Key Components of Legal Framework

• 1. Ownership and access to geothermal resources

• 1.1 What are the rules on ownership of geothermal resources? Can private parties hold ownership of geothermal resources?

  Ownership of natural resources, including geothermal, is governed by the Act on the survey and utilization of ground resources no. 57/1998 (“Natural Resources Act”). Under said act, ownership of resources in the ground is attached to private land. Resources in public land are the property of the State of Iceland. Resources are defined in the Natural Resources Act as “any element, compound and energy that can be extracted from the earth, whether in solid, liquid or gaseous form, regardless of the temperature at which they may be found”.

• 1.2 Who can grant access to geothermal resources, only state or also landowner?

  The National Energy Authority (“NEA”) is permitted to take the initiative in and/or give instructions for the exploration of resources in the ground anywhere in Iceland, regardless of whether the owner of the land has initiated such exploration or permitted others to initiate such exploration. In the same way, the NEA may permit other private or public parties to explore, in which case an exploration license shall be issued to such other parties. If, however, the landowner holds a valid exploration license, the NEA cannot interfere, and the landowner can either explore himself or allow third parties to explore, without interference from the NEA. 

  A landowner is required to grant exploration license holders unrestricted access to the private land involved. 

• 1.3 Is exploration/exploitation open to foreign investment?

  No, only Icelandic citizens and other Icelandic persons are permitted to own energy exploitation rights for other than domestic use of geothermal. The same applies to enterprises which produce or distribute energy. Individuals domiciled in another member state of the European Economic Area and legal persons which are domiciled in another EEA member state shall have the same right. 

• 2. Involvement of administrative bodies

• 2.1 Which administrative bodies (ministry and/or governmental agencies) are involved in the licensing of geothermal resources, including licensing and developing?

  The utilisation of resources is subject to a license from the NEA, whether it involves utilisation on private land or public land. A utilisation license permits the license holder to extract and use the resource in question during the term of the license to the extent and on the terms laid down in the Natural Resources Act and regarded necessary by the NEA.

• 2.2 Do administrative bodies assign any of their respective roles to a third party, including but not limited to a peer review, during the period of exploration, exploitation and/or production of geothermal resources?

  The NEA is responsible for the necessary licensing of geothermal resources and does not assign any of its roles to a third party. However, before the NEA issues a license for the utilization of resources in the ground the opinions of certain administrative bodies shall be gathered. This includes the opinion of the Environment Agency of Iceland, the Icelandic Institute of Natural History, the Marine and Freshwater Research Institute, if applicable, as well as the opinion of the local municipality.

• 2.3 Is there a government policy in place concerning geothermal resources? If so, what is the object and to what end?

  The Icelandic Master Plan for Nature Protection and Energy utilization (“Master Plan”) is a tool to reconcile the often competing interests of nature conservation and energy utilization on a national scale and at the earliest planning stages. The Master Plan is currently in its fourth phase, which is due to be completed in 2021.

  All work on the Master Plan focuses on one goal, to classify power plant options into energy utilization-, on hold-, or protection categories. Expert committees established under the Master Plan demarcate the area of impact for the planned power plant construction work and evaluate the value of numerous factors within the area by use of a rating system based on the conditions of the area pre-power plant.

  The Master Plan involves to a certain extent innovation and when the work on the plan began there was no fully formulated methodology available that would suit Icelandic conditions. The methodology has therefore gone through continuous development and will probably continue to undergo some adjustments, although most of these will probably be minor.

• 3. Allowed Exploitation

• 3.1 Is exploitation of resources subject to licensing? Do landowners have the right to exploit recourses without a license? If yes, to what extent?

  Yes, the exploitation of geothermal resources is subject to an “exploitation license” according to the Act on Natural Resources. 

  Landowners may however without any license utilize geothermal energy extracted from the ground on their private land for household and agricultural use, including for greenhouse cultivation, industry and cottage industry up to 3.5 MW. A landowner must notify the NEA of proposed drilling or other major undertakings for such purposes. The NEA may impose conditions on landowners as necessary for safety or technical reasons. 

• 4. Role and voice of landowner or “project affected people” in the licensing procedure and land lease agreements

• 4.1 Does the landowner or any “project affected people” have a role in the process of granting a license for:
     (i) exploration,
     (ii) exploitation, and
     (iii) power plant (generation license)?

  Yes, the NEA calls for written observations from the landowner/s when reviewing applications for a license. The NEA is not bound by the written observations of the landowner but takes them into consideration when reviewing the application. 

• 4.2 Will an opposition of a landowner or any “project affected people” have a bearing on the process of granting a license for:
     (i) exploration,
     (ii) exploitation, and
     (iii) power plant (generation license)?

