Last year, Iran increased energy prices to end users in a bid to bring payments in line with the true cost of generating power. Residential electricity consumers saw their electricity bills soar overnight.

The measures are part of a broader trend towards making Iran’s power sector more competitive. The government is also in the preliminary stages of creating a system where utilities compete with each other to supply power at the cheapest price.

The country’s ageing power transmission and distribution networks and a similarly mature electricity generation fleet stand in contrast to the modernising programme.

Efforts are being made in this area too with plant rehabilitation and replacement schemes in the pipeline. The Energy Ministry also has plans to further diversify the country’s energy mix. Iran was the first country in the region to develop nuclear power and intends to expand its renewable energy base significantly too. Despite the drive to increase capacity, much stands between Iran and its ambitious plans.

Discontented residents in Iran

Power prices were increased three-fold for residential users in the payment reforms of 2010. To absorb some of the impact, the government introduced direct payments to eligible families. Not everyone has claimed the direct payments and according to a source in Iran, “some people have complained that these payments are not enough; that they are not equal to the subsidies.”

The energy ministry intends to commission smaller plants closer to the demand centres to reduce power losses

There is also discontent about the exemption of industry and government in the rate hikes. The government has avoided imposing electricity price increases on the industrial sector as it fears repercussions on the economy, but this is of little comfort to residential consumers.

The measures have had some positive effects, however. The change in direct tariff prompted a 6.2 per cent drop in electricity consumption. Further energy savings are anticipated following Iran’s move towards a slab tariff system under which high users are charged more for the electricity they consume than customers using less power.

The government also has plans to tackle electricity losses on the supply side. Currently, the country’s electricity grid suffers with high power losses. Electricity distribution networks account for 70 per cent of those.

The Energy Ministry intends to commission smaller plants closer to the demand centres to reduce power losses and to carry out a programme of network upgrades. Another initiative is to deploy more combined heat and power projects to use the full benefits of the fuel.

Aside from an immediate and relatively small reduction in consumption as a result of the electricity hikes, the long-term trend has seen the demand for power in Iran growing steadily. Electricity usage increased ten-fold between 1978 and 2009 to 37,878MW. This has been driven primarily by an expanding population and a broadening industrial base.

To meet rising demand, the Energy Ministry plans to build new power projects and renovate existing generation facilities. Currently, around half of Iran’s power plants are independent power projects (IPPs) with the other half procured by the government directly under engineering, procurement and construction (EPC) contracts.

Increasing IPPs for Iran’s power sector

Farhad Parsi, proposal preparation manager at Iran’s largest power company Mapna Group sees the balance moving towards IPPs, particularly in the case of captive plants for private companies.

“Now it’s more IPPs because many companies do not have enough money to tender an EPC contract,” says Parsi.

Financing for Iran’s existing IPPs has come from many sources. Mapna has three IPPs due to be commissioned soon, of which two have been financed by local and foreign banks.

Multilaterals and development banks play a key role in project financing. As one of the eight main shareholders of the Islamic Development Bank (IDB), Iran benefits from project finance loans to fund its developments.

“Most of our financiers are Iranian banks, but we have some foreign banks too,” says Parsi. “We also have a British bank which is also cooperating with us in the financing. But we have some difficulties in this area.”

With the move towards more private-sector power projects and a long-term trend of demand growth, existing sources of funding are likely to become stretched.

Iran has achieved a lot in its bid to deliver cost-price power to consumers and has grand  plans to branch out into alternative energy. However, challenges in finding funding, political wrangling and sanctions will continue to impact its plans.