ireema NEWSLETTER

Supporting Iran in implementation of an integrated energy efficiency market

September 2019

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Economic Incentives for Energy Conservation in Iran

High energy intensity in Iran due to low energy prices

Artificially low energy prices supported by government

subsidies and a distorted tariff structure (which considers

social needs instead of the costs of supply), have led to a

surge in domestic energy consumption in Iran over the

last decades. Nonetheless, there is a strong resistance to

price reforms among policymakers, in order to avoid

inflationary effects and adverse social consequences

of increasing energy prices. As a result, unlike many

other regions and countries around the world, energy

intensity has been rising in Iran over the last decades

(Figure 2). Since internal energy tariffs have been staying

behind inflation and foreign exchange market rates

lately, the value of energy has kept dropping from the

viewpoint of consumers, while the state has a

Figure 1. Schematic illustration of the Energy Efficiency Incentives in Irana. Article 12 of the “Law on Elimination of barriers to competitiveness and improving the country’s financial system”

b. Market for Energy Efficiency and Environment

ireema NEWSLETTERSeptember 2019

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Authors:Maryam Bakhshi, mbakhshi@ireema.comFranziska NeumannEditor:Dr. Lars Handrich, service@ireema.comIREEMA c/o DIW Econ GmbH, Mohrenstraße 58, 10117Berlin

is referred to as the Market for Energy Efficiency and

Environment (M3E). Trading opportunities at M3E

currently cover natural gas and electricity savings.

Verified energy savings are entitled to receive Energy

Saving Certificates – securities validated by subordinate

technical institutions of the Ministries of Petroleum and

Energy. The certificates are issued to be traded bilaterally

or in the exchange market and finally accepted by energy

supplying companies to compensate buyers by the

equivalent amount of energy carrier.

Being established, the M3E may enable a pipeline of

energy efficiency projects running on private initiative

and direction, with the role of the state limited to

supervisory tasks (Figure 1.b). The main challenge for a

functioning M3E stems from the fact that obtainable

margins are still small in absolute values as energy tariffs

in Iran are generally very low compared to international

prices. Therefore, energy savings that are contingent on

the application of costly technology may not be feasible in

many cases.

A winning combination of incentives

The M3E can be seen as a supplement of Article 12 with

different conditions and institutional requirements. From

the viewpoint of each energy optimization project,

obtaining an export price margin is always more attractive

than the gain resulting from internal tariff differences.

The option to consider export prices for savings as

granted by Article 12 involves yet more interaction with

the state, possibly high transaction cost, and a risk of

delayed repayment due to the dependence on dedicated

budgets. The internal certificate trade is suitable for

projects with too low individual savings to justify the high

transaction costs of selling on international markets. For

consumers that already face comparatively high energy

tariffs, selling energy savings at export rates is yet the

only viable option.

In the long run, an energy price reform has to be the

priority to remove the fiscal burden of energy-related

subsidies. Still, in the short term, incentives granted by

Article 12 and the M3E offer a starting point for reducing

energy intensity and for a more sustainable development.

strong interest in easing the fiscal burden by reducingdomestic subsidized consumption and increasing exportrevenues. Moreover, the absence of an energy pricereform has been impeding many energy efficiencyprojects, with owners not being able to cover theassociated investment costs from the value of savings.This has led policy makers to provide financial incentivesfor the implementation of energy efficiency projects inIran.

Redemption of energy savings at export prices

Article 12 of the “Law on Elimination of barriers to

competitiveness and improving the country’s financial

system”, ratified in April 2015, provides the possibility to

receive cash flows from investments in energy efficiency

projects through repaying energy saving energy by one of

the following options:

• Receiving physical energy carriers in the amount of

savings to be sold on international markets and

obtaining the revenues,

• Receiving payments in the amount of the export

market value from the state.

The transaction cost associated with privately exporting

products are prohibitively high in most cases, therefore

investors would usually prefer the second option. Still,

dependence on the state as the major stakeholder for

reimbursing energy savings (Figure 1.a) provides

executional obstacles to the actual implementation of

Article 12.

Market for Energy Efficiency and Environment

The Bylaws, passed in early 2018, further determine the

regulatory setup for another option:

• Selling energy savings independently to higher-tariff

domestic consumers (leaning on the tariff differences)1

The set-up for internal trade among domestic consumers

1 The relative differences across energy tariffs are substantial. Please see IREEMA

May Newsletter for the tariff structure of the Iran.

Source of data: Global Energy Statistical Yearbook 2019