CEO Statement

Successful year

2016 was a successful year for the Company. HS Orka’s operations generated 1,189 GWh of clean geothermal power, and many development projects were advanced in the year.

One of the biggest achievements in 2016 was conclusion of the arbitration regarding the power purchase agreement with Norðurál Helguvík ehf. HS Orka launched judicial proceedings in the summer of 2014 to challenge the validity of the power purchase agreement relating to power sales to the Helguvík aluminium smelter. A decision, in favour of HS Orka, was reached by the Arbitral Tribunal at the end of November, 2016 and the agreement was deemed no longer valid. This is a long awaited victory for the Company as the uncertainty surrounding the construction of the smelter has so far hindered future development plans. 

Headquarters moved to Svartsengi

HS Orka moved their headquarters to Eldborg in Svartsengi (an area located next to the power plant) at the end of 2016. The move is welcomed due to the  close proximity to the plant which is expected to improve operations and communication between employees and divisions. HS Orka sold its premises in Brekkustígur in Reykjanes and we are delighted with the change of location. 

Deep drilling 

Work began on the deep drilling borehole project (“IDDP-2) at Reykjanes in August, 2016 and was completed in January, 2017. This was a large scale, and complex project, completed in collaboration with a number of parties including Norway's national energy company Statoil, two Icelandic power companies including Landsvirkjun, the National Energy Authority of Iceland and several other European entities. The execution of the project was very successful and drilling was completed at a depth of 4,650 m. All the main objectives of the project were achieved and we are confident that utilising energy-rich fluid from this unconventionally deep borehole in the very hot geothermal system in Reykjanes, could become a reality. The project is a research and development project where new paths are being explored in geothermal utilisation. The results from well testing at the site will hopefully be available late 2018.  

Production slightly lower then expected

HS Orka’s production was slightly lower than expected in 2016. Total electricity production was 1,189 GWh, which was 7.2% below estimated production and approx. 8.1% below the total production for 2015. The lower generation is due to reduced resource availability at the Reykjanes, though field enhancement efforts (including a new re-injection program and other measures) resulted in a stabilization of generation during the fourth quarter. Utilization of the resource has been high and stable in recent years which can be attributed to the quality of our power plants and our skilled workforce.

The operating income for the year was 7.1 billion ISK compared with 7.3 billion in 2015. The reduction is approx. 3.3% between years which is primarily the result of a decrease in income from electricity sales to the aluminium sector where prices were unusually low this year. Revenue from electricity sales was 80% of total  revenue in 2016 but was 77% for 2015. 

Operating income 2016 

7.1 bill.ISK

HS Orka has successfully increased electricity sales to the retail market in the last few years and the Company appreciates and values this positive support. 

The profit from operations for the year was 335 million ISK compared with 1,358 million ISK in 2015. The decrease between years can mainly be explained by increased energy purchases, the cost of legal proceedings and costs surrounding the deep drilling project.  

 

Increased energy production

HS Orka has continued work on increased energy production from geothermal projects in the Reykjanes peninsula and in the Eldvörp area and in Krýsuvík. The projects are at different stages and preparation work is extensive. The main aspects of this work include the completion of resource utilisation contracts, licensing, basic research and preliminary design.  A new contract was signed last year with the relevant landowners for geothermal energy utilisation in the Southwest and a new borehole was drilled in Svartsengi, SVA-26. We also began using a new and extensive pumping system in Reykjanes and continued preparation work on other projects.

An environmental impact assessment (EIA) was completed for the Brúarvirkjun Power Plant (9.9 MW) in the Tungufljót River, in Bláskógabyggð, with positive results. Preparation work for the tendering process and project design is now underway. HS Orka is working to securing finance for the project. The Company hopes to commence construction work on the Brúarvirkjun Power Plant in the summer of 2017. 

HS Orka has also worked on developing several hydroelectric projects. The Company further invested in VesturVerk hf. in Ísafjörður, to fund research on proposed power projects in Hvalá in Ófeigsfjörður (55 MW) and Skúfnavatn in Ísafjarðardjúp (9.8MW), as well as other projects the Company is working on. HS Orka now owns approx. 70% of VesturVerk hf..

The Resource Park

The Resource Park, which has received deserved attention, has once again proved unique. An update of the previously published Gamma Report, prepared for HS Orka and the Blue Lagoon, on the economic and social impact of the activities of the Resource Park, shows that the total number of employees at the Resource Park is now over 900. This is a tremendous achievement when we consider the fact that HS Orka only has 60 employees. Further development of the Resource Park is underway including the construction of a new fish farm near Svartsengi, plans for a station to transform excess carbon dioxide (“CO₂”) from the plant into a commercial product (removing hydrogen sulphur from CO₂) and preparation measures to clean and produce silica. Codland also has plans to build a factory in Reykjanes where collagen will be extracted from fish skin.

A new power purchase agreement was signed in 2015 on the sale of electricity to the proposed Thorsil silicon plant in the Helguvík area. The agreement is subject to certain provisos on both parties, including financing matters which should be lifted in the first half of 2017.

Investments

Investments 2016

2.1 bill.ISK.

Total investments in 2016 were 2.1 billion ISK. The largest investment projects were the drilling projects in Svartsengi, finailization of pipeline to the ocean from Svartsengi and , re-injection projects in Reykjanes and research on hydropower projects.

The balance sheet has strengthened significantly in recent years, with the Company rapidly paying down long term debt. The equity ratio was almost 67% at the end of 2016. This highlights the Company's ability to invest further in the near future. 

