Experts’ proposals for easing energy shortages:
Reforms in pricing policies, consumption will help
Tehran should not show ‘signs of weakness’ against possible renewed maximum pressure Hiking fuel prices to match with production costs only path to economic recovery
By Mostafa Shirmohamadi
& Sadeq Dehqan
Staff writers
The energy deficit in electricity and gas supply have recently become hot-button issues in Iran’s economy, especially as the weather turns cooler, leading to gas shortages and intermittent power outages in both the industrial and residential sectors. The situation has caught the attention of experts regarding energy management, consumption patterns, and the impact of sanctions on the country’s economy and energy sector.
At first glance, the emergence of energy shortages, particularly gas, seems puzzling, especially in a country that holds the second-largest gas reserves in the world. It might not be entirely logical to attribute this solely to external factors like sanctions. Consequently, some experts argue that the deficit is primarily a result of internal mismanagement, linking it to inefficiencies in energy production, distribution, and usage. Conversely, others point to a lack of production infrastructure and failure to modernize energy facilities, thus tying the energy shortfall to sanctions and the inability to attract foreign investment.
Determining the extent to which internal and external factors have contributed to the deficits requires further digging, but what is clear is that Iran has been grappling with energy shortages for several years now. Given that the energy sector is seen as the backbone of the country’s economy, finding a quick fix to this issue becomes increasingly urgent.
Beyond these issues, another major topic that sheds light on the role of sanctions in the energy sector is the ongoing talks about oil exports. It is clear that a substantial portion of Iran’s revenue comes from crude oil sales. The urgency to address oil income becomes even more pronounced with less than a month remaining until Donald Trump is inaugurated as the new US president, who is expected to bring back the so-called maximum pressure campaign aimed at cutting down Iran’s petrodollars.
In an interview with Alireza Kafshkanan and Amin Noorbakhsh—two experts in the energy economy—Iran Daily discussed the intricacies of these pressing issues.
Iran Daily: The energy shortfall in electricity and gas supply have become widely discussed topics recently. Could you briefly outline how these shortages have emerged in recent years? Do you think the deficit is linked to a specific government’s performance?
Kafshkanan: The crisis facing our country, or more accurately, our economy, revolves around the energy deficit. Shortages usually crop up as electricity deficit in summer and a combination of gas and electricity scarcities in winter. In summer, we struggle with electricity shortages due to inadequate power generation and, essentially, a shortage of power plants, leading to consumption outpacing production and creating a deficit. This year, the power shortfall hit 18,000 megawatts, while in 2021, the last year of president Hassan Rouhani in office, it was only 6,000 MW. By the end of Ebrahim
Raisi’s government in August, which was cut short as he lost his life in a helicopter crash, the figure climbed to 18,000 MW, with forecasts for next year suggesting peak consumption deficits could soar to 24,000 MW.
I point this out to emphasize that the energy shortage is not a problem that sprang up overnight or solely during incumbent President Masoud Pezeshkian’s administration. In winter, we also encounter a gas supply deficit, which has become more pronounced this year. In previous years, we managed the shortages primarily by shutting down industries. However, this year, in addition to the usual uptick in consumer demand, the government decided to shift some of the pressure caused by the energy shortfall from the industrial sector to the households and small businesses, redistributing the burden of energy shortages. I believe the government made the right call here.
In past years, particularly over the last three years, the government only imposed such shortfalls on industries, labeling it as “demand management,” which ultimately led to industries closing during the summer and winter.
Typically, we calculate the total annual gas production against total consumption needs to determine the shortfall or deficit. According to the Supreme Audit Court, the gas shortfall in 2023 reached 64 billion cubic meters, while usage last year hovered between 256 and 259 billion cubic meters, indicating a deficit of around 25%. This year, naturally, the shortfall is expected to surge, potentially nearing 30%. If we continue down this path, next year’s shortfall could jump to 35%. Thus, the deficit issue is not something that can be strictly pinned on this government or the previous one.
Why does the severity of the energy shortfall seem to worsen each year? Isn’t it because the government has not managed to balance production and consumption?
