Beyond the nuclear debate.

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INTERNATIONAL INTEREST IN the Iranian energy sector tends to focus on two areas: opposition to the country's nuclear programme, which Tehran claims will be solely used for power generation purposes; and oil and gas exports. However, Iran is also a sizeable power generator and consumer in its own right. Rising electricity consumption means additional generating capacity is urgently needed and new international transmission lines are encouraging cross-border power trading. Publicly owned companies are likely to carry out most of the development work but there may also be a place for foreign firms.

At present, Iran's national generating capacity stands at around 40GW, of which gas fired power plants account for 78%, oil fired capacity 12% and the hydro-sector the remaining 10%. Most thermal plants have been converted from oil to gas over the past 20 years in order to maximise oil exports and revenues. The Iranian government is now also keen to boost its gas exports, so developing an alternative form of power generation, such as nuclear energy, could make some economic sense, although Tehran's reluctance to cooperate with the international community suggests that its motives are not entirely civilian.

Iran is currently the third biggest gas consumer in the world, so the power sector certainly does absorb supplies that could otherwise be exported. However, with the world's second biggest reserves, of 974 trillion cubic feet (tcf), there should be plenty of gas to satisfy both growing domestic consumption and a thriving export sector. The main reason for tension between domestic and export objectives is the restrictive investment environment that affects power industry development. As in the oil and gas sector, foreign firms are not permitted to directly own power infrastructure in Iran, although foreign investment would be more than welcome, given that demand for electricity is currently growing by about 8% a year. Iranian state-owned company Tavanir and its various subsidiaries still dominate the entire power sector, from generation through to transmission and distribution.

The government hopes that more diversity can be injected into the generation mix to dampen domestic demand for gas. Energy sector legislation passed by the Majlis in 2005 allows for the construction of 20 commercial nuclear reactors, each with average generating capacity of 1GW. Whether these are actually developed will depend on political developments--both domestic and international--as much as on power generation imperatives. Even if the reactors are actually constructed, they are unlikely to come on stream before 2020 at the earliest, so the government hopes that the hydro-sector can make up some of the shortfall in the meantime. The Menj, Yasouj, Karoun and Lourak schemes are all to be expanded, while other new dam projects are planned. The government hopes that national hydroelectric generating capacity can be boosted from 4GW to ll.2GW by 2011 but this target seems ambitious unless construction work on all planned projects begins during the course of 2008.

However, there seems little doubt that a large proportion of, if not most, new capacity over the next decade will come from gas fired plants. New facilities with generating capacity of 1GW or more are under construction at Arak, Bandar Abbas and elsewhere. A minor degree of sector deregulation is also enabling capacity to be brought on stream from other sources. For example, Tehran Regional Electricity Company (TREC) is using private finance to fund the development of the 1GW Qom plant and hopes to complete the project during the first half of 2008.

While buy-back contracts were devised to get round the block on foreign ownership in the oil and gas sector, build operate transfer (BOT) and build own operate (BOO) contracts are now permitted in the power sector. The government hopes that plants developed under these structures will be able to contribute 12.8GW of generating capacity by 2020. A joint venture of two Iranian firms, investment group IHAG and Mapna, brought the 954MW Chehelsotun power plant on stream in South Isfahan in 2006 under a BOT deal. Ownership of the project will be transferred to the Ministry of Energy after 15 years.

However, it has proved difficult to encourage other companies to follow IHAG and Mapna's lead and the terms of investment may have to be improved if further BOO and BOT agreements are to be reached. Plans for a 2GW gas fired facility at Zanjan were drawn up in 2004 but no suitable bids have yet been received. Nevertheless, there are hopes that foreign investors could take a risk where Iranian companies have been loath to commit themselves.

In September, Iran Power Development Company (IPDC), another Tavanir offshoot, revealed that talks with the Malaysian and Saudi governments could yield the development of power plants in Fars and Zanjan provinces under either BOO or BOT contracts. IPDC's deputy head, Mostafa Ali-Rabbani, said that the Ministry of Energy would give stronger investment guarantees than in the past. However, no details on the companies involved or on whether development would be attached to wider bilateral deals were revealed.

The Iranian government could be motivated to improve the terms of investment in order to enable large scale power exports. Tehran is currently focusing on the export of natural gas for use as a power sector feedstock in other countries but the direct export of electricity could also prove lucrative. At present, there are three separate power grids in Iran but Tavanir hopes to connect these to ease the transmission of electricity around the country and to neighbouring markets. The state-owned company already exports to or imports electricity from Afghanistan, Armenia, Azerbaijan, Pakistan, Turkey and Turkmenistan and exports are likely to grow over the next 10 years.

Talks between the Iranian and Pakistani governments are being held on a 30-year deal to export electricity from Iran to its eastern neighbour. It is not known whether reaching an agreement is dependent on the construction of the Iran-Pakistan-India (IPI) gas pipeline but the final investment decision (FID) on the long awaited gas project could herald a series of other deals between Islamabad and Tehran.

Iran has already reached a wide ranging power sector agreement with Turkey. New hydro schemes and gas fired power plants are planned in the border areas of both countries but fears of security in the area have held up construction work. Progress is also lacking on the 2004 deal to integrate the transmission infrastructure of Iran, Russia and Azerbaijan. Most current trade in electricity is designed to supply relatively remote border areas but it is hoped that increasing the transmission capacity of Iran's cross-border interconnectors will enable much greater trade in electricity. Enabling privately operated power plants to supply electricity to both Iranian customers, via Tavanir, and export markets, could encourage investment in new generating capacity.

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The IPI, the Nabucco project and other pipeline schemes could certainly provide Iran with a handy additional source of foreign revenue. Yet it is vital that domestic economic development is supported by adequate investment in power generating capacity and transmission infrastructure improvements. At present, the spat over the nuclear programme seems to be attracting attention away from the power sector's main priorities. At the same time, any debate on supplying gas export pipelines should recognise that the upstream investment regime is to blame for any supply constraints rather than rising power sector consumption.