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Supply -side efforts could increase the available power supply by 4 -6 GW in a matter of months, closing the gap between supply and demand by as much as half. Available capacity at existing power plants could be raised by approximately 2 GW. Several gigawatts of new mobile units could be deployed across Iraq.
The main lever to reduce cost to consumers is through neighbourhood generators, which are currently providing an estimated 10 TWh of electricity to end -users . In total, currently households could be paying more than USD $4 billion for the additional electricity services from neighbourhood generators. Enforcing existing tariff regulations for neighbourhood generators would cut the electricity bills for most households by two-thirds.
Options for the medium term Looking beyond the immediate priority of ensuring the smallest possible gap between supply and the summer peak demand, Iraq has a range of options to address its power sector challenges in the medium term.
Realisation of power plants under construction and planned is not sufficient to bridge the gap between available supply and peak demand.
Closing the gap between peak demand and available supply is not to be taken for granted. Without efforts to keep demand growth in check, peak demand and electricity consumption are projected to increase by 50% in the next five years and by over 90% from 2018 to 2030. This rapidly increasing demand means that Iraq's challenge of bridging the gap between supply and demand is a moving target in itself.
Currently, there are about 20 GW of new power generation capacity either under construction or planned in the medium term. Even where these are successfully completed on-time, a significant gap between power supply and demand would remain in 2023 (Figure 17). Additional efforts will be needed to bridge the gap.
To support growing demand and electricity supply, existing transmission and distribution networks will need to be upgraded and expanded.
Despite efforts to provide a progressive tariff scheme, the current tier system for electricity tariffs implemented by the Iraqi Ministry of Electricity keeps the total cost for supply fixed for any level of consumption above 4,000 kWh per year, meaning that the effective price per unit of energy delivered declines with higher levels of consumption.
One way of ensuring a tariff structure that is truly progressive is to expand the current scheme to include additional tranches based on consumption levels with incremental increases for each 1,000 kWh of consumption by a set rate of escalation.
Expanding the number of tariff tiers would substantially increase revenues to the government, which could be used to strengthen the power supply system by funding the much-needed investment in the sector, and thus provide a more reliable electricity supply.
Investment in transmission and distribution networks should be a central priority in the medium term and beyond. Improving the state of distribution networks through maintenance and refurbishment requires substantial investment, but sustained efforts over several years would be handsomely rewarded.
Available grid capacity will need to increase in order to eliminate the current shortage and to meet new demand, even with successful efforts to moderate demand growth and improve distribution networks. Closing the 16 GW gap between available and nameplate capacity to a large extent for the existing fleet would offer a cost-effective pathway to expand grid supply.
New power generation capacity will also be needed to close the gap between grid supply and demand. Given the extremely high cost of neighbourhood generation, even where charges follow current regulations, a variety of sources of electricity would offer potential cost savings.
Rooftop solar PV systems also offer potential for consumers to reduce their electricity bills, and should be part of the broader basket of solutions for the power sector.
Neighbourhood generation provides a critical supplement to grid supply, but its high costs offer opportunities to improve electricity services while also lowering costs.
Should Iraqi policy makers opt for an aggressive pursuit of private investment in power generation, for instance by offering much shorter cost recovery terms of five years (rather than the industry standard of 20-25 years), this would still offer significant potential for cost savings to consumers.
Pursuing this route, combined with tariff reforms that increase revenues, would allow the Ministry of Electricity to focus the capital expenditure allocated to it by the federal budget on other essential areas, including the network, where private sector involvement is often more difficult to incentivise (Box 5).
Renewables, including solar PV and wind power, are increasingly attractive propositions for most electricity systems.
This is particularly true in Iraq, where solar resources are very good, and where renewables offer the opportunity to improve the reliability and affordability of electricity.
The falling costs of solar PV offer opportunities to make electricity more affordable, free up oil and gas resources for export, and to improve the reliability of electricity supply through diversification. Solar PV costs have been declining rapidly around the world, including in the Middle East, and are expected to continue to fall. In the past five years, the average construction costs for a utility-scale solar PV project have fallen by 50% across the region, to about USD 1 300/kW in 2018.
