Iran’s Power Industry Analysis Investment Risks & Opportunities in Post-Sanctions Era

Iran’s Power Industry Analysis

Investment Risks & Opportunities in Post-Sanctions Era Iran’s Power Sector Report produced by Energy Pioneers Ltd. and available for sale by exclusive

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Part of Energy Pioneers’ Iran energy industry report and analysis series.

Published by: Energy Pioneers Ltd.

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Table of Content

Preamble 3

Executive summary 4

Iran’s economy 5

SWOT analysis 6

Market analysis 8

Power generation capacity 8

Gross power generation 10

Power consumption 13

Transmission and distribution network 16

Maintenance and optimisation of power grid 17

Renewable energy potential in Iran 18

Nuclear power 19

Electricity tariffs and subsidies 20

Energy subsidies reform 2010 21

Electricity tariffs 22

Energy efficiency and power loss 22

Power loss in power plants 23

Power loss in transmission and distribution system 23

Exports and imports 25

Regional exports markets for Iran’s electricity 27

Turkey 28

Iraq 28

GCC 29

Armenia, Turkmenistan and Azerbaijan 29

Pakistan and Afghanistan 30

Iran: A regional electricity hub? 32

Electrical services exports 33

Privatisation process 34

Privatisation of power generation companies 35

Privatisation of distribution companies 36

Liberalisation of the electricity market 37

Stakeholders 40

Ministries of Energy and Petroleum 41

Tavanir 42

Iran Fuel Conservation Organisation (IFCO) 43

SUNA 44

Iran’s Energy Efficiency Company 44

Investment opportunities 45

Investment in the construction of high efficient combined cycle power plants 46

Technology transfer 46

Investment in combined water and power generation complex 47

Investment in optimising old power plants 47

Investment in distributed generation plants (DG & CHP) 48

Investment in renewable energy hubs in Iran 49

Concluding remarks 50

Sources 53

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List of Tables, Figures & Maps

Tables

Table 1: Installed nominal capacity 2006-2015

Table 2: New annual nominal capacity 2006-2015

Table 3: Number of operational power plants in 2015

Table 4: Fuel consumption in power plants

Table 5: Gross electricity generation 2006-2015

Table 6: Total electricity consumption in different sectors 2006-2015

Table 7: Transmission line (circuit km)

Table 8: Transmission substations 2010-2015

Table 9: Tariffs in cold regions

Table 10: Tariffs in temperate regions

Table 11: Thermal plants’ power loss during conversion 2005-2013

Table 12: Power loss in transmission and distribution system 2006-2014

Table 13: Total transmission & distribution loss based on the volume of power generated &

consumed

Table 14: Operational trans-Iran transmission lines

Table 15: Trans-Iran transmission lines under construction

Table 16: Iran’s electricity exports to regional countries 2013- 2015

Table 17: Iran’s electricity imports from regional countries 2013- 2015

Table 18: Projects defined for foreign investment

Table 19: Guaranteed purchase tariffs for wind generated electricity

Figures

Figure 1: Installed nominal capacity (2015)

Figure 2: Gross power generations (2015)

Figure 3: Consumption rate by sector (2015)

Figure 4: Major power consuming sectors

Figure 5: Electricity export & import (2015)

Figure 6: Electrical services exports 2006-2014

Figure 7: Current interaction chart of electricity market & power exchange

Figure 8: Power sector's institutional chart

Maps

Map 1: 400 & 230 kV transmission lines and transmission substations

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Preamble

Iran’s electricity sector lies on the verge of a major transformation as the country is re-emerging

from decades of sanctions and is positioning itself as an important recipient of foreign investment and

finance. Iran’s Power Industry Analysis is the Energy Pioneers’ comprehensive report on challenges,

opportunities and objectives of Iran’s long isolated electricity sector in the post-sanctions era. By

incorporating the perspectives of policy-makers and executives, together with the new legal, fiscal and

political reforms, the report aims to provide a unique assessment on how Iran’s power industry will

evolve in the post-sanctions period to respond to the country’s economic growth and strategic planning.

Our aim was to provide a timely assessment and reasonable foresight to both international energy

entities interested in enriching their research and analysis on Iran’s power sector, as well as investors keen

to contribute to the development of this strategic industry.

