Iraq’s electricity crisis a review hh istepanian june 2013

Reform of electricity sector in post conflict

states - Iraq case study

University of GlasgowCollege of Social Sciences - Adam Smith Business School

© 2013 Harry Istepanian, University of Glasgow, UK – All Rights Reserved

IRAQ’S ELECTRICITY CRISIS: A REVIEW

26 June 2013

STUDENT

Harry Istepanian

1ST SUPERVISOR

Dr. James Wilson

2ND SUPERVISOR

Dr Arjunan Subramanian

Summary


▫ Study progress

▫ General overview on Iraq

▫ Causes of electricity crisis in Iraq post 2003-war

▫ Electricity Demand Forecast Methodology

▫ Key Parameters for Electricity Demand

▫ Iraq Energy Policy Issues and Challenges

Study Progress


a) Attended PhD Programme Retreat - September 2012

b) Literature review (Completed) – June 2013

c) Collect data and country information (Completed) – June

2013

d) Review and analyse the current electricity crisis in Iraq

(Completed) – Draft report submitted on 15 June 2013

e) Evaluate the forecast for electricity demand using

econometric methods (In progress).

About Iraq


75%of Iraqis identified poverty as the most pressing need

Land Area

438,000 km235% of households believe that electricity should be the top priority for improvement

14.6 hours of electricity per day on average households receive through a combination of the public network or private generators.

90% of households supplement the public network with private generators.

Oil contribution of GDP is

60%

90%of Government revenue is from oil contribution

143 billion barrels is Iraq oil reserve

Sources: UNDP, World Bank, IMF, Ministry of Planning; Map: Google.com

population stands at approximately

32 millionBy 2030, it will grow to almost

50 million

71% of Iraqis live in urban areas

13% of these households have more than ten occupants

Unemployment rate is

11%50%of the population is lessthan 19 years old

Million barrels of oil per day

2.6Iraq currently produces

3,100 billion standard cubic meters of gas reserves.

Iraq Political Timeline


1917 – Britain seizes Baghdad.

1921 – Faisal I, son of Hussein Bin Ali, is crowned Iraq’s first King.

1932 – Iraq becomes an independent state.

1958 – King Faisal II is overthrown in a military coup.

1968 – A Ba’athist led coup.

1972 – Iraq nationalises the Iraq Petroleum Company (IPC).

1979 – Saddam Hussein succeeds Ahmed Hassan Al-Bakr as president.

1980 – 1988 Iran – Iraq war.

1990 – Iraq invades Kuwait, prompting what becomes known as the first Gulf War. A massive

US-led military campaign forces Iraq to withdraw in February 1991. Followed by UN

mandatory economic sanctions.

1995 – UNSC Resolution 986 allows the partial resumption of oil exports to buy food and

medicine (the “oil-for-food programme”).

1998 – US and UK launch a bombing campaign, “Operation Desert Fox” to destroy Iraq’s WMD

programmes.

Sources: http://www.bbc.co.uk/news/world-middle-east-14546763; http://en.wikipedia.org/wiki/Main_Page; www.guardian.co.uk; www.telegraph.co.uk; www.bbc.co.uk; www.reuters.com; www.illumemagazine.com

http://www.bbc.co.uk/news/world-middle-east-14546763

Iraq Political Timeline


2003 March – US-led invasion topples Saddam Hussein’s government, marks start of years of

violent conflicts.

2003 August – Insurgency intensifies. Hundreds are reported killed in fighting during the month-

long US military siege of the city of Falluja.

2006 February onwards – Sectarian violence.

2006 May and June – An average of more than 100 civilians are killed per day in violence in

Iraq, the UN says.

2007 January – UN says more than 34,000 civilians were killed in violence during 2006.

2007 December – Britain hands over security of Basra province to Iraqi forces, effectively

marking the end of nearly five years of British control of southern Iraq.

