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And while we’re looking the other way, our resources are peddled off at bargain prices

Tomorrow, a decision will be made as to whether the Suðurnes Power Company [HS orka, in Icelandic] will become fully privatized and owned by a Canadian company called Magma Energy.

This is the horror story of the week.

I have to confess that I have had some trouble understanding this matter and hence not given it my full attention. Today, however, I read a number of articles about this planned privatization and must say that I am profoundly shaken by the whole affair – even if I still don’t fully understand everything that has propelled the issue to its current state.

The story goes something like this. Back in 2007, the Ministry of Finance decided to sell its 15.2% share in HS orka [which supplies geothermal energy and heat to the people of Suðurnes, the peninsula on which the Keflavík International Airport sits – and also the Blue Lagoon]. Apparently it was specifically stated that the two largest power companies in Iceland – The National Power Company [Landsvirkjun] and Reykjavík Energy – were not eligible to bid for the share due to competition regulations.

The highest bidder turned out to be a company called Geysir Green Energy. There was a lot of controversy surrounding that company, all sorts of corruption allegations, so much that it managed to bring down the Reykjavík City Council back in October 2007. Part of the controversy centered on the fact that, for the first time, a public utility company in Iceland was being privatized – at least in part. The deal was signed on behalf of the Icelandic State by then-Finance Minister Árni Mathiesen of the Independence Party [remember him?].

Last July, the town of Reykjanesbær [a stronghold of the Independence Party, which favours privatizing everything to sell to their favoured friends] sold its share in HS orka to Geysir Green Energy.  At the beginning of July, the towns of Grindavík and Hafnarfjörður decided to use their option to buy a preemptive share in HS orka and sell it to Reykjavík Energy, for the purpose of ensuring that the company remained in the public sector. The Competition Authority, however, ruled that Reykjavík Energy was not permitted to own more than a 10 percent share in the company – so Reykjavík Energy pulled out.

Long story short – the Canadian company Magma Energy has now made a bid to become a core investor in HS orka with a 32 percent share. The offer expires at noon tomorrow, and unless something radical happens, it is a very real possibility that the first public utility company in Iceland – which provides the public and- yes – industry with clean, green, cheap geothermal energy – will become fully privatized, and under the control of a foreign investor.

The real scary bit, though, is that through this purchase, Magma Energy gains an exclusive right to utilize Iceland’s geothermal energy fields in the area for the next 65 years, with the option to extend for another 65 years after that. In other words, if the powers that be sign on that dotted line tomorrow, the first instance of Iceland’s natural resource passing into foreign hands will become a reality – for the next 130 years.

To add insult to injury, the price for leasing the energy fields will amount to a piddly ISK 30 million per year, which – as they so succinctly put it over at Smugan – “That amount is ten times lower than was considered justifiable to pay one útrásarvíkingur* to take on a management position in a bank.” Or roughly equivalent to renting an office space in downtown Reykjavík for a year.

130 years, people!

And once that natural resource is in private hands, it can be exploited in any way the new owner sees fit. One thing is sure: the private company will almost certainly concern itself first and foremost with the bottom line. It will likely jack up the prices to the private consumer, and it will siphen off all profits which previously went towards regional development. Consequently the region will suffer and living standards will most probably decrease substantially. The new owner will have the Reykjanes peninsula in its grip.

It’s just as frightening to think that in these times of economic weakness and while the nation is looking the other way [Icesave, EU, etc.] the opportunity is being seized to sell off our precious resources at bargain prices. God help us.

IT IS DARK NOW, LIKE THIS POST
Seriously, for the first time I am really starting to fear for this country’s future. Like, really SERIOUSLY. It’s been a cool and somewhat blustery day, showers eased up this morning and the sun made an extended appearance this afternoon. Currently it’s 11°C [54F]. Sunrise at 5.30 am, sunset at 9.30 pm.

*útrásarvíkingur – the term used here in Iceland to describe the “modern-day Viking marauders” who managed to drive this country into the ground.