Support policies that help lower the cost of capital can lower the LCOE of solar PV substantially. Auction schemes for solar PV in the Middle East have produced some of the lowest prices in the world to date. For example, in the United Arab Emirates, a project was awarded a contract in 2016 at just USD 24/MWh. These projects have been able to achieve such low levels because of falling technology costs and, critically, price guarantees that enable low-cost financing.
Large-scale solar PV projects have not been developed to date in Iraq, and so there is some inherent uncertainty on the construction costs of new projects. However, there is ample clarity on the cost of the solar panels, a global commodity whose manufacturing is concentrated in Asia, serving solar PV projects in many countries around the world.
Achieving the lower end of this range is largely dependent on the quality of the site, the ease of transporting materials to it, successful procurement of low-cost solar panels and inverters and the availability of trained personnel for installation. The completion of several projects would allow solar PV costs to converge quickly towards other experiences in the region as the market matures.
Wind power could also be an attractive option for Iraq in terms of costs. Wind resources are modest across Iraq, but recent technology improvements including low wind speed turbines and digitalised wind farm design are expanding the potential areas for development.
Towards reliable, affordable and sustainable electricity in the long term There are a number of pathways available for the future of electricity supply in Iraq. The most affordable, reliable and sustainable path requires cutting network losses by at least half, strengthening regional interconnections, putting captured gas to use in efficient power plants and increasing the share of renewables in the power supply mix.
Meeting rising demand will be a continuous challenge going forward, but taking positive steps forward in the near term would set Iraq’s power sector on a different path, one that leads to desirable outcomes for consumers, industry, government and the Iraqi economy at large.
Achieving an affordable, reliable and sustainable electricity supply is possible with targeted efforts to reduce network losses, to use captured gas in power generation and to promote renewables.
Reducing network losses is a priority matter to improve the state of the power sector in Iraq. Cutting losses provides a boost to any supply-side expansion, making it easier to meet electricity demand growth. Given that technical losses in Iraq are one of the highest levels in the world (around 40%), there is potential to cut these by half or more by 2030. Yet, this would still put the level of losses well above leading countries in the Middle East, which have achieved system losses closer to 10%.
Cutting losses in half would enable domestic grid supply to meet a higher share of demand throughout the year, limiting the need for expensive neighbourhood generation. While the average level of power sector investment would be similar to that needed to maintain the current structure, allocating more to networks would drive down the average costs of electricity per unit of consumption by one-third.
A second step forward would be to expand the use of natural gas in power generation where it is coordinated with progress in gas capture projects. Gas that is flared today would provide a cost-effective fuel to meet growing electricity demand.
Increasing the share of gas-fired generation in grid supply from below 60% in 2018 to 80% in 2030 would raise gas consumption to 38 bcm. This would cut oil consumption in power in 2030 by another 170 kb/d, increasing potential export revenue by several billion dollars, as well as contributing to reduce average grid electricity supply costs (Figure 21).
The more reliable and sustainable electricity system choices would require a larger injection of capital investment, but would also produce the lowest system costs of all options.
A third step towards a brighter electricity future in Iraq would be to emphasise the development of renewable energy power generation technologies. The development of 21 GW of solar PV and 5 GW of wind power by 20) would improve the affordability, reliability and sustainability of electricity supply.
It would also make oil and gas resources available for use in domestic industries (particularly gas) or for export. Deploying this level of solar PV and wind power would increase the share of renewables to 30% of electricity supply in 20). Thermal capacity in place today or developed in the medium term would continue to serve consumers well in the case where variable renewable are developed rapidly.
In addition to providing energy, the dispatchability of gas-fired plants would provide the bulk of flexibility services to the power system, essential for fully integrating solar and wind output. This diverse power mix would offer reliability advantages, provide electricity to consumers at the lowest average cost, while also freeing up oil and gas for other uses or export.
Compared with maintaining the current structure, an additional 9 bcm of gas would be available plus 450 kb/d of oil. Together, these could offer well over USD 10 billion in additional export revenue.
