Reykjavík Grapevine - 15.07.2011, Blaðsíða 24

24
The Reykjavík Grapevine
Issue 10 — 2011
From the top f loor of Reykjavík En-ergy headquarters, an expansive
view of Mount Hengill can be observed
on the eastern horizon. The mountain
range forms part of the Mid-Atlantic
Ridge as it cuts through Iceland and
divides the country between the North
American and Eurasian continental
plates. It is one of the most geologically
active areas in the world.
Two thick white clouds of steam can
be seen rising up from the mountain
where Reykjavík Energy operates the
Nesjavellir and Hellishei!i geothermal
power plants. Together the plants pro-
vide hot water and electricity to more
than half of Iceland’s population of
318.452.
Over the last half century, Iceland
has successfully established a name
for itself as a world-renowned leader in
the field of geothermal energy, using it
to heat 90% of the country’s buildings
and nearly all 136 swimming pools in
the country. As Iceland’s President Óla-
fur Ragnar Grímsson said at a geother-
mal conference last year, “We were very
fortunate that while most of the world
forgot about the geothermal sector, we
had visionaries in Iceland. Not just sci-
entists and technical experts, but also
local councillors in towns and cities
who saw the opportunities in this area.”
The President is well known today
for having travelled the world during
Iceland’s boom years giving lauda-
tory speeches about the nation’s val-
iant bankers who led the country to
economic prosperity, to the extent that
some have called it cheerleading. How-
ever, since the crash he has abandoned
the bankers, and now travels the world
singing songs of praise for Iceland’s
geothermal “visionaries,” who, instead
of the bankers, helped “transform a
country of farmers and fishermen into
one of the most prosperous welfare
economies in the world.”
The story goes, as he told it in Xia-
men, China last year, “In my youth,
over 80% of Iceland’s energy needs
came from fossil fuel, imported coal
and oil. We were a poor nation, primar-
ily of farmers and fishermen, classified
by the UNDP as a developing country
right down to the 1970s. Now, despite
the effects of the present financial cri-
sis, we are among the most prosperous
nations in the world, largely due to the
transformation which made our elec-
tricity production and space heating
based 100% on clean energy.”
He emphasises the last point that
Iceland’s geothermal energy business
has served to offset the effects of the
economic crisis: “Yes, indeed,” he said
in Abu Dhabi, Bali, and Shanghai last
year, and again in New York this year,
“geothermal energy has helped Iceland
to survive the recent banking shock
[…].”
While the story that the President
tells about Iceland’s transformation
to geothermal energy is indeed mar-
vellous, and it is true that the cost of
heating and electricity is nowhere in
Europe cheaper, one would have to be
wearing rose-tinted glasses to see Reyk-
javík’s geothermal energy business
as a saviour in the crisis. Upon closer
inspection it appears that the country’s
largest multi-utility geothermal energy
company, which claims to operate “the
largest and most sophisticated district
heating system in the world,” has only
driven the nation into deeper water.
A FINANCIAL BASKETCASE IS
UNVEILED
When The Best Party came to power in
Reykjavík after the May 2010 elections,
the comedian-turned-Mayor Jón Gnarr
said he was surprised to learn that
Reykjavík Energy was in such a hor-
rible financial state. “I had always had
the impression that it was the wealth
in the city,” he said of the company that
is 94% owned by the city Reykjavík
and exploits what is arguably Iceland’s
greatest resource.
Yet despite the abundance of re-
sources and a steady demand for its
services, Reykjavík Energy managed
to rack up a 233 billion ISK debt (2 bil-
lion USD or 1.4 billion Euros), which is
nearly four times the city’s annual bud-
get of 60 billion ISK. What’s more, 200
billion ISK (1.7 billion USD or 1.2 bil-
lion Euros) of this debt is in the form of
foreign currency loans, which f luctuate
at the whim of the króna.
