solar energy projects in iran

Solar energy projects in Iran

We note that  other countries, including Canada, also continue to maintain sanctions against Iran that  go beyond the limited sanctions imposed by the UN. To the extent there is any connection to such other countries in particular transactions, country-specific sanctions compliance advice should also be sought.

Solar energy projects in Iran

Solar energy projects in Iran

Despite huge hydrocarbons reserves, Iran is likely to face significant energy challenges over the next few years.

Driven by a projected increase in the rate of economic growth following the lifting of sanctions and a growing population, demand for power has increased.

To date, this issue has been compounded by poor resource management, with a lack of investment resulting in an ageing and inefficient infrastructure, and an over-generous subsidy regime leading to energy wastage and economic losses.

The government of Iran is well aware of these crucial challenges and has begun to implement various policies to address them.

Given the high energy intensity of the Iranian economy, one of the main thrusts of the government’s policy is the implementation of energy saving and efficiency measures at all stages in the domestic energy supply chain.

Iran continues to explore the various ways it might achieve these objectives in order to have the greatest beneficial impact on its economy.

As a significant oil and gas producer, Iran sees greater benefits in maximizing its exports of fossil fuels than in using them for local demand, including by generating foreign currency reserves for Iran’s substantial developmental needs.

Domestic consumption can be minimized by imposing energy conservation measures and upgrading infrastructure.

Electricity wastage through Iran’s ailing electricity transmission system is estimated to be up to 20% of power generated and steps have been taken to invest in smart power grids.

Naturally, another obvious way to reduce domestic fossil fuel consumption is by increasing the power generating capacity derived from non-conventional generation sources, including renewables.

Accordingly, the Supreme Leader, Ayatollah Khamenei, has approved

solar projects in iran

 

guidelines stipulating that the development of renewable energy resources is necessary for the country, setting a target of 5,000 MW installed capacity in the next five years, incentivized by a guaranteed power purchase regime .

Iran already has in place legislation obliging the Minister of Energy to purchase electricity produced by non-governmental renewable power plants (Financial Regulations Act 1380/2001) and under long-term contracts with guaranteed tariffs (Law of Modifying Consumption Patterns 1390/2011) adjusted for inflation and currency fluctuation.

As outlined further below, the state-owned Renewable Energy Organization of Iran (SATBA) oversees the regulatory and contractual.

framework for renewables, with a streamlined licensing process and further financial incentives for renewables developers and equipment suppliers.

Increasing renewable generation capacity has the additional benefit of assisting Iran in meeting its commitments under the Paris Agreement (COP 21), where Iran has identified development of renewable energy as a key element of its strategy to reduce greenhouse gas emissions.

It is important to note that, while still not widespread, renewable power is not new to Iran.

A long-time proponent of hydroelectric power, Iran also commissioned its first significant wind farm, at Manjil and Rudbar,  in 1994. Moreover, Iran has a young and  highly educated populace who are well aware of green issues and  who will be receptive to government policies that  are favorable to the environment. Iran is a vast country with advantageous conditions for renewable power generation due,  variously, to its latitude, climate, topography and  geography.

With the lifting of sanctions, Iranian entities should now be able to partner more easily with foreign investors to obtain the requisite renewable technology and  project financing assistance.

However, involvement in Iranian projects remains potentially challenging for non-Iranian developers, banks, contractors and  investors – both because of the general continuing complexities of doing business in Iran and  for sector-specific reasons.

This note seeks to expand upon the regulatory framework in respect of solar power generation and  identify a number of the key issues of which investors should be aware.

Electricity market

Iran’s total installed power generating capacity currently is approximately 75 GW. Over the past 10 years, demand for power in its domestic market has grown by 6.5% annually, and  the country has also started to export significant amounts of power to its neighbors.

In 2013, it was reported that renewables made up only 0.2% of Iran’s installed generation capacity.

The total installed capacity of PV.

Solar energy projects in Iran

power plants was under 90 kWp, most of which  supplied electricity to street lighting.

At the present time, renewables contribute little more than 1% of Iran’s total primary  energy consumption, with the large majority of this made up of long-standing hydroelectric power.

Iran is a large country with diverse climate and topography.

In terms of wind resource, estimates of the total potential capacity in Iran range from 30 GW to 100 GW. Solar resources are also abundant, with much of the country having in excess of 300 days of sunshine annually.  It is thought

that  the country’s geology may support the deployment of significant amounts of geothermal energy.

Finally, there is potential for using  a substantial number of waste-streams for energy generation purposes.

Overview of government incentives

The development of renewable energy has the backing of the Supreme Leader and  according to the Sixth Development Plan (2016) 5,000 MW of renewable generating capacity is to be added by 2018.