Power sectors that rely to a large extend on revenues from public funding are subject to the same constrains as a general public budget, namely economic cycles, with revenues often unpredictable, and the use of funding for maintenance and capital expenditure often used as a flexibility tool to adjust to budget cycles. Currently, investment in the power sector in Iraq depends largely on the federal government budget, which is dependent on oil prices, and where the funds compete with other needs, such as health and education.
To date, apart from five independent power producers (IPPs) outside of the Kurdistan Regional Government region, electricity sector investment has relied exclusively on the government budget. The period of low oil prices from mid-2014 severely constrained the amount of capital available for investment (falling to a low of USD 900 million in 2016). This is far below the level required to rebuild and operate an efficient power sector capable of satisfying the needs of Iraq's growing population.
Policy makers may well consider a range of pragmatic approaches, to not only attract the necessary investment and reduce the burden on the federal budget, but also to ensure that capital that is allocated is spent efficiently. There is a wide expanse of accumulated experience from countries facing similar challenges (i.e., increasing demand, substantial distribution losses and low collection rates) that have managed to establish effective models to attract power sector investment.
There is no one best approach, as each situation must find the appropriate balance that considers political constraints and public sector capabilities. Some examples provide a useful illustration of how the private sector has been brought in to share the development and operation risks: Community-owned distribution networks New Zealand provides an interesting example of how local communities have engaged in the provision of electricity.
Independent power producer model Many countries and jurisdictions run the power sector as a single company, integrating every activity of the power sector from generation to transmission, distribution and retail. Even in this model, most have made some use of IPPs.
Thailand and Mexico (prior to its 2013 reform) are good examples of countries that have taken advantage of IPPs, with various contractual arrangements, while keeping the rest of the value chain segments (transmission, distribution and retail) within public authorities.
Iraq has had several unsuccessful attempts at auctioning potential IPP projects. Addressing the issues that have stifled private investment would be necessary to ensure success in the future.
France is an interesting example where Électricité de France (EDF), the state-owned incumbent, is responsible for most of the transmission and distribution networks in the country.
Brazil has an impressive record of investments in the power sector over the last two decades and its experiences are illustrative. Some assets were not privatised and remain the sole responsibility of the state-owned utility, Eletrobras, including nuclear facilities and some distribution areas.
As a complement to this approach, since 1999, Brazil has also carried out an extensive transmission expansion programme, auctioning more than 280 lots of transmission lines, with an average length of 328 kilometres.
Iraq's ongoing electricity shortages despite substantial capacity additions, highlights two issues: the difficulty of fully closing the gap between supply and demand without investing heavily in the network to reduce losses; and perpetual challenge of expanding supply to meet unchecked growth in electricity demand, fuelled by population growth and rising incomes.
The first issue is well understood and we have illustrated the gains that are possible. But to increase the chances of achieving a reliable electricity supply, measures must also be taken to address rising demand for electricity. Left unchecked, the rise in peak demand will continue to outpace the cumulative effects of new capacity and network improvements through to 2030.
This highlights the imperative to boost end-use efficiency and to provide effective incentives to shave the demand peak in the summer with measures that reform grid and neighbourhood tariffs, and that ensure comprehensive bill collection for power provided.
Mitigating the growth in peak demand through reforming tariffs and incentivising more efficient use of energy is essential to ensure that supply can meet peak demand in the next decade. The affordability of electricity would be dramatically improved in the case where electricity from the grid becomes more reliable, as it would drastically cut the reliance on expensive neighbourhood generators.
A basket of the immediate, medium and long-term options that are available to Iraq, among others, includes: effective regulation of neighbourhood generators; reform of the (grid) electricity tariff structure; and careful shaping of the power generation mix. Effective implementation could translate to significantly lower overall consumer bills for electricity, even if the tariff is structured to fully cover the cost of supply.
The power sector in Iraq faces a number of difficult challenges and without concerted action, the situation is likely to continue to deteriorate.
On one hand, this is reason for serious concern, as reliable electricity is a cornerstone of modern economies.
On the other hand, the current state of Iraq's power system also provides reason for optimism, as there are opportunities for improvements in many areas.
