Introduced by Nisrin Khalil, Director at the German Liaison Office for Industry and Commerce in Iraq (AHK Iraq), this collaborative Iraq Energy Institute – AHK webinar took place on August 11th and discussed the challenges Iraq faces in its electricity sector, the opportunity this presents for potential renewable energy expansion and lessons from Germany’s world-leading renewable energy transition. This event was held in cooperation with the Association of German Chambers of Industry and Commerce (DIHK), the German Federal Ministry for Economic Affairs and Energy and the German Embassy in Iraq.
Nisrin began by highlighting some important facts for the sector in Iraq. In particular, she highlighted how the equivalent of 25% of Iraq’s GDP was lost due to inadequate power supply; put another way, every Iraqi loses $1000 per year because of electricity shortages, while according to one recent survey, 70% of companies operating in Iraq identify access to power as a problem.
This inevitably prevents private sector development, employment growth, and worsens poverty. To remedy this problem and take advantage of the falling costs of solar, Iraq wants to create a new financial and legal framework for renewables, increasing their share in the energy mix to 40% of power generation by 2040.
Germany provides a case study of a country that has reached this goal, and while Iraq and Germany are in many ways extremely different countries, there are general principles arising from Germany’s green energy success story that can provide starting points for reform in Iraq.
One of these highlighted by Nisrin was just how diversified the German renewable sector is, with no less than 36,000 companies in the green energy space, from large corporations to medium size and small companies, working in product development, project planning, installation and maintenance.
Given this diversity of experience, there can be no doubt that Germany can transfer at least some of its valuable technology, knowledge and skill to Iraq, to develop the sector in a long term partnership.
Yesar al Maleki, Managing Director, Iraq Energy Institute
Yesar began by highlighting how in Iraq, the generation, transmission and distribution components of the power sector are bundled together under the Ministry of Electricity’s vertically integrated structure. The MOE, and by extension the government, is the offtaker and regulator, operating and managing the federal grid throughout Iraq, with the exception of the Kurdish Region of Iraq.
This grid suffers some of the most loss intensive operation in the world, with transmission and distribution losses as high as 58%, making the problem of closing the gap in supply and demand even more challenging.
This gap has been caused by two major conflicts over almost four decades, starting in the 1980s and continuing to the 90s, but efforts to repair the grid were hindered by sanctions and later, severe post conflict instability after 2003.
The situation became more challenging after 2003 when the supply and demand gap began to emerge. Incomes started rising sharply, leading to the import of appliances, many of which were not energy efficient, while a rise in informal housing and a lack of metering compounded the problem.
As security deteriorated, planning fell behind on building supply assets and transmission and distribution was neglected, worsening the problem of demand increases averaging 2000 MW a year; as population grew, an average annual demand increase of around 6-7% has become the norm. Typically, supply is around 14 GW while demand is around 17 GW but in summer because of AC usage and the need to ramp up supply, peak supply is 19 GW but peak demand is as high as 26 GW.
The problem may in fact be even more serious: without smart metering, we cannot know what the demand really is. It could be as high as 29 GW.
So how does renewable energy fit into this picture? The IEA published a comprehensive roadmap for Iraq’s energy future in 2019 and identified a number of solutions in addition to rooftop solar PV that could be added to the system potentially within a one to three year timeframe.
So on the one hand, renewables offer a potentially cost effective and relatively quick solution. On the other hand this is cost effective when you look at Iraq’s wider energy sector. Solar is on an equal footing with oil and gas fired thermal power in terms of LCOE and may soon outcompete, and it is already competitive with gas fired power
Falling costs of solar will free up oil for export and help with Iraq’s goal of energy independence. Iraq has also been building independent power producer (IPP) capacity, slowly opening up to the private sector, in addition to importing power from neighboring countries.
In the electricity generation fuel mix, gas is 55% of installed capacity, but Iraq has not been able to fully develop its gas processing, capture and transmission network, it is the second largest flarer of gas after Russia. Iraq has to import gas from neighboring countries, adding more pressure to the budget. Iraq also practices fuel switching: using crude and Heavy Fuel Oil (HFO) reduces the efficiency of power plants.
So what happens if we bring solar into the system?
If Iraq builds solar PV capacity of 500 MW that will displace 6000 bpd of crude oil used in thermal power production, which could be exported with a revenue projection of $87 million dollars per year. If that goes up to 2000 MW utility scale solar power, it is the equivalent of displacing 24,000 bpd, to the value of $350 million by the end of the year.
In terms of challenges and incentivising such projects, usually Feed in Tariffs (FIT) are used to encourage the private sector to enter the market but what Iraq did wrong was use the FIT tariff as a depressing factor. FIT was set at $0.35/ KwH which was regressive because if you have a fresh market you need a high FIT. In 2019, this was cancelled and they had the bidding process through auction, which was a positive development.
Procurement has also been a problem- it is not clear whether Iraq has chosen direct tendering or if a procurement system is still in place. Iraq therefore needs help to build the capacity in the procurement process.
Remember that MOE is offtaker and Iraq has a weak credit rating, and sovereign guarantees usually provided for project financing are impacted by the weak oil price. In terms of Iraq’s IPP track record, there are some combined cycle plants being built and developed on this basis. But there have been some hurdles for IPP, including delayed payments, but overall it’s positive, and terms are very favorable.
