US deal crucial for power sector capacity expansion in Iran

In order to attract investment into its power sector, Tehran needs to secure a lasting, comprehensive deal with the US over its nuclear programme. Published in MEED, 8 January 2014

There are few places in the world where electricity generation is as hot a political issue as it is in Iran. The concerns that the regime in Tehran is using a legitimate pursuit of civilian nuclear power as a cover for developing illegitimate nuclear weapons mean that its power industry often makes the front pages of newspapers around the world.

Currently, Iran has just one functioning Nuclear Power Plant, about 18 kilometres south of the city of Bushehr on the Gulf coast. The facility was built with the help of Russia and began production in September 2011, reaching its full output of 1,000MW in August the following year. But this plant is simply the first stage of a longer-term strategy to build up a sizeable nuclear power capability.

More reactors

In late December, Ali-Akbar Salehi, head of the Atomic Energy Organisation of Iran, told the local Channel One television station that the body had started negotiations with Russian officials to build four more nuclear reactors. It is not clear where these will be located, but senior regime figures have spoken in the past about building more nuclear plants at Bushehr, as well as at a site further up the Gulf coast at Darkhovin, close to the Iraqi border.

Earlier in the month, Salehi had suggested the country was planning many more nuclear plants. “We should draw up a plan for [the] establishment of 20 power plants with capacity of 1,000MW each,” he said, as reported by the state-controlled Islamic Republic News Agency on 1 December.

In total, at least 16 sites have been designated for the construction of nuclear plants, according to a framework for cooperation agreed between Iran and the International Atomic Energy Agency in Geneva in early November last year. If plants are built at even a small proportion of those locations, it is likely to raise the hackles of some of Iran’s opponents in Israel, the US and elsewhere.

But whatever the international concerns, nuclear power seems likely to remain part of the country’s energy mix in the years ahead. The interim deal struck in Geneva on 24 November 2013, between Iran and the P5+1 group of Western powers, forces Tehran to reduce its stockpile of heavily enriched uranium. However, the deal does not stop it from maintaining stocks of nuclear fuel enriched up to 5 per cent, which is sufficient for use as a fuel in nuclear power plants. US officials have repeatedly stated that the interim deal does not offer Iran any guarantees over its right to uranium enrichment in the future, but senior figures in Tehran have been even more adamant that they regard it as vital. In a letter to Supreme Leader Ayatollah Ali Khamenei after the Geneva deal was reached, President Hassan Rouhani said the agreement meant the world powers had acknowledged Iran’s nuclear rights, including its right to enrichment.

Such statements mean any longer-term, comprehensive deal with the wider world will almost certainly have to allow room for Iran to enrich uranium to a level that means it will be able to continue with its nuclear power plans.

“There might be some opponents who are so concerned about Iran as a nuclear power that they want to go all the way and eliminate its nuclear programme altogether, which would practically kill the deal,” says Nader Habibi, professor of Middle East economics at Brandeis University in the US. “I think Tehran would reject any deal that said zero enrichment. But I think the US government is preparing its public to allow Iran some limited enrichment, perhaps 3.5 or 5 per cent, under international monitoring.”

Thermal power

For all the international attention given to Iran’s nuclear industry, however, the day-to-day reality for its power sector is more prosaic. The Islamic Republic relies almost exclusively on conventional thermal power plants, which account for about 93 per cent of the total electricity generated in the country. Most of the remaining 7 per cent of power comes from renewable sources including hydroelectric plants and wind farms.

Overall, electricity generating capacity has been increasing by 3-5 per cent a year in recent years. Output from renewable sources has been rising far faster, by more than 25 per cent in three of the past four years, but that is from a very low base. The most significant increases have come from gas and combined-cycle facilities, where generating capacity has been expanding by 5-9 per cent in most years.

Iran is in a comfortable position when it comes to electricity generation and is a net exporter of power, with export or swap arrangements in place with several neighbouring countries including Afghanistan, Armenia, Azerbaijan, Iraq, Pakistan, Turkey and Turkmenistan.

The trade in electricity can reach sizeable amounts. On 27 December, for example, Iran exported 1,987MW of power to Afghanistan, Iraq, Pakistan, Armenia and Turkey, and imported 987MW from Armenia and Turkmenistan.

Growing exports

Iran’s energy minister, Hamid Chitchian has spoken approvingly of the potential for exporting more electricity, telling the semi-official Fars News Agency in October that “We are moving on a growing trend in exporting electricity to neighbouring countries including Iraq, Turkey, Armenia, Pakistan and Afghanistan.”

Power shortages in neighbouring countries offer Tehran a useful route to increase its influence and shore up relations with these states, and it appears keen to exploit this potential. In December, it signed a deal with Pakistan to set up a 1,000MW connection. The project includes a 700km transmission line of 500kV from their shared border to the city of Quetta deep inside Pakistan. The previous month, Iranian officials agreed to increase electricity exports to Iraq, following a request from Baghdad.

These export agreements highlight the fact that the Iranian power sector is relatively well developed when compared with many other countries in the region. Indeed, Iran is virtually self-sufficient in terms of conventional technology. Last year, it exported more than $2bn-worth of electricity and a further $3.1bn-worth of electrical equipment, according to deputy energy minister Sattar Mahmoudi. Export markets for Iran’s technological expertise go far beyond its immediate borders, with projects in Ethiopia, South Africa, Bangladesh, Sri Lanka, Kenya and Nigeria, according to the Tehran Chamber of Commerce.

Even so, the US’ Energy Information Administration says increasing domestic demand has led to some shortfalls in supply during peak periods and the country needs to maintain a steady stream of new projects to prevent the wider-scale blackouts it has suffered in the past.

Attracting investment

The government has at least seemingly been able to attract greater participation by the private sector. In 2010, the private sector accounted for just 7 per cent of power generation, according to local investment bank Turquoise Partners. At the time, the Energy Ministry had set itself a target to bring this up to as much as 60 per cent under the country’s fifth five-year development plan, which runs from 2010 to 2015. Ministry officials were quoted by local media in mid-2013 as saying the proportion had reached 40 per cent. If true, the 60 per cent target could yet be reached, although it is likely some of the plants included in the private sector total are in fact owned by quasi-state bodies controlled by the Islamic Revolutionary Guards Corp or others.

For the power sector to really thrive it probably needs more international investment and expertise. Tehran has expressed interest in attracting more foreign investment into its power industry, beyond the help it receives from Russia with its nuclear power plants. In early December, Salehi claimed Iran was in talks with at least one other country, although the nuclear chief declined to name which.

Since being elected president in June last year, Rouhani has made strides to put the government’s finances on a firmer footing. Among other measures, this involves changes to the system of subsidies for food, fuel and electricity. But as with almost all aspects of Iran’s economy these days, much hinges on his ability to secure a lasting, comprehensive deal with the US over the nuclear programme. If such an agreement can be reached, it will free up the wider economy. That is likely to boost demand for electricity as economic activity steps up again, but it should also allow international capital freer access to the Islamic Republic, perhaps in support of its power industry among other sectors.