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UK Treasury lukewarm on plan for Iceland to pay debt in energy

Think-tank suggests £2.3bn owed from the collapse of Icesave could be paid in green electricity

Iceland could pay the £3.48bn it owes the UK and Holland by providing the two countries with a steady stream of green electricity instead of cash, if an ambitious proposal by a small Dutch think-tank takes hold.

Gijs Graafland, the director of the Amsterdam-based Planck Foundation, contacted Iceland's Prime Minister Johanna Sigurdardottir and its President Olafur Grimsson early this month to suggest that Iceland use its abundant supply of geothermal energy to pay back the British and Dutch loans that bailed out Iceland's failed Icesave bank.

Mr Graafland's "Energy for Debt" plan calls for treating kilowatts as currency. Iceland and its 320,000 inhabitants get all of their electricity from carbon-free sources, including geothermal and hydroelectric.

Like other energy observers, Mr Graafland believes there is huge potential in the country's largely untapped sources of geothermal power – heat form the earth which can be used to drive turbines. Iceland straddles the fault line between the North American and Eurasian tectonics plates, giving it plenty of geological action. He said: "A massive energy transition investment wave can help prevent a collapse from peak oil, and this can also help save the financial system."

Mr Graafland, a former dotcom entrepreneur and property investor, now runs the non-profit Planck Foundation, which aims to change global energy and financial systems. He wants pension funds, for instance, to start rewarding investors with renewables-based kilowatts. "Renewable energy facilities are the new and better gold," he said.

Neither Ms Sigurdardottir nor Mr Grimsson has yet responded, he said, but he has received letters of support from individuals at the University of Iceland and from various politicians and thinkers around Europe.

A UK Treasury spokesman said: "The Icelandic government has been clear that it does not want any connection between the loan agreement and its natural resources. From the UK Government's perspective, priority has to been given to recovering the money to protect the taxpayers' interest."

Mr Graafland admits he faces an uphill battle, noting that Iceland "does not see itself as the Saudi Arabia of the north," even though, if it further develops geothermal supplies, it could assure its future by relying "a lot less on fish and a lot more on energy".

Iceland owes Britain £2.3bn and has not established a repayment programme. In a referendum last month, voters rejected a proposal that would have cost each citizen about £10,000 to repay the debt.

The country's largest power company, Landsvirkjun, believes a high voltage route to Scotland might be possible and is looking at the feasibility. Research from the company in 2000 estimated it would cost $1bn to lay a 750-mile line to Peterhead from a 600-megawattt energy plant.