Iceland’s general election this weekend is poised to significantly impact the nation’s energy sector, with leading parties signaling a strong commitment to increasing power production to fuel economic diversification, Bloomberg reports.
Years of political gridlock over energy policy, culminating in the collapse of the ruling coalition, have left Iceland facing a critical shortage of electricity, hindering its ambitions for economic growth.
The upcoming election is expected to lead to a substantial increase in energy generation capacity. A key factor in this shift is the projected decline of the Left Green Movement, a vocal opponent of large-scale energy expansion, which is predicted to fall below the parliamentary threshold.
Iceland, known for its abundant geothermal and hydropower resources, currently generates around 20 terawatt-hours (TWh) of electricity annually, with hydropower accounting for 70%. However, this has proven insufficient to meet growing demand, particularly from energy-intensive industries. The upcoming government is expected to approve the development of new hydro and geothermal plants, along with Iceland’s first wind farm, scheduled to come online in 2026. Future development of solar and tidal power is also being considered.
The energy crisis has led to repeated supply reductions for several heavy industrial users, resulting in lost export revenue. Increased renewable energy capacity is seen as crucial to attracting foreign direct investment and meeting Iceland’s ambitious climate targets. While energy policy isn’t the top campaign issue, clarity on this front is highly anticipated by the industry after years of political stalemate.
Delays in licensing processes have already impacted projects by Landsvirkjun, the national power company, including a hydropower station and a wind farm in southern Iceland. Compounding the problem, drought conditions have further reduced hydropower reservoir levels, forcing Landsvirkjun to curtail supply to non-priority clients. This has resulted in some industries resorting to fossil fuels to meet their energy needs.
The Social Democrats, currently leading in polls with some 20% of the vote, have pledged to increase electricity production by 5 TWh (25%) within the next decade. This increase, while significant, is at the lower end of demand forecasts by Landsnet hf, the national grid operator. Landsnet projects demand to soar by as much as 37% in the same period and more than double by 2050. While the long-term energy needs of Iceland are still debated, Landsvirkjun’s CEO, Hordur Arnarson, considers adding 5-6 TWh of capacity within a decade challenging but achievable. He also notes that this expansion would help Iceland meet its energy transition goals.
In 2021, the previous Left Green-led coalition government upgraded the national climate target to a 55% reduction in greenhouse gas emissions by 2030 (compared to 2005 levels) while maintaining its aim for carbon neutrality by 2040. Currently, aluminum smelters owned by Rio Tinto, Century Aluminum, and Alcoa consume 76% of Iceland’s electricity production under priority agreements. However, other industries, including fish meal factories and district heating facilities, have faced supply shortages, forcing them to utilize fossil fuels. Arnarson predicts similar shortages in the coming years unless significant action is taken.