Comments

comments

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  • alda August 22, 2009, 10:51 pm

    With all due respect, Easy … and I know you’re Icelandic and as such don’t have the linguistic skills of an English speaker, but sometimes comments are so grammatically incorrect and with such poor spelling and no punctuation that they simply don’t make sense.

    Those comments usually don’t make it through the filter, either.

    As I said in the comment guidelines – please make sure your comment makes sense. It doesn’t have to be in perfect English — but sloppy to the point of illegibility is just not on.

  • Easy August 23, 2009, 12:39 am

    ouch!!

  • Rozanne August 23, 2009, 1:06 am

    Sending good vibes (as requested). I hope Iceland will be able to keep control of it’s energy resources.

  • Mike August 23, 2009, 8:50 pm

    Simon Brooke wrote:

    ‘However, long distance transmission of electrical energy is hugely inefficient, so Iceland need not fear that. ‘

    Actually long distance ultra-high voltage DC is remarkably efficient. Powerlines up to 1000km are already in use in the US and Canada and China is planning even longer ones.

    There’ve been a number of studies of running a submarine cable from Iceland to the UK and pumping up to 1GWe into our National Grid. It’d need new generation capacity – probably hydroelectricity, but there are absolutely no technological restrictions. The economics are really quite attractive (for the British) and it would cost a lot less than a nuclear station.

    It’d be in Iceland’s interests to consider a joint venture of this type – Britain desperately needs power, clean power at that and Iceland could generate it. And signing a 20 year contract to sell power to Britain would help diversify the Icelandic economy.

    Mike.

  • Chris Cook August 23, 2009, 11:19 pm

    It was the funding of a grid of HVDC links, and the construction of linked renewable generation, that was the subject of the Energy Pool presentation I referred to upthread.

  • Bala August 24, 2009, 8:08 am

    Excellent discussion but most of the comments are driven by FUD and not much facts: here are the facts with regard to foreign ownership in Iceland, I am reproducing this from invest in Iceland website. As you can see no one can take anything away from Iceland, the majority ownership in Energy resources has to be within Icelandic entities and the government is free to take over a private enterprise like they have done in Boliva and other Latin American countries. So lets not spread fear that something terrible is happening here… Private ownership is driven by profit but you don’t make profit without providing a service, unlike government run enterprises there is no incentive to provide service! Trust me I come from a country where the government controls everything and things are far worse than it is in Iceland…

    “Restrictions on Investment by Non-EEA / Non-OECD Residents
    Only Icelandic citizens and other Icelandic entities, as well as individuals and legal entities domiciled in another member state of the European Economic Area, are permitted to own energy exploitation rights as regards waterfalls and geothermal energy for other than domestic use. The same applies to enterprises, which produce
    or distribute energy. The maximum total shareholding owned by non-residents (except residents and legal persons of a country that is a member of the European Economic Area or of the Faroe islands) in Icelandic airline companies is 49%.”

  • Bala August 24, 2009, 8:10 am

    Oh, FUD – Fear, Uncertainty and Doubt

  • alda August 24, 2009, 9:58 am

    Bala – Sorry, but … which part of the 130-year aspect did you miss?

  • Man from Rome August 24, 2009, 12:39 pm

    I just can bring my experience of a country where public company have been privatized not too long ago (Italy).
    Since then everything got much more expensive then it used to be.
    The competition among companies should have brough – as politicians and economists used to say – a war of the prices in which the arms were disconts and low fares.
    Instead, as you can easily imagine, after a decade we pay much more than before (proportionally) for even a lower quality.
    Ok, I have a particularly pessimistic point of view but it’s not just the idea of a single one.
    But, even if your situation can’t look better just by observing who is worse than you are, at least you don’t have Berlusconi 🙂
    Bye

  • Bala August 26, 2009, 7:34 am

    Hi Alda,
    Thank you for reading my comments and responding.