“For months I found myself in daily
meetings directly or indirectly related to
Reykjavík Energy,” Jón Gnarr told me,
admitting that it grew very tiresome.
It was around that time, on Septem-
ber 25, 2010 at 11:43 pm, that he wrote
the Facebook status update that would
come back to haunt him in the form of
political ammunition six months later
[our translation]: “Reykjavík Energy is
bankrupt. The city is in bad shape and
its revenue has decreased. What should
be done? Cut backs? Price increases?
Streamlining? Where and how much?
Meetings, meetings, meetings…”
Aiming to clean up the mess, Jón
Gnarr’s team brought in Haraldur
Flosi Tryggvason as Chairman of the
Board and made him a full-time execu-
tive director with the gargantuan task
of getting the company back on track.
The initial ‘rescue operations’ included
orchestrating a mass layoff of 65 em-
ployees in October 2010 and raising the
price of heating and electricity by 27%
between November 2010 and January
of this year, to little fanfare from citi-
zens and employees alike.
Though the decision to hire Haral-
dur Flosi was initially criticised be-
cause he had been the head attorney at
L"sing, a company that guaranteed the
now-deemed illegal foreign currency
loans to individuals, he is also one of
the few Chairmen in the history of
Reykjavík Energy to have a background
in business. “We have made an effort to
hire people based on professional train-
ing and experience rather than political
affiliation,” Jón Gnarr told me.
In February, Haraldur Flosi had
been noticeably cautious when he ex-
plained to me how the company man-
aged to accumulate such colossal debt.
“If the crash had not happened, it
wouldn’t have been nearly as bad,” he
said. “When the financial crisis hit,
Reykjavík Energy was in a huge expan-
sion period, so it was quite exposed
to the crash, and because loans were
mostly financed in foreign currency,
the company’s debt about doubled over-
night.”
The company chose foreign loans
with a favourable interest rate of 1–2%
over domestic loans with an interest
rate of 10–15%. Had the company taken
domestic loans at the higher interest
rate, the debt would not have doubled in
the crash, but it would nonetheless have
been equally large today, Reykjavík En-
ergy PR Manager Eiríkur Hjálmarsson
would later tell me.
While this suggests the company's
massive debt cannot be wholly ex-
plained by the crash, Haraldur Flosi
was not interested in pointing any fin-
gers. He admitted that the company
was perhaps over-optimistic in its in-
vestments, but yet his explanations
were mostly framed by the economic
crash.
“The biggest problem today is get-
ting financing,” he said. “Foreigners
have become sceptical of the situation
here in Iceland. It’s more difficult to get
access to money and it’s more expen-
sive,” he told me, adding diplomatically,
“but I think it’s the same everywhere.
Many companies abroad are also strug-
gling to adjust to this new reality. This
is in a nutshell what happened.”
Less than one month later, this
problem became more evident. Unable
to secure loans from Deutsche Bank,
Barclays, Citibank, Council of Europe
Development Bank, European Invest-
ment Bank and Nordic Investment
Bank, Reykjavík Energy announced on
March 29 that it would be dipping 12
billion ISK deep into the city’s reserve
fund, which had been set aside for a
situation like this.
At the same time, the company an-
nounced that it would cease paying the
city its annual 800 plus million ISK in
dividends, it would continue raising
the price of hot water and electricity,
it would lay off another 90 employees,
and it would begin selling off all assets
unrelated to its core business. These
assets include everything from a fibre
optics business to The Pearl, a Reykja-
vík monument. Russian investors with
ties to Ásgeir #ór Daví!sson from the
sleazy Kópavogur strip club Goldfinger
have already made an offer on Perlan,
expressing an interest in turning the
omnipresent monument into a f lashy
casino.
THE BEST PARTY TAKES THE
RAP
Despite the fact the Reykjavík Energy
had been heavily in debt for years, little
had been said about it. “The state of the
company should have been pretty clear
for some time now,” Jón Gnarr told me,
“but for some reason, while Icesave fea-
tured heavily in the public discourse,
nobody talked about the state of Reyk-
javík Energy though the company debt
is four to five times the Icesave debt.”
