The town council of Olafsfjordur decided to harness River Gardsa between the mounds at the foot of slope Skeggjabrekka for electrical production, and acquired all the necessary permits for the project.  Formal contracts for a 200 Hp hydroelectric power station were signed on August 26^th 1939, and during the autumn foundations for the dam and the town grid were finished.

World War II delayed delivery of necessary materials and ruined all plans and budgets.  The contractors signed new contracts for the continuation on the 15^th of July 1941.  It included a 230 Hp station (172 kW).  The work, which had been delayed whole two years, was continued until December the same year.  The dam and the pipeline to the station house at Gardseyri were finished, when the shortage of necessary building materials stopped the project again.  It was commenced next spring and proceeded well during the summer.  The generators were installed the nest autumn and on the 19^th of December the power station was inaugurated.  Its output was 250 Hp (187 kW), five times larger than the original plans had been based on.

The number of inhabitants grew and so did the demand for electricity.  The power station became too small with no possibilities for increased capacity.  Therefore the town council applied for extra power from The National Electric Works (RARIK), and in 1956 started receiving it from the Skeidsfoss Power Plant further north.

In 1957, the Gardsa Power Station and the town grid were signed over to RARIK to serve as an auxiliary for the town.  The station has been problematic, especially during winter due to shortage of water.  Sometimes the generators stand still for months on end.  Ice has not been a great problem, mainly because hot water from two boreholes further upriver has spilled into it.

In 1980, the town was connected to the national grid and all shortcomings have been solved.