Iraq’s electricity crisis a review hh istepanian june 2013

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Iraq’s electricity crisis a review hh istepanian june 2013

  1. 1. Reform of electricity sector in post conflict states - Iraq case study University of Glasgow College 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
  2. 2. Summary © 2013 Harry Istepanian, University of Glasgow, UK – All Rights Reserved ▫ 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
  3. 3. Study Progress © 2013 Harry Istepanian, University of Glasgow, UK – All Rights Reserved 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).
  4. 4. About Iraq © 2013 Harry Istepanian, University of Glasgow, UK – All Rights Reserved 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 14.6hours 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 143billion 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 less than 19 years old Million barrels of oil per day 2.6 Iraq currently produces 3,100billion standard cubic meters of gas reserves.
  5. 5. Iraq Political Timeline © 2013 Harry Istepanian, University of Glasgow, UK – All Rights Reserved 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
  6. 6. Iraq Political Timeline © 2013 Harry Istepanian, University of Glasgow, UK – All Rights Reserved 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
  7. 7. Electricity Crisis Post 2003 war © 2013 Harry Istepanian, University of Glasgow, UK – All Rights Reserved Aljazeera.net/english Inside Iraq Source: Al Jazeera TV (2010)
  8. 8. Electricity Crisis Post 2003 war © 2013 Harry Istepanian, University of Glasgow, UK – All Rights Reserved 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.
  9. 9. Causes of Electricity Crisis in Iraq © 2013 Harry Istepanian, University of Glasgow, UK – All Rights Reserved Iraq Electricity Crisis Organisational Suppressed Demand Incorrect policies and economic strategies
  10. 10. Research Objectives © 2013 Harry Istepanian, University of Glasgow, UK – All Rights Reserved Analysis Demand forecasting Restructuring Policies and Economics Sector optimisation
  11. 11. Overview of Electricity Sector Structure © 2013 Harry Istepanian, University of Glasgow, UK – All Rights Reserved ▫ 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, 2 9.75%Gas Turbine, 47 .70% Diesel, 8.8 3% Source: Ministry of Electricity (2011) Crude Oil , 28.20% HFO, 28.17 % Diesel, 0.6 0% Gasoil, 7.2 4% Natural Gas, 35.80 %
  12. 12. Average Electricity Supply vs. Estimated Demand 2000 - 2012 © 2013 Harry Istepanian, University of Glasgow, UK – All Rights Reserved (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).
  13. 13. Electricity Demand Forecast © 2013 Harry Istepanian, University of Glasgow, UK – All Rights Reserved  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.
  14. 14. Electricity Demand Forecast Methodology © 2013 Harry Istepanian, University of Glasgow, UK – All Rights Reserved Residential Demand 𝑡 𝑅 = 1 + 𝛼𝑡 𝑅 . 𝜖 . 1 + 𝑇𝑡 . 𝜏 𝑅 − 1 + { (𝑛𝑡. 𝜃) 𝜇𝑡−1 𝑅 100 } Where: t R ⩽1, (t=1,2,3,…n) is the growth rate of residential electricity consumption at the year t, = 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.
  15. 15. Electricity Demand Forecast Methodology © 2013 Harry Istepanian, University of Glasgow, UK – All Rights Reserved Commercial, Industrial and Agricultural and Public Demand Where: t C , t P ⩽1, (t=1,2,3,…n) is the growth rate of commercial, industrial, agricultural and public electricity consumption at the year t respectively, = 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 = 1 + 𝛼𝑡 𝐶 . 𝜖 . 1 + 𝑇𝑡 . 𝜏 𝐶 − 1 𝑡 𝑃 = 1 + 𝛼𝑡 𝑃 . 𝜖 . 1 + 𝑇𝑡 . 𝜏 𝑃 − 1
  16. 16. Key Parameters for Electricity Demand © 2013 Harry Istepanian, University of Glasgow, UK – All Rights Reserved 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.
  17. 17. Key Parameters for Electricity Demand © 2013 Harry Istepanian, University of Glasgow, UK – All Rights Reserved Gross Domestic Product Iraq’s GDP growth has been distinctively volatile in the past thirty years. 0 20 40 60 80 100 120 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 GrossDomesticProduct(CurrentUSDBillions) YEAR Iran - Iran war started (September 1980) Iran - Iran war ended (August 1988) Iraq war started (March 2003) Civil Unrest (February 2006 - July 2008 Oil nationalisation (June 1972) Gulf war started (August 1990)
  18. 18. Key Parameters for Electricity Demand © 2013 Harry Istepanian, University of Glasgow, UK – All Rights Reserved ▫ 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
  19. 19. Key Parameters for Electricity Demand © 2013 Harry Istepanian, University of Glasgow, UK – All Rights Reserved 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
  20. 20. Key Parameters for Electricity Demand © 2013 Harry Istepanian, University of Glasgow, UK – All Rights Reserved ▫ 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
  21. 21. Key Parameters for Electricity Demand © 2013 Harry Istepanian, University of Glasgow, UK – All Rights Reserved ▫ 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). The Electricity Tariff
  22. 22. Key Parameters for Electricity Demand © 2013 Harry Istepanian, University of Glasgow, UK – All Rights Reserved We considered: ▫ Residential PEoD = -0.2 ▫ Commercial, industrial and Agricultural PEoD = -0.3 ▫ Public PEoD = -0.1 Price Elasticity of Demand Measures the rate of response of quantity demanded due to a price change. The formula for the Price Elasticity of Demand is: % Change in Quantity Demanded PEoD ( )= -------------------------------------------- % Change in Price
  23. 23. Electricity Demand Forecast Comparison © 2013 Harry Istepanian, University of Glasgow, UK – All Rights Reserved 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. 0 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 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 ElectricityConsumption(MWh/YEAR) Calculated Demand Forecast Master Plan Total Demand Forecast YEAR
  24. 24. Electricity Demand Forecast © 2013 Harry Istepanian, University of Glasgow, UK – All Rights Reserved ▫ 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%. 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 GrowthrateofElectricity Demand YEAR
  25. 25. © 2013 Harry Istepanian, University of Glasgow, UK – All Rights Reserved [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!
  26. 26. © 2013 Harry Istepanian, University of Glasgow, UK – All Rights Reserved  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
  27. 27. Iraq Energy Policy © 2013 Harry Istepanian, University of Glasgow, UK – All Rights Reserved ▫ 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
  28. 28. © 2013 Harry Istepanian, University of Glasgow, UK – All Rights Reserved ▫ 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
  29. 29. Iraq Energy Policy Issues and Challenges © 2013 Harry Istepanian, University of Glasgow, UK – All Rights Reserved The Electricity Tariff 0.00 2.00 4.00 6.00 8.00 10.00 12.00 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 UScents/kWh >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.
  30. 30. © 2013 Harry Istepanian, University of Glasgow, UK – All Rights Reserved ▫ 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!
  31. 31. © 2013 Harry Istepanian, University of Glasgow, UK – All Rights Reserved Discussion Thank you!

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