Extention of Key Incentive Scheme Boosts Iran's Renewable Energy Market

Since the lifting of sanctions, Iran’s renewable market has emerged as an exciting destination for international green energy developers and investors. Growth can largely be attributed to a generous Feed-in-Tariffs (FiTs) scheme and the government’s continued effort to promote policies that, in combination, aim to strike the right balance between promoting Iran’s renewable market, removing barriers to project deployment, and building the technical capacities of the domestic industry.  By looking at some of the recent but important developments in Iran’s renewable energy (RE) market, including the nature of government policies, it becomes clear that the Rouhani administration has set a path for growth enabled by international investment.  

Iran’s generous program of green subsidies has been the key determinant of the attractiveness of its renewable market, and with the government’s recent decision to maintain its current FiTs for another 12 months, the market is set to shift into a higher-gear. The extension of the FiTs scheme, which was delivered through a decree signed by the Minister of Energy in mid-March 2017, demonstrated the continued commitment of the government in sustaining the momentum of its favorable renewable energy investment landscape among many of its regional and international competitors. The consistency in the nature of Iran’s renewable policies in the last three years is by extension, a major confidence-building measure for developers and investors, whose interest in a given market is not cultivated by generous FiTs alone, but also by stable and predictable policy environment.

Interestingly, the recent extension Iran’s FiTs scheme comes at a time when in most of other markets across the globe, governments are either reducing, halting or terminating their FiTs schemes all together. This has been a major cause of concern for green developers and investors with huge vested interest in those markets. With a reduction in government incentives and flattened demand in the European market, green developers and investors are now eagerly looking into opportunities in other attractive markets. Iran comes at the top of the list.

Opportunities and Limits of Feed-in-Tariffs

The extension of Iran’s FiTs scheme presents a window of opportunity that will not be around forever, and so the countdown has already begun for developers to take advantage of the existing rates by signing their Power Purchase Agreements (PPAs) with Iran’s Renewable Energy Organization (SUNA) prior to March 2018. In light of this, it is projected that this year SUNA will expand its pipeline of renewable projects to be developed by international developers in partnership with local partners.

Currently, Iran’s FiTs scheme stipulates a 20-year PPA framework that supports a series of 13 renewable plants. The structure of the scheme is deliberately designed to increase the solar and wind capacities of the country, while also encourage procurement of smaller-scale projects by offering higher margin of profit for systems under 10MW and 30MW capacities. The reason behind this policy is twofold. On the one hand, it allows an experimental approach, where the impact of the initial projects that are pending construction and connection in this fledgling market can be assessed, and on other hand, it enables for the competence and commitment of developers to be evaluated in smaller projects prior to issuing further licenses for larger-scale developments. For the most capable developers, Iran’s FiTs system and structure simply means a strategy of portfolio aggregation—that is, building smaller projects that can be aggregated at a later stage. Therefore, many of renewable projects that will mushroom across different regions of the country in the next 24 months will consist of solar photovoltaic plants with 10MW to 30MW of capacity.

Nevertheless, the success and growth of Iran’s RE market cannot not rest on its generous FiTs scheme alone. For example, rival renewable markets, such as UAE, Jordan and Egypt, are currently developing and deploying projects on a much larger-scale than Iran without even considering the need to offer a generous FiTs scheme. For example, the launch of Dubai’s recent large-scale 200MW solar project in March, which was implemented at a record-low bid of 5.6 cents per kilowatt-hour, was product of a competitive RE tendering scheme, which is an alternative means of engaging developers.

The rapid pace of progress in the region’s RE markets, has made Iranian authorities ever more conscious that in parallel to providing FiTs, they need to institute and maintain multiple complementary mechanisms, such as competitive bidding tenders. Taking this in mind, the recent announcement of Yazd Regional Electricity Company for its plans to hold Iran’s first RE tender on the development of a 150MW utility-scale solar project is precisely aligned with this new emerging strategy of Iran—that is, to maintain its current FiTs scheme for broadly incentivizing development projects on smaller-scale, while phase in competitive bidding tenders as a new complementary measure to support larger-scale projects.

Project Deployment Mechanisms

In parallel to government’s effort to incentivize this market in the last two years, SUNA has also been hard at work in addressing deficiencies in regulations, removing barriers-to-entry, and setting a viable and functioning mechanism for project procurement and development. Designing an effective implementation framework, is in many respects the most challenging part of the puzzle for new emerging renewable markets, such as Iran. It requires a significant deal of coordination between various bureaucracies and organizations, followed by a synchronization of relevant policies and regulatory frameworks that enable project procurement and development. The good news is that the Iranian RE market has made great strides in this regard. The successful launch of the 14MW Hamedan solar park in February 2017, followed with the upcoming launch of Esfahan 10MW solar park, would not have been possible without a functioning project development mechanisms.

The achievements of SUNA in responding to many of technical and non-technical impediments of project implementation framework and regulation deficiencies means that the organization can now expand its activities into other important areas, such as more active investment promotion activities.. This includes establishing and developing new synergies and facilitating dialogue with international RE bodies for learning best practises in areas of policy, technology and financial resources, while also engaging with both local and international financial investors to provide the necessary project finance facilities. The recent delegations from the International Renewable Energy Agency (IRENA) and the Norwegian Export Credit Guarantee Agency to Iran to hold meetings with SUNA reflect the increased communication and engagement of this organization with international stakeholders and bodies.

