Investing in Iceland4 October 2002
Simon Jones reports on the issues surrounding the Karahnjukar hydro plant in eastern Iceland, as construction work begins on the controversial 630MW project
AFTER two years of controversy, Landsvirkjun (the National Power Company of Iceland) began work this summer on the Karahnjukar hydro plant, located in the east of Iceland, some 670km from capital Reykjavik. Under a deal signed in July 2002 with American conglomerate Alcoa, the 630MW plant will begin supplying power for a new aluminium smelter by no later than 2007. The US$3B Noral Project is one of the largest private-sector investments in Iceland's history, equivalent to almost one-third of the country's GDP.
Hydro currently covers around 20% of power generation in Iceland. The country is a world leader in geothermal energy, with 98% of buildings having geothermal heat and hot water, and volcanoes and geysers firing over half of primary energy usage. In all, Iceland sources 70% of generation from renewables. However, the government aims to meet the country's entire energy needs from green power within 40 years. The island's energy resources are still largely untapped - only 16% of some 50TWh/year of potential electric power has been harnessed. Iceland also aims to be the first hydrogen-based economy, with hydro-powered electrolysis winning supplies of the clean fuel from the country's limitless water supplies.
Once Karahnjukar comes on stream, 80% of the country's power output will be dedicated to making aluminium. This is one of the world's most energy-intensive industries, using 2% of total energy consumption. Over half the sector's global power supplies is based on hydro, with many firms developing dams to supply smelters. Population growth and increased global trade is driving demand for cans and other aluminium products. Alcoa is also sounding out state governments in Australia over development of a new smelter, with access to low-cost power the key element of any deal.
Cheap power clearly underpins Alcoa's expansion in Iceland, where tariffs are half that of the US. Energy costs are so competitive that it is even worth shipping raw materials such as bauxite from Australia for processing in the north Atlantic. Iceland's metallurgy sector also benefits from an exception to the Kyoto agreement on greenhouse gases negotiated by Reykjavik. Iceland is not required to meet the Kyoto targets - although the expansion of heavy industry, coupled with Iceland's large fishing fleet, helps generate one of the world's highest per capita carbon dioxide emissions. As a result Alcoa will face no penalties for greenhouse emissions from its new 295,000t/year smelter.
Iceland first launched the Noral Project back in May 2000. The Ministry of Industry, Landsvirkjun, and Norwegian multinational Norsk Hydro agreed to develop a primary aluminium smelter, hydro plant and related infrastructure projects in eastern Iceland. Despite extensive preparatory work through 2000-01 on both the hydro plant and smelter, Norsk Hydro stalled on fixing any firm timeframe earlier this year. Alcoa then entered the picture in April 2002, enabling the regime to keep the project alive with a new partner. A Memorandum of Understanding (MOU) was signed three months later.
The Icelandic Parliament approved granting a licence for Karahnjukar in 2001, and the hydro plant was also the subject of an exhaustive Environmental Impact Assessment (EIA). In August 2001 the Icelandic Planning Agency blocked the scheme, arguing it would harm groundwater levels, vegetation and birds. Environment Minister Siv Fridleifsdottir overturned this veto four months later and gave the scheme conditional approval.
As this difficult birth might suggest, the commitment to Noral triggered environmental protests that have grown steadily over the last two years. Pop singer Bjork, the country's most famous export, has helped win the campaign publicity well beyond Iceland - although polls also consistently show strong domestic support for Noral. Most concern focuses on Karahnjukar, rather than the smelter facilities to be built in Iceland's eastern fjords. Opponents are alarmed by the plant's scale - it has almost three times the capacity of Burfell, Iceland's biggest existing hydro plant - and especially by its location.
The Eastern Highlands is Europe's second largest wilderness area, a high plateau of lakes and virgin rivers, dormant volcanoes and deep ravines. Schemes to open up the region for hydro development have been floated for decades, but today the highlands remain a pristine region, home only to thousands of reindeer and geese.
Karahnjukar will be sited north of the mighty Vatnajoekull ice-cap. Extending over 8000km2 (8% of Iceland's landmass), this is Europe's biggest ice-sheet and the third largest in the world. Billions of gallons of glacial melt flowing north from Vatnajoekull will power the plant's turbines.
Critics argue that Dimmugljufur, Iceland's most dramatic canyon, will be dammed at the entrance and dry in all but the wettest periods. 'More than 100 waterfalls, including some of the most beautiful in the country, would be drowned by the dams,' argues Arni Finnsson, head of Iceland's Nature Conservation Association. An environmental impact study by engineering consulting firm Honnun suggests only three waterfalls will be fully submerged by the reservoirs.
Flooding of reindeer grazing areas for the main reservoir at Karahnjukar will also hit herds, although again there is disagreement over the likely long-term impact. More pragmatic critics suggest the project will also harm Iceland's booming eco-tourism sector, with normal flow only restored to waterfalls at the height of the season.