As soon as news of the emergency
loan from the city broke, however, a
blame game ensued. Fingers were
pointed in all directions, but despite
the fact that The Best Party is the only
political party in Reykjavík that did not
have a hand in running the company
during the decade that it accumulated
its monstrous debt, the fingers pointed
were generally in the direction of Jón
Gnarr and the new Reykjavík Energy
directors.
It started on March 27 with an ar-
ticle on news website Vísir.is blaming
Jón Gnarr and the new directors for
making it difficult for the company to
get its loans refinanced. As seems cus-
tomary in the Icelandic media, Vísir
based the entire story on an anonymous
source: “According to our sources from
the financial world, getting loans refi-
nanced has not been going well, due to,
among other reasons, comments that
have been made by the directors and
Jón Gnarr.”
Specifically, the article said, ac-
cording to their sources, investors had
received a translation of one of Jón
Gnarr’s Facebook statuses: “Reykjavík
Energy is bankrupt.” The status, which
has since been deleted (and is quoted
above in its entirety), was posted in
September 2010, six months prior to
the Vísir story.
This continued to be a point of con-
tention for others, like Independence
Party City Councillor and former May-
or of Reykjavík Hanna Birna Kristjáns-
dóttir, who publicly criticised Jón Gnarr
for his comments about the company
being bankrupt. She also disagreed
with the idea of phrasing the city’s 12
billion ISK loan as a city bailout, which
implied bankruptcy. This is despite
Reykjavík Energy CEO Bjarni Bjarnar-
son claiming that the company would
not have been able to continue paying
employee salaries without the loan.
Then, on March 30, Haraldur Flosi’s
predecessor as Chairman, Gu!laugur
Gylfi Sverrisson, wrote a letter to the
Overrun by Viking ambition, Reykjavík Energy built headquarters
fit for Darth Vader, expanded ambitiously, dabbled in tiger prawn
farming and flax seed production, went into the fibre optics busi-
ness, invested in a new geothermal plant, speculated in places
like Djibouti, and finally managed to run itself so completely into
the ground that foreign investors will no longer offer the company
loans.
In hopes of rescuing its multi-utility service company from the
depths of abyss, the city of Reykjavík stepped in this March with
a 12 billion ISK (105 million USD) loan, which is nearly its entire
reserve fund set aside for the company, but still only a fraction of
the company’s massive foreign debt of 200 billion ISK (1.7 billion
USD).
With thousands of captive lifetime subscribers and a means of
producing energy at very little cost, the company had all the mak-
ings of a cash cow. So what happened to Reykjavík Energy, an en-
tity that less than a decade ago was a perfectly viable, municipally
owned company providing the city with basic utilities: cold water,
hot water and electricity?
REYKJAVÍK ENERGY IN DEEP WATER
The untold story of geothermal energy in Iceland
By Anna Andersen Photos by Alísa Kalyanova
Featuring:
Ólafur Ragnar
Grímsson,
President of Iceland
Anna Skúladóttir,
former CFO
Stefán Pálsson,
historian and former
museum curator
Alfre! "orsteinsson,
first Chairman of the
Board
Svandís Svavars-
dóttir, Minister for
the Environment
and former Board
member
Kjartan Magnússon,
former Chairman of
the Board
Jón Gnarr, Mayor of
Reykjavík
Haraldur Flosi Tryg-
gvasson, current
Chairman of the
Board
Gu!mundur
"óroddsson, first
CEO of Reykjavík
Energy
Haukur Leósson,
former Chairman of
the Board
“Reykjavík Energy is bankrupt. The city
is in bad shape and its revenue has decreased.
What should be done? Cut backs? Price
increases? Streamlining? Where and how
much? Meetings, meetings, meetings…”