Quotes of the Day

On a chilly morning outside the hamlet of Reykjahlid in northern Iceland, Hallgrimur Jonasson lifts the edge of a soggy plank of wood lying in the clay to expose a small hole in the ground. "This is the rye-bread bakery," he says, yanking his hand back from a waft of scalding, sulfurous steam. A chef in a nearby hotel, Jonasson estimates his kitchen staff bake roughly three tons of the sweet, dense rye bread in the hole every summer to meet the growing demand, mostly from tourists, for the exotic carb. The bread's price tag — up nearly 20% from last year — has led to some clucking from villagers that the young entrepreneur is cashing in on a local tradition. Jonasson is more pragmatic. "Who are we kidding?" he asks. "This is our living here."

Steam has long powered Icelandic dreams. Pockets of underground water heated by the earth's core may not be particularly glamorous, but tiny Iceland has spent decades figuring out useful ways to harness its heat and power, employing it for everything from baking bread to turning turbines. Geothermal power now provides cheap, clean heat to more than 90% of Icelandic homes, and generates 30% of the nation's electricity, a slice worth roughly $120 million. In recent years, as Icelanders became smitten with the idea that their ambitious banks could create a global financial center in the far north Atlantic, geothermal power got pushed out of the spotlight. But now, with the krona down 44% against the dollar compared to a year ago and most of Iceland's banks close to bankruptcy, this nation of 313,000 is taking another look at the incredible resource boiling away underfoot.

It helps that global investment in renewable energy was up 60% last year. The number of projects using geothermal power has lagged behind wind, solar and biofuels for many years. However, since 2004, projects in the U.S. have doubled, and countries such as Indonesia have set ambitious goals for geothermal generation. The financial crisis has hit the renewables sector, to be sure, but analysts say that thanks to U.S. President-elect Barack Obama's green-energy agenda, and recent G-8 goals to cut carbon emissions by 50% by 2050, the industry will come back strong. "I have people calling me asking, 'Where should I put my money? Who do I invest in?' " says Mark Taylor, a geothermal analyst with renewable-energy-research firm New Energy Finance. "I'm still pretty optimistic about everything."

So is Iceland. Though they expect credit-crunch delays, the nation's domestic power firms are sticking with plans to nearly treble the geothermal power Iceland produces in a bid to woo companies like aluminum giant Alcoa and tech heavyweight Google. Internationally, a new crop of Icelandic investment firms have started pumping money into projects, offering partners from Djibouti to the Philippines capital, skills and — perhaps most importantly — a sense that this also-ran of renewable energy is really viable. "I think [geothermal power] is the paramount moral obligation of Iceland in the modern world," President Olafur Grimsson told TIME. "There are over 100 countries that could do the same thing we have with their resources. This is the area in which we can really contribute."

Going Underground
Ten minutes up the road from Jonasson's bread ovens, over some low hills, a series of dense white steam plumes rise into the cloudy sky. In a flannel shirt and hard hat, Birkir Fanndal maneuvers his truck over one of the dirt roads that crisscross Iceland's first major geothermal power station, Krafla. Soon after the inaugural borehole was drilled here 34 years ago, the first in a series of volcanic eruptions rocked the area. The eruptions, nine in all, went on for nearly a decade, sending engineers scrambling to keep up with the shifting earth. Fanndal, the plant's manager, stops his truck in front of a crater where, without warning, one early drill hole imploded into a cauldron of boiling water that took half a year to settle down. "There were a lot of people who said we should leave this place," Fanndal recalls.

They didn't, and their tenacity is paying off. Krafla recently became the site of a pilot project to drill extremely deep boreholes (classified as three miles or more), a frontier technology that could yield five to 10 times more energy per borehole than any similar project in the world. Landsvirkjun, the state utility that owns Krafla, has also been in talks to supply power to an aluminum smelter that Alcoa plans to build nearby. The financial downturn has put that project on hold for now, but Alcoa, which already has one smelter in Iceland, still sees the country as a site for cheap, power-intensive smelters. By going geothermal, which has less impact on the environment, Alcoa believes it can mitigate the hundreds of thousands of tons of carbon dioxide a smelter emits every year. "If you compare the offset, it's six to eight times cleaner to produce here" than in a location where a smelter would get electricity from a coal- or oil-based source, says Tomas Mar Sigurdsson, general manager of Alcoa Iceland.

