The Challenges of Gas and Electricity Imbalance in Iran

Iran is one of the richest countries in the world in energy resources., It has the second-largest gas reserves behind Russia– 17 percent – and 9.54 percent of global oil reserves. Iran is a founding member of OPEC and also the Gas Exporting Countries Forum (GECF). Nevertheless, in recent years, Iran has faced a severe energy imbalance crisis in its gas and electricity sectors, necessitating gas imports from Turkmenistan and, recently, Russia.

Iran’s 23 gas refineries produce around 850 million cubic meters of sweet gas daily. However, the country grapples with gas shortages every winter and summer.[i] In 2023, Iran experienced a daily shortage of 250 million cubic meters of gas, while in 2024, the imbalance is expected to reach 300 million cubic meters a day.[ii] Indeed, Iran’s power industry warns of a 30% energy deficit by next summer.[iii] Pressure drops or gas cuts in winter, especially in the northern provinces of Iran, and the widespread and recurring problem of power outages in summer are forcing many industrial units, including gas power plants, to switch to Mazut—a low-quality, heavy oil notorious for its high pollution levels.

Reasons for gas imbalance and shortages

High energy consumption is one of the main reasons of gas imbalance in Iran. Iran produces approximately 260 billion cubic meters of gas a year, with 18 billion cubic meters allocated for export and the remainder consumed domestically.[iv] Iran’s annual gas demand has risen from 153 bcm in 2013 to 245 bcm in 2023, reflecting a 7% yearly increase over the past decade. The residential sector and power plants have driven much of this growth and are expected to increase consumption through to 2040.[v]

Iran’s gas supply and demand by 2040 (million m3/day)[vi]

Iran’s gas consumption (bcm/yr)[vii]

Iran is the world’s fourth-largest consumer of gas behind the United States, Russia and China,[viii] and consumes 10 billion cubic meters more of gas than more than 30 European countries combined.

The strategy of delivering gas to more than 90 percent of urban and rural homes and making a vast country reliant on it exacerbated the imbalance in the 1990s. The number of gas pumps to supply gas fuel for cars and trucks increased drastically too. Iran built gas pipelines to connect refineries and power plants, which increased the production capacity of gasoline and electricity, making them available to final consumers at a lower cost. In this way, instead of millions of household gas subscribers and hundreds of thousands of gas-burning cars, gas resources were only connected to refineries and power plants directly.

In addition to low levels of productivity, the distribution network also wastes gas. According to the World Bank and the International Energy Agency, Iran flares 18 billion cubic meters of gas annually due to the lack of gas collection equipment at oil fields. Additionally, there is a 7 bcm worth of gas leakage in the transmission and distribution network each year. Iran’s gas losses during production and transmission alone equal half of Turkey’s total gas consumption. In addition to this, the efficiency of Iran’s thermal power plants is a mere 33%, and a significant portion of the received fuel is wasted during the conversion to electricity. Furthermore, 13% of the country’s electricity is lost during the transmission and distribution stages. This is also due to lack of investments in new equipment and technology.[ix]

The economic sanctions placed on Iran over the past two decades have also prevented foreign investment, and the development of gas production capacity and power plants. This has played an important role in increasing the exploitation and production of gas by Qatar and Iraq.[x] Joint fields constitute 20 percent of extractable oil and 30 percent of Iran’s gas reserves. However, according to the Ministry of Oil, only 15 of the 28 joint fields are active, and the other 13 fields have not completed development to reach the production stage.[xi]

The lack of foreign investments stalled the development of the South Pars gas field, which has played an important role in Iran’s gas imbalance in recent years. In December 2022, Iran’s then-oil minister Javad Owji warned that Iran would become a net energy importer if it failed to attract $240 billion in investment in its oil and gas sector.[xii] It is clear that it Iran will not be able to attract enough capital without removing sanctions and joining Financial Action Task Force (FATF).

An additional factor contributing to Iran’s gas imbalance is the lack of diversity in the country’s energy portfolio and the very low share of alternative and renewable energies. 68% of the country’s energy consumption relies on gas, while this figure is 26% for Turkey and 31% for Canada.[xiii] In comparison, Turkey and Canada generate 35 times and 30 times more solar and wind energy than Iran, respectively. Moreover, Turkey and Canada outpace Iran by producing nine times and 53 times more electricity from hydroelectric power plants.

