It is now two years since the government gave the approvals that made way for the creation of a huge hydroelectric scheme in the Central Highlands at Kárahnjúkar. This paved the way for a subsequent deal with Alcoa for the building of an aluminium smelter in the coastal town of Reyðarfjörður.
WHAT DOES THE SCHEME INVOLVE?
The Kárahnjúkar project will consist of nine dams, three reservoirs, seven channels and sixteen tunnels. It will divert two large rivers, the Jökulsá á brú and Jökulsá í Fljótsdal, and several smaller rivers to the north of the Vatnajökull glacier, the largest glacier in Europe. The main dam will be highest rockfill dam in Europe, 190 metres high, 800 metres long and 600 metres wide at its base. This main dam will create a huge reservoir, to be called Hálslón, which will flood a wilderness area of 57 sq. km. 70 km of tunnels will carry water to an underground powerhouse, which will have a 690 megawatts capacity.
HOW MUCH WILL IT COST AND WHO’S PAYING FOR IT?
Current estimates are that the dam and the hydroelectric scheme will cost over US$1.1 billion to build. The project is being commissioned by Iceland’s national power company, Landsvirkjun. This company has three shareholders, the government, the City of Reykjavik and the City of Akureyri. Landsvirkjun is raising funds from international financial institutions, and the nature of the company´s shareholders means that the loans are effectively state guaranteed and therefore attract beneficial interest rates and terms. Landsvirkjun and the government have signed a deal with the second largest aluminium business in the world for supply of power to a smelter which Alcoa will build at Reyðarfjörður. Under the agreement, Alcoa will buy electricity from Landsvirkjun for the next 40 years. The price paid will be adjusted to allow for fluctuations in the global aluminium price.
WHAT ARE THE PROPOSED BENEFITS?
The East of the country has been the victim of economic decline for several decades. The two key commercial activities of farming and fishing have both been in decline. Many people have left for larger towns and the remoteness of its location has meant that tourism has been slow to replace income. It is proposed that the scheme will see a wholesale regeneration of the area with 400 new jobs created directly and a further 500 in ancillary industries. The country’s economy has relied on the fish industry as its main export and, while the fisheries are well managed, environmental issues make revenue growth from this source seem unlikely. Tourism is growing year by year and provides a secondary source of foreign revenues. The creation of a major capital project, which uses natural resources with a guaranteed revenue stream for the next 40 years, is a prudent measure to replace any future decline in fish exports and tourism and strengthens the economy. The building of the project will create roads into the wilderness area and help bring in tourists to the highlands.
WHAT IS THE IMMEDIATE ENVIRONMENTAL IMPACT?
The main environmental impacts are on soil, vegetation, wildlife and landscape. The Hálslón reservoir will submerge an area of 57sqkm and diverting the rivers will impact an area of a further 2,900 sq. km, 3% of Iceland’s land area. Dimmugljúfur, one of the country’s longest and most spectacular canyons, will be partially flooded. About 60 waterfalls and invaluable features will disappear in the reservoir or will be spoilt by river diversions. 35 rare moss and lichen species will be affected, two of which are globally threatened. The reservoir will flood an area of vegetation which is used by migratory pink footed geese and reindeer for grazing and breeding. It is feared that the change will mean a local extinction of the reindeer. Below the dam, the decrease in sand carried down to the sea will cause the erosion of the shoreline, where harbour seals and nesting grounds for migratory birds will be affected. These hydrological changes will also have an impact on salmon, trout and char.
WHAT ARE THE FINANCIAL CONCERNS?
The electricity generated by the scheme has no domestic use for the Icelandic taxpayer who, through the US$ 1.1 billion worth of loans secured by the government, will be ultimately underwriting the cost of the project. Landsvirkjun and the Minister of Industry and Commerce, Valgerður Sverrisdóttir, are confident that the project can enjoy long term profitability. Independent research, however, has shown that at best the project is capable of breaking even. If interest rates increase, the price of aluminium falls, and the króna remains strong (all of which are projected), then the project will lose over $30 million a year, a loss that will ultimately be met by the already overburdened Icelandic taxpayer. If this happens, then the country will be effectively subsidising Alcoa and will have incurred huge overseas debt for a loss making project.
WHAT ARE THE ENVIRONMENTAL CONCERNS?
Beyond the immediate environmental impact of building the dam and creating the reservoir, there are deep rooted concerns about the long term impacts of the project. The level of the reservoir will rise and fall by 20 metres or more meaning that on a large area mud and silt will be exposed on the banks during the low water periods. As the mud dries, the strong and frequent winds prevalent in the areas will pick up and scatter material, like talcum powder, over the surrounding countryside, damaging vegetation and habitats and causing further erosion, which could ultimately lead to a “Dust Bowl”.
The aluminium smelter will emit 3,900 tonnes of sulphur dioxide into the atmosphere per year. This equates to an emission of 12kg/ton, whereas the United States Environmental Protection Agency allows only 8kg/ton and the WHO guidelines for Europe define a limit of 5kg/ton. This is in addition to high levels of fluoride and other gasses.
The dam is built close to one of the most volcanically active and unstable areas of the earth’s surface. The Vatnajökull glacier is reducing in size due to climate change and as a result, the earth’s crust is uplifted by between 1 and 2 cm per year, which could cause fracturing beneath the dam in years to come with disastrous results.
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