It is crazy and not sustainable, yet I can't think of why it might be a problem.
I guess it would be a problem if Iceland's Energy Authority starts prioritizing mining more Bitcoins rather than serving their people by providing ample energy for their homes; but I guess they all have it figured out. I just hope that equal amount of energy is given to the other aspects that needs such amount of energy to function as to not cause any trouble or chaos with regards to the distribution of energy.
They can build the mining operation in remote places and will not affect the power supply of existing users.