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The Outlook for Natural Gas, Electricity, and Renewable Energy in Iran

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The Outlook for Natural Gas, Electricity, and Renewable Energy in Iran The Outlook for Natural Gas, Electricity, and Renewable Energy in Iran Pooya Azadi *, Stanford University Arash Nezam Sarmadi, National Grid Ali Mahmoudzadeh, University of British Columbia Tara Shirvani, World Bank Group Working Paper No. 3 April 2017 * [email protected] About the Stanford Iran 2040 Project The Stanford Iran 2040 Project is an academic initiative that serves as a hub for researchers all around the world—particularly scholars of the Iranian diaspora—to conduct research on economic and technical matters related to the long-term development of Iran and to evaluate their possible implications in a global context. The project encourages quantitative and forward-looking research on a broad array of areas relating to Iran's economic development. It seeks to envision the future of the country under plausible scenarios. The sectors that will be covered within the first phase of the project include the economy, energy, water, environment, food and agriculture, and transportation. The project has been co-sponsored by the Hamid and Christina Moghadam Program in Iranian Studies and the Freeman Spogli Institute for International Studies at Stanford. Stanford Iran 2040 Project Encina Hall East, Room E017 Stanford University Stanford, CA 94305-6055 www.iranian-studies.stanford.edu/iran2040 Disclaimer The Stanford Iran 2040 Project is an academic initiative with the sole objective of promoting scientific collaboration in economic and technical areas related to the long-term sustainable development of Iran. The project does not advocate or follow any political views or agenda. The contributors are selected solely based on their research skills; the center is not aware of, and not responsible for, the political views of the contributors and affiliates. Likewise, contributors and affiliates are not responsible for the political views of other contributors or affiliates. Citation and Correspondence Please cite this working paper as: P. Azadi, A. Nezam Sarmadi, A. Mahmoudzadeh, T. Shirvani, The Outlook for Natural Gas, Electricity, and Renewable Energy in Iran, Working Paper 3, Stanford Iran 2040 Project, Stanford University, April 2017, DOI: 10.13140/RG.2.2.28876.62089/1 Address correspondence to: Pooya Azadi, Stanford Iran 2040 Project [email protected] Page 1 About the Authors Pooya Azadi is the manager of the Stanford Iran 2040 Project. His multidisciplinary research interests include energy, environment, and economics. Particularly, he is interested in the development of mathematical models to tackle complex problems at different scales. Prior to joining Stanford, he worked as a researcher at the universities of Oxford and Cambridge and at MIT for several years. Arash Nezam Sarmadi is a transmission planning engineer at National Grid, the world’s third largest electric and gas utility, where he is responsible for long-term planning of electric transmission systems. His research interests include smart grid and power system stability and operations. He received his BSc, MSc, and PhD in electrical engineering from K. N. Toosi University of Technology, Sharif University of Technology, and Washington State University, respectively. Ali Mahmoudzadeh, a research fellow at the University of British Columbia, has worked with industry on design and modeling of energy storage systems and techno-economic studies of micro-grid projects. He received his PhD in electrical engineering from the University of British Columbia on integration of energy harvesting and storage devices. His research interests lie in the area of new architectures for energy devices and application of machine learning in energy management. Tara Shirvani currently works on large-scale infrastructure investment projects for the World Bank. Before joining the World Bank she was based in the Middle East working with the United Nations in Iran on flare gas recovery, gas shipping, and LNG development. She earned her PhD in fuel and vehicle technologies from the University of Oxford and her master’s degree in engineering for sustainable development from the University of Cambridge. Page 2 Executive Summary This report presents our analysis of supply and demand for natural gas and electricity in Iran and forecasts their trends through 2040. We first discuss the outlook for Iran’s natural gas production and market demand and then quantify economic opportunity losses caused by suboptimal allocation of natural gas to various end uses. Subsequently, based on the projections made for individual consuming sectors, we forecast Iran’s future demand for electricity. Finally, we put the potential of renewable energy in Iran into context by comparing its future viability against other power capacity expansion scenarios, i.e., upgrading the existing gas-fired power plants and the addition of new units. Stemming from the development of supergiant South Pars gas field, Iran’s natural gas industry has shifted to a new