The first ideas concerning a hydroelectric power station in the Ellidaar Valley were proposed in 1894 by the electrical engineer Frimann B. Arngrimsson, who had spent some time in North America. The town council did not pass an approval of the construction until 1918 and on December 4th the next year the plans for a 1500 hp station were approved. A dam was constructed above the Arbaer Island and a 1 km long penstock pipeline as well. The Dam was raised twice after that to increase the capacity of the power station until the maximum of 3,16 MW was reached. Simultaneously more generators were added until their number was four, and they still operate with the same capacity as originally.
Eighteen months after the approval of the town council the operation started (May 10th) and the power station was officially inaugurated by King Christian X and his queen Alexandrine on the 27th of June 1921. In June 773 homes had been connected to this source of energy and six months later 100 more. These were the beginnings of the Reykjavik Electricity Authority. Demand continued increasing until a new project was started on River Sog in the Southwestern Lowlands and was finished in 1937. Both of the original penstocks were demolished and a new one, 2,1 m in diameter, took their place. The power station retains its original appearance and forms a part of the Electrical Museum next door.