Exciting operational year

HS Orka looks forward to an exciting operational year in 2017, starting construction on new production units, built on a strong operational foundation. 

HS Orka will continue to provide important services for the development of society and to both large and small entities.

 

Address of the Chairman of the Board

Exceptional year

HS Orka had an exceptional year in 2016. Production of electricity was good, despite some decline in production at Reykjanes. Our debt continued to be paid down rapidly and our balance sheet remains strong. Our management team performed very well and several growth projects were advanced during the year. The real highlights, however, were our final victory against Nordural in the arbitration dispute that has dragged on for six years and our great success in the deep hole IDDP-2 drilled below the Reykjanes field. 

At Reykjanes, a surprising decline in the geothermal resource followed a maintenance shutdown mid-year. We believe the cause of this was the quenching of some of the steam cap by fluids that rose during the shutdown and our increased re-injection of fluids into the reservoir. We have taken steps to reduce the re-injection and re-build the steam cap and production has improved significantly in recent months, which we hope will continue through 2017. At the Svartsengi field, on the other hand,   production has been extremely successful and electricity production has been increased, through connection of a new well.  Production of hot water and other value streams has been very good.

Headquarters to Svartsengi

We met our budget for operating results of the year despite reduced revenue due to low aluminum prices. Retail sales of electricity are growing and new important customers have chosen us to provide their power.

In late 2016 we took the important and big step of moving our headquarters to Svartsengi, right by the power plant, and as a result we no longer share any services with HS Veitur.  

The new reinjection system at Reykjanes was commissioned in the beginning of 2016.  This will contribute to enhance the stability of the field and improve production.

360 millions to shareholders 

Although HS Orka is currently retaining most of its operating cash flow for debt service and potential expansions, a flow-through dividend of ISK 360 million was distributed to shareholders in 2016 representing dividends received from the Blue Lagoon resort, which is 30% owned by HS Orka. The Blue Lagoon continued to outperform expectations in 2016 due to increased visitor attendance and operational excellence. The Blue Lagoon will soon complete construction of a new spa facility and a luxury hotel, to be in operation late this year.

Our greatest success

As mentioned, our greatest success in 2016 was winning a dispute with Norðurál Helguvík regarding a conditional power purchase agreement between the parties.   The arbitration tribunal declared the disputed agreement was deemed no longer valid.  This clears our future greatly and makes it possible to sell any now power at competitive market prices, as new power comes available. I want to express my great gratitude to the many professionals in Iceland, Canada and elsewhere who worked so hard in this successful outcome, including all of those on our senior team at HS Orka. 

Our first hydropower project is now nearing the construction phase.  The 10 MW Brúarvirkjun project is aimed to be commissioned in early 2019.

In August 2016 we started drilling the IDDP-2 well at Reykjanes, in partnership with The Iceland Deep Drilling Project (IDDP).Our main partner in the drilling operation was Norwegian Statoil and drilling was carried out by Iceland Drilling Company.  The well was completed in January 2017 at a depth of 4.650 m.  First results are extremely exciting, indicating a productive field underneath the current production field at Reykjanes.  Temperatures have been measured well above 400°. This successful well is likely to have very significant positive impact on HS Orka after it is further tested in 2017-18, and indeed on the entire geothermal industry.

The Resource Park continues to grow

The Resource Park continues to grow.  While HS Orka employs around 60 people, the whole of the resource park employs over 900 people.  A new fish farm is now being constructed near Svartsengi, using excess heat from the power plant.  And we are completing construction of our gas abatement facility in Svartsengi, cleaning H₂S and CO₂ from the emitting steam.  This is an important environmental and financial step, as the CO₂ will later be sold as a new product from the Svartsengi plant.  It is our goal to continue the Resource park concept to bring benefits to many parties by using our resources in the best possible way, to optimize the outcome for society and the environment. We are very proud to be using nature’s geothermal asset, our outstanding employees’ expertise and our capital resources to provide clean energy to all of our customers.

Thanks to employees

I wish to thank all of HS Orka’s employees, managers and directors for their strong and unselfish efforts made on behalf of the company, often under challenging circumstances. I also wish to thank HS Orka’s shareholders, Alterra Power Corp. and Jarðvarmi, who continue to work well together, with good cooperation and goodwill in addressing the affairs of the company. It is my hope that 2017 will be another year of steady and positive results for the company.  

Finance Division

The year 2016 was characterised by significant changes in the financial division. Considerable energy was spent on upgrading and implementing new computer systems and the change of location from Reykjanes to Svartsengi required a considerable number of changes, most significantly being the final separation of shared services with HS Veitur. The move altered the organisational structure of the Company, with job descriptions and procedures requiring alteration  to adapt to this change. This entailed significant challenges but also opportunities to improve and streamline work processes and systems. 

Multifaceted projects

The projects within the Finance Division are multifaceted including accounting and finance, risk management, insurance, and budgeting of the Company. The division provided billed services including accountancy, cashier and expertise in finance to HS Veitur until the end of the year. This changed after the headquarters were moved.  Services that were previously purchased from HS Veitur in the field of information technology, billing and purchasing have now been taken over by HS Orka. This has required considerable re-defining of various roles. The change has been successful and the number of employees remains unchanged.

