Iceland's Energy Lessons

The Blue Lagoon, Iceland's largest tourist destination, is a 100-degree melting pot. On a cold March day, as driving rain blows wisps of vapor from the nearby geothermal power plant, a group of Brazilian twentysomethings, a Japanese couple and teens from St. Paul's, the New Hampshire prep school, wade through the milky water and coat themselves in silica mud.

The lagoon was created entirely by accident. In the 1970s, the Svartsengi geothermal plant began to discharge water rich in salt, algae and silica, which turned into a kind of caulk. A pool formed in the featureless lava fields in western Iceland, and when locals jumped in, they found that it cleared up symptoms of skin ailments like psoriasis. Today, the Blue Lagoon sports a 15-room clinic and a spa that attracts 407,000 tourists annually. With revenue of $21 million and 200 workers, the Blue Lagoon is an Icelandic blue chip. "We are one of the 300 largest enterprises in Iceland," says Anna Sverrisdottir, managing director of the Blue Lagoon.

Iceland's economy, which until recently relied largely on fishing, has diversified in recent years, with rapid growth in tourism, manufacturing and financial services. And like the Blue Lagoon, much of the growth has been a happy byproduct of Iceland's decades-long strategy of tapping sources of renewable energy. Mindful of climate change and the need to limit emissions, many U.S. states have set goals of obtaining 10 or 15 percent of their energy from renewables at some point in the distant future, and the European Union has pledged to reach 20 percent by 2020. But Iceland is already at about 80 percent. All electricity on the island is generated through geothermal or hydroelectric sources—low-emissions sources that don't use fossil fuels. Most homes are heated by water pumped from geothermal hot spots. "We are blessed with a lot of clean and renewable energy," Prime Minster Geir H. Haarde told NEWSWEEK. "The only uses of fossil fuels in Iceland are people using cars and the fishing fleet." And increasingly, Iceland, whose most prominent exports have been haddock and Björk, is devising ways to export what has been a stranded resource.

Iceland is a small island with a tiny, ethnically homogenous population: only 300,000, with more than half living in the capital, Reykjavik. It lacks coal reserves, and is endowed with massive glaciers, which produce huge volumes of water that can be harnessed to generate electricity. It also happens to sit atop a rift in the earth's crust that keeps significant reservoirs of heat bubbling near the surface. To a large degree, it is the polar opposite of the United States. Yet we—and other developed nations—can learn some valuable lessons from Iceland about what happens when a society commits to the systematic development of renewable energy.

From the cobblestone streets of downtown Reykjavik, the storybook-cute capital, to the stark fjords of the east, positive collateral benefits—many of them unintended—are evident. None looms larger than the new $1.5 billion Alcoa Fjardaal plant, which represents the largest single private-sector investment in Iceland's epic history. East Iceland, separated from the more populous west coast by the vast Vatnajokull glacier, has been down on its luck in recent years. The fishing villages nestled against the rocky shore, separated by mountains—one of which is penetrated by a terrifying one-lane tunnel—have been losing jobs and their youth to Reykjavik. Reindeer seem to outnumber people.

But the American aluminum giant decided to build its first new smelter in 20 years near the town of Reydarfjordur, largely because of the promise of abundant clean power. Smelters require an immense amount of energy. Power-intensive companies like Alcoa are concerned both with their images and with the potential for initiatives that imposes costs on burning fossil fuels—from emission caps to carbon taxes. So when Landsvirkjun, the national utility, said it would build a 690-megawatt hydroelectric power plant 30 miles away, Alcoa took the plunge. Construction began in 2004, and today the massive plant—its 336 pots cover an expanse of nearly three quarters of a mile, the largest such line in the world—produces massive quantities of aluminum bars, coil and sheets. "It's almost the ideal place to invest, because of the combination of a highly skilled work force, an open and transparent democracy and the endless supplies of renewable energy," says Jake Siewert, vice president for environment, health and safety at Alcoa.

The plant employs about 650 people directly—400 Alcoa employees and 250 contractors in areas such as maintenance, catering and security. Alcoa's presence has also stimulated the creation of an additional 300 jobs in shipping, logistics and engineering, says Tomas Sigurdsson, a Cornell-trained engineer who is managing director of Alcoa Fjaardaal. By creating enough jobs for 15 percent of the region's work force, the plant has lured Icelanders back to the east and stimulated the first housing construction in more than a decade. "The Alcoa project has revitalized the economy on the east coast of Iceland," says Prime Minister Haarde. The plant is also showpiece for Alcoa's sustainability efforts. As we sit in the glass-walled cafeteria, dining on curried Icelandic lamb and looking out over crystalline water, an official explains how new technology captures emissions from the plant's smokestacks.

