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Work on Búdarháls Power Plant resumed

August 15, 2008

These are tenders for machinery and electrical equipment. The machinery and electrical equipment for Búdarháls Power Plant, as well as other power plants in the lower section of the Thjórsá river, will be put out to tender in a single tender. This is done to achieve more favourable prices, in addition to which considerable benefit will be gained from having the same type of equipment in all the power plants. The tender will contain an option for the purchase of equipment for power plants in the lower section of the Thjórsá river and will be valid until the latter part of 2009. The purchase of this equipment cannot be finalised until the required permits for such power plants has been obtained. Construction work on Búdarháls Power Plant will be put out to tender this autumn.

Landsvirkjun’s planned power development in south Iceland
Landsvirkjun plans to construct four power plants in south Iceland. On the one hand, there is the Búdarháls Power Plant (80 MW), utilising the tailrace drop from Hrauneyjar Power Plant at the confluence of the Köldukvísl and Tungnaá rivers down to Sultartangalón reservoir. All permits have been obtained, and preparatory work began in 2002, but was postponed in 2003. On the other hand, for the past decade, Landsvirkjun has been working on preparations for three power plants in the lower section of the Thjórsá river, i.e. Hvammur Power Plant (82 MW), Holt Power Plant (53 MW) and Urridafoss Power Plant (130 MW). The environmental impact assessment for the three power plants was completed in 2003, with positive results. They were, moreover, assessed in Framework Programme I (2003) and received the most favourable rating among new hydroelectric power plants as regards environmental impact. A project planning report has been prepared for the power plants, and work on final design and preparation of tender documents is underway.

Policy change
In November 2007, the Board of Directors of Landsvirkjun decided that the company would not, for the present, engage in negotiations for the sale of electricity to new aluminium smelters in south or west Iceland. Instead, the focus would be on achieving the best possible price for electricity and to distribute risk. The companies in question intend to use the electricity to operate data centers and silicon refining for solar panels. Landsvirkjun has negotiated the sale of electricity to Verne Holding for the operation of a data center the company intends to establish at Keflavík airport. Negotiations are currently underway for the sale of energy to several companies that will probably be established in Thorlákshöfn in South Iceland. Landsvirkjun intends to meet their energy needs with the construction of power plants in the lower section of Thjórsá river. If an agreement is reached with these companies, several hundred new jobs will be created in the area.

RTA production increase
Rio Tinto Alcan (RTA), the owner of the aluminium smelter in Straumsvík, had planned to enlarge the operation to just under 200,000 tonnes per annum through the construction of two new pot lines. These plans were not realised, as the residents of Hafnarfjördur voted against the enlargement during a referendum on the zoning plans that showed the enlargement. RTA subsequently entered into negotiations with Landsvirkjun for the purchase of electricity for a new aluminium smelter that would be located in Reykjanes or Thorlákshöfn. These plans were shelved when the Board of Landsvirkjun issued the above decision. However, RTA has found that it is possible to increase the capacity of the current smelter without enlargement by performing certain technical improvements. On making these improvements, the production capacity will increase by up to 40,000 tonnes per year and the energy requirements by 75 MW.
Negotiations between RTA and Landsvirkjun as regards this matter have been completed with an agreement which includes provisions on the renewal of an earlier energy contract, a matter which is extremely important. The agreement provides for an increase in the price of energy and ensures the operation of the aluminium plant to 2037, a longer period than would otherwise have been the case.

Status of planning issues
The municipal plans for the municipalities to the east of the Thjórsá river, Rangárthing-Ytra and Ásahreppur, are confirmed with the three power plants. Skeida and Gnúpverjahreppur confirmed a change to their municipal plans, which provides for the Hvammur Power Plant and the Holt Power Plant, at a meeting on 23 June. It is anticipated that the Minister for the Environment will confirm the plans soon. Flóahreppur has advertised a proposed municipal plan that provides for the reservoir for the Urridafoss Power Plant (Heidalón reservoir). The deadline for submitting comments expired on 1 August. The plan is expected to receive final confirmation at the close of this year or early 2009. A power development licence and a construction permit should be available by mid-year 2009 at the very latest.

Court ruling on Titan contract
Over 80 years ago, the company Titan purchased nearly all water rights as regards power plants in the lower section of Thjórsá. The contract provided for the right to land use for these plants (Skard, Hestafoss and Urridafoss) and legal proceedings in the event that an agreement on payment for the land could not reached. In 1951, the State purchased these rights from Titan and had the rights officially registered. Landsvirkjun and the State have an agreement to the effect that Landsvirkjun has power of attorney to negotiate with land-owners on the basis of the Titan contract. However, the State has not relinquished its water rights.
The owner of the farm Skálmholtshraun has initiated proceeding against the State, Landsvirkjun and the local authorities of Flóahreppur. The plaintiff’s principal claim is that the State’s water rights have lapsed due to lack of registration, i.e. the State did not declare its rights in accordance with Act No. 113/1952 on the release of interest held in land, and that the rights have therefore lapsed. The case has received fast-track processing before the District Court of Reykjavík. Atli Gíslason, Attorney at Law and member of the Althingi, is responsible for pleading the case on behalf of the land-owners. A ruling is anticipated this autumn, and if the case is referred to the Supreme Court, a final ruling may be expected by the end of the year. Furthermore, a complaint has been submitted to the Appeals Committee for Planning Issues as regards the procedure used for planning changes in Skeida and Gnúpverjahreppur. The Committee is expected to take a few weeks to reach a decision. Landsvirkjun’s negotiations with land-owners for the use of land and for water rights on the farms which do not fall under the Titan contract will also take longer than initially anticipated, although Landsvirkjun intends to conclude these as soon as possible.

Starting at Búdarháls
In light of the above, Landsvirkjun is of the opinion that it will not be possible to tender construction work for power plants in the Thjórsá river until the beginning of next year at the very earliest. In order to fulfil, on the one hand, the agreement with RTA for energy sale, within the timeframe stated therein, due to the increase in production in Straumsvík and, on the other, with Verne Holding, the decision has been made to resume work on Búdarháls Power Plant. All permits have been obtained for the plant, and it is therefore possible to tender the project with very short notice.
Landsvirkjun will continue to carry out its preparations for the planned power plants in the lower stretches of the Thjórsá river with the goal of commencing work on them as soon as possible. The company will endeavour to work toward this goal in close co-operation with the local authorities involved and the government and will make every effort to reach agreements with land-owners as regards land and water rights. In this respect, the interests of the company and the residents of south Iceland coincide.

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