Iraq needs renewables, but they won’t solve its power problems without broader reforms

Two decades on from the 2003 U.S. invasion of Iraq, efforts to improve the country’s electricity infrastructure have lagged. Despite massive hydrocarbon reserves, including the world’s fifth-largest proved crude oil and 12th-largest proved natural gas reserves, Iraq struggles with chronic electricity shortages. Citizens do not have access to reliable electricity service and have to rely on expensive neighborhood diesel generators to cover some of the gap. There is a clear need to explore cleaner alternatives, such as renewable energy systems, yet the deployment and integration of these systems would be hindered by the same structural woes that have crippled the electricity sector, and which go far beyond generation issues.

Overview of the power sector

Iraq is one of OPEC’s largest crude oil producers, second only to Saudi Arabia, with 17% of Middle Eastern oil proven reserves and 8% of global reserves. As a major producer, Iraq’s electricity sector is almost entirely dependent on fossil fuels, which account for more than 80% of power generation. Despite its vast energy resources, the performance of the country’s power sector is sub-optimal.

Iraq’s power sector suffers from a double whammy: unsustainable growth in power demand, coupled with under-investment and a lack of reforms in generation, transmission, and distribution. The result is a growing mismatch between power supply and demand.

Although there has been significant progress in the expansion of installed power generation capacity, the additions have not matched the announced plans and the growing demand and losses. Installed power generation capacity is approximately 30 GW, while the available capacity is only 23.4 GW. The peak demand, however, is estimated to have reached 34.18 GW in summer 2022. This figure may be an underestimate considering that a significant share of the supply gap is covered by neighborhood diesel generators, an informal economy which goes largely unaccounted for. These generators are prevalent across Iraq — so much so that the country ranks fifth highest globally in terms of the number of diesel generators per capita.

On average, 1 to 2 GW of power generation has been added per year, amounting to an annual growth rate of 5%; 1.4 GW was added between 2021 and 2022. A massive 13 GW was added between 2012 and 2018. But growth in power demand has outstripped the 5% annual growth in installed capacity, averaging 8% compared to a global average of 5%. The unsustainable growth in power demand is largely linked to wasteful consumption driven by high subsidies. The residential and commercial sectors are the largest power consumers, in line with regional trends, with low implementation of power conservation or efficiency measures.

The shortage is further aggravated by transmission and distribution losses, deemed elevated by international standards. The electricity infrastructure is weak owing to poor maintenance due to conflicts and corruption. The grid losses alone amounted to 8 GW in 2015. Additionally, the electricity tariff is substantially below the recovery cost. Iraq records the highest rates of subsidies and uncollected and unbilled electricity in the Middle East. The total losses, including grid losses, non-billing, and non-collection, are among the highest in the region and reportedly range between 40% and 50%, similar to Lebanon. Meanwhile, the losses in Saudi Arabia are less than 7% and the global average is 8%. A large share of these losses is untraceable, under-reported, and falls within the social contract. While there are several measures to reduce these losses, government officials may choose to ignore them due to concerns over losing political and electoral support.

Power generation is also non-resilient and is aggravated by the impacts of climate change. Iraq is considered the fifth-most-vulnerable country to the impacts of climate change globally, including soaring temperatures, drought, floods, and sandstorms. The soaring temperatures increase electricity demand while reducing supply due to lower efficiencies. Middle Eastern countries have been facing skyrocketing peak demand due to high temperatures during the hottest summer months. Egypt and Kuwait recorded all-time highs in peak electricity demand in July 2021, as temperatures soared to 53°C in some cities. In Iran, electricity crunches were aggravated by drought, which affected available hydropower plants. The opposite holds true when temperatures are lower than anticipated. Iraq recorded an improvement in available power generation capacity from 16.25 to 18.6 GW in summer 2020 because of lower temperatures.

Renewable energy integration

Considering the need to diversify the energy sector, and the growing shortages in power supply and reliance on generators, the need to explore alternative resources, particularly renewable energy, may seem evident. In practice, however, the issues that cripple the overall power sector would hinder the integration of renewable energy into the system. Large-scale projects would be hampered by the high transmission and distribution losses, weak business investment climate, and vested interests, whereas distributed renewable energy would have to overcome the absence of regulation, customer protection, and incentives.

Iraq boasts a strong potential renewable energy base: It has significant solar irradiance levels, economically-viable wind speeds in some areas, and hot springs that could present an opportunity for the geothermal development (pending technical assessments). Power generation from renewable energy sources would increase Iraq’s energy security and reduce the power sector’s greenhouse gas emissions, which account for almost half of Iraq’s total emissions, due to its high dependence on fossil-fuel-fired power plants and the heavy deployment of polluting diesel generators.

