Iraq’s electricity crisis a review hh istepanian june 2013

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

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
14.6hours 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.

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

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, 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
%

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
= 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.

Electricity Demand Forecast Methodology
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

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.
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)

▫ 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 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

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.
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

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%.
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

[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
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.

▫ 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

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