Electricity shortfall drains Rouhani’s growth drive

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Plunging oil prices have already undermined Iran’s fledgling economic recovery. But another energy issue is also holding back President Hassan Rouhani’s attempts to revive the country’s underperforming industrial base: a lack of power-generating capacity.

“It is absolutely wrong to think we can achieve economic growth without having sufficient electricity production,” Hamid Chitchian, Iran’s energy minister, warned recently. “The electricity sector has consistently been weakened over the past five years and investment has dramatically decreased.”

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Decades of heavy government subsidies have left Iran with high levels of energy consumption — per capita consumption of electricity is about 2,160 kilowatt hours compared with 1,300 kWh for neighbouring Iraq.

While Iran’s energy demands are growing at about 6 per cent a year, growth in capacity is limited to a third of that. The energy ministry admits its depleted power network requires at least 120tn rials ($4.4bn) of investment.

This is a severe challenge for a country also grappling with the impact of crippling international sanctions related to its nuclear power programme and the legacies of populist policies implemented by its previous government. Sliding crude prices are also having an impact. The IMF said in October that Iran needed oil prices above $120 a barrel to balance its books. Brent crude, the international benchmark, was on Monday trading at $58 a barrel.

The country has, so far, avoided the widespread electricity outages that affect other emerging economies unable to meet their energy demands, such as South Africa.

However, this is in part because Iran’s economy shrank for two successive years to March 2014, which led to a 30 per cent slump in industrial energy use.

With the economy growing again — by 4 per cent in the half-year to September — concerns are mounting over whether growing demand can be met. “The current trend of low investments means the sector cannot meet a further rise in consumption,” said Mohammad Parsa, chairman of Pars Tablo, a privately-owned electricity company.

Alireza Kolahi, chairman of Iran Electrical Industry Syndicate, which comprises 500 largely privately-owned companies, said that without additional investment and capacity, power cuts were likely. “The current drought means we cannot fully use hydro-electrical plants” that are an alternative source, he added. Iran has a number of large electricity generating dams, such as at Karkheh.

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Part of the problem is that the pace of construction of new power plants lags behind rising demand. This can in part be blamed on the previous government of Mahmoud Ahmadi-Nejad, which kept energy tariffs artificially low in an effort to appeal to poorer voters.

When Mr Ahmadi-Nejad slashed energy subsidies in 2010, he required government ministries to pay back the subsidies to people in monthly instalments. This is now a huge burden for Mr Rouhani’s administration, which has to pay most Iranians about $17 every month.

As well as holding back investment in electricity infrastructure, including the renovation of older power plants, it has also left the energy ministry unable to pay 240tn rials of outstanding debts to contractors and banks. The ministry said power generation costs Tehran 1,500tn rials a year, but the income is only 50tr rials.

In an effort to address its problems and lift capacity, Mr Rouhani’s government has drafted plans to expand the distribution network, cut waste, reduce consumption by raising domestic and industrial tariffs and investing in the renewable energy sector.

Hundreds of thousands of students graduate from Iran’s universities each year with electricity-related qualifications. Exports of electricity devices to neighbouring countries also raises $3bn a year — income which helped to save several private energy companies.

“The potential is high, particularly for exports,” said Mr Kolahi. With the right investment, Iran’s electricity sector could become an “engine to help the economy out of its current stagnation”.

FT.com