Iran looks at alternative models as sanctions cut off financing

Faced with renewed US trade sanctions, Iran "would be better off forgetting wind energy", unless it seriously ramps up deployment, according to Hashem Oraee, president of the Iran Wind Energy Association (IRWEA).

Online… The 61.2MW Sihapoush wind farm is Iran’s largest (pic: Arian Mah Baad)
Online… The 61.2MW Sihapoush wind farm is Iran’s largest (pic: Arian Mah Baad)

The Iranian wind sector enjoyed a sudden burst of optimism when sanctions were eased in early 2016 following the signing of the nuclear agreement.

Domestic and international firms started work, securing licences, and there was talk of competitive tenders, underpinned by 20-year power purchase agreements (PPAs) and fairly attractive tariffs.

"It was a good start," Oraee said. Nevertheless, barriers remained, notably regarding land acquisition and finance. As a result, the only major new project to come online was the 61.2MW Siahpoush facility.

US sanctions

And now, following the US’s reimposition of sanctions last autumn, development has effectively come to a halt.

Because the sanctions target Iran’s finance and banking sectors, it is virtually impossible to make payments or secure debt and equity finance, explained Ahmad Khonsari, partner at law firm Watson Farley & Williams.

Even though Europe, Russia and China maintain that Iran should be allowed to trade — and, indeed, the EU forbids European firms from complying with sanctions — few companies are willing to risk "getting on the radar" of the US authorities, Khonsari added.

Most will err on the side of caution rather than run the risk, to them or their partners, of being denied access to the US market and its all-important financial sector.

And these are early days. "There is still not full clarity how things will develop over the next one to two years," Khonsari noted. As wind is a long-term business, "investors and developers will be looking for some level of stability and security," he said.

Meanwhile, Iran is faced with an acute hard-currency shortage and unfavourable exchange rates.

"The economics of renewable projects [have] changed drastically since most of the cost is in hard currency ... [while] the payment is made in local currency," Oraee said.

Logically, tariffs should be increased to compensate, but the government is "dragging its feet", he added.

‘Oil for renewable energy’

Instead, Iran’s renewable sector is suggesting an alternative approach to facilitate deployment. While the details are still being worked out, "oil for renewable energy" broadly sees private-sector investors in renewable projects receiving certificates each month from the oil ministry.

These represent fossil-fuel derivatives equal to the amount of fuel that would have had to be supplied to thermal power stations to produce the same quantity of electricity.

The operator then sells the certificates on the open market.

While this is not risk free, it might be considered less risky than Iran’s energy ministry not being able to make cash payments under the PPA system, due to lack of funding.

Oraee will present the plan to the government in the coming weeks, but whatever happens, Iran needs to think big. An annual addition of 100MW or so is not economically viable, he argues.

Instead, Iran should target around 2GW per year if it is "to enjoy all the benefits of wind", Oraee believes.

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