Magma Energy’s HS Orka deal sees strong political debate

Alexander Richter 26 Aug 2009

The possible acquisition of a 32% stake of Magma Energy Corp. in the Icelandic geothermal power player HS Orka sees a strong political opposition, with a decision to be made until August 31, 2009.

The sale of the 32% stake of Reykjavik Energy, the utility of Iceland’s capital city Reykjavik, in HS Orka to Magma Energy sees a strong political debate.

As a background, it might be interesting to know that HS Orka (previously the combined utility of Hitaveita Sudurnesja) was the first utility in Iceland to be privatized in 2007, with Geysir Green Energy (backed then by Glitnir Bank, now Islandsbanki) buying a large stake in it. As part of that process the foundation was laid to secure access rights and splitting the utilization of the resource, the generation of power and the actual distribution. It seems like that everywhere in the world people are afraid of privatizing either parts or the whole energy sector.

But as part of the privatization process, Hitaveita Sudurnesja was split into a generation part (HS Orka) and a distribution part (HS Veita), with an equal ownership in both by the municipalities and Geysir Green Energy. Then earlier this year, the generation part, HS Orka, was further privatized and the majority in the company is now held by Geysir Green Energy, with a 10% stake by Magma Energy Corp. and 32% by Reykjavik Energy. While the latter is a more complicated story, in short based on a ruling by the competition authorities in the country, that share needs to be sold. The reason is that no utility or generation company is supposed to own as much as they would through the shares held in HS Orka. As of today Reykjavik Energy is the largest geothermal player in Iceland with around 320 MW installed power generation capacity, plus additional district heating capacity.

The distribution part of Hitaveita Sudurnesja, called HS Veita, is now majority owned by the local municipality, Reykjanesbaer.

So far so good. Now as part of the deal between HS Orka, the municipality and Geysir Green Energy, the rights to use the resources were leased to HS Orka on a long term basis, as far as I remember beyond 50 years.

The whole process of the initial privatization already had seen a strong political debate, despite the – from my own perspective – clear set-up and split of generation and distribution, which guarantees access to the resource and the energy security of the nation. But as everywhere this is a hot topic.

The involvement now of a foreign company taking a large stake in one of the country’s utilities is seen quite critical by the general public and while there might not be an alternative, people have rather strong opinions about this. So there is quite a strong political debate now, both on the actual involvement of a foreign company, the leasing of the resource rights for such a long period, the price to pay and other details of the deal currently being discussed.

Ross Beaty therefore has been in the country and met the Finance Minister of Iceland yesterday to make his case for the deal. There have also been various meetings in the municipalities of Reykjanesbaer and Grindavik with people opposed to the deal.

It will be interesting to see how this debate will end. The actual offer of Magma was extended until August 31, until then there will be more meetings and hot discussions, e.g. over the possibility of the state actually buying the stake. The latter is though rather unlikely.

Sources: The Iceland Weather Report, Visir (pdf, in Icelandic), Visir (on the topic of the HS Orka fire sale, Icelandic)

This posting doesn’t reflect in any way the opinion of my employer, nor do I accept any responsibility on the content. The posting is giving an overview of the actual political debate only.