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Market framework

Government electricity participants

Who are the principal government participants in the electricity sector? What roles do they perform in relation to#160;renewable energy?

The principal governmental authority in charge of the power industry, which includes renewable energies, is the Ministry of Energy (MoE). MoE is in charge of issuing energy regulations; developing power generation, transmission and distribution systems; implementing privatisation plans; determining macro policies in the energy sector; and devising plans for the optimisation of energy consumption.

The MoE has a specialised renewable energy arm called the Renewable Energy and Energy Efficiency Organisation (SATBA). SATBA is in charge of issuing licences for the construction of renewable energy projects and also acts as the offtaker for the guaranteed purchase of electricity generated in renewable facilities. Offtaking by SATBA is subject to the feed-in tariff (FIT) programme applicable at the time of execution of the underlying power purchase agreement (PPA).

The Production, Management, Transmission and Distribution of Electrical Power Specialised Holding Company (Tavanir), affiliated with the MoE, is in charge of the transmission and distribution of electricity through its various regional power transmission and distribution companies. Tavanir also manages grid connections, and in that capacity it is responsible for managing the transmission of electricity generated by renewable energy power plants.

Iran Grid Management Company (IGMC), also affiliated with the MoE, manages the national grid and aligns the supply and demand of electricity across the country.

Private electricity participants

Who are the principal private participants in the electricity sector? What roles do they serve in relation to renewable energy?

The power industry in Iran was a government monopoly until a national privatisation initiative in 2008, after which private sector ownership in power generation (including in renewables) was allowed. Restrictions on private ownership remain in place for transmission and distribution, so private power plant owners cannot own transmission or distribution facilities. Private sector participants, however, can act as contractors for the development and maintenance of power transmission and distribution facilities.

There are currently a large number of small and medium-sized privately owned renewable power plants, mainly in the form of solar and wind farms. There are also private entities developing renewable energy power projects on behalf of investors, or in anticipation of finding potential investors to acquire a majority or all of the project. There are also a handful of quasi-privatised companies, such as the project construction company MAPNA, majority-owned by parastatal organisations. These companies usually participate in large-scale, capital-intensive projects (to the exclusion of small and medium-sized private companies), and domesticate foreign technologies through local manufacturing of high-technology equipment such as wind turbines. Private equity investors, banks and other financiers also play a role in financing renewable energy power projects. Domestic banks lending to renewable energy projects usually act as agents for the National Development Fund of Iran, a sovereign wealth fund whose mandate includes project lending, including to renewable energy projects.

Definition of ‘renewable energy’

Is there any legal definition of what constitutes ‘renewable#160;energy’ or ‘clean power’ (or their equivalents)#160;in#160;your jurisdiction?

‘Renewable energy’ or ‘clean power’ is not defined in Iranian law. However, the Law on Modification of Energy Consumption Pattern 2011 (LMECP) and SATBA’s Statute 2016 list the following sources, power generated from which can be regarded as renewable energy or clean power:

  • wind;
  • solar;
  • geothermal;
  • small hydroelectric (less than 10MW);
  • marine and biomass (biodegradable components of agricultural products and waste, including plant and animal material);
  • forests and dependent industries;
  • decomposable industrial and urban waste that can generate electricity, heat, liquid fuels, gas fuel and various types of useful chemical applications;
  • hydrogen; and
  • fuel cell sources.

Framework

What is the legal and regulatory framework applicable to developing, financing, operating and selling power and ‘environmental attributes’ from renewable energy projects?

The main legal framework for developing, operating and selling power generated from renewable sources consists of LMECP, Regulations of article 61 of LMECP 2016 and the Sixth Five-Year Development Plan Law 2017 (6th FYDPL). The standard PPA form and the FIT programme provide further details such as terms and price for the sale of electricity to SATBA.

Development and construction of a renewable energy power plant requires a ‘construction licence’ (which is more akin to a licence to develop) from SATBA. Once this licence is issued, grid connection and environmental licences must be sought from Tavanir and from the Environmental Protection Organisation, respectively. The project land must also be secured, and private land would require an agreement with the owner(s). If the land is public, then further permits from, or agreements with, the relevant government entities would be required. Once all the foregoing licences and permits have been obtained and the project land has been allocated for the project, the PPA can be entered into between the project owner and SATBA. Once the PPA has been signed, the project owner must complete the construction of the project within the period of time specified in the PPA. This time period varies based on the type of project. For example, construction of a solar photovoltaic (PV) power plant must be accomplished within 15 months.

There are no laws or regulations specifically dealing with the financing of renewable energy power plants. The terms of these are set out in negotiated private contracts.

The operation of renewable facilities is generally regulated by SATBA and based on its policies and internal regulations.