Kafshkanan: Consumption growth has outstripped the construction of power plants and gas production in the country. Plus, keep in mind that power plants are aging year by year; while under president Rouhani, the country built plants with a capacity of 20,000 MW, this was still insufficient to meet the rising demand. During his president Raisi’s term, various reports indicate that between 7,500 and 9,000 MW were added to power generation capacity over three years. However, president Raisi himself stated that the country needed around 30,000 MW to offset the electricity shortfall—an ambitious target his administration aimed to hit in four years.
Can you shed light on Iran’s current capacity for oil output and exports? How much could production and sales potentially rise, both under current sanctions and if those sanctions are to lift?
Noorbakhsh: Iran’s refinery capacity for domestic use is clear; it stands at around 1.8 to 2 million barrels per day (bpd). Iran has also been exporting roughly 1.7 million bpd in recent months. Any increase beyond these volumes depends on how much Iran can extract from its oil fields.
First and foremost, we need to assess whether it makes economic sense to develop and extract from joint fields or if we should rely on domestic reserves. Currently, our proven oil reserves sit at 158 billion barrels, and boosting extraction will depend on enhancing our production infrastructure.
When discussing production increases in the short term—over the next two years—even if sanctions are lifted, we are not likely to see significant results. A reasonable extraction increase would be around 200,000 to 300,000 bpd. However, we also need to evaluate the future of the oil market. For instance, if oil continues to demand a minimum price of $60 to $70 over the next 100 years, we could gradually proceed with field development. On the flip side, if our analysis suggests that oil prices may drop sharply in the next 20 years, we should aggressively pursue maximum field development and ramp up production.
I believe there is potential to boost oil output to 3.8 million bpd in the short run, provided that sanctions and investment restrictions don’t linger, allowing us to simultaneously improve production and export infrastructure.
What is your take on the goal of producing 5.4 million barrels of oil daily by the end of the Seventh Development Plan in March 2029? Do you think this target is achievable given the ongoing sanctions?
Noorbakhsh: If we look at production realistically, the figure mentioned in the Seventh Development Plan makes sense. Achieving this figure, especially considering the existing sanctions, is an ambitious goal that includes condensates, but it doesn’t seem entirely out of reach. However, reaching this target hinges on the development of oil fields, refineries and export infrastructures
How feasible is it to attract and secure investment for the development of fields and refineries under the current circumstances?
Noorbakhsh: Securing financing continues to be a major hurdle for all key projects in the country. I believe that domestic companies have the technical know-how to carry out development projects in many fields, though whether they can fully finance them is a different story. That said, there is potential to draw in investment, and I think we could make this happen through collaborations with China under the 25-year agreement or similar arrangements.
Kafshkanan: To build on Mr. Noorbakhsh’s comments, it is still unclear how long the sanctions will stick around and at what intensity. During President Biden’s administration, he at least publicly expressed a desire for greater engagement, stepping away from the maximum pressure policy against Iran. Additionally, the Russia-Ukraine conflict has thrown the global energy market into disarray, making the entire world—especially Western countries—more dependent on energy guarantees, which has led to some leniency regarding Iranian sanctions and exports. This has allowed the previous government to ramp up oil exports from around 300,000 to 400,000 barrels to about 1.8 million barrels. However, two factors could shake things up: first, if the Russia-Ukraine war comes to an end and sanctions against Russia are lifted; and second, with Trump back in power, conditions for Iran could turn more challenging unless we strike a deal on our disputes. Otherwise, even China might not be as willing to buy our oil as they were before.
When it comes to developing our oil fields independently, I believe we have solid technical capabilities in this area. We successfully launched Phase 11 of the South Pars gas field in 2023 using domestic expertise. However, we need to admit that technology isn’t something we fully control. While we may excel in some areas, we face challenges in oil and gas, which is understandable since international energy giants have poured vast sums into research and development to acquire these technologies, with some holding exclusive rights to certain advancements. Thus, technology transfer is crucial for field development and resource extraction, and this can only happen with major international companies return to Iran.
In terms of financing, I’ll just point out one thing: the amount of investment needed in the oil sector is significantly larger than what’s required for electricity
If we want to keep the electricity deficit at its current level and avoid increasing shortages, how much investment is needed?
