Iceland’s Renewable Energy Model

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The land of ice and fire. The isolated land in the middle of nowhere. The Nest of the Giants. A place that sees 22 hours of light in the summer and similar level of darkness in winter.

Iceland is a country with amazingly unique geographical location that creates abundant resource of renewable energy. The country has the nature to develop electricity from wind, geothermal, and hydro. Hydroelectric supplied most of the country’s electricity while geothermal energy is mainly used for space heating and is increasingly being used for electricity as well.

Hydroelectric accounts up to 75.5% of Iceland’s electricity while geothermal provides 24.5%. Meanwhile, primary energy usage which includes space heating and transportation still counted on 19% of fossil fuels, 15% hydro and 66% Geothermal. A modern record that Icelandic politicians like to brag about.

Wind energy remains the most untapped natural resource of Iceland.

An Icelandic startup called Ice Wind tries to revolutionizing the design of wind turbines and making it more affordable for residential application.





Iceland renewable energy revolution began more than a century ago when Icelandic visionaries in late 1800 started a plan to make the capital city of Reykjavík, the first town to have electricity. However, Iceland’s first hydroelectric plant was built in town of Hafnarfjörður by a carpenter who used the energy to power his workshop and nearby houses. The plant began its operations in 1904.

Then two more hydroelectric stations began to emerge; Rekjavik in 1921 and Northern Iceland in 1922. Yet, Iceland still relied on imported coal as the main resource to power the country. With all the coal power plant, the smoke its produced turned the city of Rekjavik black and polluted the air. The cost of importing coals also weighing Iceland’s economy.

Development of hydro power in Iceland was limited to small generating station, built in the rural farmlands around the country by farmers and local technicians who used their skills to brighten and warm their homes. With its humble beginning, hydro power resource was of great importance due to improving living conditions for thousand Icelanders.

Iceland abundant hydro power. Photo by Ruslan Valeev on Unsplash

Great depression hit Iceland economy, making industry-scale hydro power plant come to halt. World war II then broke and Iceland became the north Atlantic base for allied force. The presence of allied forces brought economic growth for Iceland. In 1950s, the development of fertilizing plant hiked the demand of electricity. A 10 MW hydro power plant was constructed to support the economic growth.

A Swiss-based company shown interest in building an aluminum smelter in the country. Icelandic government responded by constructing Búrfell Hydropower Station in the Þjórsá river in 1972 to power the smelter.  To this day, the power station still operate and channel most of its electricity to the aluminum plant.

With Iceland exports were no longer limited to fisheries, electrical transmission and distribution networks were developed across the island. In 1984, the central grid connected all major hydro power stations.



Iceland has enormous number of hot springs. In the old days, the Vikings used geothermal springs for bathing and washing. Around 1908, a visionary farmer (again a farmer) used natural hot spring for space heating. The farmer lived in a valley near Reykjavík, using pipeline, he channeled the hot water from the spring to nearby houses and livestock. Harnessing low cost and natural heating.

Blue Lagoon Iceland. Photo by Frank Denney on Unsplash

More pipelines were built in 1930 to heat school, hospital, swimming pool and homes. A modern heating system was built in 1943 to serve more than 2,000 homes.

To achieve energy independent in the wake of oil crisis of 1970s, geothermal development was in favor of the politicians. A larger geothermal power facilities such as  Svartsengi and Krafla power plants were commissioned. Svartsengi plant is the one responsible for the Instagram-famous blue lagoon complex. During this period, the government encouraged conversion from oil heating system to geothermal. Hence, the use of non-renewable source for space heating declined.


Economy and Energy

Iceland entered an economic turbulence and uncertainty for its energy sector. Government had no success in attracting electricity-intensive industry foreign investment. This era saw overcapacity of electricity production. No industry means no electricity demand which translates to halted exploration and development in energy sector. A linear relationship.

Decades later, Iceland and global economy started to move again. Icelandic government started to offer highly competitive electricity price. The existing Swiss aluminum company expanded its operation and increase its production capacity. At the same time, an American company decided to construct an aluminum smelter in Iceland.

Landsvirkjun then negotiated with Alcoa, the world’s sixth largest producer of aluminium, to construct a 690 MW hydro power station alongside aluminum smelter. 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.

The new industrial facilities made Iceland National Power Company, Landsvirkjun expand its capacity by 60% within five year period.

