Development for harnessing of geothermal steam at Krafla began with trial boreholes in 1974. Work commenced in summer 1975 on sinking of production wells and construction of the power station and a 132 kV transmission line to Akureyri, the main town in north Iceland. The powerhouse and other buildings were designed to match two 30 MW turbine units which had been purchased for the station.
The station was designed and built for the Icelandic State and its operation was originally managed by a State-appointed committee. It was taken over by the State Electric Power Works from January 1, 1977 until the end of 1985, when Landsvirkjun purchased the Krafla station from the State and took over its ownership and operation.
The first turbine went on line in August 1977, but electricity production did not begin until February 1978 due to inadequate steam supply. Initially the station operated a long way under capacity on a single turbine, but in recent years it has been running at its installed capacity except during summer, when maintenance work is undertaken. Annual production has been in the region of 170 GWh.
Various initial difficulties were encountered in exploration and drilling for steam, largely due to seismic activity which caused corrosive magma vapours to enter the geothermal system, destroying the borehole linings. A series of nine volcanic eruptions began near the station on December 20, 1975 and lasted until September 1984. Since then, seismic and volcanic impacts on operations have greatly diminished.