A jubilee year for Iraq has started positively with the formation of a coalition government at the end of December after almost nine months of inter-party wrangling. Prime Minister Nouri al-Maliki, a former Islamic Daawa Party militant with close ties to the Islamic Republic of Iran, stays as prime minister despite his party coming second to the multi-sect Iraqiya Party in terms of the number of seats won in elections last March. But there is enough diversity among the 34 ministers appointed to the cabinet to reassure those hoping that 2011 will be the start of a fresh era for the people of Iraq.

This August is the 90th anniversary of the creation of Iraq. There have been many false dawns since then. The deposition of the Baathist regime led by president Saddam Hussain in April 2003 proved to be one of them. Saddam was captured and executed, but turmoil in Iraq intensified as insurgents battled the Iraqi military and its coalition partners. More than 100,000 civilians are estimated to have been killed since Saddam’s fall.

The killing continues. Violent attacks are radically down on their 2007 peak, but were still averaging 35 a day in early December. That’s about 10,000 a year.

This is only one element of the unenviable legacy the coalition inherits. Once one of the Middle East’s most advanced economies, Iraq has been radically reduced during 30 years of war, sanctions, occupation and domestic rebellion. Its per capita GDP in 2010 was less than $3,000, about an eighth of Saudi Arabia’s. Unemployment is probably over 20 per cent of the working population, about a quarter of Iraqis live in poverty and a fifth don’t have electricity. Millions, many of them highly skilled, have fled Iraq.

The country is also effectively divided. The Kurdistan Regional Government (KRG) controls most of Iraq’s three northern governorates and the oil reserves they contain. It’s not publicly acknowledged, but Kurdish independence is largely complete and probably irreversible. The KRG, itself a coalition of fractious Kurdish parties, successfully insulated itself from the turmoil that swept the rest of Iraq after the fall of Saddam. It’s the only part of Iraq that produces surplus electricity and where business is booming, but no one can afford to take peace for granted in any part of Iraq.

The government’s biggest challenge after security is rebuilding Iraq’s ruined infrastructure. And nothing will add more to its credibility than restoring Iraq’s electricity industry, once the region’s most advanced. Outside the three northern governorates, electricity generation in the summer of 2010 was only moderately higher than it was in 2002. Demand has more than doubled over the same period. According to Electricity Ministry figures, peak demand grew by almost 2,500MW in the year to August 2010. There was no production increase. The result was a growing number of brown-outs and power cuts last summer that exasperated the Iraqi people. The failure of the power system was the cause of riots in southern Iraq in June 2010 that led to two deaths and the resignation of Iraq’s Electricity Minister.

The Ministry of Electricity plans to build 13,000MW of generation capacity by 2016. These include its first four independent power projects, under bid as this article was being written. A masterplan calling for total investment of $55 billion in electricity in 2015-30 has been completed.

The first obstacle is a shortage of fuel. Most of Iraq’s electricity is produced using liquids: crude oil, gas oil and heavy fuel oil. At the same time, about 700 million standard cubic feet a day (cf/d) of natural gas that could be used in power stations is being flared in southern oil fields. The first big task is capturing the gas and this is being tackled by the Shell/Mitsubishi joint venture mandated to work on gas processing projects in southern Iraq. Delivering the associated gas the new power stations will need involves Iraqi oil production rising radically and quickly. Oil output at the end of 2010 hit its highest level since the UN embargo was imposed following Iraq’s invasion of Kuwait in 1990. Whether it can be lifted sufficiently to satisfy the power industry’s needs will depend upon production targets being hit and oil producers group Opec’s willingness to adjust to rapid Iraqi oil production.

Next comes finance. Iraq aims to raise sustainable production capacity to more than 10 million barrels a day (b/d), though about 4 million b/d is considered more likely by the end of this decade. Higher oil production and exports will deliver the money Iraqi reconstruction requires, but the government is short of cash today. The IMF estimates Iraq had a $12 billion current account deficit in 2010 and the financial constraints are continuing.

Then there are skill shortages. Iraq doesn’t have companies capable of building and operating modern power stations. Training and capacity building are desperately required.

These challenges constitute a formidable agenda for the new Electricity Minister. It’s the reason that there were few contenders for what is considered to be a thankless job.

To win the peace, the government needs electricity. If there is no power, the anger that feeds the insurgency will grow. But without peace, the capacity for reconstruction is diminished if not destroyed. Peace and power are mutually reinforcing in today’s Iraq. The government needs to deliver both and at the same time.

The MEED Insight Electricity in Iraq report is to be published in January.