    I did not miss the 130 year, but why are you so worried about the term of the contract all it says is that they will own 32% of the company for 130 years… so actually they are long term investors! The same cannot be said to some of the Icelandic investors who took more dividends out of the companies in Iceland than what they invested in them and took them out of Iceland. I would say that Icelandic investors are the ones that you need to be fearful off as they did not have any long term vision and leveraged the heck out of every company’s balance sheet that they could lay their hands on. I can say that maybe a foreign investor might have more compassion than some of the Icelanders.

    I personally think this deal is an important milestone to instill confidence back into Iceland that we are not going back to the dark ages of Government control on everything. Trust me you don´t want that… look at some of the eastern block countries if don´t believe that communism and socialism does not work!

    I think this crisis has shown that Governments have a role to play and they cannot sit on the sidelines and just let everyone run wild. Which is exactly what the Government of Iceland did, they thought hey it seems to work in other countries so lets just take our hands off the wheel and everything will sort it self out… They are suppose to GOVERN not OWN, MANAGE or CONTROL.

    Lets not move from one extreme to the other… there is a middle ground and let the right institutions manage their respective responsibilities. We know for a fact that Governments are not good at running companies or providing proper service to its constituents because of their inherent constitutional requirement of consensus building.

    I don’t trust Governments, because it consists of people and they will wield more and more control when they are allowed to. I believe there needs to be checks and balances for every institution including the Government. I commend the Icelandic people for bring down the previous Government because it failed to handle the crisis. I don’t trust the current Government is any better.

    And I don’t trust Journalists either they are in it for one thing and one thing only more viewership, the more catchy the headline the better the story…

    Regards,
    Bala

    Disclaimer: I don’t have any relationship or business interest related to the Magma deal.

  • Martin August 29, 2009, 4:49 pm

    not in principle opposed to the foreign ownership BUT not at that price. It must be an indexed fee for less than fifty years NOT 65 NOT 130
    time to get those drums out again Island

  • Greg August 30, 2009, 1:38 pm

    I can understand the fears about foreign ownership, privitisation, etc. However in this case the deal seems terribly small in comparison to ANYTHING. I Googled Iceland’s energy today and I found that:

    Iceland produces around 1,700 MW of electricity, 25% of that from geothermal power (~400MW). (found it from from this site: http://www.os.is/solofile/20644)

    This deal is supposed to give Magma 48% of HS Orka’s 150MW of power generation. so, around 75MW, from the Magma website.

    A mid sized coal plant makes 500MW in comparison – 75MW is nothing. Even without looking at international sizes, 75MW is only 4% of 1700MW of power generation, for a population of 300,000 people! How could they possibly raise prices if they only controlled 4%. This is silly guys – what about all those banks that indebited you larger than your GDP!?

    I’ve never found that private/public makes a difference. Private companies try to squeeze every penny out of you, whereas public companies are lazy, corrupt and milk the system for all they get. Seems like they were in this case. People are people and take advantage of each other any way they can.

    And Bali, above is right – isn’t a long term ownership a GOOD thing? Who takes better care of a house – a long term private owner who lives in it, or a bunch of students living there for a semester or two? I’d be much more warey of a private company that buys for 5 or 10 years – clearly then it opens the door to exploit the resource and move on.

  • Helga August 31, 2009, 3:28 pm

    In relation to Greg’s arguments:

    Yes, compared with many other electricity privatization deal the sale of a share in HS Energy is very small, but for a country with 320.000 inhabitants it is pretty big and very important. First of all, it is a matter of principle whether we want to sell the usage rights of our energy resources. Second of all, the deal is big for the area and the energy resources in question. Apparently geothermal power is not sustainable if it is exploited too fast.

