Icelandic Election Set to Usher In a Green Energy Boom

(Bloomberg) -- Iceland’s general election this weekend is likely to pave the way for a ramp up of energy production as lack of electricity hampers efforts to diversify the north Atlantic economy.

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After infighting over issues including energy triggered the dissolution of the ruling coalition and a snap election, parties leading in polls all favor a clear increase in power supply. A key opponent to such plans, the Left Green movement that represented the environmental agenda in the government since 2017 is now likely to struggle to meet the 5% threshold to get into the parliament.

Iceland, which calls itself the land of fire and ice, is one of the most geologically active places on earth as that’s where the North American and Eurasian tectonic plates drift apart. Hydro power accounts for 70% of its total electricity generation of around 20 terawatt hours per year, with the rest coming from geothermal.

The expansion that’s likely to be unleashed as a new government comes in may see more hydro and geothermal plants emerging across Europe’s most sparsely populated country. Iceland’s first wind farm, run by the national power company Landsvirkjun, is due to join the grid in 2026 and several other wind parks are on the drawing board. Harnessing of solar and tidal power remains an option too.

Also at stake is whether the world’s largest green energy producer per capita can address the repeated supply reductions for some heavy industrial users that’s resulted in lost export revenue. Adding more renewable generation capacity would also likely attract more foreign direct investment as well as raise the odds of meeting its ambitious climate targets.

While the energy issues aren’t at the top of the campaign agenda, clarity on policy will be welcome for the industry after years of no political consensus on the matter. Delays in the licensing process for power plants have postponed Landsvirkjun’s hydro power station in south Iceland as well as the nearby wind farm, while drought years reducing hydro reservoir levels have worsened the plight, forcing the company to cut supply to clients with non-priority contracts.

“It is new for us as society to be exposed to a lack of energy because we have had plenty,” Sigurdur Hannesson, the head of the Federation of Icelandic Industries, said in an interview in Reykjavik. “The incoming government will need to work very fast to solve the issue.”

The Social Democrats, a likely winner polling with about a fifth of votes, have pledged to raise production by 5 terawatt hours or 25% within the next decade. That boost would still be near the lower end of demand forecasts by Landsnet hf, which owns and operates Iceland’s transmission system.

The operator sees demand soaring by as much as 37% in the same period and more than doubling by 2050 even as there is no consensus about how much energy Iceland needs in the long term. Adding 5 to 6 terawatt hours of supply in a decade is possible but “challenging,” according to Hordur Arnarson, the chief executive officer of Landsvirkjun. It would allow Iceland to reach its energy transition goals, he said.

In 2021, the ruling coalition then led by the Left Greens upgraded the national climate target to a 55% reduction in greenhouse gas emissions by 2030, compared with 2005. It already aimed for carbon neutrality by 2040.

Heavy users including the three international aluminum smelters belonging to Rio Tinto Plc, Century Aluminum Co. and Alcoa Corp. buy 76% of the electricity produced on the island.

The smelters have mostly had enough energy, given the bulk of their power need is secured in priority agreements. But users like fish meal factories and some district heating facilities have been forced to burn fossil fuels when supply has been scant. The delays also mean that there will be similar shortages in the next couple of years, Arnarson said.

The Federation of Industries has estimated that the curtailments cost 14 billion kronur to 17 billion kronur ($100 million to $120 million) in lost export revenue.

Yet the environmental lobby argues that too much of the power supply goes to the heavy industrial users, while regulation should prioritize rest of the society more.

“There cannot be an energy shortage when the majority of the electricity produced in the country is bought by foreign heavy users,” Bjorg Eva Erlendsdottir, managing director of the Icelandic Environment Association, said in an interview.

Iceland’s central bank Governor Asgeir Jonsson said an increase in power production capacity “is very likely to happen within the next two years.” That would help lure investors from abroad, including in data centers, and be “very positive” for exports in the coming years, he said, speaking in an interview.

“Our resources, carbon free energy among other things, have risen in value which means Iceland will probably be attracting more foreign direct investment.”

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