2009 March – US President Barack Obama announces withdrawal of most US troops by end of

August 2010.

2011 December – US completes troop pull out.

2013 April – Iraq Body Count (www.iraqbodycount.org) estimates 121,722 people were killed

since the invasion in 2003. Some put the number as high as 170,000.

Sources: http://www.bbc.co.uk/news/world-middle-east-14546763; http://en.wikipedia.org/wiki/Main_Page; www.guardian.co.uk; www.telegraph.co.uk; www.bbc.co.uk; www.reuters.com; www.illumemagazine.com

Electricity Crisis Post 2003 war


Aljazeera.net/english

Inside Iraq

Source: Al Jazeera TV (2010)

Electricity Crisis Post 2003 war


The Special Inspector General for Iraq Reconstruction (SIGIR) report “Hard Lessons: The Iraq Reconstruction Experience” (2009) concluded that:

There were several irregularities and setbacks in the electricity reconstruction efforts.

The electricity reconstruction was substantially costly and complex.

Causes of Electricity Crisis in Iraq


Iraq Electricity

Crisis

Organisational

Suppressed Demand

Incorrect policies and economic strategies

Research Objectives


Analysis

Demand forecasting

Restructuring

Policies and Economics

Sector optimisation

Overview of Electricity Sector Structure


▫ The Electricity sector in Iraq is run by the

Ministry of Electricity.

▫ The Ministry oversee the operation of 6

regional generation, 5 transmission

(400kV and 132kV), and 7 regional

distribution directorates general, with 10

other directorates and supporting offices.

▫ Employs more than 43,000 (2006).

▫ The total installed generation capacity is

over 16,800 MW (2012) from 478

generation units.

▫ Iraq has the lowest power consumption

(suppressed) per capita (1,068

kWh/capita) compared to its neighbouring

countries

Hydro; 13.71%

Thermal; 29.75%Gas

Turbine; 47.70%

Diesel; 8.83%

Source: Ministry of Electricity (2011)

Crude Oil ; 28.20%

HFO; 28.17%

Diesel; 0.60%

Gasoil; 7.24%

Natural Gas;

35.80%

Average Electricity Supply vs. Estimated Demand 2000 - 2012


(Source: SIGIR, Learning from Iraq; A Final Report , March 2012)

The estimated average net capacity available at peak is

9,000 MW

The estimated average net capacity required to meet the

peak demand is 15,000 MW (IEA, 2012).

Electricity Demand Forecast


The load forecast for Iraq is complex due:• High level of suppressed demand and,• Lack of accurate historical data for actual

demand.

A simple econometric forecasting method is used for the estimation of demand.

The approach is limited to two main explanatory variables: (a) income development, of which the

percentage growth in GDP is used as an indicator and,

(b) the electricity price development.

Electricity Demand Forecast Methodology


Residential Demand

𝑡 𝑅 = ሼሾሺ1+ 𝛼𝑡𝑅 .𝜖ሻ .ሺ1+ 𝑇𝑡 .𝜏𝑅ሻሿ− 1ሽ+ {(𝑛𝑡.𝜃)𝜇𝑡−1𝑅 100 } Where:

tR ⩽1, (t=1,2,3,…n) is the growth rate of residential electricity consumption at

the year t,

a = growth rate of real income at year t,

ϵ = income elasticity of demand (IEoD),

Tt = is the tariff increase at year t,

R = price elasticity of demand for the residential sector (PEoD),

nt = number of new residential customers at year t,

θ = average electricity consumption for the new residential customers,

μ t-1 = residential electricity demand in year t-1.

Electricity Demand Forecast Methodology


Commercial, Industrial and Agricultural and Public Demand

Where:

tC

, tP ⩽1, (t=1,2,3,…n) is the growth rate of commercial, industrial, agricultural

and public electricity consumption at the year t respectively,

a = growth rate of real income at year t,

ϵ = income elasticity of demand (IEoD),

Tt = is the tariff increase at year t,

C, P = price elasticity of demand (PEoD) for commercial, industrial and

agricultural and public sectors respectively (C , P ⩽ 1) .