In 2021, Iran’s electricity generation was primarily sourced from natural gas, accounting for 81% of total production. Oil contributed 14%, followed by hydropower at 4%, and nuclear power at 1%. Both coal and non-hydro renewable sources each made up less than 1% of electricity generation.[xiv] The capacity of Iran’s renewable power plants has reached 1,231.06 megawatts (MW), based on the latest data released by Iran’s Renewable Energy and Energy Efficiency Organization (SATBA). Iranian Energy Ministry has also put it on the agenda to add 10,000 MW to the capacity of the country’s renewable power plants by the end of 2025.[xv] Nevertheless, Iran’s energy resources are still heavily dependent on oil and gas resources.

Reasons for electricity imbalance and shortages

There has been an imbalance in electricity production for a decade, which has a direct relationship with gas production and consumption. Iran supplies 70 bcm of gas to power plants each year, nearly 1.5 times Turkey’s total gas consumption.[xvi] During the summer 2024, Iran faced a 14,000-megawatt (MW) electricity shortage.

Indeed, according to Ali Nikbakht, Chairman of the Board of Directors of the Iran Power Plants Association, while the total nominal capacity of Iran’s power plants is over 92 GW, much of it is outdated. “Of the 15 GW nominal capacity of steam power plants, about 12 GW are over 30 years old. In the case of gas power plants, 2.7 GW have also exceeded 30 years of age”.[xvii] During peak electricity consumption in the hot summer season, several hours of power outages affect Iran each day, cutting off electricity to many homes as well as factories. During winter, the country struggles with a daily gas deficit of 250 million cubic meters. These shortages cost the country’s industries at least $8 billion annually.[xviii]

There are various reasons for dissatisfaction in the electricity sector. A decade ago, the power plants that belonged to the Ministry of Energy were handed over to the private sector. Nevertheless, the lack of proper planning, the ban on government investment in electricity generation, and economic sanctions prevented the plants from developing in proportion to the increase in electricity demand in the country.

On the other hand, while 60% of Iran’s power plants are private, the Ministry of Energy is the only exclusive buyer of electricity, preventing the formation of a real market for energy and mitigating the motivation of private sector investors in the construction and operation of power plants. Therefore, a critical concern is the government’s growing debt to private power plant owners, which has quadrupled over the past three years. By the beginning of this year, it surpassed 900 trillion rials ($1.5 billion based on the open market exchange rate or $2.1 billion at the official rate). This mounting debt makes it unlikely that the private sector will continue to invest in the power industry.[xix]

Iran also provided subsidies in the value of $30 billion for electricity and $52 billion for petroleum products in 2023, increasing the financial pressure on the government.

While the National Gas Company of Iran is not able to provide enough gas for power plants due to lack of resources, the use of alternative fuels such as Mazut has increased. The use of Mazut, in addition to the cost of 12 billion dollars, has played an important role in aggravating the pollution of Iran’s big cities in recent years.

High electricity consumption is also prevalent in the household sector. Peak electricity consumption in Iran reached nearly 80,000 megawatts this summer as heat waves hit the country.[xx] One of the best ways to manage consumption is to use smart meters which can gradually increase consumption costs, but currently only about 4 million smart meters have been installed, which is less than 10% of all households.[xxi]

High consumption of electricity is not only due to the increase in consumption by subscribers. In fact, 13% of Iran’s electricity is lost in its outdated transmission and distribution network. This loss is equivalent to 40% of the country’s household electricity consumption, translating into a staggering $4 to $5 billion annual loss at current regional electricity prices.[xxii]

To overcome these challenges, Iran should have increased its power production by at least 7% annually for over a decade to meet the growing demand. However, the last time this goal was achieved was in 2010. Since then, the country’s electricity consumption has grown at twice the rate of its production.[xxiii] In this regard, Iran needs about $1.0 billion of investment in the power plant sector to overcome electricity supply and demand imbalance in the country.[xxiv]

Gas swaps and electricity imports from neighboring countries

In order to overcome these challenges, Iran has decided to import gas from Turkmenistan and Russia. The most of Iran’s oil and gas fields and installations such as the South Pars gas field are located in the south and southwest of the country. Although Iran has a large network of gas transmission pipelines, its northeastern and northern provinces, including Razavi Khorasan, North Khorasan, Mazandaran, and Golestan, experience sharp drops in gas pressure during winter. Indeed, Khangiran Gas Refinery in Sarakhs, in the northeast of Iran, cannot satisfy huge gas demands in the winter.

