Power capacity building in Iran faces obstacles

Sanctions and a lack of foreign expertise are hindering plans to build up Iran’s power sector. Reforming the system of subsidies will be another challenge. Published in MEED, 3-9 September 2010

The first uranium-filled fuel rods were loaded into Iran’s nuclear power plant at Bushehr on 21 August. The process is likely to take several weeks to complete, but power from the plant is not expected to start flowing in to the national grid for another two or three months.

At that point it is likely to be producing 500MW, but even the 1,000MW the plant will eventually provide when it is at full capacity is only a fraction of the additional electricity that Iran needs each year.

Rising demand, particularly during the summer months when Iranians turn to their antiquated and power-hungry air conditioning units for relief, is putting huge strains on the network. Demand levels were up by 9.5 per cent this year, and peaked at more than 41,000MW on several occasions in July and August.

Government ministers urged people to be more cautious about their electricity use during this year’s heat wave, which saw temperatures reach 43 degrees Celsius in Tehran and more than 50 degrees in other regions, including the Khuzestan province on the border with Iraq. But despite their concerns, the country managed to avoid the widespread blackouts of 2008, with only isolated power cuts this year.

Iran is not alone among Middle East countries in struggling to cope with the spikes in demand during the hot summer months, but what was unusual this year was the announcement in mid-July of a two-day closure of government offices – something that was widely attributed at the time to the need to cut power usage.

“At the moment there is no shortage of power in Iran because we’ve had the peak and we didn’t have a problem, but it was quite close,” says a senior power industry consultant in Iran. “The sector can manage at the moment. It’s not 100 per cent healthy, but it can manage.”

Despite the amount of international attention it has provoked, the nuclear plant is a distraction for Iran’s power sector. The total installed generating capacity in the country is around 56,000MW, so even if Tehran is able to develop more nuclear plants in the future they will only account for a small fraction of the country’s power output.

Many of the country’s plants are more than 30 years old and are in need of renovation or replacement – the average efficiency rate for Iranian power plants is 36 per cent. In addition, up to 18 per cent of electricity is lost through the transmission and distribution network, leaving the country with little spare capacity.

Iran has been increasing its power generation output in recent years, from 57.7 terawatts (TW) in 1990 to more than 206TW by 2008. It is now adding 5,000MW a year to its network, says Majid Namju, Iran’s Energy Minister.

Among the new plants to recently begin operations was the 1,000MW oil-gas concentrated power plant in Assalouyeh, which came on line in June and will provide power for development projects in the South Pars gas fields. The following month, two units of the 336MW Kermanshah combined cycle power plant came on line, along with the 648MW first stage of the Khoramshahr combined cycle power plant. A further 324MW is due to be added by the end of the year at the latter site and a third stage will add 480MW, taking its final capacity to 1,452MW.

The Ardebil power plant in the northwest of the country is also currently being expanded from a current output capacity of 685MW to 1,500MW and the Iran Water & Power Resources Development Company says it has seven hydroelectric plants under construction with a total capacity of 7,000MW.

All these projects are part of Iran’s vast capacity-building programme embarked upon in response to forecasts that peak loads will hit 69,500MW by 2015 and almost 90,000MW five years later (see table).

In all, some 18,000MW was added to the network between March 2005 and March 2010, as part of the country’s Fourth Development Plan. A further 25,500MW is due to be added during the current Fifth Development Plan which will end in 2015. Last year alone $6.3bn was allocated to the power generation industry, following investments of $1.8bn in 2007 and $3.2bn in 2008, reveals Turquoise Partners, a Tehran-based investment firm.

The government is hoping that an increasing proportion of the work will be taken on by the private sector in the future. Currently, the private sector accounts for just 7 per cent of power generation, but the Energy Ministry has set a target of increasing this to as much as 60 per cent over the course of the Fifth Development Plan.

The sale of the Sabz Binalood Power Plant Production Company, which is currently under way, highlights how difficult it will be to meet this target.

The plant is currently owned by Iran Power Generation, Transmission & Distribution Management Company (Tavanir). On 15 August, the Iranian Privatisation Organisation launched the tender offer for shares in the power plant, setting a minimum valuation of IR283.4bn ($28.5m). It is the first of some 20 plants that are due to be sold by the state, with the Montazer-e Ghaem, Khoy and Mashhad plants all due to follow in the near future.

The shares in Sabz Binalood will be sold to the single highest bidder in the auction, rather than being floated on the stock market. But it is a quasi-government company, rather than a private firm, that is expected to emerge as the successful bidder due to the lack of financial or technical abilities in the private sector.

“These power plants are worth millions and, in some cases, billions of dollars and there are not many private players in the market that have the kind of resources that are needed,” says Ali Mashayekhi, head of investment research at Turquoise Partners. “I don’t see any obstacles in true privatisation, but it’s just the issue of having the financial resources and the technical capability.”

Private and public sector entities alike face similar problems in building up Iran’s power sector. International sanctions make it difficult to develop the level of expertise needed.

“The sanctions are creating some problems with money transfers and with the importation of equipment,” says the consultant. “These sanctions are not new and all of the power plants could somehow manage to operate and be connected to the grid, but we need new technology for high-capacity power plants, for example for the gas turbines.”

Alongside the effort to boost output, the government has been trying to reduce demand and address the inefficiencies in the current system. The Energy Ministry has said it wants to cut transmission losses to 10 per cent, which would be close to the international average. That may be technically feasible and is certainly uncontroversial, but the bigger issue facing the sector is far more contentious: Reforming the system of subsidies that keep prices artificially low and demand high.

“The cost of generating a kilowatt hour of electricity stands as high as $0.08, whereas consumers are charged no more than $0.02 for every kilowatt hour,” Energy Minister Majid Namju told the Tehran Chamber of Commerce in mid August. “The fact that electricity is already offered to consumers at a loss … poses a major challenge to the energy machine.”

President Mahmoud Ahmadinejad’s government has repeatedly talked about cutting subsidies for food, fuel and electricity, which cost the state up to $100bn a year. The $347bn budget for the current Iranian year, which began on 21 March, includes provisions to phase out $20bn of energy subsidies, with cash handouts being given to poor Iranians to offset the impact of higher prices.

Subsidies are expected to start being reduced from October, although the speed at which they will be cut is unclear, as do the details of the new system for compensating the most vulnerable. “The ultimate plan is to drop subsidies so that the unit price of electricity, fuel and all other energy resources are at production cost,” says Mashayekhi.

“The most likely scenario is that in the first year they will probably double the price and then over the next four years they will probably gradually increase it by 18-20 per cent each year so by the end of year five the price would match the production cost.

“There is widespread agreement that this needs to be done because it is hurting the Iranian economy,” says Mashayekhi. “If they don’t do it we’ll see more budget deficits in the coming year. There is a lot of disagreement over whether it should be done sharply or through a slow gradual process. There is also a lot of debate over how the increased costs will be compensated, both for households and for industry.”

It will take strong political nerves for Ahmadinejad to push ahead with these subsidy cuts, particularly if price rises lead to strikes or other protests. Already this summer, his government was forced to back down over a plan to raise a sales tax by 70 per cent when merchants in the Tehran bazaar went on strike.

With the worst of the summer heat now fading, those working in the country’s power sector should be focused on how to ensure enough generating capacity next year. But while the threat of electricity shortages has now passed, the power sector could provoke more problems for the authorities before the year is over.