Various roles that were previously fulfilled by the employees at HS Veitur, such as reception, cashier work, archiving and office administration had to be re-directed. Many employees took on new and varied projects and were given a broader range of responsibilities once the projects they had previously worked on had been outsourced. Arna Björg Rúnarsdóttir was hired as Office Manager and began work in the autumn. One of her first responsibilities was overseeing the relocation of the office to Eldborg, a task that was successfully managed and completed.

IT upgrade

An extensive IT upgrade of the financial accounting and payroll system began in early 2016, the first upgrade since 2008. The project was very substantial due to the long period that had elapsed since the last update. The upgrade was successful. New software tools were introduced providing significant benefits to the Company, including a warehouse data management tool and a new financial analytics tool, both implementations were successful and these systems are now in use. 

 

Difficult transition

One of the greatest challenges of the office move was the complex and difficult transition of the information technology system (previously shared with HS Veitur) to a new location, whilst maintaining operations without interruption. Extensive strategic planning, in cooperation with Advania, helped considerably during this process. The project was divided into two main phases: Control of the power stations and the structure of the HS Orka office network. 

A detailed transition was prepared for both phases, and commenced in 2015, continuing through 2016. A new Company specific IT division was created as information technology services had previously been provided by HS Veitur. Sigurður Markús Grétarsson was hired as the head of the department and began work in March 2016. Brynjar S. Jónsson and Gisli Ólafsson (who mainly handle the control systems for the power plants), were also hired which completed the Company’s IT Division. The transfer of the computer systems was very successful and the opportunity was seized to implement various innovative updates that have proved successful.

Seperation from HS Veitur

The move to Svartsengi resulted in full separation of services between the Company and HS Veitur, with the tasks distributed to employees in the financial sector, to the Warehouse Manager at Svartsengi and to the new lawyer who took on larger tendering projects. Matthias Friðriksson, who has previously served as Head of Accounting, was appointed Head of Purchasing and additional employees were hired in the warehouse. 

The move and final separation of services from HS Veitur was a success and the new arrangements have worked well.

HS Orka has used monitoring and risk management systems, implemented with the guidance of the Sarbanes-Oxley Act (SOX) in 2011, for internal control purposes. An agreement was reached with Enor accounting services in 2014 on the testing and monitoring of these procedures in order to ensure the adequacy and effectiveness of the control. Annually Enor presents their findings to the Audit Committee. The results for 2016 were good and no significant deficiencies were noted.

Research found for IDDP

During 2016 the Company commenced deep drilling of a borehole within HS Orka's production area in Reykjanes. Through the IDDP project, HS Orka has been awarded a share of a European Union research fund for participation in the deep drilling project (DEEPEGS). The DEEPEGS project is a four year project controlled by HS Orka in cooperation with partners from Iceland, the United States, France, Germany and Norway. The Company is responsible for management of the project, and Kristjan Sigurdsson joined HS Orka in 2016 as project manager.

2016 was a positive year of change. The office move and separation of services from HS Veitur has resulted in fewer staff members, taking on additional responsibility. This has proved a successful transition. The added responsibility seems to have been met with positivity and the employees look forward to the future. 

 

Board and organisation

The Resource Park

Society without waste

The park operates under the motto “Society without waste”. The companies involved in the park must ensure that all resource streams that flow to and from their operations are utilised to their full potential, in a responsible manner and to the benefit and progress of society. The Resource Park was created by HS Orka to raise awareness of the valuable resources entrusted to the Company and the importance of ensuring the sustainability of energy resources for future generations.  

The electricity and hot water production process provides HS Orka with seven effluent resource streams that can be utilised. This valuable resource must not be wasted and should therefore be utilised responsibly and carefully. Multiple utilisation supports responsible utilisation and the sustainable development of society.

Growing entrepreneurship

The Resource Park group consists of nine companies from various fields which directly utilise two or more resource streams from HS Orka’s geothermal production in the Reykjanes peninsula. The companies are separate and cover a diverse set of industries but also have a number of common factors. Most of them were established as high-tech start-ups and their operations are built on active development and science. The companies are located in the Suðurnes area, close to the geothermal production areas, enabling them to utilise the resource streams directly.

The operation of the Resource Park is built on the common interests of the various companies e.g. the effluent from one becomes the raw material for another; a close interdisciplinary co-operation. The production of thermal energy in the Suðurnes area provides the raw materials and therefore the foundation for diversified production. The operation of the Resource Park is characterised by research, development and innovation, and is a powerful tool that contributes to the sustainable development of society. Part of the operation focuses on monitoring and providing a platform for scientific and technological development to facilitate the effective utilisation of resource streams, thereby creating a platform for business cooperation in different disciplines with diverse backgrounds. The Resource Park is a dynamic and rapidly growing entrepreneurship.

Only innovation cluster built around geothermal energy

The Resource Park is the only known innovation cluster built up around geothermal energy. The partnership created between HS Orka and the companies within the park is unique and highlights the exclusive nature of Icelandic geothermal energy production. The positive impact of these clusters has been widely reported within society and was confirmed by the Icelandic asset management company GAMMA in their report on the economic and social effects of the operation. Most importantly, there were nearly 900 year-round positions at the Resource Park in 2016, a great achievement considering the fact that HS Orka has a total of 60 employees. The economic impact of the Resource Park has been extensive within the area.

Multiple utilisation

Most of the companies in the Park sell their products directly or indirectly to the international market which means that the majority of the revenue from the Park is in foreign currency. The wages of those employed by the companies within the enterprise are typically 25% higher than elsewhere in the Suðurnes area. 