paradigm: since 2000, production has increased from 230 to 750 million cubic meters per day (mcm/d) and is likely to rise to 920 mcm/d by 2020 and 1,150 mcm/d by 2040. The envisioned drastic drop in the growth of production beyond 2021 is attributed to the smaller capacity of future greenfield projects and the expected decline in production of the existing fields—particularly the South Pars field itself. Besides demographic drivers, factors contributing to the soaring demand for natural gas include the displacement of liquid fuels by natural gas for space heating and electricity generation and the development of petrochemical plants and energy-intensive industries. During this time, the amount of gas left for reinjection into mature oil fields has remained flat and the net trade of gas has been zero or negative. Although Iran’s total gas exports (to Turkey, Iraq, Oman, and Armenia) may reach 100 mcm/d levels within the next five years, further expansion of export capacity seems infeasible. Within the domestic market, the largest growth in natural gas demand will come from petrochemical and other industries and from the power sector. Stanford Iran 2040 Project Iran’s Natural Gas Supply and Demand Iranian-studies.stanford.edu/iran2040 1300 13 1200 Space Heating Power 12 1100 Industry Petrochemical 11 1000 Transport Others 10 900 Net Export Injection 9 800 Per Capita 8 700 7 600 6 500 5 400 4 Natural Gas (mcm/d) 300 3 200 2 100 1 per Capita (scm/d) Production 0 0 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 Figure ES-1. Historical data and projected natural gas supply and demand in Iran (1990–2040). The Iranian government manages the demand for natural gas by setting sector-specific prices and quotas, with prices decided annually while the quotas are often adjusted dynamically. The mismatch between the selling price and allocation priority suggests that the demand structure for natural gas (hence the total revenue) could have been vastly different had the price elasticities of different uses been factored into the pricing models. This discrepancy highlights the urgency for the country to accelerate energy price reforms and develop a competitive market for supplying natural gas to the large buyers (e.g., petrochemical plants). Page 3 Natural Gas Allocation and Revenue (or Avoided Costs) Figure ES-2. Allocation 450 priority (horizontal axis), CNG Fleet Stanford Iran 2040 Project Iranian-studies.stanford.edu/iran2040 400 (avoided cost of gasoline) revenue (vertical axis), and consumption (circle size) of 350 Natural Gas 300 Net Export natural gas for different end Reinjection uses in Iran. 250 (value of recovered oil) 200 $k/mcm Petrochemical 150 (gross added value) Space Electricity 100 Export Heating Power Petrochem. feed 50 Petrochem. fuel Other Industries 0 -50 High Allocation Priority Low -100 Since 1990, Iran’s power generation capacity has expanded at an average rate of 2.4 GW/y to meet the average gross demand growth of 9.1 TWh/y. With a share of 85%, the sector relies heavily on natural gas as the primary source of energy, while shares of liquid fuels and hydropower in 2016 were 9% and 5%, respectively. Our analysis shows that Iran’s electricity demand growth will likely decline from 6.8 to 3.8 TWh/y by 2040, reducing the need for annual capacity addition from 3.0 to 1.3 GW. Upgrading the existing power plants will add 10 GW capacity at a levelized cost of less than 1 ¢/kWh; the levelized cost of marginal electricity generation by combined cycle plants ranges from 1.5 to 6.3 ¢/kWh depending on the opportunity cost of natural gas. We also show that, with a future levelized cost of approximately 4 ¢/kWh, publicly funded utility-scale renewable energy (solar and wind) will become economically viable only if the selling price of displaced gas exceeds $150,000/mcm. Currently, the only uses of natural gas that satisfy this threshold requirement are transportation with compressed natural gas (CNG), gas export, and reinjection into oil fields. While gas export and reinjection have some growth potentials, the market for CNG vehicles seems to have become saturated. Hence, any further expansion would require a market stimulus such as an increase in the domestic price of gasoline. At the current selling price for natural gas, investment in renewable energy with the objective of making more gas available to boost production from the petrochemical industry is not economically viable. Stanford Iran 2040 Project Iran’s Electricity Demand by Sector (1990 – 2040) Iranian-studies.stanford.edu/iran2040 400 4000 Residential 350 Industrial 3500 Agriculture 300 3000 Public & Commercial 250 Street Lighting 2500 Per Capita 200 2000 150 1500 100 1000 ElectricityConsumption (TWh) 50 500 Consumption per Capita (kWh) 0 0 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 Figure ES-3. Historical data and projected electricity consumption (1990–2040). Page 4 The Outlook for Natural Gas, Electricity, and Renewable Energy in Iran Introduction With 34 trillion cubic meters (tcm) of proven reserves, Iran possesses the largest recoverable natural gas resources in the world [1].
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