However, integrating variable renewable energy systems such as solar photovoltaics and wind turbines creates a set of challenges to grid stability. Solar and wind energy sources are intermittent and do not generate fully-dispatchable electricity as power generation is available when weather conditions allow — when the sun is shining and wind is blowing — and not necessarily when demand requires. Mitigating this involves flexible power systems, expanded and modernized grid capacity, and energy storage systems, among other measures. Significant transmission capacity is also required to carry the generated electricity over large distances from the renewable energy farms to the load centers.

As previously discussed, Iraq’s grid is weak and suffers from under-investments and losses, thus restricting this integration and leading to a costly curtailment of a significant share of renewable power generation. Without grid-scale storage, the renewable energy produced would only be injected into the grid when the latter is available, leading to further curtailment. Thus, the government may find itself paying for electricity that is not consumed. Globally, renewable energy projects have been increasingly developed through independent power producers by signing long-term power purchase agreements. These agreements often include take-or-pay clauses forcing the off-taker — the government in this case — to pay for the generated power, regardless of whether it has been dispatched.

The need for grid reinforcements, flexible power systems, and storage will grow in direct proportion to the share of renewable energy in the power mix. But these require hefty capital investments, and therefore, a favorable business investment climate to attract developers and optimal financing costs. In its current state, the Iraqi business climate is only attractive for companies with a high risk appetite, due to the weak political system, heightened concerns over security and corruption, and the slow pace of economic reforms. The subsidies and wide gap between tariffs and recovery costs further hinder investments, as these investments would not be recovered but would add to the existing strains on the state budget in the single-buyer market.

The renewable energy industry’s great capital investment requirements entail heightened risks of corruption and lower value for money. This is especially true where institutions are weak and accountability mechanisms are lagging, such as in Iraq. Similarly to the oil industry, the long tenure and complexity of contracts in the renewable energy industry can lead to rent-seeking behavior and can yield quasi-monopolies where contracts are awarded to one dominant developer for political and vested interests.

Apart from large-scale renewable energy, smaller, distributed systems emerge as institutions weaken and power outages increase in frequency and duration. Consumers resort to alternatives to the state’s weak electricity service provision in the form of expensive generators and small-scale renewable energy, particularly solar photovoltaic rooftop systems. Globally, drivers for distributed generation have included laws and regulations and policy and financial incentives; by contrast, the driver in Iraq is institutional and regulatory failure. As a result of this failure, the distributed renewable energy market may develop without solid regulation, standardization, or consumer awareness or protection rights.

Renewable energy system components are highly complex and include various types and quality, especially for inverters and batteries, which the consumer may not necessarily be well informed about. In light of this and as the determinant sale factor for most consumers would be cost and purchasing power, it is expected that the market will be flooded with low quality components and installations. Consequently, many consumers may end up paying a substantial cost in terms of safety and operation and maintenance for these systems. Moreover, various models of distributed power generation, including power wheeling­ — whereby electric power is transported from a generation site to an electrical load through the grid — would be hindered by the weak and unreliable power grid.

Recommendations

While renewable energy systems are vital for energy security and diversification in Iraq, broader power sector reforms are critical for ensuring the viability, sustainability, and optimization of these systems. Investment climate reforms are also required to attract the necessary financing for these capital-intensive systems and to ensure low cost of financing. Ten additional policy recommendations are listed below:

1. Develop a renewable energy expansion plan and implement a transmission master plan, focusing on refurbishing and upgrading substations to account for rates of demand growth per area and major new load additions, including renewable energy farms.
2. De-risk renewable energy investments through measures addressing the power market and counterparty/off-taker risks, procurement risks such as transparent auctions risks, and political uncertainty risks.
3. Auction renewable energy, including solar plus storage projects, with clear pre-qualification, selection, and award criteria.
4. Promote energy efficiency measures, especially for buildings.
5. Develop an awareness and communication plan for small-scale renewable energy.
6. Adopt a renewable energy law and establish a dedicated institution.
7. Establish a one-stop shop for licensing requirements for large-scale renewable energy, including production licenses and environmental permitting.
8. Restructure the electricity tariff to reduce subsidies and adopt a time-of-use tariff, incentivizing consumption during daylight hours when the sun is shining.
9. Implement private distribution service providers with billing and collection mandates, with authority to cut non-paying consumers.
10. Implement a green investment facility for residential and commercial consumers, providing long-term financing with low interest rates for small-scale renewable energy plus storage.