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Incentives for investing in Iceland

According to Icelandic law and regulations, businesses and industries are generally open to foreign investment. Because of Iceland’s strong legal relationship with Europe, the legal framework of the Icelandic energy industry is very similar to what applies in the European Union (EU). All individuals and other legal residents of Iceland or other member states of the European Economic Area (EEA),  European Union (EU), and European Free Trade Association (EFTA) are permitted to own enterprises which produce or distribute energy, and own energy exploitation rights with regards to water and geothermal energy.

The Icelandic Parliament has adopted a general act on incentives for initial investment in Iceland (law no. 99/2010). Governmental authorities are permitted to grant both general and regional incentives for new investments in Iceland up to a defined ceiling, in line with EU legislation. In addition to certain derogations from taxes and charges, incentives can also come in the form of direct cash grants, training aid and lease of land. Industrial sites are available around Iceland at competitive cost and local communities may offer certain extra incentives.

As a member of the EEA, Iceland has access to research funds of the EU for research and development programs and joint ventures undertaken with companies from at least one other EEA country (including all the countries within the EU). In addition, EU’s energy policy is a strong driver for the Icelandic energy sector. Close to 85% of Iceland’s consumption of primary energy is renewable energy, while renewable energy sources now account for only 12% of the final consumption of energy within the EU (this refers to energy used as electricity, heating, cooling, and transportation). The European Union has a target to increase the share of renewable energy sources in its gross final consumption of energy from 12% to 20% by 2020.

This policy by the EU not only calls for major investment in renewable energy production, but creates great possibilities for countries with unharnessed green energy sources available. With this in mind, it is interesting that only a portion of Iceland’s renewable hydro- and geothermal energy resources have been harnessed (approx. 20–25% of the total and probably around 40-50% when environmental concerns have been taken into account). Iceland may also offer interesting possibilities for large-scale wind power generation. In a nutshell, it is likely that EU’s energy policy will create substantial more interest in Iceland’s green energy industry and more demand for Iceland’s renewable energy sources.

Utilizing the Icelandic wind power resource

While many countries, for example in Western Europe, are focusing on wind power to increase the share of renewable energy, Iceland has not yet constructed a single operating wind farm. The reason is simple: Icelandic energy firms have always had the privilege of being able to harness abundant low-cost geothermal- and hydropower options.

However, Iceland may be a perfect setting for extensive utilization of wind energy. Iceland is a windy country. According to early research by the Icelandic National Power Company Landsvirkjun, wind farms in Iceland can be expected to be almost 100% more efficient than in Europe or USA. And due to low population density and extensive areas of land with few natural or manmade barriers, there is plenty of space for large wind parks.

Large-scale wind power utilization in Iceland may be especially attractive in connection with a subsea electrical HVDC-cable between Iceland and Europe. Instead of constructing very expensive offshore wind farms outside the coast of countries like Denmark, Germany, Netherlands and United Kingdom, investing in wind power in Iceland may be both less costly and offer lower political thresholds.

There are several areas in Iceland that may be good locations for wind farms. The map below is from a presentation by Landsvirkjun, showing some of the most interesting sites.

Currently, Landsvirkjun is preparing the construction of two wind turbines close to one of its hydropower stations in the river of Þjórsá in southern Iceland. These will be the first large wind turbines in Iceland. This will be an interesting experiment, offering valuable information on the feasibility of wind power in Iceland. Operation and maintenance cost will to be studied along with availability-percentage of the turbines in the windy and sometimes harsh Icelandic nature.

Landsvirkjun is also participating in a Nordic research project Icewind, which will include the production of icing atlas for Sweden and Iceland based on long term meteorological statistics. The Risø Research Institute, Denmark, heads the project in which corporations and scientists from Denmark, Finland, Iceland, Norway and Sweden take part. Besides Landsvirkjun, other project participants from Iceland are the Icelandic Meteorological Office and the University of Iceland, with the Icelandic TSO Landsnet also joining as a collaborator. The project formally began in 2010 and is expected to end in 2014.

