The loan deal was signed in a ceremony at the Hellisheidavirkjun geothermal power station in south Iceland.

The money will be used to finance development of the highly volcanic Hengill area near the towns of Selfoss and Thorlakshofn and where Hellisheidavirkjun is already located. The first priority of the project is the completion of part five of the Hellisheidavirkjun project, due to come into service at the end of 2011 with production of 90 megawatts.

The rest of the loan will be used to finance half of a new geothermal plant to be built at Hverahlid, which will also produce 90 megawatts – most likely for the new aluminium smelter at Helguvik, RUV reports.

Eirikur Hjalmarsson, Reykjavik Energy Public Relations officer, told RUV that the loans are necessary because of the severe financing crisis that caused a near total drying up of funds a year ago which have the potential to slow down or stop projects.

It was therefore decided to look for loans on the domestic short-term market and a short term loan of ISK 5.5 billion since the banking collapse has been secured, but the terms are not considered sustainable. Hjalmarsson says that before the collapse Reykjavik Energy was always able to finance its projects with cheaper foreign loans.

The use of domestic short-term loans is much more than initially predicted, so financing decisions are being made directly by the board.