What sets this report apart from similar reports is that it extensively delves into the development

and operation of Iran’s electricity sector covering the period between 2006 and 2015 by exclusively

relying on the latest data and statistics published by stakeholders and relevant energy organisations within

Iran. Focused both on the current trend and short- to mid-term outlook of the sector, the report draws its

specialised analysis partly from the information and data collected from Iran’s Ministry of Energy (MoE),

the Iranian Electricity Syndicate (IES), Tavanir Co. (Iran’s Specialist Electricity Holding Company) and

Parliament Research Centre, and partly from our specialists’ knowledge and expertise.

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Executive summary

In the last two decades, Iran’s power industry has undergone a major transformation to respond to

its growing domestic needs, intensified industrialisation, and electricity export ambitions. Despite the

adverse impact of sanctions, lack of technology, chronic mismanagement, and financial challenges, the

electricity sector has continued to meet the country’s fast-paced growing power demand, albeit in an

inefficient and uneconomic manner facing occasional blackouts during peak demands. In the last eight

years in particular, under severe constraints of capital and investment, the industry has gradually

weakened; the growing number of incomplete projects and the decline in the number of new projects

lagging behind the rising demand is clear evidence of this exhaustion. Nevertheless, given that removal of

sanctions has now become imminent, and with a pro-reform, pro-foreign investment government in

office, the electricity industry is poised to expand rapidly in the years ahead, not to mention the

significant role that the country’s massive gas reserves can play in accelerating such an expansion.

Investment opportunities for improving energy efficiency and sustainability in Iran’s vast power

industry are staggering, especially when taking into account the fact that the country has been in the status

of isolation for nearly a decade. In anticipation of a favourable investment environment, MoE has

launched a comprehensive plan for optimising and resolving the industry’s widespread infrastructural

problems, as well as reducing the considerable inefficiencies across all segments of the electricity value

chain. The government is keen to keep up with the tremendous changes in the international energy

industry, and acquire the much-needed investment and technology to increase energy efficiency, and

utilise the vast untapped renewable energy potential. Due to its enormous size, it is hard to perceive that

Iran’s power industry could expand and reach its full capacity without foreign investment. As such,

within the last year alone, MoE has introduced a number of projects worth $28 billion to attract foreign

investment in the next 10 years. Moreover, as Iran encourages schemes to balance supply and demand in

support of growth, energy security, electricity exports, and environmental objectives, a huge market for

renewable energy and energy efficiency is created, supported by various attractive regulatory measures.

However, although senior officials have broadly introduced opportunities in the power sector, they have

offered less detail on the fiscal and contractual terms based on which these investment opportunities are

expected to be seized.

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Iran’s economy

Iran’s economy is characterised by a large hydrocarbon sector, a diversified industrial base, and small-

scale agriculture and services sectors. Iran has the 18th largest economy in the world, standing between

Turkey and Australia, and the 2nd largest in the Middle East, according to the International Monetary

Fund’s April 2015 World Economic Outlook. Nevertheless, the Iranian economy has struggled and

contracted severely in the last decade, partly as a result of tightening economic sanctions and isolation

from the international banking system, and widespread mismanagement and weak economic policies

initiated under the former government.

Since the inauguration of President Rouhani’s government in August 2013, and the coming into power of

highly experienced technocrats, Iran has been moving towards a more pragmatic set of policies, both on

economic and political fronts. On the political side, reaching a nuclear deal with P5+1 after almost 15

years of disputes has marked the imminent removal of sanctions which could facilitate Iran’s return to the

international fold. The political breakthrough has set in motion a new climate of cooperation as well as

creating new possibilities and opportunities for the resurgence of Iran’s economy.

Removal of sanctions will have a huge impact on the financial sector, as the Iranian banks will reintegrate

with the international financial system. This primarily removes the troublesome transactional obstacles

that traders, investors, businesses and industries have been facing over the last few years, while allowing

conventional debt market products to emerge. Moreover, as foreign investments, considered as a catalyst

for technological shift in industrial-based sectors, influx into the country, it can considerably impact the

efficiency and productivity of non-oil sectors. Subsequently, this will stimulate further investment and

productivity in manufacturing and industrial bases, as transaction costs will become lower due to higher

efficiencies in various sectors of the country. Removal of sanctions will arguably release around $80-100

billion of the country’s financial assets, which the government has pledged to channel into reviving

domestic industries, which have lost financial and technical strength in the last decade.

As a part of its preparation for the post-sanctions economic environment, the Iranian government has

introduced various reform and regulatory frameworks, such as Article 12 of the Elimination of Barriers to

Competitiveness and Promotion of Financial System (2015), aimed at stimulating and promoting the

private sector and liberalising the market – an important and timely development for Iran’s economy.

