Iraqis have got used to more regular electricity supplies in the past couple of years, and the blackouts of the post-US invasion years are receding into memory.

The improvement is the result of sustained efforts since 2006 to boost electricity provision. Iraq has increased its installed generating capacity by 40 per cent over the past three years – from about 8,500MW at the end of 2006 to 12,000MW at the end of 2009, according to the US Special Inspector General for Iraq Reconstruction (Sigir).

US government-funded projects have added some 2,913MW of new and restored capacity, enabling electricity supply to the national grid in the final quarter of 2009 to rise to 5,952MW, a 19 per cent increase from the same quarter in 2008. By March, this had edged up to an average of 6,370MW.

Yet, Iraq’s power plants on average operate at only 44 per cent of their full capacity. Peak demand is about 13,000MW, but the country is currently only capable of producing 7,000MW of electricity. The country still faces a large gap between supply and demand, forcing it to import an average 16,000 MWh a day of electricity from neighbours Iran and Turkey.

Improvements in supply cannot mask a daunting list of challenges facing the Electricity Ministry, as it seeks to attract $27bn of investment into the sector and double generating capacity within a tight six-year timeframe.

Hurdles

Inadequate fuel supplies, security problems, a weak contracting process, lack of local managerial and technical capacity, rising local demand, as well as financing constraints, all represent significant hurdles to improving power supply in Iraq.

Confronted by such challenges, Baghdad’s response has been to think big. In December 2008, it awarded the US’ GE a $3bn contract to provide 56 heavy-duty gas turbines to 10 sites across the country. A separate 16-unit deal was also signed with Germany’s Siemens in the same month to provide 3,150MW of turbines at a cost of E1.5bn ($1.9bn). The turbines are part of a fast-track project to increase generating capacity. The ministry’s main priority now is to build the plants so that the new kit can come into service over the next couple of years.

The country still faces a large gap between supply and demand forcing it to import electricity

It kick-started the process in September 2009, with the award of two $85m contracts to Canada’s SNC Lavalin and the local/UAE Uruk Engineering Services – the former to install two 125MW GE turbines at Hilla, south of Baghdad, and the latter for four 160MW turbines at Al-Taji, north of the capital. In April, Uruk commenced work at the site, and the project is due to be completed by mid-2011.

The SNC Lavalin contract is ready to be signed, but MEED understands the government must first iron out a tax issue, which involves the Finance Ministry attempting to apply an old Coalitional Provisional Authority (CPA) order that imposes taxes on foreign firms building infrastructure – previously, firms were exempt from such a tax liability. The CPA was set up as a transitional government following the US-led invasion of Iraq in 2003. “This is holding things up,” says one Western official based in Baghdad.

Delivery of the GE turbines will begin this year. At least 24 of the 56 turbines are due to be shipped to Iraq during the course of the year, with another 24 to follow in 2011.

Yet, the process of selecting engineering, procurement and construction (EPC) contractors to build the other plants may take longer than the Iraqi authorities anticipate.

The procurement process is causing headaches for some contractors. Sources say that local subcontactors are trying to bid on projects that they are not financially or technically capable of executing.

“A lot of big Western firms are wary of coming in and bidding and then getting lowballed by some Iraqi firm, who isn’t qualified to do the job,” says the official.

GE has been hired by the ministry to help in the selection process, and they are also expected to bring in their own EPC partners. About 70 contractors initially submitted letters of interest; the shortlist has now been cut back to 39. The ministry is now interviewing these companies to determine which can operate as EPC contractors, and which as subcontractors. 

The ministry’s piecemeal approach to expanding power capacity – commissioning turbines separately from the construction of power plants – has come in for criticism. “The strategy they have taken is quite unique. Usually you procure packaged projects that result in commissioned power stations producing electricity,” says an official. “The downside of this approach is that they have run into difficulties financing the downstream work required to turn this equipment into operating power stations.”

Funding problems

Lack of finance has emerged as one of the biggest challenges facing Iraq’s power sector. The government proposed the issue of two one-year Treasury bills in June 2009. The first for $2.4bn to help pay GE and a second for $600m. But members of Iraq’s parliament raised objections to the plan.

As a result, the Finance Ministry stepped in to say it would meet the obligations using existing revenues. The ministry has been working to support payments of the initial contracts to ensure the investment in the turbines does indeed lead to new power stations and an improvement in the country’s electricity supply.

