Electricity tariffs in Iran are among the lowest in the world, owing largely to the country’s own internal resources, while current and forthcoming capacity is capable of allowing GDP to double, a report said.

The current state of Iran’s electricity sector puts the country in the developed-economy basket – installed capacity per capita exceeds that in China and Brazil, and electricity tariffs are among the lowest in the world, a report said.

Notably, this has been achieved largely with the country’s own internal resources, while current and forthcoming capacity is capable of allowing GDP to double under an optimistic scenario, added the latest Utilities Research from Renaissance Capital, a leading investment banking firm.

Installed capacity leader

Iran’s current installed capacity stands at 73.2 GW, which translates into 0.91 kW per capita. This is far below the 3.25 kW per capita in the US or even the 1.6 kW per capita in Russia. However, Iran’s electricity sufficiency exceeds that of China, Brazil, Turkey or South Africa. This has largely been achieved using the resources of the national economy, as the participation of foreign investors in the sector’s development is limited.

Moreover, the system is relatively young, with the average age of capacity standing at 15 years, and capacity is likely to break through the 100 GW mark in the next five-to-seven years. Overall, taking into account current utilisation rates, we believe the Iranian power sector will not be a bottleneck on potential economic growth (unlike, for instance, in Nigeria) and could cope with as much as a doubling in national GDP.

Tariffs among the lowest in the world

Currently, we calculate Iran’s average wholesale electricity tariff at $8/MWh, compared with $75/MWh in Egypt or $17/MWh in Russia. The key reasons for this competitive advantage for the national economy include the energy subsidy system, which is set to be phased out in the next few years; major state (or state-affiliated) ownership of the sector, which significantly caps the economically rational level of required returns on investment; and low domestic prices for gas – the sector’s main fuel source.

System efficiency is high

Iran’s electricity sector demonstrates many traits of high efficiency – grid losses are low (13 per cent in 2014, vs 15 per cent in Turkey and 11 per cent in Russia); the capacity fuel mix helps to provide the cheapest source of electricity to the economy (dominated by gas-fired power units, combined with a gradual rise in the share of nuclear and hydro energy); while average capacity utilisation of 42 per cent leaves plenty of room to meet both fast-growing demand and sudden peaks in consumption.

Solid support for economic growth; private investors not needed

“We expect Iran’s electricity sector to remain a solid support for economic growth in the country – with electricity demand growing on average by 5-6 per cent pa and an investment programme well under way, we believe the sector will be able to cope well with the demands of the economy,” the report said.

However, tariff setting is non-transparent and highly regulated, the sector is dominated by state entities, and there is limited political pressure on decision-makers to adopt a more liberal regulatory regime, making the sector more of an economic tool of the government rather than a self-funded liberalised sector. Lack of pressure on the government to attract private investors into the sector makes us think this is unlikely to change in the medium term. – TradeArabia News Service