Rekjavik is at the forefront of Renewable energy usage. Courtesy of Tim Wright on Unsplash

The switch from coal to renewable came in hand as an economic decision. The use of renewable energy surged along with industrial expansion. Icelandic model is an example of successful economic transformation from coal and oil dependent to renewable.


Factors that shaped Renewable energy industry in Iceland



Iceland enjoys stable political situation. Indeed, the world corruption perception index ranked Iceland in 16th place. Country with stable political environment tend to encourage investment and economic growth. Political stability allows Iceland to focus on developing its renewable energy industry.

2-Trade Barriers

No major trade barriers imposed by Icelandic government. Only several tariffs imposed on certain dairy products and meat. A healthy trade relationship with other nations makes transferring renewable technology and knowledge between Iceland and partner countries more accessible.


Since renewable energy is the major economic drivers of Iceland, the country did a good job in protecting the industry. Iceland imposed strict regulations to govern the ownership of energy investment in the country. As per Iceland Act 1991 on restrictions of investment, only Icelandic citizen are permitted to own energy exploitation right. This Act also apply on owning enterprises that produce or distribute energy. However, the regulations have some minor exception. Individuals and legal persons domiciled in member state of European Economic Area (EEA) also granted the same rights as Icelandic citizens in the energy Industry. Yet, the extend of areas in Iceland’s energy industry that are open for non-citizens remain unknown.

Other countries also find strict regulations on energy industry. It is a mean to protect the most integral part of an economy. Nevertheless, a strategic alliance or joint venture usually took place in developing energy industry.


Iceland is not a member of the Eurozone and has its own currency. In fact, Icelandic Krona stable performance is an indicator of the country’s stable economy and the most important factor to support renewable energy industry. Since the nature of this sector requires vast and deep investment,  it requires Iceland’s economy to hold its performance in the face of longer payback period of the investment.

5- The Icelandic Character

Long winter and harsh environment shaped the Icelandic people. Thus, the natural reaction to adverse nature resulted in people with mindset of optimism and less relying on formal rule. The action-poet, which attributes to originality, ability to influence, and capacity to take risk.


Current industry developments

Iceland major electricity producer Landsvirkjun held almost monopoly in electricity generation market. The state-owned electricity, however, does not participate directly in electricity retail market of household and small businesses. Electricity generated by Landsvirkjun mainly directed towards aluminium industry and producers of ferroalloy.

Three companies; RARIK, Hitaveita Suðurnesja, and Reykjavik Energy operate in retail market electricity.

In 2003, Icelandic government implemented a new energy law and monopoly regulations. The intention of the new law was to encourage an economical electricity system. Thus, creates a competitive environment on power generation and sale of electricity.

On a per capita basis, Iceland is ahead of any other nation in geothermal generating capacity and is a world leader in sustainable energy development.

In an era when climate change is making it necessary for countries around the world to implement sustainable energy solutions. Iceland’s conversion is therefore a meaningful success story. Iceland is an inspiring example of what is possible, with many important lessons to share for any country seeking such a transformation.





[Iceland Ministry of Industry and Innovation]. (2016, October 3). Restrictions on investments by non-residents in Iceland. Retrieved from Ministry of Industry and Inno:

[Landsvirkjun]. (2016, October 5). Hydro and Geothermal Stations. Retrieved from Landsvirkjun: National Power Company of Iceland:

[ON Power]. (2016, October 5). Geothermal Energy. Retrieved from ON Power English Website:

[Orkustofnun]. (2016, October 5). Iceland – A Leader in the use of Renewable Resources. Retrieved from Orkustofnun: National Energy Authority:

Behles, D. (2013). From Dirty to Green: Increasing Energy Efficiency and Renewable Energy in Environmental Justice Communities. Villanova Law Review, 25-68

Gipe, P. (2016, October 3). Iceland: A 100% renewables example in the modern era. Retrieved from RenewEconomy:

Eyjolfsdotiir, H.M., & Smith, P.B. (1996). Icelandic Business and Management Culture. International Studies of Management & Organization, 61-72.

Heberling, G. (2016a, October 3). Energy Generation in Iceland: Part II – Hydroelectricity. Retrieved from Green Building information Gateway:

Heberling, G. (2016b, October 3). Energy Generation in Iceland Part I – Geothermal. Retrieved from Green Building Information Gateway: http/

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