In addition, The Iranian power utility TAVANIR expects renewables to provide 10% of Iranian power by 2021.

The recent lifting of nuclear- related sanctions has re-ignited interest amongst players in the global  renewables industry, further encouraged by the regulatory support and  incentives offered to renewables developers by the Iranian government, as outlined below.

The Ministry of Energy, acting through the SATBA, purchases all electricity generated from renewable sources by approved private sector projects at specific feed-in tariffs (FiTs).

Under  the current regulatory framework, developers will be granted a 20-year power purchase agreement (PPA) negotiated on the basis  of SATBA’s model- form.

The level of FiT available depends upon a number of factors, including project size (i.e. generating capacity) and technology-type. The Ministry of Energy  determines and  publishes revised FiTs (in Iranian Rials per kWh) each year.

The Iranian government has endeavored to set the FiT at a level that  is designed to attract investors, both domestic and  foreign, in order to support the rapid development of their somewhat nascent renewable power sector. However, it is notable

that  the most recent FiTs published by the Ministry (in May 2016) have seen a slight reduction in the level of FiT offered across the board. The current FiT for solar plants can  be found on SATBA’s website

(www.suna. org.ir/en/home).

Under  the most recent directive issued by the Ministry, tariffs may be increased by up to 30% where plants are constructed using locally produced equipment, technology, know-how, design and  manufacturing.

This marks  an increase in the top-up in tariff for use of local content which, under the previous tariff regime, was limited to a 15% increase. However, this may not buoy  investors in technologies which have  little or no local supply chain.

Clearly, investors will need to satisfy themselves of the extent to which such resources are readily available in the local market and seek clarification from SUNA as to how local participation will be assessed in order to qualify for such additional incentives.

Securing the  available benefits Feasibility studies As might be expected, developers will need to carry out extensive due diligence before embarking on a solar project in Iran, both in relation to any potential Iranian joint venture partners and  in relation to various  project risks and  feasibility.

Before reviewing Construction Permit  applications submitted by developers and  assessing their viability, SATBA expects them to have  carried out economic modelling and  undertaken technical feasibility studies on the proposed.

The solar Energy Market Iran

project (including identifying and investigating the appropriate sites together with an analysis  of the solar resource and  plant  design).

It is important for potential investors to note that  SATBA does not currently provide any formal  assistance to investors in site identification or liaising with other governmental or local authorities to obtain any necessary permits to undertake feasibility studies.

It should not be viewed as a “one-stop shop” for coordinating projects and/or liaising with key stakeholders once a Construction Permit  is issued, although it will provide letters of introduction to various  relevant authorities where necessary.

Construction Permit

Once feasibility studies have been completed, developers may submit an application to SUNA for a Construction Permit  (consisting of Forms  A and  B) accompanied by relevant information pertaining to a developer’s technical and  financial capability and  general details of the proposed project, in order for SATBA to evaluate whether the application should proceed.

It is important to note that  the articles of association for the investment vehicle must include, as one  of its objectives, the generation of power from renewable sources.

Once SATBA is satisfied with its evaluation of the application, it will issue  a Construction Permit  to the developer and  introduce it to TAVANIR so that  it can  arrange a Grid Connection Permit.

The decree issued by the Ministry of Energy  in May 2016 publishing the current FiT also included a number of additional conditions of which developers should be aware.

Notably, no developer may hold more than two Construction Permits at any given time.

A developer is required to wait until a project reaches commercial operations before SATBA will grant it a Construction Permit for a new plant.

It is as yet unclear how this will be applied in practice, as there is clearly a risk that  this restriction may impact investment decisions in some cases.

Grid Connection Permit

TAVANIR will then also analyses the developer’s proposals and, satisfied with the proposals, approve the issuance of a Grid Connection Permit.

The issuing body for plants of more than 7 MW will be the relevant regional electricity company.

At this stage, it is important that  investors are aware that  TAVANIR, in most cases, expects developers to bear

the full construction costs of any grid connection, as well as any necessary substations and/or line reinforcement, unless a departure from this approach is agreed under the connection agreement.

SATBA bears no connection risk under the model form PPA, so this is an issue that  will be need to be addressed under the connection agreement.

Environmental Permits and  land rights

The developer will also need to obtain an Environmental Preservation Organization Permit  from the Department of Environment.

This will only be issued where such department is satisfied that  the project complies with certain environmental criteria.

Where  the land on which  the plant  is to be developed is state-owned (as is usually the case), the developer must enter into a lease with the Land Affairs Organization of Iran.

Lease negotiations may take a significant amount of time (perhaps six months).

