Iceland’s largest hydroelectric project, the Kárahnjúkar scheme, is on course for completion in 2009. The country already relies heavily on hydro production, with only the geothermal sector to provide an element of diversification in the generation mix, but the new project will provide sufficient electricity to power a step increase in the North Atlantic country’s industrial capacity. The growth of the aluminium sector has driven new hydro investment and, with further smelters under consideration, the development of additional large-scale hydro schemes cannot be ruled out.

The main source of water storage in the Kárahnjúkar project, the Hálslón reservoir, is approaching its minimum operating level of 575m above sea level (asl), as the water level rises by about one metre per month. By mid-February winter precipitation had brought the water level up to 568.9m asl, although this is still someway short of the reservoir’s full supply level of 625m asl. Initial construction work began in late 2002. Electricity from the first unit is due by the middle of this year, with all six generating units and 690MW brought on stream by 2009.

The Kárahnjúkavirkjun plant is under construction in the area to the north of the Vatnajökull ice cap and will be supplied with water from rivers that start on Vatnajoekull. The ice cap extends over 8000km2, equivalent to 8% of Iceland’s landmass and the third biggest concentration of ice in the world. Tunnels totalling 73km will transfer water to the power plant in the Fljótsdalur valley. Maximum flow is estimated at144m3/sec and annual generating capacity at about 4600GWh. The project is entirely owned by the state owned Icelandic firm Landsvirkjun, which awarded a contract to Italian firm Impregilo to develop the power side of the venture. Another deal to supply the project’s turbines and generators was awarded to VA Tech Hydro at the end of 2003.

Even before the Kárahnjúkar scheme is brought on stream, hydro schemes account for more than 80% of all electricity production in Iceland, although geothermal plants are also used to provide a large proportion of heating requirements. However, the jump in generating capacity that Kárahnjúkavirkjun will provide is demonstrated by the fact that it is much larger than the existing hydro plants in the country. The largest are Búrfellsstöö (270MW), Hrauneyjafosstöö (210MW), Blöndustöö (150MW), Sigöldustöö (150MW), Sultartangastöö (120MW), Vatnsfellsstöö (90MW), Sogsstöövar (89MW) and Laxárstöövar (28MW).

The Icelandic government continues to promote the country as an attractive investment destination based on its hydro potential. The Invest in Iceland Agency argues: ‘Iceland is the only country in Western Europe that still has large resources of competitively priced hydroelectric power and geothermal energy remaining to be harnessed. Although electricity consumption per capita in Iceland is second to none in the world, only a fraction of the country’s energy potential has been tapped.’

Although the company is state owned, equity in Landsvirkjun is divided among three stakeholders: the state of Iceland, Reykjavík and the town Akureyri. It was formed to exploit the country’s hydro potential to supply the country’s general power requirements but also in order to attract power intensive industries to set up operations in the country. It has been tasked with supplying electricity to the entire country since 1983 and its power schemes now account for 93% of all electricity produced in Iceland.

Electricity is generated and sold to both regional state owned power utilities, such as Orkuveita Reykjavíkur (OR), Reykjavík Energy and Iceland State Electricity (RARIK), and to large scale industrial enterprises. Unlike state owned power companies in much of the rest of the world, Landsvirkjun is able to operate without state subsidies and finances new hydro schemes from its own financial resources and sustainable loans.

Aluminium sector demand

Much of the extra generating capacity provided by Kárahnjúkar will be consumed by new energy intensive aluminium smelters that are being developed in the country. There are already two operational aluminium plants: the Straumsvik smelter, which is owned by Canadian firm Alcan and Nordural’s Grundarfjordur facility. Both are being expanded and this will impose a greater strain on Landsvirkjun’s existing power plants.

The Straumsvik plant, which is located close to Reykjavik, currently has production capacity of 178,000 tonnes a year (t/yr), although Alcan plans to expand this to 460,000t/yr in stages. The Grundarfjordur plant is located in the same area, just 50km north of the capital, at Grundartangi. Its production capacity has been doubled from 90,000t/yr to 180,000 t/yr and is currently being expanded to 260,000t/yr. In April 2006, Landsvirkjun agreed a three-year deal to supply electricity to Nordural’s aluminium smelter covering 2006-08, utilising generating capacity of up to 65MW.

However, it is the construction of Alcoa’s new Fjardaal plant at the port of Reydarfjördur on the east coast that has driven the construction of the Kárahnjúkar hydro scheme. Most of the hydro plant’s electricity will be consumed by the smelter under a 40-year power purchase agreement (PPA) that was reached between Landsvirkjun and Alcoa in March 2003. The smelter, which is being built at a cost of US$1.1B, will have production capacity of 346,000t/yr. First production is due by the end of this year, when the first electricity is supplied by Kárahnjúkar.

Alcoa is also examining the possibility of developing another smelter, in North Iceland, although the 250,000 tonnes a year Bakki facility would be supplied with electricity by a geothermal plant rather than another hydro project. However, Arni Finnsson from the Iceland Nature Conservation Association claims: ‘Alcoa intends to start small and then expand. If they expand, they will probably use hydro power derived from a glacial river in North Iceland. We would oppose that.’ Other aluminium projects are being considered by Norsk Hydro and Century Aluminium.

Problems and criticism

There have been some technical difficulties on the construction of the Kárahnjúkar project. For instance, according to Landsvirkjun, the tunnel boring machines have experienced ‘heavily fractured ground and water inflows into their sections of the headrace tunnel’, through areas that include hard basalt and pillow lava geology. Work on the Jökulsá diversion tunnel began during the first quarter of this year and is due to be completed during the course of 2008. The tunnel will ‘add to the water supply capacity of the power house by connecting the Ufsarlón reservoir to the main headrace tunnel’.