Iran is a member of the Kyoto Protocol, and therefore renewable energy projects can benefit from the emission trading system once such projects are registered. At the national level, the Supreme Energy Council has recently approved the Law Creating the Environment and Energy Optimisation Market 2018, introducing Energy Saving Certificates (ESCs) as an incentive for energy consumers to save energy. ESCs are issued to energy consumers (rather than electricity producers) who have reduced their consumption with confirmation by the relevant assessment entities and final approval of the Commission for Energy Saving, itself an affiliate of the Supreme Energy Council. ESCs can be traded in the newly created Energy and Environment Optimisation Market, which operates under the auspices of the Iran Energy Exchange (IRENEX). ESC holders can use the certificate to fulfil their statutory energy saving obligations. ESC holders may also sell their ESC to others, or receive energy in an amount equivalent to the amount stipulated in the ESC from the governmental supplier, Tavanir.

Stripping attributes

Can environmental attributes be stripped and sold separately?

ESCs can be stripped and sold separately. At the national level, the Energy and Environment Optimisation Market is intended to act as the secondary market for trading ESCs. However, this Market is not yet operating and ESC trading is pending the approval of trading regulations by IRENEX.

Government incentives

Does the government offer incentives to promote the development of renewable energy projects? In addition, has the government established policies that also promote renewable energy?

To promote investment in renewable power plants, the government has introduced a number of incentives including long-term (20-year) PPAs for the guaranteed purchase of electricity and the FIT programme (with built-in annual adjustments to protect against inflation and foreign exchange rate fluctuations). In addition, a number of tax breaks (from five to 25 years, depending on the location of project) and import duty exemptions are available to renewable projects. Access to cheap governmental lands for construction of renewable energy projects is another considerable incentive. To assure investors as to SATBA’s credit standing, a sovereign guarantee may be available for large-scale plants.

Furthermore, a number of policies have been devised to promote renewable energies in Iran, requiring the government to:

  • increase the share of renewable and clean power plants to at least 5 per cent of the country’s power production capacity by 2021, with priority given to non-governmental domestic or foreign investments (article 50 of the 6th FYDPL);
  • procure 20 per cent of electricity consumption of governmental entities from renewable energy sources (Council of Ministers Decree dated 21 September 2016);
  • allocate 30 per cent of the net government revenue from implementing subsidy reforms to grant loans or managed funds for, among others, improving energy efficiency and the expansion of electricity generation from renewable sources (article 8(b) of the Subsidy Targeting Act 2010); and
  • increase electricity subscription fees and deposit the additional amounts collected into the treasury, to be entirely used for the development and maintenance of rural electricity grids as well as for generation of electricity from clean and renewable sources (article 5 of the Law Supporting Electricity Industry 2015).

Despite the above policies and with the exception of the last item, implementation details of these policies are yet to be approved.

Are renewable energy policies and incentives generally established at the national level, or are they established by states or other political subdivisions?

Energy policies and incentives are established at the national level, within the framework provided by law, by the Supreme Energy Council and the MoE (through SATBA for renewable energies).

Purchasing mechanisms

What mechanisms are available to facilitate the purchase of renewable power by private companies?

There is no specific mechanism to facilitate the purchase of renewable power by private companies. Although such companies can procure their power needs directly from power producers (including renewable power producers), price disparity remains the main impediment as Tavanir supplies electricity at a subsidised lower rate, while SATBA purchases electricity from renewable producers at a subsidised higher rate. This arrangement makes the direct purchase of renewable power (or any power, for that matter) by private entities from producers uneconomical.

Legislative proposals

Describe any notable pending or anticipated legislative proposals regarding renewable energy in your jurisdiction.

The legal and policy framework for renewables in Iran is an evolving one, with significant development in recent years. Therefore, further legislation and regulation is anticipated to clarify implementation of government policies to promote renewable projects (some of which have been mentioned above).

In particular, under the 6th FYDPL, the MoE is required to transform the current FIT programme into a market-based FIT operation through IRENEX, and to put in place the legal framework for the implementation of this. Also, SATBA and the MoE have long been working to revise the standard PPA form to address the current form’s bankability issues and make it more attractive to domestic and foreign investors. SATBA has held several meetings with market players (such as producers, associations, banks and advisors) in this regard.

Drivers of change

What are the biggest drivers of change in the renewable energy markets in your jurisdiction?

Power shortage is a primary concern of the government in the energy sector, and has been a driver of the government’s policy to promote private sector engagement in generating electricity from renewable sources. The government’s 20-year PPAs and its FIT programme offering relatively high offtake tariffs have played a major role in transforming the renewable landscape in Iran in recent years. However, due to structural difficulties in financing the construction of utility-scale projects, the generation of electricity from renewable sources has so far fallen below expectations and Iran remains dependent on electricity produced from traditional non-renewable sources.

Disputes framework

Describe the legal framework applicable to disputes between renewable power market participants, related to pricing or otherwise.

There is no specific legal framework for the settlement of disputes that may arise between or among renewable energy market participants, and there is no requirement or set procedure for initiating claims against the government or state-owned entities, whether inside or outside Iran. These disputes are usually resolved in civil courts unless an alternative dispute resolution mechanism such as arbitration is agreed upon by the parties.

With respect to disputes arising under a PPA between SATBA and an independent power producer (IPP), the parties must first try to resolve the dispute by negotiation, failing which they must refer the dispute to a panel of experts. If the dispute is not resolved by the panel, Iranian courts have jurisdiction to issue a final ruling.