  As noted before, an opposition of a landowner will not have a direct bearing on whether a license is granted. However, the opinion of the landowner is taken into consideration by the NEA when the license is granted. 

• 4.3 Are the terms of land lease agreements regulated and if so, (i) what is a general timeframe of land lease agreements and (ii) what are the obligations for decommissioning at the end of the term?

  Before a holder of an exploitation license starts extraction on a private land the license holder must reach an agreement with the landowner on compensation for the resources.

  If such agreement is not reached, the holder of the license can submit a request to the Ministry of Industries and Innovation for expropriation. The conditions for expropriation are set out in the Constitution of the Republic of Iceland, which states that expropriation can only be carried out if (a) the expropriation is required by public interest, (b) there is a clear legal basis for the expropriation, and (c) land owner is fully compensated for the expropriation.

  According to the Act on Natural Resources the direct terms of the agreements are not regulated and there are no legal obligations for decommissioning at the end of the term. 

• 5. Criteria for granting of a license

• 5.1 Which documents need to be submitted and what is the criteria for obtaining a license for:
     (i) exploration,
     (ii) exploitation, and
     (iii) power plant (generation license)?

  (i) exploration: the Natural Resources Act provides little guidance on which documents should be submitted with an application for an exploration license other than stating that the application should stipulate in a clear manner what the purpose of the application is and contain information on the proposed operation of the applicant as decided by the NEA. 

  The application shall, amongst others, include information on the following in accordance with the best practice guidelines established by the NEA: 

  • the purpose of the license;
  • detailed geographical boundaries of the requested license;
  • time schedule for the execution of exploration; 
  • report on the plausible effect the exploration will have on and around the geographical area of the license;
  • listing of all prior exploration documents for the area in question;
  • exploration schedule including dates of commencement; 
  • the different stages and conclusion; and
  • plan for drilling and other development projects including the clean-up of work areas and altered land.

  (ii) exploitation: Like in the case of an exploration license, an application for an exploitation license should state in a clear manner the purpose of the application and contain information on the proposed operation of the applicant as decided by the NEA.

  Information on the following must be contained in the application of an exploitation license in accordance with the best practice guidelines established by the NEA:

  • the purpose of the license;
  • detailed geographical boundaries of the requested license;
  • time schedule for the execution of exploration;
  • report on the plausible effect the exploration will have on and around the geographical area of the license;
  • listing of all prior exploration documents for the area in question;
  • exploration schedule including dates of commencement;
  • the different stages and conclusion;
  • plan for drilling and other development projects including the clean-up of work areas and altered land;
  • information on the provisions on the quantity and rate of utilization of the resource in question;
  • the applicant´s insurances in case of any liabilities caused by the licensee; and
  • information on environmental aspects including the final decision on behalf of the administrative body of environmental matters.

  According to the Natural Resources Act the NEA shall, when reviewing an application for exploitation, ensure that (i) the utilization of the resources is consistent with environmental considerations, (ii) the use of the resources is efficient from a macroeconomic perspective and (iii) account is taken of existing utilizations in surrounding areas. 

  (iii) power plant: An application for a power plant license shall be in writing and accompanied by the following documents: 

  • the name of the applicant, registration number, address and legal form (license to construct and operate an electric power plant can only be granted to independent legal and taxable entities); unless they have 100 kW or less installed capacity.
  • conclusions of the research made for the respective power plant;
  • a description of the power plant, including maps and plans showing the location and arrangement of facilities, key statistics on the power plant and the demarcation of the power plant area;
  • a draft timeline for the construction of the power plant, when the construction should be complete and when the operation of the power plant is to start;
  • the budget for the construction of the power plant;
  • an agreement with the transmission and/or distribution system operator;
  • information on whether an agreement has been reached with the landowner/owner of the resources with regards to compensation for the resources;
  • information on the environmental factor of the power plant and the influence on the relevant energy resource, including whether an environmental impact assessment must be carried out according to Act on Environmental Assessment no. 106/2000 (“Environmental Impact Act”); and
  • information on what other license the applicant considers relevant for this type of operation and whether the power plant is fully consistent with the existing town and country planning.   

  The NEA must take the following into consideration when granting a power plant license: 

  • power plant licenses can only be granted to independent legal and taxable entities; unless they have 100 kW or less installed capacity. 
  • a license can only be issued for the production of energy from renewable resources (certain exemptions apply for back-up power plants in isolated transmission systems); 
  • the power plant must be connected to the transmission system either directly or through a distribution system operator if the power plant is smaller than 7 MW; 
  • an environmental assessment must have been carried out; and
  • the power plant must be fully consistent with existing town and country planning as defined by the relevant municipality and whether the applicant has sufficient funding to build the power plant and necessary facilities and equipment for the power plant. 

