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The Hydro and Geothermal History

Icelanders have a long history of harnessing their country’s renewable hydro- and geothermal energy sources. Recently Iceland even became the world’s largest electricity generating country per capita. This happened when Iceland’s electricity-generation capabilities surpassed that of Norway in 2007.

Iceland’s natural energy resources offer some of the most economic possibilities to generate electricity. This applies to hydro- and geothermal sources alike. So far most of Iceland’s electricity production comes from hydropower. Geothermal energy is also important source for electricity generation, but more important as resource for heating (especially district heating).

If current governmental plans for future harnessing continue to develop, Iceland’s capacity for generating electricity may double in a fairly short period. Substantial parts of the new generation will come from hydropower projects, but geothermal harnessing may become the fastest-growing part of the Icelandic energy sector.


The Icelandic hydropower story started more than a century ago. At that time Icelanders used imported coal and kerosene for heating and cooking, along with the traditional national peat. Some Icelanders began to realize that the nation might harness its natural and abundant geothermal heat as well as its hydropower, as a source for heating and electricity generation.

By the late 1800’s, Icelandic visionaries had introduced plans of making Reykjavík the first town in the country to have electric lighting. However, it was not until the early 20th century that the first small hydroelectric station in Iceland became a reality.

The very first Icelandic hydropower station started operating in the town of Hafnarfjörður, near the capital, in 1904. Two additional towns in Iceland got electricity from hydropower stations in the early 1920’s; Reykjavik in 1921 and Akureyri in northern Iceland in 1922. This hydro project in Reykjavík marked the birth of the public utility firm Rafmagnsveita Reykjavíkur (Reykjavik Electrical Utility); today, this company operates as Orkuveita Reykjavíkur (Reykjavik Power Utility).

The first years of the 20th century also marked the beginning of geothermal harnessing in Iceland. Icelanders had for centuries used natural geothermal springs for bathing and washing, but in 1908 the geothermal hot water began to be harnessed for heating individual homes. The person responsible for this visionary project was a farmer that lived in a valley with natural hot springs, close to Reykjavik. The water was led to the houses through a pipe from the hot spring nearby, offering the family and its livestock natural and environmental friendly low cost heating.

A few years later, Icelanders began using geothermal water as a heat source in greenhouses. All of these projects were financed and executed by individuals. It was not until the 1930’s that the local authorities started to show real interest in geothermal heating and began to try harnessing Iceland’s immense hydropower.

In the 1920’s a small group of creative thinkers made plans for much larger dams and hydropower stations to be constructed in Iceland. This was a reflection of what was happening in Norway, where the engineer and entrepreneur Sam Eyde, among others, founded the [Norwegian?] industrial firms we know today as Hydro and Elkem. The Icelandic lawyer and businessman Einar Benediktsson made several efforts to attract European investors to build large hydropower stations in the glacial river Þjórsá in South Iceland. The plan was to utilize the electricity in fertilizer plants, just as was happening in Norway.

Many Icelandic politicians opposed the idea of allowing foreign investors to buy Icelandic waterfalls. Already in 1907, the Icelandic Parliament (Alþingi) adopted legislation that prohibited investments by foreign companies or individuals not living in Iceland. This was a threshold to all plans regarding financing and construction of large hydropower plants in Iceland. This governmental policy and lack of interested investors delayed the utilization of Iceland’s natural hydropower resource for decades.

Instead, development of hydropower in Iceland was limited to small generating stations, built in the rural farmlands around the country by farmers and local technicians who used their skills to brighten and warm their homes. Despite being small scale, this harnessing of the Icelandic hydropower resource was of great importance due to improving the living conditions for thousands of Icelanders. But large-scale generation for the general public was still far away.


It is noteworthy that the Norwegian parliament was faced with similar political issues and debates to those of Iceland, but came to a very different conclusion.  This decision contributed to Norway’s development into an industrialized nation early in the 20th century. Around the year 1900, foreign investors started to show interest in the hydropower resources of Norway. Many Norwegian politicians worried about foreign ownership of the hydropower resource, just as their Icelandic colleagues did. However, Norway took a different path from that of Iceland.

The Norwegian parliament, Stortinget, adopted legislation allowing foreign investment in the Norwegian hydropower industry on the condition that the power stations would be returned to the government after a fixed time period (the Hjemfall Principle). The result was robust industrial development in Norway in the early 20th century. This included construction of numerous large hydropower stations and fertilizer plants, laying ground for some of Norway’s largest industrial corporations.

The Norwegian model regarding the ownership structure of hydropower stations was never seriously considered  by Icelandic politicians. Instead, development of hydropower utilization in Iceland was mostly limited to very small generating stations.

Large-scale hydropower utilization in Iceland was still far away. When the Great Depression spread across the world in the 1930’s, all plans for large-scale hydropower in Iceland came to a dead end – a situation that lasted for decades. It was not until after Word War II, that Icelanders started building hydropower stations for substantial electricity generation.


The 1940s marked a new era for the Icelandic economy. In the Second World War, Iceland became an important strategic base for the Allies.  Due to the  presence of first the British and then American troops the Icelandic economy experienced high growth. With foreign dollars flowing in, the municipality of Reykjavik slowly expanded its geothermal district heating system.  The same process took place in several other communities around the country that had good access to geothermally heated water. In addition to district heating, the natural hot water was harnessed for greenhouses and used in swimming pools.

