Domestic electricity consumption in Iran is rising, but the Iranian government is struggling to make the necessary investment in new capacity to meet this demand. Although it is a slow process, the country is beginning to welcome investment from private sources, even from foreign companies.

Paul Breeze

Sitting strategically between Iraq and Afghanistan, Iran lies at the heart of one of the world’s most turbulent regions. As the seat of the Shia branch of Islam it wields an important influence across the Middle East, an influence that has brought it into conflict with both Israel and the USA.

Meanwhile the country’s nuclear ambitions, leading it to attempt to establish a uranium enrichment programme, have resulted in concerted international efforts coordinated by the United Nations to apply pressure on the government through trade and financial sanctions.

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At the same time the country controls some of the largest oil and gas reserves in the world, making it impossible to ignore when global economic activity is becoming increasingly constrained everywhere by limited supplies of these commodities.

Most of the international problems associated with Iran stem from an ideological conflict that began with the overthrow of the Shah in 1979. Following the Islamic revolution the country became the world’s largest and most significant theocracy with a centrally-controlled government based on conservative Islamic principles.

While the government is in theory a democracy, democratic freedom is extremely limited by Western standards with most liberal parties banned from recent elections. This is a source of further western criticism.

Yet, the international situation is rife with contradictions. Iran ostensibly shuns the west and its values but it needs vast inward investment to develop the energy reserves, which keep it solvent because it cannot afford to develop them itself. Internally it is increasingly turning to western market-based systems to supplement or supplant state-controlled industries.

Many companies claim that they cannot afford to be without a presence in a country with one of the world’s largest hydrocarbon reserves. And where western firms cannot or will not invest, governments and companies from China, Russia, Malaysia and Venezuela are ready and willing to take their place.

The country’s hydrocarbon reserves are enormous. Proven oil reserves in 2007, at 136 billion barrels, represent ten per cent of the world total and the third largest national reserves after Saudi Arabia and Canada. Gas reserves are 27.6 trillion m3, the second largest in the world after Russia. Revenues from oil provide for 60-70 per cent of government income. However oil production is declining and without major investment output could fall sharply, with dramatic consequences internally.

The weight of subsidies

The problem with Iran’s energy sector stems from subsidies. While the high price of oil on world markets is providing it with large revenues from exports, much of the government’s income from these exports go on the subsidy of the internal use of energy. According to the minister of energy, Parviz Fattah, current energy sector subsidy amounts to $50bn each year, a situation, which he has described as illogical.

Nominal power installed capacity of Iran 2000-2006
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Subsidies drive domestic consumption up, creating a vicious circle. Domestic consumption of oil in Iran in 2005 was 41 per cent of production. Elsewhere in the Middle East it is around 19 per cent. Meanwhile Iran has limited refining capacity and so has to import much of its gasoline, but this too is subsidised. Virtually all of the natural gas produced in Iran is consumed domestically, and the cost of this is subsidised as well. In fact domestic consumption is thought to be limiting the country’s ability to export natural gas and liquefied natural gas (LNG).

Subsidies are having a serious affect on the electricity sector too. Electricity tariffs are so heavily subsidised that the income from sales cannot cover the cost of production, let alone provide a sufficient return to fund investment in new facilities. In May 2007 the domestic cost of electricity was around $0.015/kWh compared with a minimum of $0.100/kWh in the European Union, the energy minister claimed.

According to the minister, the electricity sector was self-sufficient until as recently as eight years ago. Now it has to rely on government revenues from oil and gas for support to keep it afloat. Industry subsidies in the year to March 2008 were about $500 million he said. If the industry is to become self-sufficient again, the only solution is to remove subsidies. But removing subsidies will not be popular.

The consequence of this is that the government has discovered an enthusiasm for establishing a competitive electricity market in Iran. This will have a two-fold effect. It will allow the government to achieve its aim of shifting construction of new generating capacity from the public to the private sector. And it will provide a mechanism for removing the dead-weight of subsidy which is suffocating the industry. As the government clearly understands, a competitive market cannot operate with subsidies in place. Whether this strategy can be implemented remains to be seen.

Centrally-controlled electricity sector

As with most of Iranian industry the electricity sector is centrally controlled, in this case through the Ministry of Energy. The ministry’s main instrument is the Power and Transmission Management Company (Tavanir), which was established in 1969. Tavanir is a holding company responsible for the national grid management company, 16 regional electricity companies, 32 generation management companies, 39 distribution companies and a range of other entities including the Iran Power Plant Project Management Company (Mapna).

Mapna is one of the electricity sector’s key organizations, working with both national and foreign bodies in the power sector. In addition it is also a key partner in ‘build-own-operate’ (BOO) and ‘build-own-operate-transfer’ (BOOT) projects. Iranian companies affiliated to Mapna include the Iran Gas Turbine Manufacturing Company (TUGA), which builds gas turbines up to 160 MW and steam turbines up to 250 MW under Siemens licence, as well as supplying the auxiliaries required for simple cycle and combined-cycle gas turbine plants. Another Mapna affiliate is the Andiseh San’at Boiler Manufacturing Management Company (MASBA), which manufactures both conventional boilers and heat recovery steam generators. Both TUGA and MASBA were established in 1999. In addition Mapna has its own gas fired power plant and combined-cycle power plant development and construction arms making it is the largest power plant contractor in the country. All these internal facilities allow Iran to remain largely independent of the global power plant construction industry.