Not least of these is the current reliance on expensive neighbourhood generation that provides less than 15% of electricity consumed but captures more than 90% of household spending on electricity.
This publication reflects the views of the IEA Secretariat but does not necessarily reflect those of individual IEA member countries.
The IEA makes no representation or warranty, express or implied, in respect of the publication’s contents (including its completeness or accuracy) and shall not be responsible for any use of, or reliance on, the publication.
Unless otherwise indicated, all material presented in figures and tables is derived from IEA data and analysis.
The demand side of the equation is robust, with the global economy showing signs of recovery from the COVID-19 pandemic.
Fundamentals suggest that the global oil demand will continue to grow, driven by the ongoing economic recovery and low interest rates.
OECD oil demand has been strong, led by the United States, where gasoline demand has recovered quickly.
Non-OECD countries have also seen strong oil demand growth, particularly in Asia, where economies are bouncing back from COVID-19-related lockdowns.
Other non-OECD regions have also seen robust demand growth, driven by industrial production and transportation activity.
Iran's supply uncertainty has increased as the US revives sanctions, which could impact global oil markets.
Non-OPEC supply has been strong, particularly from North America, where shale production has continued to grow.
OECD countries have also seen increases in supply, driven by refinery throughput and inventory builds.
In terms of stocks, OECD industry inventories have built up in recent months, with the majority of this growth coming from the United States.
Non-OECD refineries have seen varying levels of throughput and inventory builds, depending on the region.
The decision by the United States to withdraw from the Joint Comprehensive Plan of Action regulating Iran’s nuclear activities has switched the focus of oil market analysis from the fundamentals to geopolitics.
When sanctions were imposed in 2012, Iran’s exports fell by about 1.2 mb/d. It is too soon to say what will happen this time, but we should examine whether other producers could step in to ensure an orderly flow of oil to the market and offset a disruption to Iranian exports.
In Venezuela, the pace of decline of oil production is accelerating and by the end of this year output could have fallen by several hundred thousand barrels a day. Our April data show that Venezuela’s production is 550 kb/d lower than its target under the Vienna Agreement and this “excess” is more than Saudi Arabia’s total commitment.
The decision by the US Administration had, to some extent, already been factored into oil prices. Even so, alongside steady demand growth, solid compliance with the Vienna Agreement, and new data showing a further fall in stocks, it contributed to Brent prices rising above $77/bbl.
As the International Monetary Fund noted recently, the global economy is doing well. Therefore, we remain confident that underlying demand growth remains strong around the world, which has been an important factor in the rise in oil prices.
On the supply side, in today’s uncertain geopolitical climate, higher production from the US will be an important contribution to compensating for lower volumes from elsewhere. For now, this Report shows a modest increase in our estimate for US output growth in 2018, mindful of the current logistics constraints that have manifested themselves in the extraordinary widening of the differential between WTI prices at Midland and the Gulf Coast to $15/bbl.
For some time, the focus has been on OECD stocks, and new data show a further decline in March of 27 mb to the lowest level in three years and to 1 mb below the widely cited five-year average figure. For now, the rapidly changing geopolitical landscape will move the attention away from stocks as producers and consumers consider how to limit volatility in the oil market.
The global economic outlook remains supportive, and we have updated our forecast with the latest IMF projections. While the Fund’s projections for non-OECD countries are mainly unchanged, the outlook for developed economies has been revised up on recent strong data.
The growth outlook for Europe and the US has been revised up by 0.2 percentage points on average and by as much as 0.4 percentage point for some European countries such as Spain. In the US, growth is expected to accelerate from 2.3% in 2017 to 2.9% in 2018.
Projections for some emerging countries (Brazil, South Africa) have been significantly revised upward. The IMF expects world economic growth to accelerate from 3.7% in 2017 to 3.9% in both 2018 and 2019.
However, April temperatures were low with heating degree-days 70% higher than last year and 40% higher than the long-term average, providing another boost to LPG and heating oil demand.
The impact of higher prices on demand in several developing countries are likely to be stronger than in the past.
