Thursday, April 22, 2010

Blackouts threaten Iran

Blackouts threaten Iran
By Ali Kheradpir

Iranians have been warned they face power blackouts this summer if the government in Tehran does not pay billions of dollars it owes to electricity generators and contractors.

Consumers pay only a fraction of the real cost of power because of government-regulated prices. The
debt means that no one is willing to invest in new generating capacity and companies in the associated equipment sectors have started folding.

The warning of more cuts this summer came from Mohammad Parsa, board director of the Iran Electrical Industry Syndicate, who said the government owes US$5 billion to the electricity supply industry and contractors and a further $1 billion in
compensation for the delay in paying off the debt.

The country has struggled with widespread power outages once before - in the heat of the summer of 2008, when the government was forced to ration electricity in major cities across Iran. Repeated power outages resulted in frustration for Iranian citizens but and delivered a heavy blow to industry.

"We are not threatening the government with blackouts. If we are not going to be paid we will simply be unable to meet demand. Many electricity companies are already on the verge of collapse," a syndicate board member said.

At least one company, Avanagan, the biggest producer of electricity transmission pylons in Iran, has already shut down.

Energy Minister Majid Namjou has expressed the hope that the government will manage power supplies in the coming summer. He has also announced that $500 million has been allocated to clear some of the government's debt to the industry.

While most of the electricity generators are run by the government, the equipment producers and contractors are generally from the private sector.

Mohammad-Ali Abbasi, deputy head of industries at the Chamber of Trade, Industries and Mining, has said that recurring power outages in 2008 cost industry more than $230 million.

The government claimed in 2008 that the blackouts were the result of a drought affecting the output of hydroelectric power plants. However, many experts believed this was an excuse to draw attention away from the government's mismanagement as hydroelectric power
accounts for only 10% of the country's electricity needs.

While Iran is the biggest generator of electricity in the Middle East, its output does not meet its growing consumer demand.

The Iranian grid at present is able to deliver 40,000 megawatts, which according to Deputy Energy Minister Mohammad Behzad is the expected peak consumption this year.

One expert said a quarter of power output comes from worn-out plants, and the Majlis Research Center found that 23.5% of the electricity generated goes to waste in the transmission network. The World Bank has named Iran the number one waster of electricity in the Middle East and North Africa.

The country has very little spare capacity when consumption peaks. Former energy minister Parviz Fattah put this reserve at 3%, where it should ideally be 25%.

Building new power plants, renovating existing ones and developing the distribution network all require funding and economic sanctions mean there is no foreign investment in the sector. The key issue is the low prices of electricity fixed by the government and the subsidies paid to consumers, which have reduced investor interest in the sector.

The government has allocated $3.2 billion for energy subsidies in the current year. The Majlis, or parliament, has announced the real price of every kilowatt-hour of electricity to be eight cents while the average price paid by consumers is only 1.6 cents.

"Iranian industry is only working at 20% to 30% of its full potential. If it worked at full capacity there would be severe power cuts already," an electricity equipment producer said.

The government wants to cut subsidies and eventually charge consumers the real cost of electricity. Energy Minister Majid Namjou has said consumers will soon be paying 4.3 cents per kilowatt-hour, but it is still unclear whether the government is capable of carrying this out and facing the unpredictable social consequences.

Without an economic return, the private sector in Iran has no desire to invest in increasing the country's electricity generating capacity. The government has even promised to pay in advance for electricity generated by the private sector but entrepreneurs seem to be more interested in venturing into international markets.
Despite international sanctions, Iranian electrical industry manufacturers have nearly $2 billion worth of export contracts. However, Parsa said the failure to pay off the debts to the industry put this in jeopardy and put at risk the jobs of more than 900,000 people working directly or indirectly for the industry.

Ali Kheradpir is an Iranian journalist and energy expert.

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