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Given its extensive fossil fuel reserves it is not surprising to find that oil and gas account for virtually all of the county’s power generation with the exception of a small hydropower capacity (amounting to less than nine per cent of production). The greater part of production is based on natural gas with smaller contributions from fuel oil and diesel, which is used in some plants in winter when domestic demand for gas for heating is high.

Nominal generating capacity in 2006 was 45 111 MW. Of this, 40 869 MW was operated by the Ministry of Energy through Tavanir and 4242 MW was operated by private sector companies. Plants classified by Tavanir as steam or gas – the latter presumably open cycle gas turbine – accounted for 30 414 MW of the total nominal capacity. Combined-cycle plants added a further 7676 MW of capacity. There is 418 MW of diesel capacity, 6556 MW of hydropower capacity and 47 MW of wind capacity. Most thermal plants operate preferentially on gas to allow for export of liquid fuel though these have duel fuel capability. A small number not yet connected to the gas grid operate only on liquid fuel.

Actual capacity was significantly lower than nominal. Tavanir-controlled average capacity was 37 277 MW, 3592 MW lower than nominal capacity. Most of the difference is accounted for by lost capacity in thermal gas and combined cycle plants, though Tavanir supplies no explanation for the non-operational capacity.

Gross production in Iran in 2006-2007 was 192 535 GWh. Of this 181 539 GWh was generated by government-owned plants and 10 996 GWh by the private sector. Of the government-owned facilities, thermal steam plants accounted for 88 962 GWh (46.2 per cent of gross production), while thermal gas plants produced 33 759 GWh (17.5 per cent) and combined-cycle plants 40 343 GWh (21.0 per cent). Hydro, diesel and wind plants contributed a further 9.6 per cent. Figures from Tavanir show that in 2006, 73 per cent of the fuel consumed by thermal plants was natural gas, 17 per cent diesel and ten per cent fuel oil.

Nuclear ambitions

One of the main source of friction between Iran and the international community concerns its nuclear programme. This was not always so. During the 1970s there were plans to build 23 000 MW of nuclear capacity in the country using technology from the USA, Germany, France and the UK. At the same time Iran lent France $1 billion towards building a uranium enrichment facility belonging to Eurodiff in exchange for a ten per cent share in the consortium.

Of the proposed plants, only Bushehr (with German technology) was started before the 1979 revolution, when all other contracts were cancelled. Work here finally halted in 1988 and the project was taken over by Russia during the 1990s. Since then Iran has invested around $1 billion for a single 1000 MW unit which is finally expected to enter service by the end of this year. Meanwhile in 2007, the government began seeking tenders for two new units at the site.

International tension has been stoked by Iran’s attempts to build a uranium enrichment plant, attempts which some western governments believe are part of a plan to build a nuclear weapons capability. However the government insists that the enrichment is intended to supply fuel for power plants.

In support of this, at the beginning of 2008 Iran’s ambassador to Russia claimed that the country has started building a new nuclear power plant at Darkhovin in southwestern Khuzestan based on indigenous technology. The proposed plant will have a capacity of 360 MW and is presumably the first of a proposed network of 20 000 MW of nuclear capacity which the government says it wants to build by 2020 in order to release hydrocarbons for export.

Power sector growth and privatization

Meanwhile demand for electricity is growing rapidly. Consumption in 2006 was 144 598 GWh, up nine per cent on 2005, following seven per cent growth the previous year. As a consequence the government has ambitious plans for new construction, though with restricted government investment. In fact the energy minister announced in November 2007 that it would no longer invest in power plant construction and that it intended to transfer 37 000 MW of capacity from the public to the private sector over the next six years.

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The statement on investment appears to contradict Tavanir figures for construction of new capacity between 2007 and 2013. These show that 27 565 MW are due to be added between 2007 and 2013, of which 12 867 MW will be built by the private sector. The remainder will, presumably, require public funding. The largest additions will involve open cycle gas turbine and hydropower plants with smaller contributions from combined-cycle plants. Steam turbine based thermal plants are to be phased out with almost no new construction over this period. By the end of 2013 the total installed capacity is projected to reach 72 676 MW.

The government is looking at BOO or BOOT contracts for private sector projects but few details are available. Nor is it clear where investment will come from. The continued pressure from the USA on western companies will make it difficult to use finance from western banks to support such development, though other sources will probably materialise. A recent BOOT project involves Saudi Arabian company Zelel in a joint venture with Tavanir to build a 1200 MW combined-cycle plant in Azerbaijan. Power from the station will be sold to Iran.

While fossil fuels will continue to provide the main source of electricity in the medium term, Iran is also developing renewable capacity and technologies. Its 47 MW of wind capacity is due to increase with a feasibility study underway for a 60 MW wind farm, while a projects to add a further 325 MW are under discussion.

Studies for a 100 MW geothermal plant are also underway and indigenous development of solar thermal generation has started with construction of a 17 MW solar parabolic collector system.

Clearly Iran places considerable emphasis on its indigenous technologies. However the projected level of growth, with capacity expected to reach close to 125 000 MW by 2024, will be difficult to sustain without both massive inward investment and imported technology. How this will be managed in the face of current tensions is likely to shape the future of the nation’s electricity industry. MEE