Let the Turbines Spin: Iran’s Opportunity to Combat Climate Change

The cold season is upon Iran and air pollution levels are on the rise yet again and the pandemic was not able to change much in this front. With more than 19,600 premature deaths per year and an annual cost to the Iranian economy upwards of $13 billion or 3.2% of its GDP, air pollution has been taking a hefty toll on Iranian society and economy, calling for long-term solutions to this decades-long problem. Iran is facing a major challenge to reduce massive, wasteful, and unjust fossil fuel subsidies and implement a tolling system in Iran’s congested cities. Yet, promoting renewable energy to combat climate change is another piece of the puzzle for reducing air pollution and fossil fuel dependency in Iran. In fact, increasing the share of renewable energy in Iran’s energy mix is the most effective and economically feasible strategy to reduce the country’s air pollution and other forms of environmental degradation.

High Cost, High Reward

Solar and wind energies boast immense potential, but as of now constitute less than 1% of Iran’s total energy mix. Renewable energy overall constitutes less than 7%, with 6% in hydropower and less than 1% in solar and wind energy. While this number is relatively low at the moment, it is both technically and economically feasible to address all of Iran’s electricity demand through hydro, wind, and solar sources. Electricity generation from solar farms and photovoltaic cells is economically most justifiable in areas with Direct Normal Irradiation (DNI) above 5 kWh per meter square per day, which is true in more than 75% of the country or areas in Figure 1 shaded in orange, red, and purple colors.

Figure 1. Solar Atlas of Iran (Source: World Bank Group, ESMAP, Solargis)

Also, Iran is located in a wind belt, where wind speed at the height of 40 meters averages 5 meters per second in at least a quarter of the country. This is shown in Figure 2 for areas of the country shaded in green, yellow, orange, red, and dark purple colors.

Figure 2. Wind Atlas of Iran (Source: https://globalwindatlas.info)

The Iranian government has taken important steps in promoting wind energy, but financing this shift proves to be the main obstacle. Heeding this immense potential, the Iranian government has put in place policies and attractive incentives to increase the share of renewable energies in Iran’s energy mix. When it comes to electricity generated from wind, the government offers 20-years guaranteed power purchase agreements (PPAs) with a Feed-in-Tariff (FiT) of 2.1 cents per kWh, which is about 10 times the wholesale retail price of 0.23 cents per kWh for electricity generated from fossil fuel power plants. However, considering the cost of the purchase, installation, operation, and maintenance of the turbines, a FiT of 2.1 cents per kWh results in a -13% Internal Rate of Return (IRR), which is clearly unacceptable from an investment point of view. For the private sector to invest in development of utility scale wind farms in Iran, a FiT of at least 12 cents per kWh is required, which will result in an IRR of 5.5%.

It is important to realize that the FiT for wind energy was indeed around 14.5 cents per kWh between 2013 and 2018, which resulted in Iran’s installed wind capacity to increase from 150 MW to around 300 MW (Figure 3), but it has since been reduced to the current level of 2.1 cents per kWh because of large and continuous depreciation of the Iranian rial vis-à-vis major currencies in the past three years. The Iranian rial collapsed by more than 600%, or seven-folds, from around 37,000 rials per USD in 2017 to the current exchange rate of around 250,000 rials per USD. In turn, the FiT for wind energy has been reduced to 2.1 cents per kWh.

Figure 3 – Development of wind capacity in Iran, 2000-2018 (Source: Tavanir, detailed statistics of Iran electric power generation, 2018.)

Tapping Potential and Making Strides

Reducing large, wasteful, and socially unjust fossil fuel subsidies can free enough of the government budget to finance the growth of renewable energy, namely wind energy. The survival of the Iranian wind energy industry depends heavily on the ability of the Iranian government to commit to a FiT that is equal to or larger than 12 cents per kWh in the long run. At first look, the Iranian government seems to lack the ability to commit to such a FiT for 20 years. Severe and prolonged economic and financial sanctions and rapid depreciation of the Iranian rial have negatively impacted the government’s fiscal position significantly, leaving no room for the government to commit to economically suitable FiTs for wind and other renewable energy sources. However, reviewing energy policies of the Iranian government in the past decades reveals the grim reality that fossil fuel subsidies have ranged somewhere between 20% and 30% of Iran’s GDP, year after year. For example, a 2019 IMF working paper estimates that Iran’s post-tax energy subsidies (including all kinds of fossil fuel, electricity, and water) were about $111 billion or around 30% of the country’s GDP in 2015. In 2018, the government reduced fossil fuel subsidies to $69 billion, which was 15.3% of the country’s GDP and 16% of total global energy subsidies. Since then, energy subsidies have again increased to about $110 billion because of the substantial continuous depreciation of rial vis-à-vis major currencies in the past three years.

What makes such massive subsidies even more unjustifiable and ludicrous is the fact that more than 82% of such subsidies end up in the pockets of the Iranian households in the top income decile. Moreover, because of the large price difference in gasoline between Iran and its neighboring countries, smuggling of gasoline and diesel outside of Iran has been commonplace and amounts to more than 8 million liters per day in 2019, albeit a decline from 2018’s 12 million per day figure. Clearly, fuel smuggling benefits only the smugglers and the economies of the destination countries, at a massive cost for the Iranian economy.

Considering the inequitable, inefficient, and ineffective nature of energy subsidies in Iran and its immense pressure on governments finances, it only makes sense to reduce or remove them altogether. As seen in Table 1, in order to meet 5% of Iran’s estimated total electricity demand through wind energy, the annual cost for a FiT of 12 cents per kWh would be $1.5 billion. Based on a very conservative estimate of explicit (and not hidden) fossil fuel subsidies of $70 billion a year, the annual cost of this FiT for the government would be about 2.14% of the fossil fuel subsidies in Iran. Moreover, the capital needed to develop and maintain the wind farms hosting 16,500 660-kilowatt Vestas V47 wind turbines would be around $12.86 billion or just 18% of the total cost of subsidies of fossil fuels in one year.

Wind energy can also help address some of Iran’s other challenges including air pollution and high unemployment rates among educated youth. In addition to reducing dependency on fossil fuels, the development of the wind industry in Iran will also create tens of thousands of green jobs in Iran’s labor market, which is suffering from high unemployment rates among educated youth, while also reducing CO₂ emissions by around 18.5 million metric tons per year,[1] an amount that is equivalent to the CO₂ emitted by 4.6 million cars in a year or 27% of Iran’s transportation fleet. Further, it would reduce water consumption at Iran’s current thermal plants by about 18.5 billion liters per year and result in more than $160 million savings in the public health outcomes.[2] By tapping into its immense wind energy potential, not only can Iran reduce its dependence on fossil fuel as a source of energy in the long run, but it can also take steps, albeit small, in making dents in other challenges facing the country.

Amin Mohseni-Cheraghlou is an assistant professor in the Department of Economics at American University in Washington, D.C. He has also taught at the University of Tehran in the faculties of Economics and World Studies. His areas of expertise are Development Macroeconomics, International Political Economy, Economies of the Middle East and North Africa (MENA), and Islamic Economics and Finance. A research consultant for the World Bank Group since 2007, Amin writes frequently on topics related to development economics and economies of the Gulf and the MENA region. He holds a Ph.D. in Economics, an M.A. in International Development, and a B.S. in Electrical Engineering.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Gulf International Forum.