Renewable energies in Iran – a market of the future?

In a nutshell:

On 16 January 2016, the Implementation Day, the economic and financial sanctions against Iran were eased and partly lifted. This opens up new investment and sales opportunities in Iran, in particular with regard to renewable energy technologies.

The parliamentary elections held on 28 February 2016, which significantly strengthened the position of President Hassan Rouhani and his supporters from the moderate faction, have shown that the opening of the Iranian market is also backed by the Iranian people.

Until today, the Iranian power market has been shaped mainly by conventional energy sources. Not at least, this is a consequence of the fact that Iran holds large crude oil and natural gas reserves. Moreover, it was not before 2013 that the first nuclear power plant with a capacity of 700 MW in Bushehr became fully operational. According to plans, two more reactors will be built on the site of the Bushehr nuclear power plant, each with a capacity of 1000 MW.¹

The supply of electricity in Iran is in the state’s hand and the responsibility of the Ministry of Energy, with the state-owned Tavanir holding company operating under the auspices of the Ministry of Energy. One of Iran's five institutions that were assigned special tasks is “Renewable Energy Organization of Iran” (SUNA), a state enterprise responsible for organising and promoting the development of renewable energies.

Figure 1: Organisational chart of the Ministry of Energy of Iran²

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The 2013 total installed capacity of 70.2 GW is composed of the following technologies:

Figure 2: Iran's installed capacity by technology, 2013³

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The installed capacity of renewable energies was 10.4 GW_el and is mainly attributable to hydro power. Deep geothermal energy does not play any significant role in Iran yet but it is a very promising source of energy (its economic potential is estimated at about 35.7 GW_el ).

Within the framework of the sixth five-year development plan (2016 to 2020), the Iranian government wants to increase the share of renewable energies up to 5,000 MW el of installed capacity (excluding hydro power) until 2020. The government intends to achieve this goal by guaranteeing the purchase of power also from non-state power plants at special feed-in tariffs. The potential production volume from renewable energies per year is allocated as follows:

Wind: 8 TWh
PV: 16 TWh
Biomass: 23 TWh

In the future, a particularly strong focus will be on wind power. So far, wind farms have been installed in Manjil (Gilan), Binaloud (Khorasan-e Razavi), Safeh (Isfahan), Sarein (Ardebil) and Takestan (Ghazvin). Iran also offers excellent conditions in photovoltaics. With about 300 days of sunshine per year and a global radiation of about 2.5 to 5.5 kWh/sqm depending on the location, the solar potential in Iran is more than twice as high as in Germany.

In addition, Iran has a high electrification rate (98.4 %), which enables connecting PV plants to the grid in most of the regions.² In 2014, the Iranian government invested a total of USD 60 million in solar projects.³

What does the incentive system look like?

The incentive system for renewable energies in Iran is based on three instruments:

fixed feed-in tariffs;
National Development Fund of Iran; and
special duty on electricity.

In June 2015, the parliament adopted amendments to the rates of feed-in tariffs, which include two new essential regulations. First of all, the term of power purchase agreements (PPA) that provide for a guaranteed feed-in tariff was extended from 5 to 20 years and the funding approach was substantially changed. The uniform tariff based on avoided costs for fuel and CO2 emission that is applicable to all technologies has been replaced by a remuneration that differs according to technology and is based on the respective power generating costs (Levelized Cost of Energy, LCOE). This creates a much more attractive environment to project planners and investors focusing on renewable energies – not only due to the differentiated handling of the individual technologies but, in particular, because of the long-term planning security in this business area.

The current tariffs apply until March 2016 and have been listed in schedule 1.

Schedule 1: Feed-in tariffs Iran, as of: June 2015⁴
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In each of the 20 years of the term, inflationary adjustments will be made as follows:

Inflationary adjustment formula regarding feed-in tariffs³

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Fixed feed-in tariffs are supplemented, on the one hand, by payments under the National Development Fund of Iran, which cover part of the capital costs incurred for infrastructure projects. The eligibility criteria are being currently revised and, of course, the pool of available funds is limited.

On the other hand, a special duty on electricity is charged by TAVANIR, a state-owned enterprise fulfilling various functions in the power sector, and added to every electricity bill. This system virtually follows the allocation mechanism provided for in the EEG [German Renewable Energy Sources Act]. It is charged at a rate of IRR 30 (about 0.089 eurocents) per kWh and is intended to be spent on the expansion of the electricity supply system in rural areas and on generating electricity from renewable energies.

Iran offers good market entry opportunities for German technology suppliers and project planners, also because “Made in Germany” is deemed to be a true quality label in Iran.

Note: Our local and international expertise in the areas of legal & tax advice, audit and accounting enables us to offer our Iran clients comprehensive services from a single source – be it for example a market entry or the expansion of a business model.

Any Independent Power Producer (IPP) looking to install a power plant in Iran and to conclude a PPA with SUNA should essentially take the following steps:

Figure 3: Steps in the process for signing a PPA with SUNA⁴

As of now, exporters may again apply for “Hermes cover” guarantees in order to secure their business transactions. Basically, also the assumption of investment guarantees has become possible, again.⁵

The advantages associated with a diversified energy mix in Iran are obvious. In satisfying its electricity demand with energy from renewable sources, Iran will be able to increase its oil and natural gas exports. Decentralised energy supply will also facilitate the supply of energy to rural regions. A country like Iran – which bets on renewables despite holding rich resources of fossil fuels and is thus able to achieve climate protection policy objectives – might now intensify its international cooperation with other countries in tackling climate protection issues.

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^* 1 EUR = 33.364 IRR (Iranischer Rial; Stand Sept. 2015).

¹ U.S. Energy Information Administration Iran Country Report, available from: https://www.eia.gov/beta/international/analysis.cfm?iso=IRN, 31/3/2016.
² Based on the "Organisational chart of the Ministry of Energy of Iran", available from: http://www2.tavanir.org.ir/info/stat83/sanatlhtml/Table/table05.jpg, 31/3/2016.

³ BSW Bundesverband Solarwirtschaft e.V.: The Emerging PV Market in Iran, December 2015, available from: https://www.solarwirtschaft.de/enabling-pv.html, 31/3/2016.

⁴ BMWI [Federal Ministry for Economic Affairs and Energy] Erneuerbare Energien in Iran [Renewable energy in Iran]: Geschäftsbedingungen und Chancen [Economic framework and business opportunities] available from http://www.erneuerbare-energien.de/EEE/Redaktion/DE/Downloads/Publikationen/Praesentationen/ 2015-10-01-iv-iran-04-uni-tehran.html, 31/3/2016.
⁵ IHK Region Stuttgart Iran – Weg frei für Hermes-Deckungen [Using Hermes guarantees] available from: https://www.stuttgart.ihk24.de/Fuer-Unternehmen/international/Aktuelles/Iran---Weg-frei-fuer-Hermes-Deckun- gen/3119044, 31/3/2016