    And then we come to the argument of the long term contract. Is a company that has a right to use the resource for 130 yrs more likely or not to use it wisely than a company that uses the resource for 10 yrs? First of all, none of us is going to be alive in 130 years, and certainly not the shareholders of Magma Energy, so why should they protect it? Hypothetically, ME could buy 48% of HS and get hold of GGE’s share, exploit the geothermal power more than they are allowed to (there are some laws concerning how much energy may be used per year, but HS orka already bypassed them and tapped out more energy than it was allowed, but to my knowledge, it has not been asked for any compensation other than to write an explanatory letter to Orkustofnun), raise the price to consumers and then the owners can sell their share of the company in 10 years time after maximizing profits for themselves. Why would they care about the future of the company or the energy resource? They can then buy another company or a resource for the profit and continue the same game.
    I know that I sound very pessimistic, but unfortunately this is only based on similar deals elsewhere, as well as with our recent experience of bank privatization.

  • Bala September 1, 2009, 11:18 am

    Helga,
    I understand the pessimism… but it is unwarranted. There is a fear of the unknown and everyone is focusing only on what can go wrong. Why is no one talking about what could go right about this deal? There is no equity left in any of the companies in Iceland. If you want the economic spiral to stop you need new equity to restart all the projects, create jobs and start the growth engine again in Iceland. Believe me you children want it and need it… and the Icelandic Government is not going to do it! No Government is capable of doing it… it has to be the people of Iceland and lets not blame everyone else for the problems faced by Iceland lets look at ourselves and see what we can change.

    I want to quote Mahatma Gandhi “Be the change you want to see in the world!” If you project pessimism and negativity unfortunately that is what you will receive in return. Lets move on and move forward with a positive energy and sense of optimism. That is the strength of Iceland and that is what attracted me to move to Iceland and live in Iceland…

    And Alda, all your “Excellent Points” comment are given to people who agree with you which I think is not very objective. If you just want everyone to agree with you to read this blog then you should not have it open to all people.

    Jai Ho
    Bala

  • Greg September 1, 2009, 11:33 pm

    OK, so from what I see there are 4 main problems & fears with this deal:

    1. The price is too low, and foreigners are stealing Iceland’s resources.
    – I agree, although not much can be done about this. However they are one of the few companies that is actually investing in Iceland, as unfortunate as this sounds, it’s a positive, not a negative. More on this later.

    2. The price of electricity will increase.
    -Not likely. See my post about, 4% of the total market share of Iceland’s electricity means exactly nothing – they couldn’t change the price in a million years. And doesn’t HS Orka sell just to Alcoa anyway?

    3. 130 years is too long
    -a long rent means the company will take care of the property. Helga, your logic makes sense but in your example, wouldn’t the company want to sell at a profit at the end of your 10 years? You can only sell plants if they’re worth something to the next owner. In other words, why would Magma buy 130 years of property rights, drain the property dry and ditch a valueless project in 10 years, when they could just buy a much cheaper 10 year deed and ditch the property for quite a lower price? So clearly they intend on either keeping the property themselves for the duration, or at least taking care of it until they eventually sell it to someone else for a profit.

    4. Iceland is privatising its energy resources
    No it isn’t, HS Orka is privately run and so is GGE. Both seem quite inefficiently run, typical of local operations around the world. Both also seem quite bankrupt, and it’s not like the state can buy them out in its present state. So who cares if one private company buys out another?

    Guys seriously I understand your fears, but you need to chill out. This company’s not going to take over your lives, it’s absolutely impossible for it to do anything to your electricity bill (as I said, 4% won’t be able to shift the price), and it’s a good sign of faith in a country which has been stigmatised by the entire world as a financial basket case. I hate bringing Thatcher into this, but England really turned around when she privatised the country – sure lots of things became expensive, but before her England was barely ahead of Soviet Russia in terms of economic prosperity.

    I wish you the best, and hope Iceland will come out of her troubles stronger than before. I don’t, however, think this particular deal is the harbinger of another apocalypse like some of the comments here seem to think it’ll be.

    Cheers,

  • ElleE September 17, 2009, 3:15 pm

    I do not know why you say the nation is turning the other way, since that is not the case at all. Many of us have done everything in our power to stop this horrendous sale. We have urged the government in different ways to to stop it, to change the laws.