Country Focus: Iran – Growth demands pragmatism

Nigel Blackaby, Features Editor

Operating under strict Islamic rule for over a quarter of a century, Iran has shown little sign of liberalizing its economy. One sector in which private development projects have gained acceptance is the power industry.

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The Republic of Iran is currently enjoying the strongest growth since the ruling Shah was overthrown in 1979 and an Islamic state established. Its economy has grown quickly over the last two years, principally on the back of the massive energy windfall created by booming oil prices. Gross Domestic Product (GDP) for 2004 is predicted to be 6.7 per cent with the country enjoying a budget oil surplus of more than $9 billion this year.

The economy of Iran is largely based on oil, which accounts for 80 per cent of export earnings, up to 50 per cent of the government budget and 10-20 per cent of GDP. Latest estimates put Iran’s oil reserves at 129 billion barrels, ten per cent of the total world reserves. The country’s gas reserves are second only to Russia in size, at an estimated 26.6 trillion cubic metres.

As its economy grows, so does Iran’s demand for electricity. Iran already has the biggest power market in the Middle East with installed capacity of around 36 GW, out of an estimated total of 140 GW for the region as a whole. With a seven to eight per cent annual increase, Iran’s is one of the highest growth rates for electricity demand. The country is looking to add 30 GW of capacity over the next ten years with a target of 96 GW by 2020.

Iran’s electricity industry commemorated its 100th anniversary this year. The sector was nationalized in 1965 and is controlled by the Ministry of Energy (MOE), primarily through an executive organization known as Tavanir (the Power and Transmission Management Organization). Tavanir controls an array of subsidiary companies including 16 regional electricity companies, 30 generation management companies, 42 distribution companies, the Electric Power Development Company, the Iran Power Development Company (IPDC) and the Power Plant Management Company (Mapna). Mapna operates as an EPC contractor, building plants for other Tavanir subsidiaries such as IPDC.

Tavanir is also responsible for Iran’s electricity transmission network. This comprises three parts. The Interconnected Network serves most of Iran apart from two remote regions, one in the east of the country and the other in the south. This network comprises 440 kV and 230 kV transmission lines. The eastern Khorossan is served by the isolated Khorossan Network while the Sistan and Baluchistan Network serves the southeastern provinces of Sistan and Baluchistan. Currently around 94 per cent of Iranians have access to one of these grids. It is government policy to connect the three grids into a single network. There are, in addition, international links to Azerbaijan, Turkmenistan and Turkey.

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Predicted capacity growth in MW Source: Tavanir

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Breakdown of generating capacity affiliated to the Ministry of Power, 2002-2003 Source: Statistical Centre of Iran

In 2002-2003, Tavanir, on behalf of the MOE, oversaw a generating capacity of 30 605 MW. Other institutions controlled a further 6 190 MW providing a total national generating capacity of 36 795 MW. Of the Tavanir capacity, 27 856 MW supplies the Interconnected Network while 176 MW was operated on the two isolated networks. By 2003-4, the total installed capacity had fallen slightly, to 34 328 MW.

Steam generation accounts for 47 per cent of Tavanir’s installed capacity with hydropower representing ten per cent. Gas fired generating capacity had increased significantly in Iran in recent years and along with combined cycle capacity now accounts for 40 per cent. This will grow much more in years to come.

Total electricity production in 2004 was 142 890 GWh. In 2003 gross production from Tavanir plants was 135 TWh. When internal consumption was taken into account, net production was 130 GWh. Peak load in 2003-2004 was 27 107 MW.

In addition to thermal and hydropower, Iran is investing in other sources of power. Wind power capacity was 11 MW at the end of 2002 and this is expected to rise to 60 MW by the end of 2004. Meanwhile the country’s first geothermal power plant has begun operating in the northwestern province of Ardebil. Initial capacity is 2 MW with a plan to increase this eventually to 100 MW.

Since Iran relies heavily on fossil fuel for its energy, atmospheric emissions of carbon are becoming a significant environmental factor. The sale of both oil and electricity in Iran is subsidized resulting in much inefficient usage, thereby exacerbating the emissions problem. The Iranian government is aware of the dangers of carbon emissions. The projected increased use of gas, particularly in combined cycle plants, is seen as a way to help reduce emissions. The use of renewable energy is also on the increase, although it still accounts for no more than two per cent of total energy consumption in Iran.