In this regard, in a remarkable sign of tightening relations, Iran, Azerbaijan and Turkmenistan signed a trilateral natural gas swap deal on the sidelines of the 15th summit of the Economic Cooperation Organization (ECO), in Ashgabat, on November 27, 2021. Former Iranian Oil Minister Javad Oji noted that under this tripartite agreement, Iran will receive about 1.5 [billion] to 2 billion cubic meters of gas a year from Turkmenistan in the Sarakhs [region] and will deliver it to Azerbaijan from Astara.[xxv]

. On June 26, 2024 Russia’s energy giant Gazprom and the National Iranian Gas Company (NIGC) signed a Memorandum of Understanding (MoU) worth around $40 billion for investment in Iranian oil and gas fields and also the transfer of Russian gas to Iran.[xxvi] The deal stipulates that Iran will receive 300 million cubic meters of Russian gas daily, with Russia also covering the construction costs of the necessary pipeline infrastructure, leveraging their technology for seabed pipelines [Caspian Sea].[xxvii] This is a gigantic amount of gas, which amounts to more than one-third of Iran’s daily production.[xxviii] Iran hopes that with the implementation of this agreement, it will consume part of the imported gas to compensate for the gas shortage and imbalance and export the rest to Armenia, Pakistan, Turkey and Iraq. Iran also hopes that with the investment of Russian companies for the development of seven oil and gas fields in the west and south of Iran, it will be able to increase the production capacity and solve part of the imbalance problem.

While Iran faces an imbalance in electricity supply in the summer, Armenia has a gas imbalance problem in the winter. This is the basis of the cooperation agreement between the two countries since 2009, as part of which Armenia has been importing natural gas from Iran, turning it into electricity at a local thermal power plant, and supplying it back to Iran. The surplus of electricity obtained from one cubic meter of natural gas has remained in Armenia.[xxix] Iran and Armenia extended their deal until 2030 last year.[xxx] This faces two important challenges, however. The first is the lack of sufficient amounts of gas in Iran. The second is that an increase in the capacity of Iran’s transit pipelines to Armenia is not in the interest of Russia’s Gazprom, which supplies 80% of Armenia’s gas.

On the other hand, Iran exports electricity to Pakistan and Afghanistan. Indeed, Iran also exports gas to Turkey and indeed exports electricity and gas to Iraq, which has been exempted from US sanctions in recent years. All these contracts were concluded in years when Iran was not facing the problem of energy imbalance and sanctions. Iran hoped to become an energy hub in the region and find the possibility of exporting gas to Europe after exporting electricity and gas to its neighbors. Economic sanctions, the lack of foreign investment and energy imbalance halted these plans. In recent years, Iran’s electricity exports to Iraq have stopped due to imbalance and peak electricity consumption in summer, and due to imbalance and peak gas consumption in winter, Iran’s gas exports to Turkey and Iraq have stopped or faced a sharp decrease. These conditions have led Iraq to a gas swap agreement with Turkmenistan and Iran, as well as the import of LNG gas from Qatar, in order to avoid further damage to Iraq’s power plants.[xxxi]

Conclusion

There is no doubt that energy shortage and imbalance has become one of the main challenges of modern-day Iran. The increase in energy price and decrease in government subsidies, especially for gasoline, have led to dissatisfaction and protests in recent years. Iran’s basic and sustainable solution to solve the problem of energy imbalance and lack of electricity and gas requires canceling economic sanctions, attracting domestic and foreign investment for the development of refineries and power plants, paying off government debt to the power plants owned by the private sector, improving the transmission lines and pipelines of the energy distribution network, and diversifying energy sources for the modification of energy consumption patterns.