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The main use of geothermal energy is for space heating with the heat being distributed to buildings through extensive district-heating systems. About 85% of all houses in Iceland are heated with geothermal energy. Renewable energy provides 100 per cent of electricity production, with about 70 percent coming from hydropower and 30 percent from geothermal power.

Iceland is ranked 53rd in the list of countries by carbon dioxide emissions per capita (2003), emitting 62% less than the United States per capita.

Iceland's unique geology allows it to produce renewable energy. Iceland is located on the Mid-Atlantic Ridge, which makes it one of the most tectonically active places in the world. There are over 200 volcanoes located in Iceland and over 600 hot springs. There are over 20 high-temperature steam fields that are at least 150°C [300 °F] many of them reach temperatures of 250°C.

This is what allows Iceland to harness geothermal energy and these steam fields are used for everything from heating houses to heating swimming pools. Hydropower is harnessed through glacial rivers and waterfalls, which are both plentiful in Iceland.

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Due to the special geological location of Iceland, the high concentration of volcanoes in the area are often an advantage in the generation of geothermal energy, the heating and production of electricity. During winter, pavements near these areas (such as Reykjavík and Akureyri) are heated up. Five major geothermal power plants exist in Iceland, which produce approximately 24% (2008) of the nation's energy. In addition, geothermal heating meets the heating and hot water requirements of approximately 87% of all buildings in Iceland. 

Consumption of primary geothermal energy in 2004 was 79.7 Petajoules (PJ), approximately 53.4% of the total national consumption of primary energy, 149.1 PJ. The corresponding share for hydro power was 17.2%, petroleum was 26.3%, and coal was 3%. Plans are underway to turn Iceland into a 100% fossil-fuel-free nation in the near future.

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Iceland is the first country in the world to create an economy generated through industries fueled by renewable energy, and there is still a large amount of untapped hydroelectric energy in Iceland. In 2002 it was estimated that Iceland only generated 17% of the total harnessable hydroelectric energy in the country. Iceland’s government believes another 30 TWh of hydropower every year could be produced, whilst taking into account the sources that must remain untapped for environmental reasons.

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Currently, imported oil fulfils most of Iceland's remaining energy needs. This is very costly to the country and has caused Iceland to focus on domestic, renewable energy. In 1999 Icelandic New Energy was established to govern the project of transitioning Iceland into the first hydrogen society by 2050. This followed a decision in 1998 by the Icelandic Parliament to convert vehicle and fishing fleets to hydrogen produced from renewable energy.

Iceland provides an ideal location to test the viability of hydrogen as a fuel source for the future, since it is a small country of only 300,000 people, with over 60% living in the capital, Reykjavík. The relatively small scale of the infrastructure will make it easier to transition the country from oil to hydrogen. There is also a plentiful supply of natural energy that can be harnessed to produce hydrogen in a renewable way, making it perfect for hydrogen production. Iceland is a participant in international hydrogen fuel research and development programs, and many countries are following the nation's progress with interest. Iceland already converts its surplus electricity into exportable goods and hydrocarbon replacements. In 2002 it produced 2,000 tons of hydrogen gas by electrolysis—primarily for the production of ammonia for fertilizer.