Iran expects demand for electricity to continue increasing at its current rate for the next ten years. In order to keep pace with demand the country is planning to build additional hydropower and thermal power plants. Much of this new capacity will take advantage of Iran’s massive natural gas reserves. The cost of the additional capacity required by 2020 has been put at $96 billion. Such a figure is beyond Iran’s budgetary capacity and the government is backing the use of private investment from both domestic and international sources. This is likely to take the form of Build-Own-Transfer (BOT) schemes under which private sector companies contract to build and then operate plants for 15-20 years before handing them to the public sector. This became possible following a change in Iranian investment laws in 2002.

Iran’s first IPP developed by a foreign/local consortium for IPDC under a BOT model is over 50 per cent complete. The 800 MW South Isfahan power station is the first such plant of the many planned by the IPDC, having been given the remit of delivering 6000 MW of new electricity from BOT plants.

Plans for BOT plants at Ali Abad and Tabriz are expected to advance over the next few months. Saudi Arabian developer Saudi Oger has agreed terms on a sovereign payment guarantee enabling an Energy Conversion Agreement (ECA) to be signed in respect of Ali Abad and similar terms are expected to be made available to Xenel Industries, the developer of Tabriz. A new BOT project, a 500 MW gas fired plant at Iran’s natural gas hub of Assaluyeh, was launched by IPDC in November.

The 900 MW combined cycle Parehsar power plant in Gilan Province was to have been Iran’s first IPP after an ECA was signed in 2001 with a consortium including German and Italian interests. Financial closure was delayed due to difficulties in negotiating financial guarantees and Italy’s Edison, the new owners of Sondel’s 50 per cent lead stake, took the decision to pull out. Falck Luxembourg has agreed to replace Edison and the project is now working towards securing a payment guarantee and financial close.

Due in part to the difficulties experienced with international developers, Tavanir is pursuing a parallel programme of IPP projects aimed mainly at the domestic investment market using the Build-Own-Operate (BOO) model. The BOO model is the preferred IPP structure for the planned four unit 2000 MW project at Zanjan. Tavanir was expected to reach financial close on Zanjan 3 and 4 projects in February, which are being developed by the Social Security Fund and Bank Melli International Investment Company, respectively. Construction was expected to start by the end of the Iranian year in late March. Site selection is underway for the Zanjan 1 and 2 IPPs, which were unsuccessfully issued for international tender in 2003.

Mapna has also announced plans to develop 3000 MW of combined cycle capacity at four locations, Ardebil, Urumiyeh, Qain and Parvand. These will use gas turbines supplies by the local Mapna Gas Turbines Company, manufactured with the assistance of Germany’s Siemens and Italy’s Ansaldo Energia.

Tavanir is also negotiating energy conversion agreements with potential private developers for two other 500 MW gas fired power plants in Yazd and Kermanshah and aims to sign agreements by the second quarter of 2005.

Iran is also building a nuclear power plant at Bushehr and has stated that it hopes to complete 7000 MW of nuclear capacity by 2020. However the country’s nuclear programme has become a cause of international concern as a result of the construction of a uranium enrichment facility, which some western governments believe could be used to produce weapons grade nuclear material. Unless the issue can be resolved it is likely to cause further friction with the USA, and possibly with other Western countries.

A plan to import up to 1000 MW of electricity from Armenia through the construction of two high-voltage power lines between the countries is dependent upon the completion of a 184 km gas pipeline that will deliver fuel for power generation.

Iran is now achieving some success in its policy of attracting foreign investment in BOT projects, however power industry sources say the legal framework in Iran is still not tight enough to ensure project ownership. There is a lack of trust about long-term payment guarantees and Iran’s investment and political climate is still perceived by many foreign companies as risky. However, given the increasing level of demand for electricity, the acceptance that much of this will be met through investment by private capital and the availability of cheap gas, the fundamentals are in place for the policy to eventually succeed.

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