These associated positive momentums and developments, have led the country’s key economic

stakeholders, especially the business community, to react positively, while it has equally revived the

confidence of international investors for returning to the Iranian market.

Statistically, according to the World Bank 2015 projection, the Iranian economy will receive a boost by

removal of sanctions, and its GDP is likely to grow by 5.1% in 2016-17 and 5.5% in 2017-18

respectively. The inflation has sharply declined from a monthly rate of 45.1% in June 2013 to 13.7% in

December 2015. Central Bank of Iran (CBI) has also predicted that by March 2017, the inflation will

eventually reach a single figure. While one should take into account the recessionary impact of low oil

prices and stagnant demand in domestic markets, the anticipated economic improvement can potentially

set the Iranian economy on a path of mild growth, as it could mitigate the risk of capital being negatively

offset by currency depreciation or price inflation.

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Even though the economic prospect of the country is no longer as dim as before, the economic outlook

could be affected by many factors beyond the economic research and data analysis; the country has been

suffering from nearly a decade of complete isolation. Both domestic and international economic experts

agree that restoring economic normalcy and a return to medium-growth scenarios in Iran will require time

– potentially three to four years before economic and legal institutions necessary for sustainable

development and growth could emerge. Therefore, to a large extent, it depends on the ability of policy-

makers not only to maintain the new paradigm of economic management, which includes an emphasis on

the pivotal role of the private sector and the minimisation of the role of the state in the economy, but also

the ability to carry out major steps to liberalise the market, stabilise the economy and business

atmosphere, and mitigate risks of investment, in order to make it appealing enough for both domestic and

foreign investors.

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SWOT analysis

Strengths

A diversified and multi-billion dollars industrial base economy

Reliable supply of clean fuel from abundant natural gas resources

Over 500 equipment manufacturing companies and 200 contractors engaged in the field of electric

engineering, consultancy, and power plant construction

Large reserves of copper, aluminium, zinc, and polymer as some of major raw materials required in

the electrical industry

Strong track record in dam building and power plant construction

Geopolitical and geographical advantages: vicinity to regional markets of Afghanistan, Armenia,

Azerbaijan, Iraq, Pakistan, Turkey and Turkmenistan

Extensive national grid, semi-integrated with immediate neighbors

Abundant pool of young, skilled, dynamic and qualified professionals

Support of short- and long-term economic goals and development plans; i.e. Five-Year Economic

Development Plans, the 2025 Development Outlook and policies of Economy of Resistance

Strong and experienced private sector

High solar insolation and wind density attitudes

Effective regulatory and policy frameworks offering incentives to promote renewable sources of

energy

Plans for expansion and development of electricity industry in parallel with the development of oil

and gas sectors as anchors of Iran’s regional ambitions

Weaknesses Inefficient energy infrastructures and systems resulting in massive energy and economic losses

Lack of modern technology and outdated capital stock

Insufficient investment capital primary as a result of US and international sanctions

Subsidised electricity prices: a large gap between retail prices and total costs of production and

distribution

Non-payment by some state industries and companies

Dependence on government funds: annual budget deficit of around $5 billion equivalent to half of the

annual expenditure of the industry

Dependence on Ministry of Petroleum for fuel supply and some development initiatives

Complicated management structure and decision-making process at organisational level

Heavy bureaucracy and complex state regulations

Weak process planning, project execution and human capital management

Ministry of Energy reputation loss as a result of huge non-repaid debts

Potential competing role of state-institutional companies

High cost of development of renewable energy

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Opportunities

Comprehensive plans in place for diversification of power generation capacities

Considerable untapped potential for enhancing efficiency and energy saving from power generation to

consumption

Significant expansion of industrial sector and the requirement for substantial investment in the electricity

sector

Market expansion opportunities in neighboring countries

Potential transformation into the region’s energy hub, connecting Caspian littoral states with the Persian

Gulf states through a dependable transit corridor

Favourable geographical position and climatic conditions for development of renewable energy sources

Threats

Overshadowing role of the government and existence of opaque interest groups

Government’s high levels of debt to the private sector, contractors, consultants, manufacturers and a

number of leading Iranian Banks

High local interest rates on loans, making repayments cumbersome

Possible US and international sanctions snapback

Water scarcity

Subsidies and low electricity prices

Regional political turmoil and security risks

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