By Dalga Khatinoglu
March 23, 2019
The peak electricity demand in Iran and its neighbor clients Afghanistan and Iraq happens in warm months, but during this period last year Islamic Republic’s exports plunged due to high demand at home.
Its electricity imports from Armenia and especially Turkmenistan have been declining dramatically since September. This is possibly due to U.S. banking sanctions, which restrict Iran’s ability to pay its bills.
During international sanctions prior to the nuclear deal (2011-2016), Iran was also unable to pay for Turkmen gas and electricity imports, running up $2bn in debts.
Iran increased nominal power generation capacity by 2.3% last year; less than half of projected growth, but its actual electricity generation increased by only 1% to 312 TWh, a fifth of projected plan.
The growth rate for actual power generation is far below nominal capacity, because the country’s hydroelectric generation decreased by about 60%, pushing actual production down. In other words, a significant amount of Iran’s hydroelectric generation capacity was idle during the last fiscal year.
Iran suffers from water shortage, which is considered by many international and domestic experts the most serious crisis the country will face in the future.
Thermal power plants shared 92% of total power generation, Bushehr nuclear power plant about 2.3% and the rest of came from renewables and hydroelectric plants.
One of the most serious problems in the country’s thermal power plants is their low efficiency, which stands at 36.4%. The index for modern and progressive power plants in the world stand at 60%. Iran has had a decade-old plan to improve the efficiency of thermal power plants. But annual improvements amounted to only small fraction (0.2%) since 2008 due to sanctions-related restrictions on Iran’s access to foreign investments and modern technology.
Money-Losing Power Sector
Iran’s power sector is a losing industry due to low electricity prices and poor efficiency of power plants.
According to estimates by Iranian Parliament Research Center, the cost of electricity generation in the country would reach 294 trillion rials ($2.6 billion, based on open market USD exchange rate) during the current fiscal year. That is about 3 trillion rials less than total revenues (including 42.12 trillion rials in exports).
Therefore, generation of electricity is a loss for the government that controls the whole network.
Thermal power plants receive subsidized fuel from government ($8.3 per 1000 cubic meters of gas, while the regional gas price is about $250) and sells electricity at a very low price (2 cents per a kilowatt hour, against up to 13 cents/kwh in U.S. or 12-35 cents/kWh in EU).
According to the International Energy Agency, Iran with $45.1 billion fossil-fuel subsidies, ranked first in the world in 2017. Almost one-fourth of this huge subsidy, $12.3 billion was allocated to the electricity sector. The is far behind other countries in the Middle East.
For a country like Iran, which according to the International Monetary Fund, has a GDP of $333.6 billion for 2019, this amount of subsidies is extremely high. Iran holds the fourth highest proven oil reserves in the world.