The Resource Park has, in recent years, played a major role in the development of employment opportunities in the Suðurnes area, creating a number of well paid jobs for individuals with a diverse educational background. The companies also need a number of services provided by the local government and the number of indirect jobs created by this is estimated to be over a thousand. Multiple utilisation therefore directly contributes to the development and infrastructure of society. 

Most of the companies in the Park sell their products directly or indirectly to the international market which means that the majority of the revenue from the Park is in foreign currency. The wages of those employed by the companies within the enterprise are typically 25% higher than elsewhere in the Suðurnes area. 

Well paid jobs

The Resource Park has, in recent years, played a major role in the development of employment opportunities in the Suðurnes area, creating a number of well paid jobs for individuals with a diverse educational background. The companies also need a number of services provided by the local government and the number of indirect jobs created by this is estimated to be over a thousand. Multiple utilisation therefore directly contributes to the development and infrastructure of society.

The opportunities provided by the resources from HS Orka’s production have not been fully realised and the Company is therefore continually exploring new ways to support increased efficiency in the utilisation of natural resources, which will in turn benefit the Resource Park. 

An example of this is the current construction of a station at Svartsengi to transform excess CO2 from the plant into a commercial product (removing sulphur from CO2). The project has almost reached completion.

Matorka is currently working towards establishing an aquaculture station in Grindavik which will utilise excess geothermal water from the nearby Svartsengi Power Plant. Codland has also announced its intentions to further develop its production in the Marine Product Health House in Reykjanes. Continual research is being conducted on the chemical composition of geothermal seawater and precipitates from energy production where various valuable minerals and metals can be found. These represent macronutrients and compounds needed by the market which can create new products sourced from geothermal production, therefore supporting the total utilisation of the natural resource.

Specialised companies

HS Orka works systematically to secure the partnership of new, specialised companies for the park who can utilise the resource streams available. More diverse and specialised companies that base their activities on research and development are providing funding for the park and support the ideas behind it. Increased technology, processing efficiency and increased interest from the corporate sector will enable the Resource Park to grow and strengthen its foundation in the coming years. This will be of tremendous benefit to the Suðurnes region and the entire country.

The employees at HS Orka are strongly influenced by Albert Albertsson (the concept creator of the Resource Park) who has always focused on responsible production and processing and has encouraged employees to live and work in nature but not at its expense. According to Albert's philosophy, imagination is the only limiting factor in development. The Resource Park is the offspring of these theories.

HS Orka will persevere and continue to develop the Resource Park both rationally and responsibly, and for the good of the community.  

 

Natural resources

Resources

HS Orka owns and operates two geothermal power plants on the Reykjanes Peninsula. The Company also utilises the freshwater resource in the Lágum area for the processing of fresh water for neighbouring municipalities and to produce hot water for domestic heating. Our goal is to utilise the natural resources that the Company has been entrusted with in a sustainable manner, whilst maximising the utilisation of the geothermal fluid extracted from geothermal systems. This is achieved by various measures such as resource stream utilisation and ensuring adequate re-injection.

The quantity of fluid extracted and re-injected back into the system is registered in order to monitor the status of the natural resource.

 

Geothermal extraction and injection in 2016

	Extraction	Re-injection	Net extraction
Svartsengi	13 million tonnes	10,5 million tonnes	2,5 million tonnes
Reykjanes	14 million tonnes	4,5 million tonnes	8,5 million tonnes

 

Electricity production 2016

	Electricity production
Reykjanes	630 GWh
Svartsengi	560 GWh

 

Svartsengi

	Water
Hot water	13.800.000 m3
Cold water	6.600.000 m3

Operations and maintenance 

Reykjanes Power Plant

Operations at the Reykjanes Power Plant were successful this year. A number of outages were carried out in order to perform required maintenance on the steam plant including a five year maintenance on Turbine 1 in June and an annual maintenance on Turbine 2 at the end of August. These outages require unit shut downs for the work but are necessary to preserve the lifespan of the equipment and the crews work hard to minimize the outage durations.

A maintenance outage at Reykjanes last summer resulted in a decrease in steam production, however the Company has deployed several methods of field enhancement to mitigate decreases in generation at the Reykjanes plant and to enhance future field stability. The mitigation measures have achieved positive results, and generation stabilized during the fourth quarter. Subsequent to the year end the Company has examined the potential for improved utilisation at the existing power plant by changing the steam feed to the turbine. The assessment revealed that an increase of 2-4 MW could be achieved from the geothermal steam source if new steam ejectors were purchased. Work began on the project immediately.

Further field enhancement measures, including new wells and well work-overs, will be studied and potentially introduced in 2017 in light of new information from the deep drilling project. Well IDDP-2 may have the potential to add an incremental 30-50 MW of capacity to the Reykjanes plant, but the final potential will not be known until late 2018, following further tests and research. 

Re-injection measures were increased substantially within the area by utilising new re-injection wells.

Svartsengi

Operations at the Svartsengi Power Plant were successful this year. Availability time was high and the planned maintenance outages were well executed. The Ormat control systems were replaced and operational and mechanical reliability increased significantly as a result. The project was completed in cooperation with representatives from Ormat. 

Electricity production increased in Svartsengi and the annual permit allowance was fully utilised. The area reacted well to the increased production capacity. 