• 6. Duration of Licenses and Renewal

• 6.1 What is the maximum duration of a license for:
     (i) exploration,
     (ii) exploitation, and
     (iii) power plant (generation license)?

  (i) exploration: The maximum duration is not limited by law. Normally exploration licenses have a duration of 1-15 years. 

  (ii) exploitation: Exploitation licenses can have a duration of up to 65 years. 

  (iii) power plant: The maximum duration of a power plant license is not limited by law. We note however that a power plant license expires 10 years following its date of issue if the license holder has not begun development at that time and 15 years after the date of the issue if a power plant has been constructed but not commenced operating.  

• 7. Terms of License

• 7.1 What are the general terms of the license for:
     (i) exploration,
     (ii) exploitation, and
     (iii) exploration drilling and other drilling,
     (iv) power plant (generation license)?

  (i) exploration and exploration: In a license for exploration and/or exploitation the following is specified: 

  • whether the articles of association of the license holder have been approved by the relevant Minister, in instances where the license holder is a legal entity;
  • duration of the license, including information on when the operation shall commence and by what time it should be completed; 
  • definition of the relevant geographical area;
  • what resources the license covers, including information on quantity and rate of utilization;
  • that the NEA approves of the preliminary drawings of any proposed facilities;
  • reporting obligations of the license holder; 
  • safety and environmental protection measures;
  • purchase of insurance for damage caused by the license holder; 
  • surveillance and cost of surveillance; 
  • payment of license fee to meet the cost of the preparation and the issue of the license; 
  • how extraction of facilities and equipment should be carried out following expiration of the license; and
  • clean-up of work areas and land that has been altered in the course of exploration and/or exploitation.

  (ii) power plant: In a license for power plants the following information is specified: 

  • the size of the power plant and definition of the relevant geographical area;
  • information on when the operation shall commence and by what time it should be completed; 
  • reporting obligations imposed on the license holder with regards to the NEA and the transmission system operator, to the extent necessary for those parties to perform the respective roles;
  • safety and environmental protection measures;
  • conditions relating to the technical and financial capacity of the license holder; 
  • disposal of facilities and equipment when their use is discontinued; and
  • other matters pertaining to the conditions of the license and the obligations of the license holder. 

• 7.2 Are exploration license holders granted pre-emptive rights with regards to exploitation or do exploration licenses automatically convert into exploitation licenses if the resource has been substantiated? If so, are there any conditions?

  A landowner has pre-emptive rights to an exploitation license. 

  Generally, an exploration license does not grant the holder pre-emptive rights nor does it automatically convert into an exploitation license. We note however that holders of exploration license for a district heating utility hold pre-emptive rights with regards to exploitation license for up to 2 years after the exploration license terminates.   

  A landowner shall previously have been granted an exploration license in order to hold pre-emptive rights to an exploitation license.

• 7.3 Is an exploitation license included in a power plant license or are these licenses separate?

  Exploitation licenses are granted on the basis of the Natural Resources Act with the conditions related thereto such as regarding sustainable use of the resource. Power plant licenses are granted separately on the basis of the Electricity Act.           

• 7.4 Are there any encumbrances in place for the licence holder to keep a license, once granted?

  As stated above the utilization of resources inside the ground is subject to a license from the NEA. Before the holder of a utilization license begins extraction on private land the holder needs to reach an agreement with the landowner on compensation for the resource or obtain permission for expropriation and request assessment. In the event of neither an agreement made on compensation nor expropriation requested within 60 days immediately following the date of issue of an utilization license, the license shall be cancelled. The same applies if utilization based on the license has not started within three years of the issuance of the license. This also applies to the utilization of resources inside public land.

  The NEA may revoke licenses if their conditions are not fulfilled. If a license holder does not comply with the conditions established in the license or contracts relating to the license, the NEA shall issue a written warning and provide time limits for rectification. Should the license holder not comply with such a warning the license shall be revoked.

• 8. Termination and revision of licenses

• 8.1 What actions by the license holder would warrant revision of exploration-, exploitation- and power plant (generation) licenses?

  (i) exploration license: If environmental objectives are not met and reasoned with documents, in accordance to the Act on control of Groundwater no. 15/2011 (“Groundwater Act”), an exploration license can be revised.

  (ii) exploitation license: exploitation licenses can include provisions on revision after a given time is passed. If environmental objectives are not met and reasoned with documents, in accordance to the Groundwater Act, an exploration license can be revised.