We will have to address issues of building additional transmission lines to transfer power

Jeff Larkin, Parsons Brinckerhoff

Although donor support from the US has now been wound down, Japan still has uncommitted money set aside to loan to Iraq, with the power sector likely to figure prominently if it is disbursed. Despite this, there are still significant unmet financing requirements.

“[Iraq is] still struggling to fund the GE and Siemens purchase,” says a donor representative. “The government might have covered part of the turbines’ purchases through T-bill issues, but instead they have to cover it through public resources, and also all the EPC work that needs to go on to turn these into operating power stations.”

Contractors are also struggling to fund their construction costs. Letters of credit from the Trade Bank of Iraq can take months to be issued and major contractors are experiencing difficulty in obtaining the export credit guarantees they need to proceed with projects. “One of the biggest impediments is export credit agencies don’t look on Iraq favourably, so it is proving difficult for EPC contractors to secure some of the guarantees,” says Jeff Larkin, country manager at Parsons Brinckerhoff, a US contractor advising on Iraq’s power sector masterplan.

But given how critical a role the power sector plays in improving living standards, analysts expect financing will ultimately be made available. “I think they will find money. Yes, it’s a big burden, but the issue is they need to contract some competent legal, financial and technical people,” says a Western official in Baghdad. Iraq is also considering launching independent power projects (IPPs) to access other forms of funding, but the security situation and lack of maturity of the local private sector is stymieing the process.  

However, the Kurdistan Regional Government (KRG) has made progress with privately financed schemes. The local Mass Global Investment Company awarded two contracts totalling $200m to GE in February 2010 for power equipment and services for its IPPs at Dohuk and Sulaimaniyeh, which will have a combined capacity of 750MW. Construction of KRG’s first 500MW IPP at Erbil has already been completed.

It is likely be a while before a successful IPP gets off the ground in other parts of Iraq. The Electricity Ministry has identified six potential IPP projects, but these may struggle to provide a quick-fix solution to the supply/demand gap.

“The ministry’s thinking is that IPP developers can come in and build new plants much quicker than it can by itself. But at the end of the day, it might take as long to negotiate an IPP contract as to build it,” says Larkin. 

A more immediate challenge that needs addressing is the country’s feedstock shortage. Iraq does not have access to an optimal fuel supply due to the limited availability of natural gas. As a result, it has had to resort to burning fuels, either crude oil – which is used at the six-unit Qudas plant – or heavy fuel oil – used at the Baghdad south and Baiji power stations. This is inefficient and expensive and US officials estimate the use of the liquid fuels reduce output by 800-1,200MW.

Iraq urgently needs to increase its gas production. In a new proposed bid round, three southern non-associated gas fields will be put up for auction, raising the prospect of more gas for power stations, but the main focus is to capture flared gas from the southern oil fields.

In September 2008, UK/Dutch Shell signed a heads of agreement with Iraq’s South Gas Company to capture more than 1 billion cubic feet a day of flared gas.

The equivalent of about 4,000 MW of capacity is being flared in the south, but there is still no firm commitment from the Oil Ministry that this will be used for power generation.

Furthermore the Shell project is not making headway, largely because South Gas Company has encountered difficulties raising funding for the project. It expected that flared gas will only be used to fuel power plants in the country by 2015 at the earliest.

“Lack of fuel is the biggest issue,” says Larkin. “There used to be an abundance of heavy fuel oil, but that is no longer the case.”

Upgrading networks

But improvements to Iraq’s transmission and distribution networks will also become more pressing, once the country increases its generating capacity. The transmission system needs new 400kV and 132kV lines and substations, as well as the repair of existing lines. The transmission system is currently able to sustain some 8,000MW of generation.  

“We are getting to the stage in the planning process where we will have to address some fundamental issues of building additional transmission lines to transfer the power,”
says Larkin.

There are other steps the government can also undertake to tackle the supply/demand balance, say analysts. For instance, ending electricity subsidies would help curb power consumption.

Structural reform of the sector is also needed, say analysts. The separation of powers between policymakers and regulators would ensure better transparency and more efficient management of the sector.

The blackouts may be less frequent, but Iraq still has much to do to invest in new facilities and rehabilitate existing plants. And even then, this might not be enough, as power demand is rising rapidly in the country.