HS Orka completed two new production wells at the Svartsengi field in Iceland in 2015 and 2016. The first of these, well SVA 25, was drilled at a new southernmost location in the field, and was connected to the Svartsengi plant in the third quarter of 2016. SVA 25 is now supplying 3 to 4 MW of production steam to the Svartsengi plant. The second production well, SVA 26, was drilled at a new easternmost location in the field. Well SVA 26 is undergoing testing and is expected to be connected to the plant in 2017, with early estimates indicating production potential similar to SVA 25. Both wells extended the known boundaries of the Svartsengi field, which has successfully supported operations since 1978..

Hot water producton

The arrival of a new thermal production tower at the end of 2015 significantly increased production capacity and allowed the Company to perform maintenance and inspection work on the older towers. The construction and installation of new pumping stations for Grindavík was completed this year and it commenced operating in the fall. The completion of the station has significantly increased the transport capacity to the reserve tank in Grindavík.

Work commenced on the renovation of pumping stations for condensate collection and injection into the re-injection system.

Cold water supply

The renovation of two cold water pumps was completed this year and all pumps have now been replaced with new pumps which will lead to improved efficiency and increased performance.

The renewal of pipes in the pump house for the utility supply to Grindavík was completed this year and one larger pump was installed to replace the two previous smaller pumps. 

Other projects

The regional distribution system to three pumping stations in Svartsengi was strengthened considerably by replacing the transformer and a new distribution station commenced operations.

An emphasis was placed on keeping up the appearance of the Company’s power plants this year, including a significant amount of work carried out on the areas surrounding the Svartsengi Power Plant and painting of the building.

The supply pipeline to the Blue Lagoon was renovated and expanded, at no cost to the Company. 

Energy purchases and electricity sales

Growing demand for electricity 

The revenue from electricity sales to the retail market increased by 4.7% compared with the previous year, despite a decrease in fishmeal factory demand. The demand for electricity for energy intensive industry continues to grow and electricity consumption in the general market is steadily on the incline.

Seeking out new ways to increase production is an important factor in meeting the increased demand for electricity. An agreement was reached with two small hydropower plants this year; with the Svelgsárvirkjun in Helgafellssveit and the Gönguskarðsvirkjun in Skagafjörður. Additional agreements with smaller producers are expected to be finalized in 2017. Work continued on the preparation of large power plant projects in both hydropower and geothermal energy.

The revenue from electricity sales on retail market

4,7%

HS Orka purchases electricity from a number of hydropower plants via agreed contracts and the production output for these stations was satisfactory this year. The fact that Landsvirkjun’s water budget was good this year is an important factor in HS Orka’s operations as part of the electricity sold by the Company to the retail market is purchased wholesale. 

Last year of wholesale contract with Landsvirkjun

Last year marked the final year of the wholesale contract between HS Orka and Landsvirkjun which was initiated in 2005 when changes were made to the electricity market and the market became competitive. Landsvirkjun has announced a new wholesale business arrangement that will lead to an increase in prices in excess of inflation for the coming years. This will particularly affect the purchase of flexible energy and Landsvirkjun dominates the market as it has nearly all of the country‘s largest hydropower stations at its disposal. HS Orka has stressed the importance of constructing new power stations in the coming years with the possibility of flexible production to meet these needs. 

Most of the fishmeal factories that have been electrified in recent years took advantage of low oil prices early in the year and ran the production line on oil instead of electricity. This development, as well as a smaller capelin quota led to a significant decrease in electricity sales to these companies between years.

The data center industry continues to grow

The data center industry continues to grow in Iceland. The largest operators are Advania and Verne Global, but some new data centers starting operations entered into contracts with HS Orka this year. Competition from other countries in Europe, on the location of data centers, is high and certain areas in Scandinavia enjoy tremendous support from government who are vigorous in their efforts to facilitate the development of the industry. Iceland still needs to take action to improve its competitive environment.

The balancing power price imposed on distribution costs by the state to cater to residents in cold areas affects smaller data centers and creates a competitive disadvantage against larger businesses not connected to the distribution system and who do not have to pay the charge. Moreover, national competition for data centers is increasing. 

Sales to Carbon Recycling International increased over last year and it seems that production is doing well. The outlook for the world market is also positive.

 

Sales to Norðurál decreased

Sales to Norðurál decreased somewhat due to permitted curtailments enforced during the year to meet the declining production of Reykjanes. Aluminum prices remained low which was in line with predictions for the year and the Icelandic Kroner strengthened considerably. The ratio of aluminium production in electricity sales at HS Orka decreased in both volume and revenue. Norðurál is still HS Orka’s largest client. The conclusion of the Arbitral Tribunal that the power purchase agreement between HS Orka and Norðurál Helguvík was in fact invalid will have a positive impact on future projects related to power generation in Reykjanes. 

 

Energy production and electricity sales

	2016 GWh	2015 GWh	Change%
Total production of own plants	1.189,4	1.293,6	-8,1
Own use: Power plants	-66,3	-64.9	2,2
Energy purchases from others	490,2	437,4	12,2
Sales to the general market	820,0	871,6	-5,9
Sales to the aluminium sector	722,4	739,4	-2,3
Other electricity sales	70,9	55,3	28,2

Energy production and electricity sales

	2015 GWh	2014 GWh	Change%
Total production of own plants	1.293,8	1.337,6	-3,3
Own use: Power plants	-64,9	-67,0	-3,1
Energy purchases from others	437,4	361,0	21,2
Sales to the general market	871,6	762,7	14,3
Sales to the aluminium sector	739,4	761,6	-2,9
Other electricity sales	55,3	107,3	-48,5

Developement projects

Prepatory work continued

The Brúarvirkjun Power Plant
Preparatory work on the Brúarvirkjun project continued throughout the year. Measurements were conducted on the river flows to fine tune the flow-duration curve of the river and review the key design parameters of structures, including the penstock. An Appraisal Report was issued with the revised budget. Feasibility was assessed and the outcome was promising. Preparations for the tendering process and project design were carried out at the end of the year.

