In the last post I wrote about how a set of investors, meticulously assisted by the ruling powers in Iceland, managed to gain a controlling share in HS Orka, a geothermal energy company supplying green energy to Iceland’s southwest peninsula, Reykjanes, next to the capital Reykjavík. It was the first privatization of an energy company in Iceland, and was clearly engineered to transfer the company into the hands of people who had a very clear view of the fact that green energy would – and will – become ever-more valuable in the future.

We left off where 66.7% of HS Orka, which had previously been in the public doman [as it should be, since the privatization of fundamental services like energy supply is a BAD idea] was now owned by a company called Geysir Green Energy (GGE). In July of this year, GGE sold an approximate 11% share of the company to a Canadian company named Magma Energy Corp., which also had an option for purchasing another five percent.  

What was particularly interesting about the sale to Magma Energy was that Magma is a foreign company. Icelandic law prohibits investment in Iceland’s natural resources by foreign companies – for good reason. This country has ample natural resources, including green energy and fresh water – resources that will only become more valuable with time, particularly as the devastating effects of climate change become evident. Most Icelanders agree that control of Iceland’s resources must be kept in the country to benefit its citizens – not to benefit of some multinational corporation that is first and foremost concerned with paying dividends to its shareholders. Which of course amounts to nothing more than a form of colonization.

However. As Iceland is a member of the European Economic Area, companies and individuals within the EEA have the same rights as Icelanders to invest in Icelandic companies. Hence the Canadian Magma Energy simply set up a shell company in Sweden – a company that existed only on paper – to allow it to buy the shares in HS Orka.

Then, through a complicated set of regulations and competition legislation, the last remaining public partner in HS Orka – Reykjavík Energy – was ordered to sell its share in the company. Reykjavík Energy’s ownership had been a last-ditch effort by two towns in the Reykjanes area to ensure that HS Orka remained in the public domain; however, Iceland’s Competition Authority ruled that, since RE was effectively in competition with HS Orka, it could not own more than a 10% share in the company. Consequently RE decided to pull out of HS Orka entirely and sell its full share.

Since Reykjavík Energy is a public company, the sale of the HS Orka share was the responsibility of the Reykjavík City Council, which is headed by the Independence Party. If you remember from the last post, it was the Independence Party which was instrumental in transferring the initial share of HS Orka to Geysir Green Energy, to benefit cronies of the party. The Independence Party was also the political force instumental in implementing the free-market capitalism that has now failed so spectacularly in Iceland. The IP is known for its machinations in transferring public assets into the pockets of its own people and being engaged in similar underhanded deals.

Two bids were received for Reykjavík Energy’s share in HS Orka. One was from Magma Energy. The other was from … we don’t know. The Independence Party in the Reykjavík City Council refused to reveal who made that bid, saying only that it was “unacceptable”.

What was not unacceptable in their view, however, was the bid by Magma Energy. Even though every thinking person could plainly see that the terms of the sale were atrocious. Consider:

Reykjavík Energy lends Magma a full 70 percent of the purchase price with a bullet loan, meaning Magma makes no payments until the end of the loan term – seven years later [apart from the down payment of 30 percent, of course].

Reykjavík Energy has no guarantee for the loan except the shares in HS Orka itself – i.e. Magma Energy puts up no collateral.

The loan bears interest of 1.5 percent. [Wouldn’t you love for, say, your mortgage to bear interest of 1.5 percent?!]

The loan is in US dollars, so all exchange rate risk is taken by Reykjavík Energy. Since the krona is presently very low against the dollar and can well be expected to rise again within the next seven years, the amount of money that will eventually be paid back will be substantially lower than the amount that was lent.

The interest on the loan in case of default is somewhere around 5 percent – which is a pretty damn good interest rate all on its own. So, you know, at the end of that seven years, it might even be worthwhile for Magma Energy to default. They probably couldn’t get a much better loan deal than that anywhere else.

Meanwhile, the Mayor of Reykjavík, Hanna Birna Kristjánsdóttir, had the gall to appear on state television, look the nation in its collective eye, and declare that this deal was a very good one for the City of Reykjavík. Oh the folly!!

Bad as all that is, what is REALLY scary is this: With the sale, Magma Energy gains exclusive use of Iceland’s geothermal fields on the Reykjanes peninsula for a full 65 years, with the option of extending for another 65 years. That’s a total of 130 years that private investors have access to Iceland’s geothermal resources – resources that, incidentally, are not inexhaustible. Granted, Magma Energy must pay a fee for that use, but that fee – determined by the Independence Party in Reykjavík’s City Council – is an insulting ISK 30 million per year, roughly equivalent to renting an office space in downtown Reykjavík for the same length of time.

Once that natural resource is in private hands, it can be exploited in any way the new lease holder sees fit. Even to the point of running it dry – as things stand now, it is unclear how long a geothermal energy field will last before it dries up completely, or whether it needs to be “rested” for any length of time.

One thing is sure: the private company will almost certainly concern itself first and foremost with the bottom line. This will probably mean jacking up prices to the private [home] consumer, and it will siphen off all profits which previously went towards regional development. Consequently the region will most probably suffer and living standards decrease substantially. The new owner will have the Reykjanes peninsula in its grip.

[Both images in this post are of geothermal areas on the Reykjanes peninsula. Photo credit.]