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Realistic innovation

February 27, 2009
Landsvirkjun's Communications Representative Thorsteinn G. Hilmarsson recently wrote on the Morgundbladid newspaper Op-Ed page that Landsvirkjun had emphasized entering into agreements and discussions with companies like data centres and polysilicon factories that had expressed interest in starting up such operations in Iceland. The company however deems it to be more secure for the sale of energy to smaller companies to be based on energy sales to the larger ones. Hydroelectric power stations require enormous amounts of initialization capital, but their operation costs are extremely low. Good utilization of the power station from the start is a prerequisite for return on the investment.
Hilmarsson pointed out that these days there was recession, and economic activities were contracting all over the world. Companies have little capacity for investment, and many kinds of operations in many places have been discontinued. It is interesting that aluminium smelters in Iceland continue in full swing, he said, even though their owners are pulling in their sails elsewhere in the world and letting thousands of workers go. This is because of the aluminum smelters' obligation to purchase electric energy in Iceland under the long-term agreements made with them by Landsvirkjun and other energy companies.
The aluminium smelters have to pay for electricity whether they utilize it or not. Such assurances are difficult to get from the small high-tech companies recently looking to Iceland. Their parent companies and assets do not support this. If substantial investments in power stations were based on sales to them, the uncertainty of revenues from them, depending on the global financial situation, could lead to losses for the energy companies. This would create a risk that revenues would not be earned against the investments in the power stations.
Clearly, Landsvirkjun's finances would be in jeopardy today if its investments in previous decades had been based on servicing short-term agreements with smaller companies having no purchase obligations. Criticism has been made that Landsvirkjun's profitability did not compare favourably with Icelandic companies in the stock market engaging in international operations, e.g., in the field of pharmaceutical manufacturing. Not much need be said these days that companies producing great profit can also incur great loss and even go bankrupt on the shortest possible notice. The production of energy is a long-term operation with modest but secure profitability and limited risk.
With decades of build-up effort, Landsvirkjun has laid a solid foundation for energyintensive industry in Iceland, which has now become an important part of Icelands' economy.


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