  (iii) power plant license: the NEA can include a provision in a license regarding the revision of a license in case more than one producers intend to produce electricity in the same geographical area, in order to secure the overall efficiency of the area in question. The NEA can also include a provision regarding the revision of a license on the grounds that terms of conditions have changed substantially.  If environmental objectives are not met and reasoned with documents in accordance to the Groundwater Act, an exploration license can be revised.

• 8.2 Does the license granting authority license have the power to revoke or terminate licenses? If yes, what actions of the license holder would warrant the termination of the license?
     (i) exploration license,
     (ii) exploitation license,
     (iii) power plant (generation license)?

  (i) exploration license: According to the Natural Resources Act, an exploration license can be revoked if any of the conditions in an exploration license are not fulfilled or the contracts relating to the license. A written warning shall be issued providing time limits for rectification. The license shall be revoked in case the license holder does not comply with the terms contained in such warning. 

  (ii) exploitation license: If a license holder does not reach an agreement with the owner of the land and/or the resource for compensation or requests expropriation to the relevant Ministry within 60 days from the date of issue of the license, it shall be revoked. Also, according to the Natural Resources Act, an exploration license can be revoked if any of the conditions in an exploration license are not fulfilled or the contracts relating to the license. A written warning shall be issued providing time limits for rectification. In case of the license holder does not comply with the terms of such warning, the license shall be revoked. 

  (iii) power plant license: if a license holder does not reach an agreement with the owner of the land and/or the resource for compensation or requests expropriation to the relevant Ministry within 90 days from the date of issue of the license, it shall be revoked. If construction has not started within 10 years from the date of issue of the license, it will be revoked. Also, if production of electricity has not started within 15 years from the date of issue of the license, it will be revoked. According to the Electricity Act, a power plant license can also be revoked if any of the conditions in a power plant license are not fulfilled or the contracts relating to the license. A written warning shall be issued providing time limits for rectification. In case of the license holder not complying with the terms of such warning, the license shall be revoked.

• 8.3 Can the license granting authority set forth conditions into licenses which provide for (i) stricter terms and conditions of licensees or (ii) more lenient terms and conditions for licensees, when such terms and conditions (whether stricter or more lenient) are not otherwise provided for by law?

  The license granting authority, the NEA, can put forth stricter terms and conditions in order to guarantee that environmental and socio-economical aspects are respected as well as the exploitation already begun in the geographical area. The authority cannot put forth more lenient terms and conditions than the ones the law provides for.

• 8.4 What remedies does the License granting authority have in order to enforce compliance to the terms and conditions of a license, other than by revoking the license?

  The NEA can only put forth a written warning if conditions are not complied with prior to a revocation of a license in the case of exploration and exploitation licenses. In the case of power plant licenses, the NEA can put forth daily fines ranging from 10,000-500,000 ISK in relation to the severity of the fault. The NEA can put forth a written warning and a moderate time limit for amendment. in the case of non-compliance to the written warning and request for amendment the NEA can revoke the license or alter it. If the fault is considered to be severe, the NEA can revoke the license without warning. 

• 9. Regulatory and information obligation

• 9.1 Briefly outline the surveillance carried out by the regulatory authorities during the license period, e.g. with regards to reporting duties and/or on-site visits.

  The monitoring of exploration and exploitation licenses is based on the Natural Resources Act. The purpose of monitoring of exploration and exploitation licenses is to secure the sustainable utilization of the natural resources. Also, to make sure that the conduct of the licensee is in such manner that the resources are not contaminated or limited in any way for future use. 

  The NEA is responsible for monitoring exploration and exploitation based on granted licenses. The NEA reports to the Ministry on the execution of search, exploration and exploitation of natural resources. The protection and monitoring of exploration and exploitation areas is also subject to the Nature Conservation Act. The monitoring is largely conducted by collecting the data to be delivered by the licensee. When there is doubt or if the licensee has been in breach of the conditions in the license, NEA employees visit the sites for inspections. There are no regular onsite inspections or visits. 

  Monitoring of power plant licenses is based on the Electricity Act no. 2003/65 (“Electricity Act”). The purpose of the monitoring is the same as mentioned above, to secure the sustainable utilization of the natural resources and to make sure that the conduct of the licensee is in such a manner that the resources are not contaminated or limited in any way for future use.  The monitoring shall make sure that the licensees fulfil all the conditions according to the Electricity Act. The NEA shall also cooperate with the Competition Authorities regarding the production of electricity in vertically integrated companies. The NEA may appoint an accredited inspection agency to monitor licensees regarding the conditions under the Act on Measures, Weights and Accreditations no. 62/2005. 