An Environmental Impact Assessment (EIA) was carried out during the year and the preliminary report was presented and comments and/or modifications or any revision of the design were responded to. A field trip was organised with the various professional organisations, with the assistance of the landowners to present all conditions within the study area. 

The National Planning Agency assessed the project and found it to be acceptable with the provision that a study would be carried out on the presence of nesting Harlequin ducks and that wetland areas would be restored and birch scrub would be planted in the area. Work was carried out immediately to reach an agreement with the relevant professional bodies on the fulfilment of these conditions which must be met during the construction period.

Work began on the identification of risk factors and the evaluation of a suitable organisational structure for the project which must consider, amongst other things, the long distance from the Company's headquarters and the significant material transportation needed from the harbour to the site.  The transportation of materials will pass through urban areas.

Work was also carried out on the General and Regional Development plans necessary for construction, alongside the EIA. The Regional plan was developed for the plant’s structures including the powerhouse, dams and road and was amended to reflect the material extraction spoil areas. These plans had almost reached completion at the end of the year.

Connection to Rarik distribution network

Transmission Interconnection options were examined separately including options to connect the power plant and the national grid and the other to connect to Rarik’s distribution network in the area. The conclusion was that an agreement should be reached with Rarik to connect the plant with the substation distribution network in Reykholt using a 33 kV cable system which will be part of the distribution area for Rarik..

 

Improved efficiency of the utilisation

REY 4, low-pressure turbine and improved utilisation at the Reykjanes Power Plant
Preparation measures for a 30 MW low- pressure power plant continued throughout most of the year. The low- pressure turbine will utilise geothermal fluid output by the existing 100 MW power plant and will therefore improve the overall efficiency of the utilisation of geothermal fluids at the Reykjanes Power Plant.

No significiant enviromental impact

Planning work continued and compliance with the EIA statement was also assessed. The National Planning Agency evaluated if a resubmission of the EIA was required and concluded that the project was not likely to have any significant environmental impact and was therefore not subject to an EIA. The new regional plan was subsequently approved by the Reykjanes and Grindavík municipalities and a construction permit was issued for the project.

Collaboration with Fuji Electric

Design work on the steam turbine was performed in close collaboration with Fuji Electric (FE) and the turbine has been fully engineered and is ready for production. An announcement was made on the European Economic Market, with regard to the proposed collaboration between FE and HS Orka and the possible purchase of the turbine, to advance the procurement process. This was done as a security measure should the company be subject to the procurement procedures of entities outlined by the EU. The legal status of this is currently under consideration. 

The generator from the steam turbine intended for REY-3 was evaluated mid-year and based on its condition assessment, it appears to be suitable for use on REY-4. Due to the decline in generation at Reykjanes in 2016, further work on REY-4 is subject to the results of the field stabilization efforts currently underway, together with the results of the IDDP-2.

Limited effect on the enviroment

Svartsengi Power Plant: Utilisation and development license
HS Orka applied for a change to the development license for the project after drilling was completed on wells 11 and 25, with the intention of drilling another well during the year (well 26).  The National Energy Authority initially indicated that the project was subject to EIA rules as it would result in the additional utilisation of 5-6 MW, however further evaluation by the National Planning Agency concluded that the project would not have to go through a full EIA as the effects on the environment were limited. Subsequently a license was issued for the connection of wells 25 and 26.

A decision was made to apply for a new utilisation license for the geothermal area in Svartsengi- Eldvörp, based on the conclusions of the National Planning Agency and the recommendations of the National Energy Authority. An application was also sent in for amendments to the development license for the Svartsengi Power Plant. Model calculations carried out by Vatnsskil Consulting Engineers, were submitted as the basis for utilisation and re-injection for the next thirty years as well as an assessment of the effects of drawdown in Svartsengi and Eldvörp. The application process should be completed by the first half of 2017.

Exploration and utilization of resources

Stóra-Sandvík 
Stóra Sandvík is categorised as ‘appropriate for development’ by the Master Plan. Agreements were negotiated with the landowners at Stóra Sandvik, on the authorisation for exploration and utilization of resources in specific areas of their land (in the Kalmannstjarnir and Junkaragerði area). An exploration license had previously been acquired. An agreement was subsequently reached with Ísor (Iceland Geosurvey) to assess, amongst other things, all the available information from previous studies and to add specific studies to identify areas that would be successful for steam production. Areas were also identified for a shallow exploration well. The results are expected in 2017.

Landowners granted special permission to install seismographs in certain areas of their land as the results could benefit research in the area.

 

Eldvörp
The Development Division assessed the interaction between energy production in Svartsengi and proposed steam production from the Eldvörp area in order to successfully divide the utilisation of the area into phases. A cautious approach will be taken in geothermal development in the Eldvörp area with careful attention to the development of production in Svartsengi - especially with regard to the steam cap development. A change in priorities was also proposed for exploratory drilling that will prove useful when it comes to drilling the first exploratory wells.

Since no on site construction work was performed in 2016, an extension of the development permit was requested and issued by Grindavik to extend the permit to October 2017. A field trip was organised with representatives from the Icelandic Environment Association where plans for the project were presented to them. The project was also presented to the Board of Reykjanes Geopark.

