Drought drives up Iran's power prices

Jul 30, 2008 02:00 AM

by Tamsin Carlisle

Iran is considering raising electricity prices five-fold as early as September in order to curb domestic consumption, as it grapples with a power crisis brought on by the worst drought to hit the country in more than a century.
The drought has caused hydroelectric output to fall by 75 %, Alyssa Rallis, an economist with the consulting firm Global Insight, said in a new report. In partial compensation, Iran’s mostly gas-fuelled thermal power plants have increased production by 25 to 27 %, she said.

But Iranian gas production is insufficient to make up the entire shortfall, leaving the country with 1,000 MW less generating capacity than it needs. That and soaring summer temperatures have led to rolling blackouts across major cities.
In June, Parviz Fattah, the energy minister, issued blackout schedules for residents of Tehran and asked consumers in the capital to cut their electricity usage by 10 %.

The facts
75 -- Percentage by which drought has caused hydroelectric output to fall.
27 -- Percentage by which Iran’s gas-fuelled thermal power plants have increased production.
770 -- Price, per kWh in Iranian rials, to which Iran plans to raise its heavily subsidised electricity rates.
13 -- Amount, in millions of tons, by which drought has cut Iran’s agricultural production.

According to Global Insight, Iran plans to raise its heavily subsidised electricity rates to 770 Iranian rials (Dh 3.05) from 160 rials per kWh by the end of September.
The drought, which has also cut Iran’s agricultural production by 13 mm tons since the start of its fiscal year in April, pushing up food prices, has highlighted the state’s larger energy problem, which is “overconsumption resulting from heavy subsidies”, Ms Rallis said.

The Islamic Republic also subsidises gas, setting prices at about $ 0.02 (Dh 7) per cm, compared to $ 0.30 per cm in neighbouring countries and much higher rates elsewhere. Petrol, subsidised on a two-tier scale, is also priced lower than in most other states in the region.
“Heavily subsidised fuel for cars and heating homes has led to massive waste and overconsumption, making government efforts to meet rapidly rising demand a hopeless task,” Ms Rallis said. “With no incentive to conserve, consumption has skyrocketed, compounding the impact of a growing population.”

Mohammed Ahmadian, the Iranian deputy energy minister, recently estimated that wastage accounted for up to 18 % of power consumption.
The drought in Iran has had other negative effects on the country’s economy. Though it has produced enough wheat to be self-sufficient since 2004, this fiscal year Iran became an importer of a projected 5 mm to 6 mm tons.

Low interest loans to drought-struck farmers and extended loan repayment periods are expected to cost the government $ 979 mm this year. The government has also announced it will invest nearly $ 1.7 bn over the next three years to establish high-pressure irrigation systems. The silver lining has been that Iran’s electricity woes may oblige the government to turn its attention to underlying capacity deficits.
“The… drought is serving as a reminder of the Iranian economy’s severe structural problems,” Ms Rallis said.

Raising energy prices would boost inflation in the short-term, increasing ordinary citizens’ financial burdens in the months leading up to Iran’s next presidential election, scheduled for next year.
“Despite the government’s talk of overhauling subsidies and increasing power and irrigation infrastructure, reduced agricultural output and frequent blackouts are unlikely to go away anytime soon, disrupting economic activity across the country,” Global Insight predicted.

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