  The NEA can request all information and data needed for the monitoring of issued power plant licenses. The NEA can also stipulate that these parties shall regularly inform the NEA of matters which are important to the monitoring. Furthermore, it can request parties subject to regulatory monitoring to establish internal controls pursuant to requirements established by the NEA. 

  The NEA may request information or data from other public authorities for the purpose of its regulatory activities. 

  The NEA performs necessary inspections of the places of business of parties and can seize documents when there is a strong reason to believe that the provisions of the Electricity Act and other regulations or conditions of the license have been violated. 

• 9.2 Which information is required to be submitted to regulatory authorities during the license period for the holder of a license for:
     (i) exploration,
     (ii) exploitation,
     (iii) power plant (generation license)?

  (i) exploration: The holder of an exploration license shall no later than May 1st every year and at the end of the license term submit a report with all the results of the exploration as well as information on the nature and size of the resource. The extent of information to be delivered in is based on the exploration schedule which sets the frame for information due to be handed in. 

  If a license holder or landowner drills holes, he shall keep a diary describing the location of the hole, sedimentary stratas, type and depth, when water enters the hole, temperature and other related information. License holders shall hand over a copy of the diary within a month from the drilling of the hole. The NEA can demand that specimens of rock and soil from the drilling be preserved. 

  (ii) exploitation: License holders shall submit to the NEA a report no later than May 1st every year containing information regarding the total quantity and estimated value of the extracted resource and other information indicating the situation of the resource. The license holders shall make sure that the know-how of the geothermal resource and experience gathered during its exploitation is accessible and transparent both to the public and for academic purposes.

  If a license holder or landowner drills holes, he shall keep a diary describing the location of the hole, sedimentary stratas, type and depth, when water enters the hole, temperature and other related information. License holders shall hand over a copy of the diary within a month from the drilling of the hole. The NEA can demand that specimens of rock and soil from the drilling be preserved.  

  Information on extraction of energy and mass, release of liquid and gases, pressure draw down, chemical changes and earthquake measurements shall be public within a year. Information and data to be handed in regarding the nature and size of the natural resource and the response of the geothermal system to production shall be made public within 5 years from the making of the data. If a licensee is of the opinion that it is important to prolong the secrecy of the data on account of business interests or competition interests, it can be requested to the NEA with reasoning, for 5 years at a time.  Data to be handed in is the following: 

  • total monthly quantity of geothermal liquid extracted from the geothermal system (in kg) and the extraction per year (in Tg);
  • total monthly quantity of geothermal liquid extracted from each borehole on the geothermal area (in kg);
  • total monthly quantity of liquid drawn down into the geothermal system (in kg) and the draw down per year (in Tg);
  • monthly reading of the temperature of water drawn down into the geothermal system (in ˚C);
  • monthly measurements of the water level of the boreholes on the geothermal area and can be measured (in m);
  • measurements of pressure or pressure draw down into the geothermal system (in MPa/bar);
  • measurements made on the warmth of the borehole liquid from each borehole exploited on the geothermal area in question (in kJ/kg) and the relevant data supporting it;
  • primary geothermal energy utilization from the geothermal well (in PJ/a). Primary geothermal energy is the energy that is released from the geothermal liquid on its way from the original state to the referred state at 15˚C at 1 bara;
  • primary geothermal utilization of geothermal minus the primary energy of geothermal liquid drawn down into the same geothermal well within the same period;
  • heat and pressure measurements in boreholes on the geothermal area;
  • chemical analysis on geothermal water (and steam where applicable);
  • results of simulator calculations made for the geothermal system; 
  • measurements made to monitor the changes in the geothermal system; 
  • information on new boreholes on the exploitation area; and
  • results from new boreholes regarding the nature of the geothermal system. 

  (iii) power plant: The NEA can request all information and data necessary for the monitoring of the licensee. Data to be handed in is the following: 

  • total monthly quantity of geothermal liquid extracted from the geothermal system (in kg) and the extraction per year (in Tg);
  • total monthly quantity of geothermal liquid extracted from each borehole on the geothermal area (in kg);
  • total monthly quantity of liquid drawn down into the geothermal system (in kg) and the draw down per year (in Tg);
  • monthly reading of the temperature of water drawn down into the geothermal system (in ˚C);
  • monthly measurements of the water level of the boreholes on the geothermal area and can be measured (in m);
  • measurements of pressure or pressure draw down into the geothermal system (in MPa/bar);
  • measurements made on the warmth of the borehole liquid from each borehole exploited on the geothermal area in question (in kJ/kg) and the relevant data supporting it;
  • primary geothermal energy utilization from the geothermal well (in PJ/a). Primary geothermal energy is the energy that is released from the geothermal liquid on its way from the original state to the referred state at 15˚C at 1 bara;
  • primary geothermal utilization of geothermal minus the primary energy of geothermal liquid drawn down into the same geothermal well within the same period;
  • heat and pressure measurements in boreholes on the geothermal area;
  • chemical analysis on geothermal water (and steam where applicable);
  • results of simulator calculations made for the geothermal system; 
  • measurements made to monitor the changes in the geothermal system; 
  • information on new boreholes on the exploitation area; and
  • results from new boreholes regarding the nature of the geothermal system. 