Power supplier Landsverkjun insists that recent modifications will limit the plant's impact. Alcoa's proposed smelter is much smaller than earlier schemes, allowing installed capacity to be cut from 750MW (as permitted by parliamentary approval) to 630MW. Planned annual energy generation is now estimated at around 4460GWh.
In recent months, engineers have also redesigned Karahnjukar in response to 20 itemised conditions set out by Environment Minister Fridleifsdottir in December 2001. These will limit the number of diversions, so curtailing much less of the open expanses around Snaefell - Iceland's highest mountain outside the icecaps. Design of the largest dam has also been modified to allow overflow water to run into Hafrahvammar canyon.
The Reykjavik utility has also abandoned earlier plans for a three-year interval (2006-2009) between two phases of construction. The project will still go ahead in two phases, but these will now overlap. Landsvirkjun has already fulfilled all requirements of last year's EIA.
However, the plant remains a major intervention in the region. Eight dams will be built across two of the highland's three virgin rivers (and their tributaries), Jokulsa a Dal and Jokulsa I Fljotsal, with the water drained through a 38km long tunnel over the edge of a plateau. The glacial Jokulsa a Dal will be dammed at the Fremri-Karahnjukar mountain. The main rock-built Karahnjukar dam will stand 190m high at the southern end of the Hafrahvammar canyon. Two smaller saddle dams - Saudardalur (25m high) and Desjarardalur (60m high) - will flank the main dam in adjacent, relatively shallow valleys. The river will be diverted through a bottom outlet during construction of the main dam. This outlet may also serve for future flushing of sediments from the reservoir. Together, the three dams will hold the Halslon reservoir, which will cover an area of 57km2 when filled and hold some 2000GI usable storage.
A 200m long spillway will be built at the western end of Karahnjukar dam, in line with conditions laid down by the Environment Ministry. Overflow water will pass through a tunnel to the Hafrahvammar canyon a few hundred metres downstream, where it will form an 80m high waterfall into the canyon. Landsvirkjun will build a viewpoint close to this waterfall, overlooking both the canyon and the dam.
Tunnel boring will help limit the plant's impact in the highlands. A 40km headrace tunnel, 7m in diameter, will take water from the Halslon reservoir under heathland to an underground powerhouse within the Teigsbjarg escarpment, at the uppermost reaches of Fljotsdalur valley. Access is via a 650m long tunnel, with a control and switchgear house located at the tunnel entrance. The power station will house six turbines with a combined installed capacity of 630MW. Water then runs from the turbines through a 1.6km long and 8m wide tailrace tunnel, in turn passing into a 1.1km long tailrace channel and then back into the bed of the Fljotsdal where it widens into a lake.
In the second phase a 30m high dam will be built across the Jokulsa I Fljotsdal 2km downstream from a major waterfall. The Ufsarlon high-altitude reservoir will cover about 1km2, with water diverted from here via a 13.5km long tunnel to the headrace tunnel running from Halslon. The arrangement enables Karahnjukar's main reservoir to be fed by both glacial rivers. This second stage also includes the so-called Hraun-Diversion, which will supplement Ufsarlon with water from four river tributaries. Two 400kV high-voltage lines will transmit the electricity 53km to the smelter at Reydarfjordur.
Iceland's authorities were anxious for a quick agreement with Alcoa to enable preparatory work to begin this summer. Initial work included laying a road to the dam site, installing electric cables and building a temporary bridge over the river Jokulsa a Dal at the site. Design planning and issuing of bidding documents for contracts covering dam and tunnelling work is also underway. Landsvirkjun has agreed to carry out this work in line with a cost-sharing agreement laid out in the MOU with Alcoa. Further development will begin once the two parties reach final agreement over power pricing for the plant.
Alcoa spokesman Jake Siewert reports a 'broad coalition' supporting the project in Iceland, which was chosen ahead of several other possible locations. Such major schemes always face some opposition, argues Siewert: 'Do you know of one that has no political impact and that environmentalists are all for?' The government also insists environmental fears over Karahnjukar are misplaced. 'We've calculated that the damage is relatively small,' says Prime Minister David Oddson, who also holds out the prospect of a national park in the region.
Critics accuse the government of social engineering, comparing the hydro plant and smelter to the vast projects undertaken in Stalin's Soviet Union. But the project has widespread support in eastern Iceland, where it offers the prospect of well-paid, secure employment. Indeed Karahnjukar is key to government efforts to halt the population drift away from rural areas - a particular problem for the region around the proposed smelter. Noral will produce hundreds of jobs in eastern Iceland, strengthening the regional economy and in turn allowing for improvements in transport, education and healthcare. The aim is to reduce dependence on the fishing industry, which is still responsible for some 70% of national income.