Increased private participation in Iraq’s power sector could see generating capacity triple over the next decade. However, structural reforms, not more infrastructure, are required if Iraq is to put an end to power shortages.
- Iraq is anticipating significant power shortages this summer. The electricity sector’s operable capacity is projected to be 18 GW and peak demand 24 GW. The situation continues to be a national security issue.
- With a nameplate capacity of more than 26 GW, Iraq could curb shortages by incentivising energy-saving consumption and upgrading infrastructure. If successful, these measures coupled with new capacity would bring Iraq to surplus levels by 2025, according to the IEA.
- The government’s electricity plans are ambitious: it claims that large-scale gains will be made by 2023. However, considering that Iraq has spent $120bn on the sector since 2003 with very limited results, the sector is unlikely to see a major breakthrough. This is due to the difficulty in overcoming political and vested interests, and implementing bureaucratic and consumption pattern reforms.
- Iran will continue to be Iraq’s major electricity provider, but competition from regional players may intensify if political relations improve.
Underinvestment and population growth drive electricity shortfall
Iraq’s electricity sector is severely underdeveloped due to low capital expenditure and widespread corruption. War has also had a devastating impact: the latest fight against ISIS caused $7bn in losses to power infrastructure. Population growth, which is expected to increase by 14m by 2030, and excessive consumption patterns also put added strain on the grid.
Electricity shortages are most severe during the summer, when the increased use of air conditioners, coolers and fans overloads the grid and results in power cuts which often last for days. Protests sparked by shortages are common: one incident in Basra last year led to the death of 27 demonstrators.
Government agrees to long-term electricity roadmap
The Ministry of Electricity sees partial privatisation of the power sector as the only long-term solution to Iraq’s electricity crisis. In early May it signed three contracts worth a total of $784m with Siemens for 750 MW of new capacity. As part of the deal, the German firm will construct a gas-fired power plant south of Baghdad; upgrade 40 gas turbines with upstream cooling systems; and install 13 substations across the country. The project is part of a broader $15bn three-phase electrification plan agreed by Siemens and the government, which aims to add 11 GW of capacity by 2028.
US firm GE is also expected to win other power projects in the country, after an intervention from the Trump administration saw the Iraq government sign a memorandum of understanding (MoU) with GE for 14 GW, half of which could be made available in the short term. Both Siemens and GE claim their projects will be self-financing, as they will not only focus on new capacity but also on re-enabling inoperable capacity.
Demand growth will outpace supply unless consumption is curbed
If delivered, both plans will nearly triple generating capacity but not suffice to put an end to power shortages. According to the IEA’s latest report, the gap between maximum grid supply and peak demand grew from 6 GW to 11 GW between 2014 and 2018 and is likely to reach 13 GW by 2023. This means Iraq would need a substantial 65 GW of installed capacity instead of 50 GW by 2030 to satisfy demand – a nearly impossible task.
Curbing demand growth is key to improving the power system. This could be done, for example, by improving pricing structures to disincentivise high energy use and encouraging low-energy solutions. Any top-down plan to solve the problem would be unlikely to succeed as the government lacks the mechanisms to implement it. Instead, the responsibility should fall on the private sector as the only actor able to provide round-the-clock supply and rationalise consumption due to its reliance on fee collections.
In addition to boosting capacity through large-scale energy companies, the government is targeting renewables contracts with smaller independent power providers (IPPs), with the aim of installing 500 MW of solar power per year. However, energy contracts in Iraq’s power sector carry risks both for multinationals and IPPs. Multinationals seem to entertain uneasy relations with the Ministry of Electricity and MoUs rarely come to fruition. Moreover, there is considerable public opposition to increasing private participation in the sector, which is widely seen as opening the door to complete privatisation. In 2017, when the government unveiled its plan for partial privatisation, several provincial councils rejected it outright, claiming that it would hurt low-income consumers.
US sanctions could reduce Iran’s dominance in energy supply
For now, Iraq remains dependent on imports of gas and electricity from Iran, which account for a fourth of its current electricity capacity. Following a visit from President Hassan Rouhani in March, bilateral cooperation on electricity is set to expand. The two countries are planning to cooperate on increasing grid synchronisation, renovating power plants and carrying out personnel training. More ambitious plans also include decreasing Iraq’s technical loss by 30% by the end of 2020 and offsetting its power shortage issue the following year.
However, with US pressure on Iranian energy exports mounting, these plans may not come to fruition. Iraq also has long-term ambitions of becoming a regional electricity hub rivalling Iran. For this, it will need to diversify suppliers. There is already a plan in the works with Jordan to barter power for oil by 2021 and Saudi Arabia has said it intends to sell electricity to the country at a reduced rate from a 3-GW solar power plant close to its border. For now, these remain statements of intent, which means Iran will maintain its market edge in the short term. As US sanctions intensify, however, its role will diminish instead of strengthening as expected.
Priorities for Iraq’s Electricity Sector:
Daniel Moshashai is Castlereagh’s MENA analyst. He specialises in Iran, the GCC, economic diversification in national agendas and geopolitics in the Middle East.