Dubai’s Quest Energy is developing an independent power project (IPP) in Iran, in the latest sign that foreign firms are willing to invest in Tehran’s power industry despite US sanctions.

Table: Iranian power plans

Quest is developing the €320m ($499) plant in partnership with Iran Power Projects Management Company (Mapna). The consortium will build a 1,000MW open-cycle gas-fired power plant at Shiraz. Mapna will supply the turbines, which will be built to a Siemens design. The project, known as Fars 1 IPP, will be financed by a group of banks led by the Islamic Development Bank.

Mapna and Quest have established Fars Gas Power Plant Company, which will develop the plant. The project company has signed a power purchase agreement and a long-term energy conversion agreement with the state-owned Iran Power Development Company (IPDC).

With demand for power growing at more than 8 per cent a year, and signs of supply shortages, the Iranian Energy Ministry is keen to attract more private investment to the power sector.

The residents of Tehran and other cities have been experiencing power cuts on a daily basis in recent weeks, without electricity for up to four hours a day as summer temperatures soar.

The country’s first private power plant was built in 2004 and Tehran is now planning to develop up to 43 new plants and privatise existing ones.

In July, it announced that it had issued licences for the development of build-own-operate and build-own-transfer projects. "More than 43 preliminary agreements have been issued and more than 38,000MW of private power capacity will be constructed," says Davud Manzoor, deputy energy minister for strategic and integrated planning.

The ministry plans to privatise 10 existing power plants by the end of the year. "In the first step, the shares of eight thermal power plants and two wind power plants will be issued on the stock exchange," says Manzoor. "The total capacity of these plants is nearly 8,000MW."

Manzoor says the ministry would like to attract both local and international developers.

US-led sanctions against the country mean that Western companies are unlikely to invest in Iran, but some Gulf investors have attempted to enter the market.

Saudi Arabia’s Xenel Industries had planned to develop a 1,200MW IPP at Tabriz, but the project has been on hold since last year because of disagreements over price with IPDC. (MEED 21:12:07).

"Four years ago, the deal could have happened," says one source close to the project. "The power purchase agreement was initialled, but IPDC never accepted the tariff. The availability of credit is now much less and the cost of power stations has gone up dramatically."

In late July, the Iranian government announced that consumer electricity tariffs could be increased fivefold this year in a further effort to reduce demand for power in the face of increasing supply shortages.

Prices could increase to IR770 ($0.08) a kilowatt hour (kWh) from the current tariff of IR160 a kWh. "Prices have been very cheap for a long time," says one industry source.

The official inflation rate in Iran is 26 per cent.

The deal with Quest Energy builds on other links between the UAE and Iran. A feasibility study was recently completed on a proposed electricity interconnection between Dubai and Iran.

The 180-kilometre-long, 1,500MW interconnection will use high- voltage direct current to supply Dubai with power from the Iranian national grid (MEED.com 24:7:08).