The scheme has been designed to minimise the impact of silting on the reservoir. However, in laying the cornerstone of the Kárahnjúkar power plant in an official ceremony in May 2006, the chairman of Landsvirkjun, Jóhannes Geir Sigurgeirsson, commented: ‘I would however like to point out in this regard that if predictions of a warmer climate turn out to be true, there is every likelihood that it will take the reservoir not 400 to 500 years to fill with silt, as indicated by the meteorological data of the past 50 years, but a much longer period.’ The Kárahnjúkar power plant is also known as Fljótsdalsstöö, or Fljótsdalur station.

There is no doubt that the project will have a large impact on the country as a whole. The minister of industry and commerce, Valgeröur Siguröardóttir, commented: ‘No single enterprise has so profoundly impacted population developments and the quality of life in this region during recent decades. Moreover, this undertaking will have long term positive effects on the economy of Iceland as a whole.’ However, the development of hydro schemes in order to feed the aluminium sector has attracted a great deal of criticism from environmental non-governmental organisations (NGOs) because of the impact on wilderness areas and the flora and fauna supported by the area. The large area of very scarcely populated wilderness is generally regarded as Europe’s largest unspoilt area.

Some NGOs have also claimed that the growth in the aluminium sector threatens Iceland’s Kyoto commitments. The agency Iceland News Briefs reported that ‘the emissions of Icelandic aluminium smelters will far exceed the 1,600,000 tonnes permitted under the Kyoto Convention for the latter part of its commitment period if all of the planned smelter projects materialise. The average emissions for the period, however, will be below the limits agreed to. Following expiration of the convention, emissions could increase by up to 2.2 million tonnes per year.’

However, Landsvirkjun disputed the criticism of the Kárahnjúkar project contained within the World Commission on Dams (WCD) report. The report argues: ‘The project has caused both local and international controversy, with concerns about the environmental impacts of such a large project in a fragile and pristine arctic wilderness area. More specifically, the project will flood five hundred nesting sites of the rare pink footed goose and Iceland’s only reindeer herd is likely to diminish. Wetlands downstream will also be affected by wind erosion of soils left exposed from construction, the draining of watersheds and the fluctuations of the water level in the reservoir.’

The Icelandic company counters that pink footed geese numbers are increasing that ‘the 500 nesting sites in question are not traditional sites of the species and that their loss will not result in any measurable effect on the size of the stock.’ It adds that the reindeer are actually divided into a number of different groups, with only one third resident in the Kárahnjúkar region. According to Landsvirkjun, ‘No research has indicated that the reservoir is likely to endanger the reindeer in Iceland.’

Finally, Landsvirkjun argues: ‘Research has not shown any likelihood of wetlands being damaged for the reasons stated in the report…Vegetation in flat areas downstream along the riverbank is actually likely to increase. Concerns due to wind erosion relate to vegetated coastal areas in the reservoir. A comprehensive plan for mitigation measures has been approved.’

Export options

The possibility of Iceland exporting electricity has been mooted in the past. The country possesses large untapped hydro and geothermal potential, which has thus far been undeveloped because of the limited size of the domestic market. With a small population of just 292,000 and little industrial tradition, it is not expected that Iceland will be able to make the most of its power sector potential based on the domestic market. However, the growth of the aluminium sector in recent years has certainly helped to boost demand for power.

Iceland is fairly remote and it was not considered viable to develop cross-border transmission interconnectors in the past. However, a combination of the development of the country’s hydro sector and growing demand for electricity in continental Europe raised the possibility of such a transmission line being developed. Landsvirkjun and Norwegian firms Statoil and Statnett carried out a feasibility study on the development of a submarine cable between Iceland and Norway in 2002-03, while exports to Germany have also been mooted, but such export projects have yet to be pursued. Any transmission line from Iceland to continental Europe would be among the longest subsea transmission lines in the world and the long distance would increase the proportion of electricity lost.

In the absence of an export option via transmission, Iceland does have another option for electricity exports. Electricity use comprises such a large proportion of aluminium production that exporting aluminium is often equated with exporting electricity. The fact that a country such as Iceland, which is generally known for its high costs, is able to compete in the global aluminium sector, demonstrates the strength of its power sector. If the government can continue to maintain an attractive investment environment and global aluminium consumption continues to grow then there is no reason why the country cannot attract additional aluminium production capacity that will require yet more hydro capacity.

Partly as a result of its takeover of its French competitor Pechiney, Alcan has undertaken a full assessment of its global operations over the past two years. While the Canadian company is making a series of changes to its operations, two particular investment decisions stand out: the increase in its Icelandic production capacity and the construction of a new smelter at the Coega industrial zone in South Africa. The latter will be supplied by South African power giant Eskom, which is often credited with offering the lowest power tariffs in the world. If the Icelandic hydro sector can compete with South African coal fired plants with regard to supplying electricity to power hungry industrial projects, then Landsvirkjun must be able to offer attractive tariffs. With so much untapped hydro capacity it would be unsurprising if additional hydro projects were developed in the island state over the coming decade.

Table 1 Readying the TBM to move into the starter tunnel.
TBM ready A panoramic view of the job site; a dramatic and severe environment. Image 11 Figure 2: Kárahnjúkar dam area Figure 2 Tables

Table 1