Iceland knows a bit about kicking the fossil-fuel habit. At the turn of the last century, life on the isolated island was bleak. It had been among the poorest nations in Europe for centuries, and a smoky haze choked Reykjavik, thanks to the coal inhabitants burned during the interminable winters. In the 1930s, Icelandic engineers successfully diverted underground water to heat an elementary school, and the rest of the capital slowly followed suit. When the global oil crisis hit in the 1970s, efforts to turn this local resource into electricity — by drilling holes into underground heat pockets and reservoirs to release pressurized steam that then runs turbines — moved into high gear. Today, if it's not raining or snowing (or both), views from Reykjavik's harbor are relatively clear. Icelanders hope steam can pull them through tough times again. "The Icelandic power industry will be one of the pillars to carry us out of this crisis," says Asgeir Margeirsson, CEO of Geysir Green Energy. As Thorunn Sveinbjarnardottir, Iceland's Environment Minister, puts it: "Icelanders think about this resource in almost biblical terms."

A New Mission
Over the years, Icelandic engineers have learned which temperature enables underground liquids to power a turbine, how to manage a boiling cavern's chemistry, and how to keep power plants sustainable by "resting" boreholes to give the source time to replenish its heat. While the ongoing costs of a geothermal power plant are low — Krafla, for example, has only 15 full-time employees — the start-up technology needed to extract heat from a few miles beneath the earth's surface and convert it to electricity is not cheap. By some estimates, conducting the necessary geologic surveys and exploratory drilling for one plant can take up to eight years and $20 million before the turbines start turning. "The high cost is a barrier to everybody," says Karl Gawell, executive director of the U.S.-based Geothermal Energy Association.

That big, high-risk investment will only come down with the development of better technology. Gawell sees Icelandic investments abroad as an important way to develop the sector: "Icelanders have been a significant part of making the strategic investments you need to make this happen."

Perhaps not surprisingly, in Reykjavik talk about geothermal power can sometimes take an evangelical turn. One afternoon in May, in the slick offices of Reykjavik Energy, Gudmundur Thoroddsson points out a World Bank study that lists electricity above corruption, crime and access to capital as the biggest obstacle to budding entrepreneurs in Africa. "It saddens me when I come to a place where you have a big oil-driven generator sitting on top of a geothermal field and you're paying three or four times the cost [for energy]," says Thoroddsson, the former CEO of Reykjavik Energy's investment arm.

The company is focusing its early investments on East Africa, an area with vast amounts of underground heat and little means to tap it. The company plans to start exploratory drilling next year to build a geothermal plant in Djibouti. In July, the government of the Philippines awarded a Filipino-Icelandic consortium exploration rights to half of Biliran Island in the country's south. Twenty years ago, three boreholes were drilled on Biliran and then abandoned when the underground liquid at the other end of the drill was found to be too acidic. Since then, the industry has learned how to address that problem by adding chemicals to the mix, and geologic exploration is underway again. "I think a lot of investors trust Icelanders for what they're doing. They understand the risks involved," says Zammy Sarmiento, president of Biliran Geothermal Inc., the group that won the concession.

Geothermal has its share of critics. The power plants release low levels of carbon dioxide, nitric oxide and sulfur, and some people worry that drilling holes deep into the earth destabilizes the land around it. This summer, police arrested a group of environmental activists who had chained themselves to machinery at a drill site near the nation's largest power station outside Reykjavik to protest the plans for a new aluminum factory. Iceland's government has responded to such criticisms by trying to diversify and attract companies like Microsoft, Cisco and Yahoo!, all of which have discussed building massive server farms on the island.

To ensure that geothermal energy powers Iceland's future, the country is boosting the number of university programs dedicated to the subject. It's essential to make Icelanders as enthusiastic about steam as they have been about the finance industry over the past few years. On a blustery Sunday afternoon in May, a circle of visitors in all-weather jackets waits in front of the Strokkur geyser, a popular tourist attraction in southwest Iceland. Among the crowd is a busload of Harvard M.B.A. students fresh from their exams. Georg Ludviksson, an Icelandic grad who helped organize the tour, said he wasn't sure what he was going to do with his new degree, but returning home to work in geothermal investment was a real possibility. "There could be a big opportunity there," he says. His country would be happy to have him.

• Krista Mahr
• Iceland is betting on geothermal energy to power its future. Can it turn poorer parts of the world onto steam as well?