Mineral deposits investigated

Mineral deposits investigated
Mineral deposits at the geothermal power-plant in Reykjanes were found to contain radioactive materials and the National Planning Agency was subsequently asked to assess the situation. The Agency concluded that the treatment and disposal of mineral deposits would be subject to an EIA so the Company has initiated an EIA process to perform an assessment on the effects of the project on the environment. The project is significant in scope as this signifies a new development in the operation of geothermal power plants in Iceland. The scoping document draft was completed at the end of 2016 and the process, which will be open to the public, will subsequently begin.

Sea pipeline, gatehouse
A development license was extended this year and a development license was issued for the gatehouse for the sea pipeline. This represented the final stage of the construction of the  discharge pipeline from the power plant in Svartsengi to the sea which was completed under the guidance of the Technical Services Division. Special environmental controls were used during the construction period as well as close project supervision to ensure that all the requirements outlined in the permit were fulfilled during the execution of construction work

HS Orka expects the increased discharge capacity provided by the pipe will facilitate increased production from the Svartsengi plant and enable further development from the joint Svartsengi-Eldvörp geothermal field.

Wind energy
The collaboration with local communities on the Reykjanes peninsula, for a possible location for further research on wind power, continued. Local governments were asked to outline policies with regard to wind energy issues. More knowledge was obtained via consultants and manufacturers at home and abroad. Work will continue on acquiring a license to start measuring the wind speed in the Reykjanes area, using an 80 m high meteorological mast.

Krýsuvík
A new research plan was prepared as well as an application for the renewal of an exploration license. The exploration license was granted for a three year period.

Further work suspended

Suðurorka ehf and the Búlandsvirkjun power project
An EIA was developed as well as an analysis of mitigation measures based on the conclusions of the National Planning Agency. The preliminary EIA report was in its final stages when the proposal for phase three of the Master Plan for Hydro and Geothermal Energy Resources in Iceland was introduced. The project was provisionally categorised as “protected” which means that the project would not be allowed to continue. Further work on the assessment was suspended until a final categorisation decision was reached. A formal letter opposing the categorization of the project was sent to the committee.

VesturVerk ehf, Hvalá and other small-scale power stations
An EIA was carried out on the Hvalár power project on behalf of VesturVerk. Comments on the assessment were addressed and work began on the revision of the general plan.  The EIA is not yet under review by the National Planning Agency.

Low flow measurements were conducted in the Ófeigsfjarðarheiði highland area in nine locations during the spring period for the Hvalárvirkjun and Skúfnavatnavirkjun Power Plants. A 15 tonne excavator was used as well as three snowmobiles in order to access these areas as conditions were harsh with snow levels from between 2-10 metres. Measurements were also conducted in July and September. Engineers from Verkís travelled to Ófeigsfjarðarheiði in August to identify glacial till materials to be used for the construction of the dam at the Hvalá Hydropower Plant and to assess the conditions at the dam site.

An exploration license was granted for the Hest-  & Skötufjarðarvirkjun and Hvanneyrardalsvirkjun power projects and flow meters were subsequently set up in the Glámuhálendi highland areas. Estimates show that the Hvanneyrardalsvirkjun power project could supply 14-16 MW of electricity and the Hest-& Skötufjarðarvirkjun could supply 16-20 MW. Both power plants are subject to the assessment of the Master Plan and the preliminary designs must be completed before applications are sent in for phase four of the Master Plan. Work began on preparing landowner contracts and an assessment of the relevant rights of the parties concerned.

Construction and development

Re-injection pipeline completed

Extensive construction work continued in 2016. The directional drilling of an exploration well in Svartsengi: SV 26, to a depth of 2,500 m was completed. The purpose of drilling was to assess the size of the geothermal field to the east of the current known area. Discharge tests will be conducted this spring.

Well SV 25 in Svartsengi, which was drilled in 2015, was connected to a power plant and now supplies 3 to 4 MW.

A re-injection pipeline was completed in Reykjanes, from the production area and up to the north end of Sýrfell, where two re-injection wells have been drilled: RN 33 & 34. The new re-injection pipeline can transport approx. 300 kg/s of re-injection fluid.

As indicated above, work continued on design of a low-pressure turbine at Reykajens and the injection of the fluid from the low-pressure step. Experiments were also carried out on hot water production for a heating utility at Reykjanes. 

Re- injection and disposal projects for geothermal fluids in Svartsengi were also completed. The last phase; a pipeline from the injection zone to the sea (the pipeline runs to the west of Arfadalsvík in Grindavík), was placed into operation in the fall. There is therefore no further need to dispose of geothermal fluid in the area to the east of the Svartsengi Power Plant except in the case of an emergency.

A new run-off pipeline was installed from the power plant at Svartsengi and to the Blue Lagoon to replace the original deteriorated pipeline. The new pipeline is above ground, is isolated and covered in coloured aluminium. The pipeline can transport enough seawater to supply the Blue Lagoon in the future.

 

Deep drilling project – a new dimension in the production of geothermal energy!

One of the largest projects of 2016 was the Icelandic Deep Drilling Project IDDP- 2 / Deepegs in Reykjanes which is a research and pilot project carried out in cooperation with Reykjavik Energy, Landsvirkjun, the National Energy Authority of Iceland, and Statoil. A number of additional parties supported the project and the European Union provided a large grant for the work. HS Orka lead the deep drilling project and IDC were hired to perform the drilling, using the largest drill rig in the country (Thor) and powering it with electricity directly sourced from the Reykjanes Power Plant.