In 1947 the Icelandic government established a special electrical corporation, Rafmagnsveitur ríkisins, to build and operate electricity plants and distribute electricity. The aim was to harness hydropower sources for the general public, making the country less dependent on imported coal and oil, but also to break ground for larger industries.

The first Icelandic hydropower plant with a capacity of more than 10 MW was built in the early 1950s. It was located in Southwest Iceland, not far from Reykjavik. At the same time a fertilizer plant was constructed, a landmark for a new beginning in the Icelandic power and industrial sectors.

Other similar – and even larger – hydro projects would soon follow. Extensive parts of Iceland were becoming self sufficient in electricity generation and it all came from hydropower. In the 1960s, the first truly large-scale Icelandic hydropower station was constructed. The Swiss company Alusuisse (now part of Rio Tinto Alcan) had expressed interest in building an aluminum plant in Iceland, paving the way for utilizing the Icelandic glacial rivers for large-scale power generation.

The publicly owned National Power Company(Landsvirkjun) was established in 1965 with the first task to construct and operate Búrfell Hydropower Station in the Þjórsá river. At this time, Iceland had started to attract power intensive industries. The Búrfell Hydropower Station started operating in 1969, originally with a capacity of 210 MW. The electricity went to the new Alusuisse aluminum smelter in Straumsvík.

Icelandic exports were no longer limited to just fisheries – Iceland had also become a substantial aluminum exporter. In the 1970s the smelter was enlarged twice and at the same time the Norwegian Elkem built a ferrosilicon production plant in Iceland. This development led to a strong increase in electricity demand and construction of more large-scale hydropower stations. The industrial age had arrived in Iceland.


So far, the Icelandic electricity industry had been based solely on hydropower. In 1978, however, geothermal power also became a source for electricity generation in Iceland when the Krafla Geothermal Station began operations.

Around the same time, Icelanders started to use extremely hot steam from underground to heat up cold water and harness the heated water in the same way as geothermal hot water. The first project of this kind was executed at Svartsengi on the Reykjanes peninsula in 1976, to be followed by larger Nesjavellir Geothermal Station close to Reykjavik.

These successful projects of combined heating and power generation were important signs of the great potentials in utilizing Iceland’s abundant geothermal energy. However, despite enormous quantities of unharnessed natural power resources, the growth in the Icelandic energy industry in the 1980s turned out to be somewhat slow. Difficulties in the world economy meant low electricity prices the world over, and few new opportunities were on the horizon for the Icelandic energy sector.

Iceland thus entered a long period where the government and Landsvirkjun had no success in attracting foreign investors to power-intensive industry projects in Iceland. Still, the Icelandic government decided to go ahead with a new large hydropower project, Blanda Power Station, without having secured sale of the electricity. The result was overcapacity [overproduction?] and a somewhat uncertain future for the Icelandic energy sector.

After more than a decade of economic turbulence, things finally started to move again and energy intensive industries became interested in expanding their operations. Icelandic power companies were offering very competitive electricity prices, making Iceland an attractive location once more for expanding aluminum firms. In 1995 the only aluminum smelter in the country, now owned by Rio Tinto Alcan, decided to increase its capacity substantially. At the same time an American firm, Columbia Ventures, decided to construct an aluminum smelter in Iceland. This became the second aluminum smelter in the country and is now owned by Century Aluminum. Glencore International is its largest shareholder.

All three main Icelandic energy companies were involved in providing electricity to the new industrial facilities. This meant an enormous increase in generation. For example, in a period of only five years, Landsvirkjun alone expanded its capacity by 60%.

Landsvirkjun was soon to take another major step in expanding its business. In 2002, it negotiated with Alcoa to construct what today is Europe’s largest hydropower station outside of the former Soviet Union. This is the 690 MW Kárahnjúkar Dam and Fjótsdalsstöð Power Station.

This project was met with unprecedented public opposition, mostly based on environmental concerns. But majority of Icelandic politicians supported the project and the Fljótsdalsstöð Power Station and the new Alcoa smelter both started operating in 2007. Iceland now had three large aluminum smelters. Together the three smelters were consuming close to 80% of Iceland’s electricity generation and all were thriving on Iceland’s favorable electricity prices.

Aluminum prices on the world market were high, bringing in great profits for the aluminum firms stationed in Iceland. At the same time electricity prices around the world were rising fast, making Iceland’s electricity more competitive than ever.


Due to its low-cost green electricity and reliable transmission system, Iceland may continue to be an attractive location for new aluminum smelters. However, as electricity prices in many parts of the world have risen substantially in the last few years, new types of industries are now being drawn to Iceland as a location.

In addition to the highly competitive price of electricity in Iceland, many industrial countries have started to show more interest in renewable energy and are considering new carbon taxes and closure of nuclear power plants. This development is creating intriguing opportunities for the Icelandic power sector. Numerous hydro- and geothermal options remain unharnessed, which sets Iceland in a rare position in our energy-constrained world. The major power producers in Iceland are now in a position to offer green electricity at very competitive prices – around 50% lower than electricity costs in Western Europe.

This trend towards less carbon emmissions is a very strong incentive for growing demand for Icelandic green electricity. It offers the Icelandic power sector interesting possibilities for a growing rate of return. In the long run this will create stronger companies with better credit ratings and also make the Icelandic electricity industry more attractive for investors. Having all these issues in mind, it is hardly an overstatement to express that the Icelandic energy sector is looking towards a bright future.

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