The founding of Landsvirkjun in 1965 may be traced to the Icelandic government‘s growing interest in increasing the utilization of hydroelectric energy resources by attracting foreign investors for power-intensive industry in Iceland.
Early in the 1960s, the Swiss aluminum producer Alusuisse expressed an interest in building an aluminum plant in Iceland. At this point, Landsvirkjun was established for the purpose of constructing and operating hydroelectric power plants which could both sell electricity to heavy industries and provide the general market with electricity at reasonable prices. Up to this time, the electrification of Iceland had been managed by the national government and municipalities around the country; however, these electric works were incapable of financing new energy projects.
Búrfell Hydropower Station
After Landsvirkjun was founded, construction began on the Búrfell Station. Approximately one third of the investment capital was provided by the World Bank, so that it exercised considerable influence on the organization and procedures adopted at Landsvirkjun, since the bank regarded its loans to the company as a contribution to development aid for Iceland.
The bank emphasized that the company should be independent and free from government interference. With this condition in mind, the bank insisted that the national government and Reykjavík municipality each own half of the company shares. Also, since a stable flow of income was emphasized from the very beginning, Landsvirkjun's owners contributed to the company the River Sog Station, at that time Iceland's largest producer of electricity, along with water rights in the Þjórsá river and other forms of support. The bank formulated Landsvirkjun's original depreciation rules, accounting practices and pricing policy to be in line with Western models. Furthermore, the bank emphasized that Landsvirkjun should have only a minimal staff, putting all projects out to international tender and engaging outside engineering consultants for project management and for supervision of the subcontractors who constructed power plants.
Hydroelectric Power Stations in the rivers of Thjórsá and Tungnaá
From the time the company was first started until the end of the 1970s, the company had built three power stations along the South Iceland rivers of Þjórsá and Tungnaá. After Búrfell Station was completed in 1972, construction started on Sigalda Station and subsequently on Hrauneyjafoss Station, which began operation in 1981. During these early years, electricity sales were increasing to the Straumsvík aluminum plant, and sales were also negotiated with the company Icelandic Alloys at Grundartangi. Towards the end of the period, weather conditions and mushrooming demand resulted in a power shortage in Iceland, making construction of the Sigalda and Hrauneyjafoss plants a race against time.
Changes in Ownership
In 1983, Akureyri municipality acquired a share in Landsvirkjun, so that Reykjavík and Akureyri came to own half the company, jointly with the Icelandic State (the division of shares was Reykjavík 45%, Akureyri 5% and the State 50%).
Laxá Station, previously owned by the municipality of Akureyri and the State, was merged with Landsvirkjun at this time. As a result, Landsvirkjun became a national electricity company, whereas its operation up till then had been limited to the south and west of Iceland. In 1986 Landsvirkjun purchased Krafla Geothermal Station from the State. The period 1982- 1996 was characterized by only a small increase in electricity demand while foreign interest in power-intensive industry projects in Iceland was little at that time. It was in those years that Landsvirkjun built Blanda Station, with many criticizing the resulting surplus supply of electricity.
New Electricity Contracts
In 1995-96, however, circumstances became favorable for foreign investment in heavy industry. Landsvirkjun negotiated contracts for increased energy purchases by the Straumsvík aluminum plant, Icelandic Alloys and a new aluminum plant, Norðurál. All those contracts were completed in just under a year. This introduced a period of intense development at Landsvirkjun, which increased its production by about 60% in five years. The power plants at Blanda, Búrfell and Krafla were enlarged, and new plants were constructed at Sultartangi and Vatnsfell.
In 2002 negotiations were concluded for electricity sales to Alcoa Fjarðaál at Reyðarfjörður, which led to the construction of the Kárahnjúkar Power Plant. The project was finalized in autumn 2008. The Kárahnjúkar Power Plant is Landsvirkjun's biggest construction, and increased the company's electricity production by another 60%.
A new Electricity Act
Significant changes occurred through the passing of the new Electricity Act in 2005, since it entailed marketization of the electricity sector. During preparations for this step, as early as 2000-2002, Landsvirkjun's staff was readying the company for this development by a thorough revision of its strategy, organization and procedures. This effort was aimed at using the anticipated changes resulting from a marketing orientation of the energy sector as an opportunity for growth and improved operations. Methods of operating the electricity system were completely reassessed, the company's market position was analyzed, and a new organizational plan was designed for the entire operation. Amendments to the Electricity Act became somewhat delayed, but the company was well prepared when they eventually came through. The biggest change was that from 1 January 2005 the company's Transmission Division, with a staff of nearly 70, became Landsnet, an independent limited company and a subsidiary of Landsvirkjun. Landsnet owns and operates the Icelandic transmission system and manages the country‘s electricity system.
As of 1 January 2007, the State took over the ownership shares of Akureyri and Reykjavík in Landsvirkjun, turning it into a public partnership, fully owned by the State and controlled by the Ministry of Finance.