FEATURE: Iran's summer of power cuts could be worst yet with new capacity on hold

Tehran — Iran, despite being OPEC's fourth-biggest crude oil producer, faces an unprecedented summer of electricity cuts as power plant disruptions and a lack of investment in new capacity leave output far below demand.

Power demand is exceeding supply by about 11,000 MW, forcing Tehran to impose unannounced power cuts for hours at a time when the need for air conditioning soars amid temperatures hitting close to 50 degrees Celsius on a daily basis. Climate change has also left parts of the country in drought, leaving no water for hydroelectric power plants, while US sanctions on the country's energy industry have discouraged domestic and international investment.

Iran could be facing years of power cuts if it doesn't take steps to put supply and demand more in line.

"The impact of climate change in terms of temperature increase in drought has increased demand and reduced power generation from hydropower," Jessica Obeid, senior adviser and energy specialist at Azure Strategy, said. "Despite being one of the major power producers in the region, Iran is also one of the highest consumers, and the significant growth in electricity demand needs to be addressed."

Iran has resorted to importing 650 MW of electricity from Armenia, Turkmenistan and Azerbaijan while halting 2,000 MW of power exports to neighbors, still leaving a big supply shortfall. It also, on July 12, offered to pay anyone with a generator 3,800 rials (1.5 cents) for each kWh of electricity produced and to provide the fuel needed as a way of urging utilities to boost production.

Nuclear plant shutdown

Authorities have cited a two-week shutdown of the 1,000 MW Bushehr nuclear power plant, a temporary halt at a hydroelectric plant due to drought, and ill-timed plant maintenance. Some 800 MW of capacity from the 2,214 MW Neka power plant has also unexpectedly gone offline.

Iran has also put on hold some $4.5 billion of water and electricity projects because of US sanctions, with 15,000 MW of new capacity waiting to be financed, President Hassan Rouhani said at a cabinet meeting July 7.

"We are not prepared for the demand," Karim Kabiri, head of the renewable energies committee at Iran's industry trade group Electricity Industry Syndicate, told S&P Global Platts. "Our household, industrial, agricultural and commercial sectors have developed but our production capacity has not as much."

Iran's total installed power generating capacity is 85,000 MW, he said, but much of it is unreliable.

Iran's electricity production is primarily from natural gas, along with gasoil and mazut, a type of heavy fuel oil. Thermal power plants account for 81% of production, while hydroelectric contributes about 15%.

Meanwhile, some 55% of the country's thermal and fossil-fueled power plants are private, but they don't have the money for repairs, Kabiri said. "Costs and incomes don't match. There is no profit in generating power."

Iraq and Turkey could offer options for grid interconnections providing a small share of electricity, but Iraq has its own power crisis and Turkey is trying to mend relations with the US and Gulf countries, Obeid said. Iran imports about 1.5% of its power and exports 4.5%, she noted.

"In the short term, Iran will have to have a defined power rationing strategy and provide incentives for reduced electricity consumption," she said. "There are no magic bullets."

Energy abundance

Iran has an abundance of oil and natural gas but has been unable to resolve its power shortages, with a lack of domestic investment and US sanctions discouraging investment from abroad curbing funds for plant maintenance and expansion and new projects.

Its crude oil production in June reached 2.48 million b/d, the highest since April 2019, according to the latest monthly S&P Global Platts production survey. It also has the world's second-biggest gas reserves after Russia, according to the BP Statistical Review of World Energy 2021.

"Fuel availability is not the problem at all," Iman Nasseri, who runs consultancy FGE's Iran service and previously worked in the country's oil industry, said. "These power cuts show how much the US sanctions have negatively impacted Iran's energy sector and economy. Those delayed maintenance programs at thermal power plants and the issues with Bushehr nuclear plant are all direct results of the US sanctions."

US sanctions have also partly prevented Iran from ramping up renewables capacity, according to Kabiri. While global renewables expanded at a record pace in 2020, according to the International Renewable Energy Agency, Iran is unlikely to meet a 5% renewables target by March 2022 as they make up only 1% now, he said. "We also should have developed small size gas-fueled power generators. Water coolers should have been upgraded with small panels on the roofs."

A renewed push on renewables could eliminate the need for fossil fuels for electricity in five to 10 years, he said. Rooftop solar panels could also be an immediate solution, but the government needs to guarantee the purchase price of power from the panels to spur demand from households, he said.

High prices for electricity don't deter demand because electricity is subsidized, he added. "The government is always indebted to power plants. And the consumer consumes cheap energy as much as they want."