• 10. Power purchase agreements

• 10.1 Are general terms and conditions, such as duration of Power Purchase Agreements regulated? If no, are there any soft law or general recommendations in place in your jurisdiction?

  General terms and conditions of Power Purchase Agreements (“PPA”) are not regulated by Icelandic law. We note however that if the power producer is owned by the Icelandic state and/or municipalities the agreement is subject to notification and approval by the EFTA Surveillance Authority (“ESA”) in order to ensure that the agreement does not entail state aid cf. Article 61 of the EEA Agreement. In the absence of a market price for electricity to power intensive industries in Iceland, the basis of ESA´s examination has been to assess whether the PPA made by a publicly owned company is made on terms acceptable to a private market investor and whether the sale of electricity would be expected to be sufficiently profitable for a private operator. In instances where the power comes from existing facilities ESA has examined whether the price set out in the agreement is acceptable with reference to the price set out in other existing power contracts.  Where the power comes from a new facility the basis for ESA´s examination is whether the power producer obtains acceptable return on the new investment (the power plant).

• 10.2 What is the permitted or general duration of PPA's?

  Duration of PPA´s is not regulated by law. Duration of existing PPA´s approved by ESA ranges from 15-40 years.

  Duration of wholesale agreements to retail companies is usually from 5-10 years.  

• 10.3 Are public and/or national regulatory authorities involved in any way in forming the terms of PPA's, either directly or indirectly?

  ESA is indirectly involved if the power producer is a publicly owned company as explained above. The NEA is however in no way involved in the forming the terms of PPA´s.

• 11. Incentives

• 11.1 Is there any governmental support or funding available for exploration activities?

  The National Energy Fund is administered by the NEA and owned by the Icelandic state. The operations of the National Energy Fund are based on rules no. 654/2016 and the fund grants subsidies for measures that aim to reduce the use of fossil fuels and the exploitation of domestic energy sources instead of fossil fuels. Icelandic citizens and other persons holding the right to produce energy from domestic resources can apply but grants shall not exceed 50% of the estimated costs of a given project. 

  The National Energy Fund grants loans to smaller municipalities and individuals for geothermal drilling as well as grants to individuals and companies to switch from subsidized electricity to geothermal heating.

  Furthermore, the Energy Research Fund awards grants to students, university research projects, institutions, companies and individuals conducting research in the field of environmental and energy issues in Iceland.

• 11.2 Are there any incentives offered by the government or local authorities for utilization of geothermal energy? If yes, in what form (e.g. tax and/or feed-in tariffs) and what are the maximum amounts permitted?

  No. We note however that foreign investors can apply for an investment agreement with the Icelandic Government under Act on incentives for initial investment in Iceland no. 41/2015. It has been common practice in recent years that foreign investors making large investments in Iceland have entered into an investment agreement prior to the PPA. Approved investment qualifications will qualify for incentives in the form of derogations from taxes and charges, a fixed income tax rate for a period of 10 years as well as exemptions from customs and excise duties on importation. The incentives are thus provided for the investment and not through the PPA. 

• 11.3 What requirements must the project fulfil in order to be eligible to receive such incentives?

  To qualify for an investment agreement with the Icelandic Government a number of conditions must be meet, such as that a minimum of 75% of the investment cost must be financed without state aid (thereof 20% of that proportion must be financed with own equity of the party applying for incentives) and the annual turnover of the prospective investment project must be a minimum of ISK 300 million or create a minimum of 20 new jobs within the first 2 years. The investment shall be in operation in a given area in Iceland for at least 10 years

• 11.4 Are the incentives subject to recovery in any instances?

  According to Act on incentives for initial investment in Iceland no. 41/2015, investment agreements made with the Icelandic Government shall include provisions regarding recovery. The incentive can be revoked if the investor deliberately provided false information or concealed information that would have influenced the incentive. 

• 11.5 In the case of production of electricity from geothermal, are there any incentives/rewards for utilizing the geothermal energy for other than producing electricity, such as waste heat?

