American Power After Afghanistan
How to Rightsize the Country’s Global Role
After years of exclusion from the global financial system, Iran is pushing foreign firms to invest in its massive oil and gas holdings. But there’s another part of Iran’s energy economy that’s opening up: its renewables sector.
Iran has good reasons to develop its hydroelectric, solar, and wind resources—from popular concerns about air pollution to fluctuating oil prices—and since the completion of the nuclear deal in 2015, it has made some progress in doing so. The trouble is that there are also a number of serious barriers to further growth. Foreign companies, worried about the threat of sanctions, are still reluctant to do business in Iran, and problems in Iran’s electricity market are stifling new projects. Only by addressing those problems can Iran grow its green economy.
Iran doesn’t seem like an obvious candidate for green energy investment: the country has the second-largest reserves of natural gas in the world and is a major oil producer, and far more of its domestic power generation comes from fossil fuels than from renewable resources. In 2014, the most recent year for which data from the International Energy Agency are available, natural gas accounted for over 195,000 gigawatt-hours of Iran’s power generation, whereas hydroelectric, nuclear, and wind plants produced fewer than 19,000 gigawatt-hours. (Although Iran’s solar photovoltaic sector has recently attracted some foreign investment, in 2014, it was nearly nonexistent.)
Nevertheless, there are a few reasons why developing Iran’s renewables sector makes sense. By relying more on renewable energy domestically, it is possible that Iran could sell more oil and gas abroad. Growing its renewables sector could also help Iran fulfill the commitments it made under the Paris climate change agreement, which call for the country to reduce its greenhouse gas emissions relative to 2010 by 12 percent before 2030, under the most optimistic scenario. Iran’s renewable energy capacity now stands at around 200 megawatts. By next year, the country hopes to add 5,000 more.
Popular pressure to reduce pollution is another reason to expand the renewables sector. Between March 2014 and March 2015, some 5,160 people died as a result of pollution in Tehran alone. Vehicle fumes account for most of the country's problems with air quality, but in some oil-rich provinces, the director of Iran’s Center for Weather and Climate Change said in January, gas flaring, or the burning of natural gas from oil and gas wells, is the biggest source of air pollution.
The air-quality problem has provoked outrage in Tehran and other cities. In one video that went viral in November 2016, a group of young women rapped in protest against pollution on Tehran’s busy Shariati Street. And in January 2017, Rambod Javan, a popular actor and director, appeared on his television show with the head of Tehran’s public parks commission to urge Iranians to do what they can to help reduce pollution.
The public’s frustrations appear to have registered with local officials, at least in Tehran. In November, for example, Eqbal Shakeri, the head of the Tehran city council’s urban development committee, criticized city officials for having turned a blind eye to pollution’s harms. But so far, the authorities have done little to solve the problem.
At the national level, meanwhile, Iran has introduced a number of reforms to develop its renewable energy sector. The government’s fifth five-year plan, covering the years 2010 to 2015, laid out so-called feed-in tariffs, which have allowed Iran’s leading electricity utility and subsidiaries of the country’s Energy Ministry sign long-term contracts with renewable energy producers at guaranteed prices, helping increase renewables’ competitiveness in the electricity sector. In 2015, Iran extended those contracts from five to 20 years to further spur investment. And in May 2016, the Renewable Energy Organization of Iran (SUNA) said that it would increase guaranteed prices for electricity generated at plants built with local skills and equipment by up to 30 percent—an attempt to boost domestic manufacturing and employment in the sector.
Without boosting electricity prices by cutting subsidies, it will be hard to sustainably expand Iran’s renewable power capacity.
The government’s effort to attract investors has already been somewhat successful. In June, Planet in Green, a German consultancy, signed a contract with SUNA to develop a 100-megawatt solar park near Tehran. The next month, the British Photovoltaic Association agreed to cooperate with Iran’s Energy Ministry on up to one gigawatt’s worth of solar projects. And the South Korean company KTC signed an $820 million deal in October to build a solar plant and a wind farm in Iran. Between October and December, Iran hosted two international conferences promoting its clean-technology industry, and in February, the Energy Ministry unveiled plans to build two seven-megawatt solar power plants in Hamadan Province.
Despite the recent progress, the growth in Iran’s renewable power sector seems set to stall. The remaining limits on Iran’s access to foreign financing are the first problem. The election of Donald Trump as U.S. president has rendered the future of the nuclear deal uncertain, discouraging international banks from backing new energy projects in Iran. And many such institutions also fear running afoul of the U.S. restrictions that already exist. A lot of Iranian companies, especially in the energy sector, are controlled by the Islamic Revolutionary Guard Corps—a fact that prevents many Western banks from doing business with them.
Then there are the Energy Ministry’s debt problems: it owes private electricity producers some $6.8 billion. The debt is due in part to the gap between the cost of producing and distributing electricity and the price Iranians pay to use it. Whereas it costs Iranian utilities around three cents to produce and distribute every kilowatt-hour of electricity, thanks to consumer subsidies, Iranian households pay, on average, only two cents to use the same amount, despite the fact that the government has hiked consumer electricity prices three times since 2013. Taking into account the expense of building and maintaining solar and wind-powered plants, the cost of electricity from those renewable sources is probably even further from the subsidized prices consumers pay. So without boosting electricity prices by cutting subsidies, it will be hard to sustainably expand Iran’s renewable power capacity. Indeed, the Energy Ministry’s inability to pay its debts to conventional power plants does not paint a promising picture for companies considering investing in renewable power stations in Iran.
Some members of Iran’s parliament fiercely oppose subsidy cuts, arguing that they would disproportionately harm low-income Iranians. Others have called for downsizing the Energy Ministry, claiming that more efficient management and technology could bridge the gap between consumer prices and the costs of generation, transmission, and distribution. So far, the debate has failed to produce policies that could protect low-income households without putting more stress on Iran’s finances, such as consumption-based pricing, which would encourage high-consuming households to use less electricity.
The good news is that renewable energy prices are falling, and that should make clean power more affordable and popular in Iran, too. And although Western banks are still reluctant to back deals in Iran, countries with fewer ties to the U.S. banking system, such as China—which is also the world’s largest market for solar panels and a leading producer of wind power—are likely to try to capitalize on Iran’s renewable energy goals. The Shanxi International Energy Group, a Chinese firm, has already expressed interest in building 600 megawatts’ worth of solar plants across Iran. More generally, in recent months, Chinese companies have shown that they’re willing to circumvent U.S. restrictions to do business in the country.
To really make the most of its potential, however, Iran needs to reform. Tehran should make its banking system more transparent, and it should trim some electricity subsidies to show that the government will follow through on its promises to pay private electricity producers—renewable and otherwise. Local firms can help create jobs in the renewables sector, but by working with foreign companies that know how to keep costs down, Iran could do even more to help its green economy flourish.