In terms of grid stability and new technology integration in the future, this has been a concerning issue for some because technical losses now are 40% and non technical losses are 18% and the grid is very old. So, if you add the intermittent nature of renewable energy, some people think the grid can’t take it. But a recent MOE study conducted for the first bid round concluded this is not the case.
With the bid rounds in 2019, there were some expressions of interest but due to the political crisis and COVID-19, we do not see momentum happening any time soon, maybe developments will be moved to 2021. These would be done on a Build, Own, Operate (BOO) basis and under the Investment Law of 2006, which allows for the provision of land, waives customs fees, allows for the repatriation of profit, free of tax, outside the country and has a 20-50 year permit validity, depending on the project.
In terms of distributed energy resources, it is worth highlighting here that Iraqi houses are practically off grid, with 30%-70% of their power coming from the grid and the rest being off grid. So what about rooftop solar?
We’ve done surveys on the supply and demand side. There is a need and an agreement that the supply side would like to bypass government bureaucracy and go to customers immediately and create a direct market to the consumer. This is a market that could be built.
There is potential for something like the Indo-German solar energy partnership which had the objective of creating 1 GW from rooftop solar, and we have been building a concept at the institute where we would like to do that. Silent and reliable, non-polluting energy. Standalone energy will get rid of the problems of wiring that plague Iraq, cutting greenhouse gas emissions and providing clean sustainable energy for a competitive cost.
For example in the last week I needed to get a new subscription for my own home and it cost $600 just for wiring and installation. That’s 70% of the cost of a 1 kw -3 kw solar system. So we want to see this start up as a market in Iraq.
In terms of an Iraq – German partnership, Iraq needs help with legislative, policy and financial frameworks as well as technological capacity building
Ellen Von Zitzewitz, Deputy Director – International Energy Cooperation, Federal Ministry for Economic Affairs and Energy (BMWi)
Ellen Von Zitzewitz highlighted the remarkable energy transformation which has occurred in Germany, a country with 83 million people that no longer has a growing population and has the fourth largest economy in the world with very high energy consumption, at around 600 TWh. She noted how Germany last year achieved 50% renewable energy consumption.
“Our target was 35% by 2020 but it’s even higher now, we want it to reach 65% in 2030 and 80% by 2050 so electricity will be mostly renewable by then. But we are also having aggressive energy efficiency targets, although these are lagging behind a little because it was harder than anticipated to renovate older houses. But we have a new climate package in industry, transport and agriculture to push efficiency forward.”
“So, we came from a coal based energy supply with a little bit of gas, and nuclear, but we turned it around to phase out nuclear and coal by 2038, and this is already 20% less compared to last year. So renewable energy is now number one in our energy mix. We had four big utilities, not as integrated as Iraq, but four for production and distribution, and the legislation allowed a process of diversification. Ninety percent of renewable energy in Germany at one point was completely private, for example, in energy communities and small cities.”
In terms of replicability in Iraq, critical for this transition was political will.
“We decentralised the energy sector and this helped create more jobs and more value, it was no longer dominated by the four big players.”
Dr. Sebastian Bolay, Director Electricity Market and Renewables at the Association of German Chambers of Commerce and Industry (DIHK) and coordinator of DIHK’s energy policy
Dr. Bolay highlighted that in the transition to greater use of wind and solar energy in Germany, a paradigm shift was underway. He explained how bidding processes were driving this change, and driving down costs for solar.
“If you bid, you bid for market premium per kWh and you get it for 20 years, if you are successful and if your project gets awarded. It’s a pay as you bid system, if you bid for 5 Euro cents per kWh, that’s what you get if you are awarded, no matter what other bidders bid.”
“Installations above 750 kw can take part in auctions. Rooftop and freestanding PV compete, there’s no separate system for bigger rooftop. There is a pay in advance guarantee, 5 Euro cents per KW bid. If successful you have to hand in the other 25- to 45, it depends how much you have to pay. If you don’t do that, you won’t be awarded.”
“With self consumption, you cannot use the electricity yourself, you have to feed electricity into the grid. It’s been quite successful, we started in 2015 and only with freestanding PV and now with bigger rooftops, although we only had one big rooftop system successful in this tender system. We saw a steady decline in bids, starting form 9 Euro cents per kWh we went down to nearly 4 Euro cents, and the volume was rising and prices went up because the competition wasn’t that tough. For the last rounds this has remained steady at 5 Euro cents per kWh and we expect bids will go down in the future as long as we have the right areas to build freestanding PV. And for rooftop solar in Germany, you can build it for about 4 cents per kWh, according to a recent study.
It’s not only about the big traditional players investing in renewable energy in Germany. We have a lot of energy companies here, also small and medium size. But in the beginning, the renewable transition was driven by households and farmers and normal companies, bakeries, supermarkets and industrial companies. There are now 2 million PV installations mostly owned by private households and companies. So if you want to create a renewable energy system it will take billions. So you cannot rely only on the big energy companies. You need to create a stable framework for decentralized actors.
In our renewable energy law we have a definition, it consists of local people living in a city or town trying together to build wind or PV, local companies, handicrafts or shops that invest some of their money into these small projects. And this doesn’t just raise money, it raises awareness, and is important for the acceptance of the energy transition here in Germany. So this model is a cornerstone to reach our goals.”