You can find information about wind energy potentials in Iceland on our wind page.

Icelandic geothermal know-how

Iceland produces a substantial share of its electricity by harnessing geothermal resources. Geothermal plants now account for approximately one-quarter of all electricity generated and consumed in Iceland. In addition, Iceland has a long tradition harnessing low geothermal heat for central district heating. This explains why geothermal is such a large share of the primary energy use in Iceland (in total, close to 65% of Iceland’s consumption of primary energy is geothermal energy).

Several European countries are looking towards utilizing geothermal heat, not least as a source for electricity production. However, these countries do not share Iceland’s geophysical conditions – low-cost geothermal electricity is not an option unless you have access to very high temperatures. On the other hand it may be an excellent option for many European countries to harness their low geothermal heat for central heating.

This is an area of expertise where Iceland has great strength. Iceland has a long tradition harnessing low geothermal heat for central district heating, which explains why geothermal is such a large share of the primary energy use in Iceland.

Icelandic engineering firms have been exporting this know-how to countries on the European continent. This for example applies to Hungary. There, the company Mannvit has provided engineering, procurement, and construction management of a geothermal district heating plants. These types of plants are replacing fossil-fuel powered district heating systems with environmentally-friendly and sustainable geothermal energy.

This type of geothermal harnessing is an option that could be appealing for many communities in numerous countries in Europe. In addition to Hungary, this for example applies to Britain, Germany, France, Slovenia and several other countries. In a nutshell, domestic geothermal energy is a resource Europeans should consider very seriously for district heating.

Photo at left: An official groundbreaking ceremony marked the beginning of the construction process of the geothermal district heating plant in the town of Szentlőrinc, Hungary. The cornerstone was laid by Mr. Össur Skarphéðinsson, Foreign and External Trade Minister of Iceland, Pál Kovács, Deputy Secretary of Energy Policy from the Ministry of Development and, Dr. Márk Győrvári, the Mayor of Szentlőrinc.

Icelandic energy attracts foreign investment

Although Iceland is an independent country with its own currency, the country has a very close economic relationship with its Nordic neighbors as well as the European Union (EU). In this regard, Iceland’s membership in the European Economic Area (EEA) is of special importance.

The EU has adopted an ambitious and binding renewable energy policy, generally referred to as the 20/20/20. The policy requires:

  • a reduction in EU greenhouse gas emissions (by 2020) of at least 20% below 1990 levels,
  • 20% of EU energy consumption to come from renewable resources,
  • and finally a 20% reduction in primary energy use compared with projected levels, to be achieved by improving energy efficiency.

These climate and energy targets will result in a highly increased demand for renewable energy, a demand where Iceland is well-suited to contribute. No less important for the green Icelandic energy sector is the upward-pressure this policy will put on electricity prices. In a nutshell, the EU’s legally binding energy and environmental legislation is making Iceland’s renewable energy more competitive than ever before.

The Icelandic energy and business sectors have been attracting numerous new types of foreign companies to the country in recent years, such as the data-center of Verne Global (a recent benchmarking study by PricewaterhouseCoopers (PwC) in Belgium described Iceland as the most competitive location for the operation of data centers). The latest large energy project in the country is the ongoing construction of the 95 MW Búðarháls Hydropower Station. Several other power projects are being considered and planned, with a total capacity of several hundred MW.

The Icelandic energy industry itself has also gained interest from foreign investors. Recently, Iceland’s third major electricity company (HS Orka) was bought by a Canadian energy investment firm, lead by geologist and resource company entrepreneur Ross Beaty, CEO of American Silver Corp. The electricity industry in Iceland is open to direct investment by all legal entities registered within the European Union (EU) and the European Economic Area (EEA). You can read more about this in our section about Foreign Investment.

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