright Christopher Mathews June 2017 vi Leigjendavandinn: The Tenant Problem in Geothermal Leasing Christopher Mathews June 2017 Abstract Iceland is heavily reliant on the efficient use of geothermal energy. Two-thirds of the nation’s current energy needs are met by geothermal resources, and if properly utilized geothermal energy can power Iceland for centuries to come. The division between ownership and control of the resources has caused concern among Icelandic policymakers that private companies with temporary rights to use geothermal resources may focus on short-term exploitation to the detriment of the long-term public interest. This issue is called leigjendavandinn, the tenant problem. Iceland developed a statutory solution for the tenant problem in 2008; but European authorities contend the law violates international agreements and have demanded it be changed. This paper looks at geothermal power and the dispute over Iceland’s answer to the tenant problem, and proposes an alternative approach to the problem consistent with both Icelandic and European law. Keywords: geothermal, leasing, tenant, policy, leigjendavandinn viii Leigjendavandinn: The Tenant Problem in Geothermal Leasing Christopher Mathews júní 2017 Útdráttur Ísland er mjög háð skilvirkri notkun á jarðhita. Tveir-þriðju af orkuþörfum landsins er nú mætt með jarðhita, og ef auðlindin er nýtt á skilvirkan hátt getur hún knúið landið í aldaraðir. Mögulegt lagalegt bil milli eignar og stjórnar auðlindarinnar hefur valdið því að íslensk stjórnvöld eru farin að hafa áhyggjur af því að fyrirtæki með tímabundinn nýtingarétt á auðlindinni muni einblína á skammtíma nýtingu sem muni skaða langtíma hagmunum almennings. Þessi vandi er kallaður leigjendavandinn (e. the tenant problem). Ísland þróaði lögboðna lausn við leigjendavandanum árið 2008, en Evrópsk stjórnvöld telja íslensku lögin vera brot á alþjóða sáttmálum og krefjast þess að þeim verði breytt. Þessi rannsókn skoðar jarðhita og deiluna um lausn Íslands á leigjendavandanum, og leggur fram aðra nálgun á vandanum sem er í samræmi við bæði íslensk og evrópsk lög. Leitarorð: jarðhiti, leiga, leigjandi, stefna, leigjendavandinn x Leigjendavandinn: The Tenant Problem in Geothermal Leasing Christopher Mathews Thesis of 60 ECTS credits submitted to the School of Science and Engineering at Reykjavík University in partial fulfillment of the requirements for the degree of Master of Science (M.Sc.) in Sustainable Energy Science June 2017 Student: _____________________________________________ Christopher Mathews Supervisors: _____________________________________________ Guðni A. Jóhannesson _____________________________________________ Eiríkur Elís Þorláksson Examiner: _____________________________________________ Harpa Þórunn Pétursdóttir xii The undersigned hereby grants permission to the Reykjavík University Library to reproduce single copies of this Thesis entitled Leigjendavandinn: The Tenant Problem in Geothermal Leasing and to lend or sell such copies for private, scholarly or scientific research purposes only. The author reserves all other publication and other rights in association with the copyright in the Thesis, and except as herein before provided, neither the Thesis nor any substantial portion thereof may be printed or otherwise reproduced in any material form whatsoever without the author’s prior written permission. June 1, 2017 ________________________________________________________________ Christopher Mathews Master of Science xiv Dedicated to my supervisors for their guidance, teachers for their enlightenment, classmates for their support, and family for their love; To my friend, Andrés Ragnarsson, who assured me things would all work out; And to the cats who reminded me not to take any of it too seriously. xvi Acknowledgements Thanks to the Reykjavík University staff who made it all possible. xviii Preface This dissertation is original work by the author, Christopher Mathews. Portions are based on my research and writing for other classes, including Sustainable Energy Systems and Economics of Energy Markets. xx xxi Contents Acknowledgements ..........................................................................................................xvii Preface ............................................................................................................................... xix Contents ............................................................................................................................. xxi List of Figures ................................................................................................................ xxiii List of Tables .................................................................................................................... xxv List of Abbreviations ....................................................................................................xxvii List of Symbols ................................................................................................................ xxx 1 Introduction ...................................................................................................................... 1 2 Objectives and Methods ................................................................................................... 3 2.1 Objectives. .............................................................................................................. 3 2.2 Methodology. .......................................................................................................... 4 3 Analysis and Discussion ................................................................................................... 6 3.1 Understanding Geothermal Energy. ....................................................................... 6 3.1.1 Overview. ................................................................................................... 6 3.1.1.1 The Fire Down Below. ................................................................ 6 3.1.1.2 The Evolution of Geothermal Energy Use. ................................. 8 3.1.2 A Brief History of Geothermal Energy in Iceland. .................................. 11 3.1.2.1 The Geothermal Island. ............................................................. 11 3.1.2.2 Making Use of Iceland’s Heat. .................................................. 12 3.1.3 Iceland’s Geothermal Outlook. ................................................................ 18 3.1.3.1 Geothermal Energy and the Economy. ...................................... 18 3.1.3.2 The Future of Icelandic Geothermal Energy. ............................ 21 3.2 Geothermal Energy and the Law. ......................................................................... 25 3.2.1 An Overview of Icelandic Public Law and Its Sources. .......................... 25 3.2.1.1 The Constitution of Iceland. ...................................................... 25 3.2.1.2 Statutes. ...................................................................................... 27 3.2.1.3 Regulations. ............................................................................... 34 3.2.1.4 Decisional Law. ......................................................................... 34 3.2.2 Private Law in Iceland. ............................................................................. 34 3.2.3 International Law and Organizations. ...................................................... 35 3.2.3.1 EFTA and the EEA Agreement. ................................................ 35 3.2.3.2 The EFTA Surveillance Authority. ........................................... 36 3.3 Icelandic Geothermal Policy. ................................................................................ 37 3.3.1 Renewability and Sustainability: The Difficulty with Definitions. .......... 37 3.3.1.1 Renewable Energy. .................................................................... 37 3.3.1.2 Sustainable Energy. ................................................................... 39 3.3.2 Sustainable Utilization of Geothermal Energy. ........................................ 40 3.3.2.1 Reservoirs. ................................................................................. 40 xxii 3.3.2.2 Equipment. ................................................................................. 45 3.3.3 The Value of Sustainable Use. ................................................................. 47 3.4 Leigjendavandinn.................................................................................................. 51 3.4.1 Definition and Summary. ......................................................................... 51 3.4.2 Theoretical Basis of the Tenant Problem. ................................................ 51 3.4.3 Regulating the Tenant Problem. ............................................................... 54