𝑡 𝐶 = ሼሾሺ1+ 𝛼𝑡𝐶 .𝜖ሻ .ሺ1+ 𝑇𝑡 .𝜏𝐶ሻሿ− 1ሽ 𝑡 𝑃 = ሼሾሺ1+ 𝛼𝑡𝑃 .𝜖ሻ .ሺ1+ 𝑇𝑡 .𝜏𝑃ሻሿ− 1ሽ

Key Parameters for Electricity Demand


Population▫ The growth in population will exert

tremendous pressure on the energy

resources of the country.

▫ Iraq’s population was 33.3 million in June

2011 and will become 55.85 million by

2030.

▫ Current deficiency in housing is more than

1 million housing units.

▫ Estimated number of housing stock will

reach 8.4 million units by 2030.

▫ 97% of the households will be connected to

the electricity grid in 2030 compared to

79% in 2012.

Children living next to Daurra Oil Refinery near Baghdad.(Source: http://commons.wikimedia.org)

▫ the number of household customers is expected to double from 3.94 million

connected households to 8.40 million in 2030.



Gross Domestic Product

Iraq’s GDP growth has been distinctively volatile in the past thirty years.

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20100

20

40

60

80

100

120

YEAR

Gro

ss D

om

est

ic P

rod

uct

(C

urr

en

t U

SD

B

illio

ns)

Iran - Iran war started

(September 1980)

Iran - Iran war ended (August

1988)

Iraq war started (March

2003)

Civil Unrest (February 2006 - July

2008

Oil nationalisa-tion (June

1972)

Gulf war started (Au-gust 1990)



▫ The substantial increase in

the growth rate post 2003

was due to sharp increase in

crude oil prices (US$ 27.68 in

2003 – US$ 86.46 in 2012)

▫ GDP growth forecast is 10.6%

per annum during 2010-2020

and expected to decline

gradually thereafter to settle

around 8.78% in the next two

decades (IEA, 2012).

Gross Domestic Product



Income Elasticity of Demand

A measure of the relationship between a change in

the quantity demanded for a particular good and a

change in real income.% change in Quantity Demanded

IEoD (ϵ)= --------------------------------------------% change in income

We considered:

▫ Residential IEoD= 1.1 (1.3 – 1.6)

▫ Commercial, Industrial and Agricultural IEoD= 1.0

▫ Public IEoD= 0.9



▫ The current tariff levels for the five consumer categories are heavily

subsidised.

▫ Comparison of Iraq electricity tariffs with selected world and neighbouring

countries.

The Electricity Tariff

Sources: Ministry of Electricity; World Bank; http://en.wikipedia.org/wiki/Electricity_tariff

Country US ¢/kWh GDP/Capita (US $) [2011]

Iraq 0.85 ~ 4.50 (weighted average is 1.85)

3,501

UK 20.0 38,818

USA 8 ~ 17 48,442

Jordan 5 ~ 33 4,666

Turkey 13.1 10,498

Iran 2 ~ 19 4,526 (2009)

India 8 ~ 12 1,489



▫ the cost-covering tariff is around 11.30 US

¢/kWh.

▫ High technical and non-technical losses in the

T&D are contributing heavily to the high cost-

covering tariff.

▫ A more reasonable estimate with the current

condition of electricity grid will be 15 US ¢/kWh

(generation cost: 6 - 8 US ¢/kWh and

transmission and distribution cost: 7 - 10 US

¢/kWh).




We considered:

▫ Residential PEoD = -0.2

▫ Commercial, industrial and Agricultural PEoD = -0.3

▫ Public PEoD = -0.1

Price Elasticity of DemandMeasures the rate of response of quantity demanded

due to a price change. The formula for the Price

Elasticity of Demand is:

% Change in Quantity DemandedPEoD ()= --------------------------------------------

% Change in Price

Electricity Demand Forecast Comparison


the demand estimation using current methodology is higher than base case load estimation anticipated originally by the Ministry’s Master Plan and closer to the high base forecast.