On the other hand, where the land is privately-owned, the developer is free to negotiate for the purchase or lease of the land – a process which  would  usually be somewhat shorter than negotiation with the government.

PPA negotiation

Once the developer has all the required permits in place, SATBA will invite it to start  negotiating a PPA.

It is important to note that Construction Permits are not transferable so must be obtained in the name of the legal entity that is intended to own the plant.

Under  the current regulatory regime (as reflected in the PPA issued by SATBA), a developer may lose its right to the preferential FiT agreed where the plant  does not reach commercial operations, in the case of solar, within 15 months of entering into the PPA. In such cases, the

The solar Energy Market of Iran

developer will be offered the lower of the agreed FiT rate  or the latest base rate  approved by the Ministry. This could have  a material impact on project economics over the term of a PPA.

It remains to be seen whether developers are successful in negotiating adequate protections into the PPA to ensure that  relief is granted for delays caused by force majeure.

If not, this could have  an impact on bankability.

It is worth  noting that  developers are required to provide SATBA with a bank guarantee to cover the development period (i.e. from execution of the PPA until commercial operations) up to an agreed percentage of the contract value, which  may be called by SATBA should the developer fail to perform its obligation during this period, such as obtaining environmental permits, or completing the grid connection.

During operations, SATBA’s payment is secured by a rolling letter  of credit from an Iranian bank covering the next  six months’ worth  of its payment obligations under the PPA.

It will be interesting to see  whether lenders to international investors are satisfied with SATBA’s financial covenant and the security offered.

Solar projects in Iran

Investor protection

Bilateral investment treaties (BITs) and multilateral investment treaties provide comprehensive, effective protection for investors against political risks.

Investors are protected from government interference, which may include expropriation without compensation, unfair or inequitable treatment, less favorable treatment than nationals or other investors, and restrictions on currency transfers.

Appropriate corporate structuring to take advantage of treaties can provide rights  of action directly against a state under international law.

This type  of structuring is not expensive or burdensome, and may simply involve inserting a holding company in the corporate chain.

It can  create significant savings as compared with political risk insurance. As described further below,  there are a number of ways this type  of protection can  be obtained:

  • BITs;
  • Multilateral investment protection treaties; and
  • Iranian investment protection legislation.

Iran has 48 BITs in force with other countries and  has signed a further 11, which  are not yet in force.

These BITs are not all the same and  can contain different protections and have  different requirements for protection.

In general, the BITs with Iran offer:

  • an undertaking of fair and equal treatment;
  • a guarantee of free transfer of funds outside the country; and
  • recourse against Iran, in an ad hoc international arbitration outside Iran in case of expropriation

or loss of investment due  to a decision or action of an Iranian governmental body.

Certain of these BITs require investments to be approved by the Iranian investment authority.

This requires that  foreign investors register investments and  obtain a certificate of admission or an investment license under FIPPA (see below)  which  sets out the conditions on which  an investment is admitted into the country.

Iran is a signatory to two multilateral investment protection treaties: (i) the Agreement on Promotion, Protection and  Guarantee of Investments among the Member States of the Organization of the Islamic Conference 1981 (OIC Treaty) and (ii) the Agreement on Promotion and Protection of Investment among Member States of the Economic Cooperation Organization 2005 (ECO treaty).

The protections in these treaties are more limited in nature and  BIT protection is usually preferable.

Iran also has a Foreign Investment Promotion and Protection Act (known as FIPPA) and  Implementation Regulations. FIPPA is designed to encourage and  protect foreign investments in Iran, whether by way of equity investment in Iranian companies or in the financing of Iranian projects.

Solar energy projects Iran

Our experience shows that the FIPPA license reduces bureaucracy and facilitates certain administrative issues, such as residency and work permits for employees of the foreign investor.

Pursuant to FIPPA, all areas of the Iranian economy are open to private sector investment, under build, operate and  transfer (BOT) schemes, buy-back agreements and  civil partnership.

In these areas, foreign investors benefit from the same rights  and  exemptions available to local investors.

FIPPA contains provisions whereby foreign investors cannot be deprived of their ownership rights  unless such expropriation is in the public  interest/ benefit, and  then only in accordance with a prescribed procedure and the payment of fair compensation.

Generally speaking, however, FIPPA does not grant sufficient protection unless supported by the protection of a BIT.

 

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Iran’s Sixth Development Plan also provided for the installation of 500 MW of new solar capacity by 2018. Iran’s climate is diverse, and many of its regions are arid. Because the south, northwest and southeast regions receive around 300 days of sun per year, they are uniquely suited for solar energy. The Iranian government has prioritized the central region in particular due to its climate and proximity to the national power grid.

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