  N/A 

• 12. Participation and authority of indigenous people

• 12.1 Are the rights of indigenous peoples in connection to geothermal resources regulated?

  N/A 

• 12.2 To what extent are indigenous municipalities involved in the process of granting licenses?

  N/A 

• 13. Alteration of law and regulation

• 13.1 What are the principles regarding retroactivity of laws and regulations, can changes in such rules affect license holders?

  It is a general principle under Icelandic law that laws should not be retroactive and should accordingly not affect licenses already issued.

• 14. Taxation and capital controls

• 14.1 How does taxation in the sector affect license holders?

  License holders are taxed in the same manner as other legal entities in Iceland in accordance with the Act on Income Tax no. 90/2003. 

• 14.2 Please describe and provide information on the applicable tax rate and resource tax.

  Companies with limited liability are subject to 20% income tax and partnerships and other company forms subject to 36% income tax. 

• 14.3 Is the sale of energy subject to VAT?

  Yes, the VAT on the sale of electricity is 24% and 11% for electricity used to heating houses.

• 14.4 Is VAT refundable and what is the procedure for VAT refunding?

  VAT is not refundable as concerns the sale of energy.

• 14.5 Is the flow of foreign capital restricted with capital controls? If so, briefly describe the nature of such controls.

  The capital controls were introduced in Iceland in November 2008, after Iceland was struck by an unusually severe banking crisis in October 2008. 

  With the Rules on Foreign Exchange, no. 200/2017, which took effect on 14 March 2017, most restrictions on foreign exchange transactions and cross-border movement of domestic and foreign currency were lifted. Since then, households and businesses have not been affected by the restrictions provided for under the Act. Restrictions on specified transactions are still in place, however, with the aim of reducing the likelihood of carry trade in connection with investments in connection with new inflows of foreign currency. 

  Restrictions currently in place include cross-border movement of domestic currency in certain cases, derivative trading for purposes other than hedging, foreign exchange transactions without the intermediation of a financial undertaking, cross-border lending and borrowing in certain cases and settlement of transaction with financial instruments in certain cases. 

• 15. Environmental Impact Assessment

• 15.1 What demands are there regarding environmental impact assessment prior to exploration, exploitation and or production of geothermal energy?

   Utilization of geothermal energy is subject to environmental impact assessment when such utilization could have significant environmental effects due to its scope, nature or location. Environmental impact assessment is governed by the Environmental Impact Act, nr. 106/2000.  A project developer shall notify the National Planning Agency (“NPA”) prior to utilizing geothermal energy and submit the following documents:

  • description of the project (scope and main steps);
  • information on the geographical area of the proposed project and proposed facilities;
  • information on how the proposed project falls within the plan, proposed facilities and general information on how the project fits within the existing town and country planning;
  • description of local conditions, terrain, vegetation and land use and whether the proposed project is near or on protected areas; and
  • description of which parts of the project may have an impact on the environment.

  The NPA shall make a decision on whether a project is subject to environmental impact assessment within four weeks.

  If the proposed project is subject to environmental impact assessment, the developer of the project shall submit a scoping document proposal to the NPA as early as possible on the planning stage. In the proposal, the project developer shall provide information on the following:

  • the project;
  • the project site and alternatives which could be considered and provide information on the planning of the project site;
  • how the project will comply with development plans;
  • what aspects of the project and of the environment should be emphasised;
  • description of data already available; and
  • a plan for making information available and for public consultation.

  The scoping document proposal shall be made known to consultation bodies and the general public as well as the NPA. The NPA shall make a decision on the developer’s proposal within four weeks of its receipt, having received the opinion of the licensors and other parties, as appropriate.

  Once this procedure is done and a project developer decides to engage in the project, a report on the environmental impact assessment must be complied. The substance of the report shall be consistent with the scoping document. The report shall specify the effects, cumulative and synergic, direct and indirect, which the proposed project and concomitant activities may have on the environment and the interaction of individual environmental factors. It shall explain upon what premises the assessment is based. It shall describe the aspects of the proposed project which are regarded as most likely to have an impact upon the environment, including its scale, design and location, compliance with development plans, proposed mitigating measures and proposals for environmental monitoring where appropriate. The main alternatives considered, and their environmental effects, shall always be explained and compared. A non-technical summary shall be prepared describing the report’s main findings. The report’s findings shall include classification and criteria for the environmental impact of individual aspects of the project, based upon guidelines issued by the NPA.