Building Technical Capacity

Support for renewable energy will not only bring numerous environmental benefits, but will also have significant economic yields for the country. The RE sector can important source of job growth should investment support local capabilities and infrastructure. Iran’s renewable market, despite in its infancy, has already inspired countless entrepreneurs to set up localized businesses in the value chain of renewable power generation and development solutions.

This has not gone unnoticed by the government, which has particularly designed its FiTs scheme in order to foster technical capacity within the industry. The program supports local businesses and entrepreneurs active in this field by allocating a premium of up to 30% on base FiTs rates to those projects that utilize locally-produced content. This premium is attractive enough to encourage international developers to maximize integration of domestically produced technologies, or to explore new local manufacturing of key components.

The next generation of Iranian electrical engineers and technicians has already demonstrated resilience, technical expertise and an entrepreneurial-mindset by not only creating and supporting the value chain of electricity generation of the country, but also exporting their services, equipment, and technologies to the regional markets. To demonstrate, Iran’s power industry, exported over USD 3 billion in electric engineering services and goods to the regional market last year. Aside from supportive policies, the long-term potential to use Iran as a launchpad for regional expansion, sets the country's renewable energy market apart from its regional rivals. Investors are beginning to take note. 

Photo Credit: Financial Tribune

Renewable Iran: Creating the Energy Network of the Future

The global energy industry continues to find greater value in efficiency and clean technology, with a rapidly growing reliance on renewable energy. For Iran and the Middle East however, oil and gas have hardly been challenged as the dominant industry forces. But now that Iran prepares to once again open doors to the international business community, we must ask if renewables can, or even should, play a greater role in the future of Iran’s energy sector.

So, what’s the problem?

Iran is the country with the world’s largest conventional gas reserves and is the world’s third largest producer of natural gas - behind the US and Russia. Given these abundant reserves and production, you have to question why has a country of Iran’s population been a consistent net importer of natural gas during the last decade. The answer is Iran has very high per capita consumption of gas and other fossil fuels, with much of it going into power generation. In 2014, Iran burned 50 billion cubic meters of gas for power generation: that is more than in the UK, Germany, Italy, and France combined. In fact, in 2013, Iran consumed more gas than China, and was the 8th biggest energy consumer in the world, despite being the 32nd largest economy (World Bank) and the 17th most populated country. 

Moreover, according to the International Energy Agency (IEA), Iran is among the top ten global emitters of CO2. Iran is the top emitter in the Middle East and accounts for almost a third of the region’s total carbon emissions. Fossil fuels account for almost 98% of Iran’s total primary energy consumption.

Of the 70 gigawatts (GW) of power generation capacity installed in the country, only around 11 GW are low carbon sources with most of that hydro (10 GW) while 1 GW is nuclear, and 0.1 GW is either solar or wind. The rest is largely old, inefficient, and polluting fossil fuel power plants burning either fuel oil or natural gas. According to Iran’s Ministry of Energy, over the past decade electricity demand has grown by almost 6% annually, and is expected to grow by at least 2% - 4% through the end of the decade. There are now more than 30 million grid connected clients in Iran, compared to less than 20 million only ten years ago. 

So, Iran faces the problem, how can it meet this rapidly growing electricity demand while reducing its consumption of gas and fuel oil to eliminate imports (and facilitate exports), reducing carbon emissions to more average global per capita levels, effectively addressing the challenging air quality issues, and still attracting foreign investment and new technology?

The Role of Renewables

The answer is likely to be found in a combination of a modernisation of its power generation capacity, greater energy efficiency, and much greater reliance on renewable forms of generation.

In terms of renewables, Iran is naturally blessed with very good solar and wind conditions. Iran receives around 300 days of sunshine each year, compared to less than 64 days in Germany, the world’s leader in solar power with almost 25% of the global solar power capacity. The Global Wind Energy Council stated that some of Iran’s mountainous areas in the west and northeast have unique wind corridors that have plenty of potential for renewable generation.

The Iranian government is starting to get that renewables should now be an important part of the country’s energy strategy. In early 2014, Iran’s Ministry of Energy unveiled its plans for adding some 5 GW of renewable power capacity, mostly wind, to the country’s power fleet by 2018. Since the beginning of 2014, construction for around 400 MW of renewable capacity has started, and contracts for more than 500 MW have been awarded. The Iranian government increased its budget for renewable energy by more than 400% last year to around $60 million; although still small, the growth is going in the right direction.

Iran has also adopted a number of new policies towards renewable expansion, using similar policies to many Western European countries and opening up the sector to foreign investors. The Ministry of Energy has set up the Renewable Energy Organization (SUNA) that will administer these policies that include a feed-in-tariff scheme, under which the Ministry of Energy will buy the power generated from renewable sources at set tariffs for a 20 year period. At the set energy tariffs, investors are expect to be able to recover a full return on their investment in around four years of operations. In addition, the Iranian government is committed to providing up to 50% of the cost of installing residential solar panels, and to installing solar panels in public buildings. 

Another spur to renewables growth comes from the calls to introduce a carbon emissions trading scheme. In February 2014, Iran announced that it is planning to introduce an emission trading scheme (ETS) that would cover its power sector. Although little information is available about the structure of the scheme, it is certain that such ETS's are designed to discourage the use of inefficient fossil fuel burning power plants. The emissions cap will eventually increase the power generation costs for inefficient power plants and will further support the growth of clean energy and renewables.

With all the challenges Iran is facing, renewable energy offers a unique sustainable solution for Iran to fundamentally overcome these issues, while providing significant investment opportunities for international investors, and also boosting the overall sustainability of economic growth. 

Photo Credit: Wikimedia