Kafshkanan: To tackle the crisis in the electricity sector, we plan to allocate $5 billion from the National Development Fund for power production. If we inject this amount into the electricity sector alongside other measures, we could address a significant portion of the current deficit. However, it’s natural that meeting future electricity needs in the residential and industrial sectors will require further investments.
Regarding gas, just to boost pressure in the South Pars gas field alone, we need to invest $20 billion to extract gas, as we are currently facing pressure drops in some fields.
What do you believe is the root cause of the energy shortages?
Kafshkanan: The root causes of the gas and electricity deficits can be traced back to a bill passed in 2005 known as the Price Stabilization Motion. In my view, this plan really slowed down the nation’s development engine and ultimately brought it to a halt in the following years. During the reformist government of president Mohammad Khatami, a program was proposed that aimed for an annual hike of 20% in energy carrier prices to gradually match them with real costs. This scheme was quite successful and coincided with what I consider a golden era for Iran’s economy post-Revolution. The public trusted it, leading to its successful implementation. Unfortunately, though, the Price Stabilization Motion upset the supply and demand balance for electricity, leading to government intervention in setting energy carrier prices. From that point on, investment in power plant construction began to decline, and sanctions complicated matters even further. Sanctions have particularly hampered Iran’s access to oil and gas technologies. You may recall that Phase 11 of South Pars was put on hold back then, and subsequently, Total and a Chinese company (Sinopec) pulled out of developing the country’s oil and gas fields. Then, when the JCPOA (Iran’s nuclear deal) was signed in 2015, those companies returned to Iran, but with the re-imposition of sanctions, Total exited in 2018, followed by the Chinese company in 2019.
Noorbakhsh: Regarding the Price Stabilization Motion mentioned earlier, I must say that this initiative fostered a misguided consumption pattern for energy in the country. Essentially, when we set prices artificially, it sends the wrong signals to consumers. For instance, when someone is buying a house, energy costs are often the last thing on their minds. Similarly, when purchasing a car, they may disregard its fuel usage because gasoline prices in our country are very low. On the other side, regulated fuel prices hinder efforts to optimize fuel consumption, as cutting vehicle fuel consumption requires investment from car makers, which raises production costs. Consumers are often unwilling to pay more for vehicles that consume less fuel. Therefore, until fuel prices are adjusted, we won’t see satisfactory results in this area. Of course, any price adjustments should be handled carefully; they shouldn’t suddenly double or triple prices. This process should unfold gradually or through other methods to avoid putting undue pressure on vulnerable groups.
Trump will soon take office, and evidence suggests he may intend to ratchet up pressure on Iran, with one of America’s key tools being the prevention of Iranian oil sales. In your opinion, how successful do you think Trump’s approach could be?
Noorbakhsh: Looking at the people around Mr. Trump, I believe he will likely dive back into the maximum pressure strategy, especially in the first nine months, before the snapback deadline set out in the JCPOA. Various assessments suggest that our oil exports could drop by between 200,000 and 600,000 bpd during this period.
However, the current scenario is different from when Trump first rolled out his maximum pressure policy. Back then, most of Iranian barrels went to countries that were US allies, like India, European nations and East Asian countries. These countries quickly swapped out Iranian oil for alternatives, including American crude, after receiving temporary exemptions, which led Iran’s oil exports to take a nosedive, even falling below 200,000 bpd in 2020—a situation worsened by the COVID-19 pandemic.
Now, the feasibility of cranking up maximum pressure depends on two main factors: the mechanism of sanctions and the political landscape. The sanctions mechanism has three critical elements: first, how the US plans to cut off Iran’s financial transactions; second, the targeting of tankers carrying Iranian oil; and third, the ways to discourage buyers from purchasing Iranian oil.
One major hurdle in curbing Iran’s oil exports is the issue of tankers. The US will probably focus on sanctioning tankers carrying Iranian oil first. During President Biden’s time in office, there were precedents for sanctioning oil tankers and Iran tried to replace these vessels with others. If the US ramps up sanctions on tankers this time, Iranian oil exports could run into serious trouble, as finding replacements takes time.
