This report presents our analysis of supply and demand for natural gas and electricity in Iran and forecasts their future 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 mcm/d and is likely to rise to 920 and 1150 mcm/d by 2020 and 2040, respectively. The envisioned drastic drop in the production growth 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, the displacement of liquid fuels by natural gas for space heating, electricity generation, and the development of petrochemical plants and energy-intensive industries has given rise to such a soaring domestic demand that 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 export (to Turkey, Iraq, Oman, and Armenia) may reach 100 mcm/d levels within the next five years, further expansion of the export capacity seems infeasible. Within the domestic market, the largest growth in natural gas demand will come from petrochemical and other industries, and the power sector.
The Iranian government manages the demand for natural gas by setting sector-specific prices and quotas, the former of which is decided annually while the latter is adjusted dynamically. The mismatch between the selling price and allocation priority suggests that the demand structure (hence the total revenue) could have been vastly different had the price elasticities of different uses been factored in 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 large buyers (e.g. petrochemical plants).
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 heavily relies on natural gas as the primary source of energy, while shares of liquid fuels and hydro 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, while 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 ~ 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 transport (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 and 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, investments in renewable energy with the objective of making more gas available to boost the production from the petrochemical industry is not economically viable.