Icelanders regard plentiful, cheap, guilt-free energy as part of their birthright. In the 1930s, Reykjavik's municipal utilities began tapping into the earth's crust, liberating energy bubbling under the surface to heat homes and water for domestic use. In the 1960s and 1970s, the country began to tap geothermal sources to drive turbines and create electricity. As Iceland has grown more connected with the global economy, its financial markets and institutions have been subject to volatility. But consumers have been insulated from the shocks of higher energy prices. Many things are expensive in Iceland, especially food. (A slice of surprisingly decent pizza in downtown Reykjavik will set you back $7.) But energy is cheap. Over the past 10 years, the price of electricity, compared with a broad measure of inflation, has fallen 75 percent in Iceland.

Icelanders are energy hogs. SUVs are as common on the roads in Reykjavik as they are in Rochester, N.Y. They use electricity to power de-icing systems in driveways and city streets, and to heat 130 outdoor swimming pools, which are to Iceland what Starbucks outlets are to Seattle. "If you want to hear the current gossip in England, you go to a pub; here you go to a swimming pool at 6:30 in the morning," says Asgeir Margeirsson, CEO of Geysir Green Energy, a private-equity firm that specializes in geothermal energy. In 2004, per capita electricity use in Iceland was nearly twice the amount in the United States. But their profligacy doesn't tax the economy or the environment unduly. From the low-slung headquarters of Reykjavik Energy, the capital city's utility, puffs rise from the horizon. The water vapor is the only form of emissions produced by the Hellisheidi Geothermal Power Plant, which sits in the snow-covered hills 13 miles outside of town. Iceland is one of the world's wealthiest nations, measured by income per capita, and the United Nations Human Development Index rates it the most livable nation on the planet.

In the interconnected global economy, Iceland is discovering new ways to export renewable energy—whether it is building geothermal-powered tourist attractions or using hydroelectric power as an inducement for industrial companies like Alcoa. And today, Iceland views its expertise as a means of becoming a bigger player on the world stage. "We can contribute to the economic development of foreign countries by teaching them to use this resource," says Gunnar Orn Gunnarson, managing director of Reykjavik Energy Invest, a unit of an Icelandic utility that is currently working on a project in Djibouti—which lies astride East Africa's Rift Valley—that could provide electricity and water for drinking and irrigation.

Enex, an Icelandic firm backed by Geysir Green Energy, is in a joint venture with Chinese energy company Sinopec to build and manage a geothermal district heating system in Xianyang. Iceland America Energy, a subsidiary of Enex, is developing a geothermal plant in the Truckhaven area in southern California. Glitnir Bank, one of the largest Icelandic banks, employs a staff geologist to evaluate geothermal projects, and has funded geothermal companies in Nevada and California.

Icelandic New Energy, a four-person firm, is spearheading the country's efforts to sever the nation's remaining links to fossil fuels. In 2003, it opened the world's first commercial filling station and started running a fleet of three hydrogen-powered buses. Today, the company is overseeing the deployment of two dozen hydrogen-powered cars, including rentals available from Hertz. "If we can convert geothermal electricity into fuel, we can be a 100 percent sustainable society," says Jon Bjorn Skulason, general manager of Icelandic New Energy, as he guides his hydrogen-powered Prius through traffic on Reykjavik's Highway 1. He pulls over to a Shell station and inserts a card reader to activate a hydrogen pump.

Even with gas at $8 a gallon in local currency, an expensive hydrogen-powered Prius isn't competitive with a gas-guzzling Jeep Cherokee. In Iceland, the public sector has funded the hydrogen experiments and continues to play a significant role in the development of alternative energy. The efforts to move beyond polluting fossil fuels carry their own environmental costs. To build the hydroelectric plant that serves Alcoa required flooding pristine areas, for example. By and large, however, there's a consensus in Iceland that having the government take such action is good economics and environmental policy. "From a global perspective it is more responsible to produce aluminum in Iceland from clean energy sources rather than producing them elsewhere from fossil fuels," says Prime Minister Haarde.

Companies are coming around to a similar view. Sipping a cappuccino and looking out over Reykjavik's harbor, Ossur Skarphedinsson, minister of Industry, Energy and Tourism, lists the blue-chip companies that have inquired about tapping into Iceland's cheap green energy. An American firm and Icelandic investors are spending $300 million to build a data center that will be rented out to foreign tenants—another new industry, and another way to export a natural resource.

At the Blue Lagoon spa, where plans have been drafted for 150-room hotel, Anna Sverrisdottir, talks up her company's latest efforts to turn green energy into green. For about a decade, the spa has been selling pricey skin-care products at its gift shop and at the airport. This month, she says, Blue Lagoon's masks and muds will begin to appear in stores in America. "Do you know Saks Fifth Avenue?"