Private Sector Highlights Downside of Power Subsidies

EghtesadOnline: The controversial policy of paying subsidies to the loss-making power sector that has kept electricity prices low for consumers is unsustainable and has put private power producers in danger of bankruptcy, the head of the Power Generation Companies Syndicate said.

News ID: ۷۸۷۰۵۶

20 September 2021

“As long as the government insists on paying $1 billion in subsidies to the power sector annually, the industry cannot thrive and the gap between power generation capacity and demand will keep rising,” Barq News also quoted Ehsan Sadr as saying.

“Raising electricity tariffs and charging real prices is the only realistic solution to help the Energy Ministry tackle its financial crisis. Having said that, vulnerable social classes need to be supported by special aid packages.”

According to the official, cutting subsidies will increase inflation, but combating the growing menace needs courage as the problem should be tackled.

“The fact of the matter is that the government has only been able to pay the huge subsidy by not settling its massive debts to the private sector,” he said.

“Energy Ministry’s unpaid debts is worth over $3 billion and instead of clearing the debt, they give subsidies, which is totally unsustainable and must end sooner rather than later.”

Cheap Electricity

Data released by the ministry show that from among all countries, Iran has the cheapest electricity, charging on average 1,000 rials (about 0.7 cent) per kilowatt-hour after Burma, Egypt and Kuwait.

“The government keeps on reiterating that it wants to privatize the power sector. The key question is how private companies can invest in this sector with such unrealistic [low] prices,” the head of the Power Generation Companies Syndicate said.

“Unless prices become real, the problem will persist and possibly get worse.”

Due to the huge gap in the real energy costs and the bills sent to consumers, the government must annually pay about $1 billion in subsidies.

“We have often reminded the government that the energy subsidy they pay is four times the national budget.”

Sadr rejected the long-held subsidy policies as unwanted, unhelpful and something future governments will find prohibitive and impossible to sustain.

In December 2010, Iran launched an ambitious and controversial energy subsidy reform program. Energy prices that had been kept well below international levels for decades were raised by 2 to 9 times.

As part of the so-called Subsidy Reform Plan, the government at the time removed energy subsidies and instead paid 455,000 rials ($41.5 then and $3.25 now) to each Iranian on a monthly basis.

According to the International Energy Agency, Iran ranked first globally by spending $45 billion on energy subsidies in 2017.

The amount, which increased by 55% year-on-year, is 10.4% of the national GDP and 15% of total global energy subsidies.

Power Deficit

ILNA quoted Mohammad Parsa, the head of the Federation of Iranian Energy Exports Industries in Tehran, as saying that Iran will have at least 10,000-megawatt power deficit next summer unless private power producers get involved in mega projects.

As per the law, private companies cannot directly supply consumers with electricity they generate. Instead, they should sell to Iran's Power Generation and Distribution Company, a subsidiary of the Energy Ministry.

However, due to financial constraints and shrinking budgets in recent years, the government has been unable to meet its commitments to contractors and pay its bills on time.

As a result, private power producers are facing problems with their development plans, namely to raise production and help ease the projected power shortage in the coming years.

This is while power projects worth $13 billion are on hold unless contractors are given guarantees that they will be paid on time.

“The Energy Ministry also owes $80 million to combined heat and power plants this year,” Parsa said.

“Small-scale power plants are among the cheapest sources of electricity and built by private companies with little dependence on public resources or the National Development Fund of Iran.”

For the construction of a big power plant, the government needs an estimated $60 million while a small-scale station (25 MW or lower) can be built with $2 million.

Parsa complained that although the Energy Ministry is obliged to purchase electricity from small-scale power plants for five years, the biggest problem is that they have not been paid for more than six months this year, which does not include arrears of previous years.

“We are aware of the financial limitations of the ministry, but the pressures are harming investors,” he said.