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As Tehran Struggles to Attract Foreign Investment, Iran’s Renewable Energy Sector Booms

Iran- Qazvin Azad Islamic University
Iranian students from the Qazvin Azad Islamic University, west of Tehran, assemble the solar-powered Havin-2 vehicle for a test drive in Qazvin, on June 2, 2014. Photo AFP

The 2015 nuclear deal struck between Iran and six world powers – the United States (US), United Kingdom (UK), Russia, France, China and Germany – was considered a turning point for Iran and its position on the global stage. The deal promised to strengthen the Iranian economy by lifting crippling sanctions in return for limitations to the country’s controversial nuclear energy programme. Following the agreement, the Iranian President Hassan Rouhani said that his country aims to attract at least $30 billion a year of foreign investment.

Rouhani’s statement was followed by an influx of foreign visitors. In 2016, 400,000 business visitors and 300 delegations of foreign investors entered Iran. However, the latest annual UNCTAD report on global foreign direct investment, published in June 2017, suggested that despite the promises of the nuclear deal, the volume of foreign investment is significantly behind what is needed for Iran to achieve its economic objectives. According to the report, the volume of foreign direct investment in 2016 was just over $3.4 billion, a 64 per cent increase compared with 2015. However, this is significantly lower than 2012, when foreign direct investment amounted $4.7 billion.

There are various factors that can explain this lack of progress. First and foremost, the Trump administration’s aggressive policies towards Iran have created significant new challenges. However, even before Trump’s election, there was uncertainty about the US Treasury in providing guidance to the international banks about dealing with Iran. Hence, as well as the legal ambiguity regarding the extent of the remaining restrictions, foreign firms find it difficult to finance their investments in Iran through major international banks.

Further complicating the situation was Trump’s decision in October 2017 not to recertify Iran as being in compliance with the deal. Trump claimed that the terms were too lenient and that Iran had broken parts of the agreement, including heavy-water limits and access for international inspectors.

Although the US has not officially withdrawn from the deal, the signals from Washington are unsettling for potential foreign investors. There are also internal factors that discourage foreign investment, including widespread corruption, political factionalism and the lack of an independent judiciary. However, the main challenge remains Trump, who has called for new sanctions on Iran and referred the deal to Congress for changes to the US terms.

Yet despite these challenges, one sector in Iran is thriving: renewable energy. Iran is one of the most advanced countries in the region in its development of renewable energy, mainly hydro-power schemes. The sector has been able to attract some considerable foreign investments. The largest of these – worth $2.9 billion – came from Norway’s Saga Energy, in an agreement signed with the state-owned Amin Energy Developers to build a solar power plant with a generating capacity of up to 2 gigawatts (GW) over the next five years.

Furthermore, talks are underway between Iran and Norway’s Scatec Solar, which is interested in building a 110 megawatt (MW) solar power plant. The deal, which is worth around $132 million, could be expanded to 500 MW at a later date. Furthermore, Iranian authorities announced that Danish companies are ready to invest another $1 billion in the sector.

Energy producers from the UK, Germany, Italy, India, South Korea, Japan, Spain, China and Switzerland have all visited the country to test the investment waters. The UK’s Quercus has shown an interest in delivering 600 MW of solar power at a total cost of €500 million. Meanwhile, a group of Italian investors is considering funding renewable projects in the southern province of Hormozgan, after visiting a solar energy site near Bandar Abbas.

By April 2017, European Union countries had invested $3.6 billion in renewable energy in Iran, creating some optimism about the future of the sector, which has significant potential for growth and development. Iran has more than 300 sunny days and an average of 2,800 hours of sunshine a year. Tehran is looking to boost its emerging renewables sector,  which currently has an installed capacity of 240 MW – far below its total installed generation capacity of 75,000 MW.

The Iranian government also offers favourable investment terms. Speaking in April 2017 at the first Iran-European Union Business Forum on Sustainable Energy, Mohammad Khazai, president of Iran’s Organization for Investment, Economic and Technical Assistance, said companies investing in renewables could receive a tax holiday of up to 13 years depending on the location of their plants and that the government would guarantee 20-year output purchase agreements.

Although one has to be cautiously optimistic about foreign investment in the energy sector, the Iranian economy is in a dire need of investment. Yet as usual, the economy is overshadowed by Tehran’s foreign policy and the international environment. With Trump in the White House, tensions between the US and Iran are likely to escalate, and the Iranian economy will be the main victim of this escalation.

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