2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 20300

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

300,000,000

350,000,000

400,000,000

450,000,000

Calculated Demand Forecast Master Plan Total Demand Forecast

Ele

ctri

city

Con

sum

pti

on

(M

Wh

/YEA

R)

YEAR

Electricity Demand Forecast


▫ Total peak demand is expected to be around 46,867 MW in 2030.

▫ The calculated demand is 23.7% higher than the base case forecast reported in

the Ministry’s load Master Plan forecast (35,750 MW in 2030).

▫ The growth rate in the demand is expected to decline steadily from the current

level of 11.72% in 2013 to reach around 5.51%.

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 20300.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

Gro

wth

rate

of

Ele

ctri

city

D

em

and

YEAR


[Reference: Luay J. Al Khatteeb (2011), ‘Capitalising on Iraq’s Natural Gas Resources’, Iraq Power & Gas Projects (MEED 2011), 13th – 14th June 2011, Conrad Istanbul.]

Iraq “Power” Status quo!


The The current vertically integrated structure of the sector is

exacerbated by:

▫ Lack of clear policies,

▫ Government micromanagement, and

▫ Poor regulation

It is necessary to make the sector more attractive for potential

independent investors.

The government have been reluctant so far to take any serious

measures to privatise the electricity sector.

Iraq Energy Policy

Restructuring and Privatisation

Iraq Energy Policy


▫ Iraq has the world’s 11th largest proven gas reserves – around

3.6 trillion cubic meters (2010).

▫ Natural gas production was 1.9 billion cubic meters in 2011

(BP, 2012).

▫ Natural gas might presents the key solutions to the electricity

crisis especially with escalating price of crude oil.

▫ Inadequate investment in natural gas industry.

▫ The newly built electricity generation will require around 7 – 10

million cubic meters per day will force Iraq to continue heavy

reliance on imported gas from Iran.

▫ Renewable technologies including solar, wind and hydro-

electric could offer tremendous benefits for meeting the

country’s energy needs.

Inefficient Utilisation of Natural Resources


▫ The sector depends heavily on government subsidy due to

inefficient and below-cost recovery tariff structures (Krause,

2005; Fattouh & El-Katiri, 2012).

▫ Undermined financial viability due to:

▫ Performance deterioration.

▫ Economic inflation since 1990s.

▫ Failure to realign prices with underlying costs.

▫ Failure to establish adequate rate increases.

▫ Collection rates below 30% or less of the billed amounts.

▫ Frozen end-consumer tariffs since 2003 and no tariff

adjustments to partially recover the high reconstruction cost.

Tariff Structure

Iraq Energy Policy

Iraq Energy Policy Issues and Challenges



2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

0.00

2.00

4.00

6.00

8.00

10.00

12.00

US c

ents

/kW

h

>15 years to increase the tariffs to attain the current cost-covering level (11.30 US ¢/kWh) at average increases between 5 – 15% per annum.


▫ Organisational development of electricity sector in Iraq.

▫ Continue field Investigation and Interviews (~ December 2013).

▫ Develop the nexus between violence level and energy consumption

during the period 2003 – 2008 (~ September 2013).

▫ Adopt various econometric methods (e.g. ARMA) in analysing the

electricity demand (~ March 2013).

Future Work Plan

Short term Plan

Long term Plan

▫ Investigate the impact of electricity crisis on political, economic and

social well-being.

▫ Development of sector model and restructuring.

▫ Optimisation of the sector.

▫ Thesis writing!


Discussion

Thank you!

Iraq’s electricity crisis a review hh istepanian june 2013

Business

Transcript of Iraq’s electricity crisis a review hh istepanian june 2013