Drilled to depth of 3.000 meters

The purpose of the project was to evaluate the area beneath the production area in Reykjanes. The current production area reaches a depth of 1500-2500 meters and no previous investigations have been carried out below a depth of 3,000 meters. HS Orka contributed one borehole to the project which is 2,500 meters in depth (RN-15). The hole was deepened to 3000 metres and casing was installed in the form of a steel tube, fixed in concrete. This type of casing had never been installed at such a depth in Iceland before.

Directonal drilling to depth of 4.650 meters

Directional drilling was then carried out to a depth of 4,650 meters resulting in the deepest borehole to be drilled in Iceland. Drilling began in August and was completed in January. The drilling work was accompanied by many complex, technical challenges and conditions became more complicated and difficult as greater depths were achieved. Various unexpected incidents occurred during the execution of the project and the drill heads became stuck on a number of occasions. However, the knowledge and experience of HS Orka and IDC was fully utilised and all of the problems that arose were successfully resolved. One of the biggest challenges was accessing the drill core; 23 meters were excavated in 13 attempts and the last one was recovered from the bottom of the borehole.

All the project objectives were achieved including accessing the drill core, measuring high temperatures and locating permeable rock. The temperature at the bottom of the borehole has initially been measured at 427°C at a pressure of 340 bars, and initial well readings indicate supercritical conditions (indicating that the fluid could be utilised for energy production). The temperature and pressure of the well indicate that as much as 30-50 MW of energy could be produced from this single well, which is up to ten times more output than a conventional production well. The actual output of the hole will not be determined until late 2018, when extensive and varied tested has been completed.

Learning curve

The project has been a steep learning curve and the theory that wells can be drilled to such a depth is now a reality. This knowledge will prove useful in other drilling projects and opens up the possibility of drilling other wells to a similar depth based on this experience. The completion of this drilling only represents one chapter of the project as the next step is to complete the exploration of production options and discharge testing, which will take place over the next two years.

The successful utilisation of the well would indicate that deeper wells could supply more energy than conventional wells. This means that fewer wells would be needed for energy production with less environmental impact and lower costs.

Climate change objectives

Emphasis on environmental matters 

HS Orka strives to reinforce the importance and urgency of environmental matters which concern all of us. One hundred and ninety five nations signed a Memorandum of Understanding and pledged to keep global warming below 1.5 ° C. This requires a concerted effort from all those involved. HS Orka signed a joint declaration on climate action with the Icelandic Center for Corporate Social Responsibility (Festa) and the City of Reykjavik. The Company spent the first half of 2016 outlining measurable objectives on environmental matters. The following results were published in mid-2016:

HS Orka has a deep sense of responsibility when it comes to the handling of the natural resources it has been entrusted with and the company has a long history of responsible resource utilization. The Company therefore welcomes the recent increased awareness on climate change and waste management and will diligently continue its efforts in this area to increase the positive impact it has on society and the environment.

Human resources

A number of roles within the Company were redefined after the separation of the two businesses (HS Orka and HS Veitur) was completed and the headquarters of HS Orka were relocated to Eldborg in Svartsengi in 2016. A service agreement had previously been in place and the companies purchased specific services from one another. This shift resulted in the need for a number of new employees as five HS Orka employees transferred to HS Veitur. 

A total of six employees left the Company in 2016 and eight new employees joined the team.

Human resource

Piecharts

HS Orka had a total of 60 full time employees at year-end. 

HS Orka employees 

60 employees

Quality systems

A certified quality system according to ISO 9001 was successfully implemented. Internal audits were carried out according to plan and improvements were carried out as a result. Two external audits were also conducted by BSI and these proved successful. Quality system committee meetings were held every other week where the quality system was reviewed to support continuous improvement in this area. Four employees were trained to become internal auditors by attending the relevant courses and undertaking an internal audit, under supervision. 

The implementation of the ISO 14001 environmental management system standard and the OHSAS 18001 safety standard was prepared and work on the project will continue next year. The aim is to achieve certification by the spring of 2018.

The development, implementation and operation of a quality management system according to ISO 9001, ISO 14001 and OHSAS 18001 represent a major project that affects all aspects of the business. The commitment of the management team is vital as well as the participation of employees. The benefit of the quality management system becomes clearer with each passing year and is evident in the daily tasks of all employees who strive to do better and thus ensure continuous improvement.  A quality culture is growing within the Company and will only increase with time.

Safety

HS Orka is continuously improving its health and safety policy and the Company strives to be an accident-free workplace. Employees and contractors are encouraged to enter reports on near-miss accidents and first aid incidents into a simple database. This type of disclosure allows the Company to make improvements that reduce the likelihood of relapses and this leads to a safer working environment. 

Accidents and incidents

A total of 32 accidents/incidents were reported during the year and these were divided according to whether the employees were contractors or HS Orka employees as well as location and severity. Contractors reported a total of 28 accidents/incidents, of which three were accident related absences with a total of 43 lost days.

HS Orka employees reported four accidents/incidents, of which there were no accident related absences.

Accidents/incidents: Contractors

Accidents/incidents without absences

Accidents: Absence of 1-7 days

Accidents: Absence of over 7 days

Online Annual Report

HS Orka has undergone various change in the last year. One of the developments is that insted of releasing a printed version of the annual report, it is now published online. This is in line with CSR policy of the company. 

A pdf-version of HS Orka´s annual report is available online.