Latest / The Productivity Podcast with Fexingo: Output, Efficiency, and Long-Term Economic Growth / How Iceland Turned Cheap Geothermal Into a Data Center Powerhouse
Transcript
- Lucas: When you think of a digital economy powerhouse, Iceland probably isn't the first country that comes to mind. Three hundred seventy-six thousand people, a GDP roughly the size of Vermont's, and a landscape defined by volcanoes and glaciers. Luna: Right, but that volcanic landscape is exactly the point, isn't it? Lucas: Exactly. Iceland now hosts over twenty large-scale data centers, including facilities for Borealis Data Centers, Verne Global, and even some cryptocurrency mining operations. The draw is simple: geothermal and hydroelectric power at roughly four point three cents per kilowatt-hour for industrial users. Luna: That's about forty percent less than the US industrial average, which is around seven and a half cents. Lucas: And well below the global average of about twelve cents. For a hyperscale cloud operator running thousands of servers around the clock, that difference adds up to millions in annual savings. Level39, a London-based think tank, recently ranked Iceland as the most cost-effective location in Europe for data center energy. Luna: But there's a catch. Iceland's total electricity generation is only about nineteen terawatt-hours per year. That's less than one percent of what the United States produces. Lucas: And data centers now consume roughly twenty-eight percent of that. The national grid can deliver about one thousand nine hundred megawatts total, and a single new hyperscale facility can demand fifty to a hundred megawatts on its own. So the question becomes: how much of Iceland's renewable bounty can you dedicate to computing before you start squeezing other sectors? Luna: Or before you need to build new geothermal plants, which take years to permit and construct. Lucas: Iceland's advantage isn't just cheap power. It's also the cold climate. Ambient temperatures in Reykjavik average around five degrees Celsius, which means data centers can use free air cooling for most of the year. That cuts the energy needed for cooling by roughly thirty to forty percent compared to a facility in, say, Virginia or Texas. Luna: So the total cost of ownership — servers plus power plus cooling — is significantly lower. Lucas: That's why companies like BMW and KLM have chosen Iceland for their high-performance computing workloads. BMW runs crash simulations on Icelandic servers because the lower latency to European markets is still acceptable, and the cost savings are real. One study by the consulting firm Arthur D Little estimated that a data center in Iceland can achieve a total cost of ownership that's thirty to fifty percent lower than a comparable facility in Central Europe. Luna: But there's a tension between attracting these facilities and maintaining Iceland's green brand. The country runs on nearly one hundred percent renewable energy. Adding more data centers could require new dams or geothermal wells, which carry environmental costs. Lucas: There's also the job question. Data centers are highly automated. A fifty-megawatt facility might employ only thirty to fifty people. Iceland has a tight labor market — unemployment is around three percent — so the employment argument isn't as strong as it would be in a less developed country. The real benefit is tax revenue and the diversification of the economy away from fishing and tourism. Luna: Speaking of tourism, there was a fascinating conflict a couple of years ago. A proposed data center near a popular geothermal spa, the Blue Lagoon, faced local opposition because of water usage concerns. Lucas: Right, that was the Data Center at Reykjanesbær project. Locals worried that drawing geothermal brine for cooling would affect the Blue Lagoon's water chemistry. Ultimately the project was scaled back. It's a reminder that even in a country with abundant renewable resources, siting decisions are contentious. Luna: So how does Iceland's model compare to other cold, remote locations with cheap power? Places like northern Norway, Quebec, or even Newfoundland? Lucas: Norway has similar hydroelectric resources and even lower electricity prices in some regions — down to about three cents per kilowatt-hour for industrial users. But Norway's grid is more constrained, and the country has been slower to attract data center investment. Quebec, on the other hand, has been very successful. The town of Shawinigan now hosts a major Microsoft data center, drawn by Hydro-Québec's rates around four cents. Luna: So Iceland has a first-mover advantage, but it's not unique. Lucas: Not unique, but they've branded themselves well. The Invest in Iceland agency actively markets the country as a data center destination, and they've streamlined permitting. The result is that Iceland now has about one hundred and fifty megawatts of data center capacity operational, with another fifty megawatts under construction. For a country of three hundred seventy-six thousand people, that's a disproportionate share of the global data center market. Luna: And cryptocurrency mining was a big part of that early growth. At its peak in 2018, Iceland was home to about eight percent of the world's Bitcoin mining hashrate. Lucas: That's true, and it created a lot of controversy. Critics argued that mining Bitcoin was a wasteful use of clean energy that could power homes or green industries. Some Icelandic politicians called for a ban on new mining operations. The mining companies themselves have become more discreet, partly because of public pressure and partly because the Bitcoin halving cycles have squeezed margins. Luna: But the shift from mining to more traditional cloud computing is a positive development, economically speaking. Hyperscale data centers tend to have longer-term leases and more predictable revenue. Lucas: And they bring with them ancillary services. When Verne Global built its facility near Keflavik, it also invested in fiber connectivity. Iceland now has multiple submarine cable connections to Europe and even a planned cable to North America called the Farice-1. That changes the game entirely. Low latency to both continents makes Iceland a potential hub for latency-sensitive applications like financial trading or real-time AI inference. Luna: The productivity angle here is really about how a small country leveraged a natural resource — geothermal heat — that would otherwise be stranded. You can't export heat across an ocean, but you can export computing power. Lucas: That's the core insight. Iceland turned a non-tradable resource into a tradable service. And they did it through intentional policy: a favorable corporate tax rate of twenty percent, no import duties on server equipment, and a fast-track permitting process for data centers. It's a textbook case of what economists call 'comparative advantage' applied to the digital age. Luna: But there's a limit. The grid can only support so much. Iceland's national power company Landsvirkjun has said it can't guarantee power for new large-scale projects beyond about twenty twenty-eight without new generation. Lucas: So the next phase likely involves smaller, more specialized facilities. Edge data centers, high-performance computing clusters for research, maybe even quantum computing cooling infrastructure. Iceland's cold climate is also being explored for carbon capture and storage, another energy-intensive process that benefits from cheap renewables. Luna: If walking through the economy with us has made something click, and you'd like to help us keep these conversations ad-free, listeners can support the show at buy me a coffee dot com slash fexingo. Lucas: Yeah, that kind of support is what lets us dig into niche stories like this one — stories that don't always make the headlines but really matter for understanding how productivity works in practice. It's deeply appreciated. Luna: So back to Iceland — what do you think the next bottleneck will be? Power or connectivity? Lucas: I'd say power first. Connectivity can be upgraded with new cables, but new geothermal or hydro projects take a decade to bring online. Meanwhile, data center demand is growing at roughly fifteen percent per year globally. Iceland's competitive window might close sooner than people expect unless they invest in new generation now. Luna: So the lesson for other cold, remote regions is: if you want to attract data centers, you need to have your energy permitting and grid capacity sorted years in advance. Lucas: Exactly. It's an infrastructure play, not just a power-price play. And that's the real productivity lesson from Iceland — you can turn a natural advantage into a digital export, but only if you build the physical and regulatory bridges to make it happen.