These, and similar changes in many other developing countries mean that higher global oil prices will translate more directly to higher prices for end-users, unless governments decide to intervene to protect them from the full impact.
contrast, gasoline and kerosene demand have relatively strong price elasticity: close to - 0.05. Gasoil is more a production factor, used for the transportation of industrial goods and responding strongly to economic activity indicators but indifferent to price changes.
By contrast, gasoline is used by households and responds strongly to prices. Kerosene has the highest response to economic activity and a relatively strong response to prices.
The effect of higher prices should in particular become apparent in gasoline demand in the next few months.
Conclusions we can draw from a global analysis of oil demand are obviously limited: each country reacts differently to oil price changes. Amongst the factors are whether final prices are regulated or not, the structure of its oil demand, taxes, exchange rates, and other products.
However, preliminary data for March show a slowdown in Europe and US demand to slightly below last year, reflecting in part warmer weather in the US. Low temperatures in the US triggered a rebound in heating oil demand in April.
Weekly data point to a small drop of 0.3% in gasoline demand in March and an increase of 0.8% in April.
Several large non-OECD countries showed strong growth in 1Q18 with India particularly impressive. In other countries, e.g. Pakistan and Egypt, the switch to natural gas in power generation is displacing oil.
We have revised some assumptions and data used in the computation of Chinese demand, resulting in small downward revisions for 2016 (20 kb/d) and 2017 (45 kb/d). In general, demand was revised down in the first quarter of the year and slightly up in the subsequent quarters.
Venezuela’s production collapse has tightened the global oil market more quickly than many anticipated, even with robust non-OPEC supply growth and now there is additional uncertainty following the withdrawal of the US from the Iran nuclear deal.
The freefall in Venezuela has already pushed compliance with the Vienna Agreement off the charts and, together with losses in Mexico, accounts for almost 40% of the 2.5 mb/d that was removed from the market in April.
Saudi Arabia vowed to work with major OPEC and non-OPEC producers as well as major consumers to “mitigate the impact” of any potential shortages.
So far, the US and Canada, which together added 1.8 mb/d to world supplies in 1Q18 compared with a year ago, are helping to offset the unintended declines in Venezuela and Mexico. While production will continue to ramp up, this may not be enough to compensate for potentially steeper losses.
As for the US, already impressive growth of 1.6 mb/d in 2018 is bumping up against emerging infrastructure constraints that could cap gains. Furthermore, independent producers are showing little enthusiasm to drill more wells despite higher prices and are instead prioritising capital discipline and shareholder returns.
Parties to the Vienna Agreement, scheduled to meet on 22 June, have signalled they intend to keep supply cuts in place until the end of 2018. Should a decision be taken to remove the cuts, only Saudi Arabia, the UAE, Kuwait and Russia are likely to be capable of a quick ramp up of substantial volumes.
Ther e is also the potential for additional US sanctions targeting PDVSA following Venezuela’s 20 May presidential election. Washington has already enforced economic measures that impair Venezuela’s ability to finance projects and pay back debt. With the oil sector spiralling deeper into crisis, it is possible that capacity could fall by several hundred thousand barrels a day by the end of the year.
Iraq's exports and production could be substantially higher if Baghdad and Erbil were able to reach a lasting political deal to use the Kurdish pipeline. In a bid to boost production from the north, the ministry of oil and BP have agreed to expand the scope of their agreement to develop Kirkuk to include the Kurdish-controlled Khurmala dome as well as the neighbouring fields of Bai Hassan, Jambour and Khabbaz.
The aim is to boost output at Kirkuk to 1 mb/d from roughly 300 kb/d now. BP will carry out technical and geological surveys and a comprehensive evaluation of the fields, wells, facilities and pipelines to resolve any technical problems, increase oil production and develop the associated gas.
Iraq meanwhile awarded six of 11 blocks on offer in its fifth licensing round for border oil and gas fields and exploration blocks, although it failed to lure the oil majors. Five of the exploration blocks on offer near the borders with Iran and Kuwait and in the offshore failed to attract bids.
Amidst the uncertainty, however, foreign companies are unlikely to finalise contracts for new investments in Iran or to enter into long-term sales contracts.