  Within four weeks of receiving the environmental impact statement, the NPA shall deliver a reasoned opinion on whether the report meets the criteria of the Environmental Impact Act and whether the environmental impact is satisfactorily described. The NPA’s opinion shall explain the main premises of the assessment, including the quality of the data on which the assessment is based, and its conclusions.

• 16. Other regulatory requirements or permits needed

• 16.1 What other licenses are needed in order to commence exploration, exploitation and/or production with geothermal energy?

  All major projects that have potential effect on the environment and may change its appearance are subject to a development license from the relevant municipality subject to the Act on Planning no. 123/2010. Further, all power plants must apply for a building permit from the NPA in accordance with the Act on Constructions no. 160/2002.

  We note also that power plant options, larger than 10 MW, that fall in the energy utilization category of the Master Plan for Nature Protection and Energy Utilization (“Master Plan”) can be used for generation of electricity. The Master Plan only handles power plant options larger than 10MW. The Master Plan is established with Act on the Plan for nature protection and energy utilization no. 48/2011 (“Master Plan Act”). The objective of the Master Plan is to bridge opposing views and interest regarding land use in areas rich in energy resources in Iceland. The Master Plan Act provides for a process whereby power plant options are categorized into a) energy utilization category, b) on hold category and c) protection category depending on a number of factors. The Master Plan shall be submitted in the form of a parliamentary resolution for an approval by the Icelandic Parliament at minimum every four years.

• 16.2 Which other regulatory requirements are in place, including but not limited to the need to provide insurances or guarantees, in connection with the commencing or continuing of exploration, exploitation and/or production of geothermal energy?

  Please find a detailed summary of regulatory requirements in question 4.1., including but not limited to, the applicant´s insurances in case of any liabilities caused by the licensee. 

• 17. Legislation

• 17.1 Have there been any recent amendments to the legislation for licensing, exploration and/or exploitation of geothermal energy in the last 15 years? If so, have these amendments made a noticeable impact on the increase or decrease of production of electricity from geothermal resources?

  The Icelandic legislation has for most parts remained the same since 1998 when the Natural Resources Act entered into force, with a number of smaller amendments taking place over the years. 

• 17.2 Have any other factors made a strong impact on the production of electricity from geothermal in the last 15 years? If so, for what reasons.

  he Master Plan for Nature Protection and Energy Utilization is a tool designed to bridge opposing views and interests regarding land use in areas rich in energy resources in Iceland. The Master Plan is regulated by Act No. 48 from 2011 on the Plan for nature protection and energy utilisation that was passed unanimously by the Alþingi on 16 May 2011. According to the Master Plan Act, every phase of the Master Plan concludes with the expert committee submitting its recommendations for categorization of power options to the Minister for the Environment and Natural Resources. The minister presents those as a proposal for a parliamentary resolution to the Icelandic Parliament in collaboration with the Minister for Industries and Innovation. Once Parliament has passed the proposal, the parliamentary resolution on the categorization of power options becomes legally binding. 

• 17.3 Is there a specific legislation in place regarding geothermal extraction?

  Natural Resources Act applies to geothermal extraction. 

• 18. Alternative or cascade use of resources

• 18.1 When applying for a licence, is it possible to apply for one license or authorization, which provides for multiple or cascade use of the resource, e.g. direct and indirect utilization (generation of electricity, district heating and cooling)?

  According to Article 6 of Natural Resources Act the utilisation of resources in the ground is subject to a licence from the NEA, whether it involves utilisation on private land or public land, with some exceptions provided for in the Act. A utilisation licence permits the licence holder to extract and use the resource in question during the term of the licence in the quantity and on the terms which are laid down in this Act and which the NEA regards as necessary. Accordingly, only the utilisation previously agreed upon by the NEA is allowed. 

  According to Article 8 of the Natural Resources Act it is permitted, without a licence, tosurvey and utilise on private land rocks, stones, gravel, clay, sand, pumice, tephra and other volcanic and mineral material, as well as soil, peat and brown coal.

• 18.2 Could mineral extraction from geothermal fluid be included under such cascade usage clauses?

  N/A. 

• 18.3 What possibilities does a license holder have to expand operation in order to seek further revenue based on secondary resources?

  N/A. 

• 19. Water rights

• 19.1 Once an exploitation license has been granted for the operation of a power plant, along with access to fresh water for power plant operation, can the licence allow for sales and distribution of fresh water to local communities?

  A landowner may, wihtout a license, utilise groundwater on his or her private land for household and agricultural use, up to 70 litres per second. However, landowners must notify the Energy Authority of proposed drilling and other major undertaking for such purposes. 

  A municipality shall have pre-emtive rights to utilisation licence for groundwater within the boundaries of the municipality for the needs of water utility operated in the municipality.