On the political front, it is important to note that most of our oil exports are currently headed to China. I believe that, despite US pushback, China is likely to keep buying oil from Iran—not just to support Iran, but also because China typically maintains a diversified quota for its oil imports. China sees importing oil from Iran as a way to strengthen its energy security.
I think China will keep backing Iranian oil shipments. By speeding up the process of replacing targeted tankers, Iran can hold its export levels steady. Regardless, Iran needs to tough it out in the face of the incoming Trump administration, as showing any signs of weakness could undermine its bargaining position in potential negotiations and deals.
What are possible solutions to the energy crisis? President Pezeshkian recently apologized for the deficits in the residential sector, which was noteworthy, and promised that these issues wouldn’t come up again next year. How feasible is it to tackle these deficits?
Kafshkanan: In my opinion, the government can only reduce the severity of the energy crisis; keeping next year’s peak consumption deficit at current levels seems pretty unlikely. This year, the Energy Ministry’s plan to tackle the electricity shortfall was to split a 5,000-megawatt deficit between the industrial and residential sectors—3,000 MW for industry and 2,000 MW for households. However, in recent days, actual shortages have exceeded 5,000 MW.
I believe the government’s plans to address deficits are more focused on strategies laid out in the Seventh Development Plan. However, I think the first step to tackling the shortages is lifting the sanctions. We need to push toward an agreement. To address the current power deficit, there needs to be roughly $80 billion; for oil and gas, around $180 billion; totaling about $250 billion in investment, which can only be pulled in through attracting foreign investment. Additionally, an 8% economic growth target has been set in the four-year development plan. If we want to hit this growth, the key driver of economic growth—namely the electricity, gas, and energy sectors—must be revived.
Given that lifting sanctions depends on various factors beyond Iran’s control, even if they stay in place, I believe we could still aim for a lower economic growth rate of around 3%. However, this would require all branches of power in the Islamic Republic to come together and take the matter seriously.
How can we achieve economic growth even in the face of sanctions?
Kafshkanan: Absolutely, one of the most crucial factors that can help Iran in this area is resolving the energy economy equation. We need to first tackle the energy shortages and bridge the gap between selling prices and the actual cost of energy production. When we talk about the need to adjust fuel prices, it doesn’t mean we should suddenly hike them, as society may not be able to handle such increases and the government will likely steer clear of such moves for security reasons.
Another approach would be for the government to sort gas and power consumers into two groups: those who follow appropriate consumption patterns could be exempt from any changes and even incentivized, while tariffs for industries and heavy consumers could be increased.
In this area, we need to tweak tariffs, which has already been done in the residential electricity and gas sectors. Essentially, the energy costs for those who exceed fitting usage levels should be several times higher than for those who stick to consumption guidelines.
In the industrial sector, the government should aim to bring energy prices closer to actual costs, thereby lowering usage. As you know, during peak consumption times and cold seasons, Iran’s energy exports of electricity and gas to neighboring countries, including Iraq, are halted. The gas Iran ships to Iraq generates much-needed foreign revenue and excessive domestic usage can deprive the country of this income.
So, when we have the chance to rake in income from power and gas exports, why should we provide energy to any industry at subsidized prices? Moreover, the benefits of that industry’s production don’t directly flow to the public. Thus, giving subsidized fuel to industries doesn’t seem reasonable and the government has no choice but to adjust fuel prices.
This approach has already been addressed in a law called Removing Barriers to Electricity Industry Development, which stipulates that 1% of the electricity consumption of industries will be transitioned to renewable energy or provided at free market prices over the next five years.
What is the current status of the country regarding the development of solar and wind farms and boosting power generation through renewables?
Kafshkanan: As I mentioned earlier, the Removing Barriers to Electricity Industry Development Act plans for 1% of industrial electricity consumption to switch over to renewable energy each year. We are hopeful that, per this law and the revenue generated from this sector, new solar and wind power plants will be set up across the country.
On the other side, during the previous administration, the goal was to produce 10,000 MW of green energy over a four-year span, but only about 250 MW were actually generated during three years of that government’s term. Overall, we merely crank out around 1,300 MW of power from renewable energy resources. The aim remains to bring in another 10,000 MW of clean energy each year, which I think is a bit wishful thinking.
That said, I need to stress that optimizing energy consumption is more crucial than just building renewable and thermal power plants to tackle the existing deficits. For every unit we invest in energy optimization, estimates suggest we could see returns up to seven times the cost of constructing thermal power plants. Therefore, optimizing energy use is vital, especially since it helps cut down on carbon emissions, which is a social responsibility for all governments. More importantly, we could even make revenue by helping reduce carbon emissions through global carbon credits and the Paris Climate Agreement.
What is your forecast for oil prices next year and how would a slide in oil prices impact our economy?
Noorbakhsh: In my view, a sharp drop in oil prices is unlikely. Forecasts by 20 economic research institutes indicate that oil prices for next year will hover $60 to $75 per barrel. I think it’s improbable that oil prices will dip below $60 unless we encounter another global crisis like COVID-19.
What strategies can Iran pursue to boost gas revenues and stabilize its standing as a natural gas exporter?
Noorbakhsh: Given the shifts in the global landscape over the past two decades, we need to change our approach to energy trade, especially gas, which is not just an economic tool but also carries political and security implications. On one hand, we rank third in gas production and second in gas reserves worldwide. On the other, we’re geographically positioned among major gas-producing countries like Russia and Turkmenistan, both of which are facing export challenges. Turkmenistan is landlocked and Russia is struggling with serious issues in gas exports following the Ukraine conflict, with exports down by around 100 billion cubic meters annually.
In light of this, we can step up our role in regional energy trade through both domestic production and trade with these countries. We need to seize the opportunity to first purchase surplus gas from Russia and then from Turkmenistan, thereby solidifying our role in gas trade. However, I believe the gas we acquire should not be used domestically to cover shortages. This gas should be directed toward generating foreign revenue through exports.
The objectives laid out in the Seventh Development Plan indicate that we need to import 20 billion cubic meters of gas annually while exporting a total of 40 billion cubic meters, which I see as a minimal target. Our country’s capacity for gas exports far exceeds these figures.
We can sell our gas by developing infrastructure to countries where export conditions are favorable, such as Pakistan and Oman. Gas is less vulnerable to sanctions compared to oil and can politically and strengthen Iran’s position in the region. For instance, look at Israel—it produces only one-tenth of Iran’s gas, yet its gas exports in 2023 were about 10% less than ours. Israel has leveraged gas as a tool to break its isolation, exporting to countries like Egypt and Jordan. This is one of the chief reasons these two countries have softened their stance toward Israel.
I believe the window of opportunity for gas trading in the region is closing fast and we need to take advantage of it. The Seventh Development Plan represents a crucial moment for rolling out this strategy, especially as Israel and Turkey are eager to capitalize on the current energy situation in the region, particularly after the Ukraine crisis. We must not overlook the fact that the US is determined to prevent this from happening. This approach isn’t new; the US has been aiming to undermine Iranian and Russian power in the global gas market for nearly two decades. To achieve this, it has two main strategies: one is to back the gas pipeline projects of competitors to create alternatives for our gas buyers and the other is to destroy the regional gas market via dumping LNG into the global market.
There are currently talks about agreements to purchase gas from Russia, including the transfer of a specified amount of gas through a yet to be laid undersea pipeline in the Caspian Sea to Iran. What’s your take on this and how should we make the most of this opportunity?
Noorbakhsh: Yes, agreements regarding the pipeline you mentioned have been discussed and we need to see how the details play out. From an economic standpoint, it would be more cost-effective for this pipeline to come into the country over land, as both Turkmenistan and Azerbaijan have the necessary infrastructure. Recent discussions suggest that this gas will be transported via Azerbaijan. The key point is that this gas transfer should happen under a win-win scenario.
Iran can export the gas it imports from Russia primarily to Iraq and Turkey and secondarily to Oman and Pakistan. I believe that Iraq will be our market for at least the next decade and how well we utilize this market’s capacity will depend on our own performance. Last but not least, we must prevent any disruptions in our natural gas exports in order to be internationally recognized as a reliable supplier of energy.
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