Utility-scale renewable projects

Project types and sizes

Describe the primary types and sizes of existing and planned utility-scale renewable energy projects in your jurisdiction.

After the introduction of long-term PPAs and the FIT programme, the number of renewable projects with a capacity of 10MW or more increased. Solar PV and wind farms are the most common forms for utility-scale renewable projects. Most solar PV plants are within the 10MW range, with a few plants exceeding 10MW. Wind power plants usually have a capacity of 50MW or more.

Development issues

What types of issues restrain the development of utility-scale renewable energy projects?

Financing challenges have been major impediments to the development of utility-scale renewable projects in Iran. These challenges include difficulties in securing foreign financing due to the reluctance of foreign banks to lend to Iran, practical difficulties in transferring funds to and from Iran and the limited amount of domestic finance available. In addition, the standard PPA form presents bankability challenges, as it falls short of the expectations of foreign financiers and banks. The absence of a well-developed grid connection infrastructure increases construction costs for investors, which in turn further exacerbates financing challenges.

As a result, renewable projects in Iran tend to be small-scale projects financed primarily through equity or local financing. Furthermore, the limited number of grid connection facilities dictates available project locations based on vicinity to the grid. If a further but more efficient location for renewable power generation is selected, the developer must build grid connection facilities at its own cost. Finally, the abundance of fossil fuels in Iran and their low price has been a structural disincentive against large-scale renewable power generation projects.

Hydropower

Primary types of project

Describe the primary types of hydropower projects that are prevalent.

Conventional hydropower (such as dams) accounts for the bulk of hydropower capacity in Iran. Run-of-the-river hydropower projects (pumped-storage and municipal water pipes) have only recently gained attention. This latter group consists of small or micro-scale projects, usually with a capacity less than 10MW (and hence classified as renewable energy projects). Hydropower projects with higher capacities are classified as conventional power plants.

What legal considerations are relevant for hydroelectric generation in your jurisdiction?

There is no specific regime applicable to hydroelectric projects. To the extent they are classified as renewable projects, hydroelectric projects are treated like other types of renewable projects, with the caveat that hydropower projects have a lower FIT compared to solar PV, wind and biomass projects.

Distributed generation

Prevalence

Describe the prevalence of on-site, distributed generation projects.

Concern about power shortages has led the government to promote distributed private energy production. SATBA encourages residential consumers and industrial plant owners to generate power to cover part or all of their demand and sell any excess to SATBA. As a result, many small on-site distributed generation projects are being built across Iran.

Types

Describe the primary types of distributed generation projects that are common in your jurisdiction.

Solar PV and wind projects are the primary types of distributed generation projects in Iran.

Regulation

Have any legislative or regulatory efforts been undertaken to promote the development of microgrids? What are the most significant legal obstacles to the development of microgrids?

There is no law or regulation specifically promoting the development of microgrids. The main impediment arises from limiting private sector participation in renewable projects to power generation, and excluding the transmission and distribution of electricity.

Other considerations

What additional legal considerations are relevant for distributed generation?

No specific legal considerations arise in respect of distributed power generation.

Energy storage

Framework

What storage technologies are used and what legal framework is generally applicable to them?

Energy storage is an underdeveloped field in Iran, with no notable energy storage projects as far as we are aware. The Supreme Council for Science, Research and Technology started an initiative in 2014 to prepare, along with the relevant ministries, the National Regulation for the Development of Electric Energy Storage Systems Technology. Early drafts of this proposed regulation provide for behind-the-meter storage, but this regulation has not been adopted yet.

Development

Are there any significant hurdles to the development of energy storage projects?

Energy storage projects are not viewed as commercially feasible. Storage technology is not locally manufactured and its importation (including batteries and installation equipment) makes such projects quite expensive. Moreover, there is some legal uncertainty as to whether delivery to a storage facility by an IPP qualifies for the benefits of the FIT programme.

Foreign investment

Ownership restrictions

May foreign investors invest in renewable energy projects? Are there restrictions on foreign ownership relevant to renewable energy projects?

Foreign investors can invest in renewable energy projects in Iran with no restriction on ownership, including 100 per cent ownership.

Equipment restrictions

What restrictions are in place with respect to the import of foreign manufactured equipment?

Generally speaking, the importation of foreign-manufactured equipment such as solar panels, inverters, meters, wind turbines and related equipment is subject to import duties. However, there is an exemption for equipment used for renewable energy power plants.

Despite this, renewable projects that obtain financing from Iranian government-owned banks often face, as a condition of financing, restrictions against the importation of equipment that has a locally manufactured equivalent.

Projects

General government authorisation

What government authorisations must investors or owners obtain prior to constructing or directly or indirectly transferring or acquiring a renewable energy project?

Renewable energy projects require the following licences and agreements prior to construction:

  • a construction licence from SATBA (which is more akin to a licence to develop);
  • an environmental licence from the Environmental Protection Organisation;
  • land agreement(s) (with private owner(s) or the relevant government entity);
  • a grid connection licence from Tavanir or its regional affiliate;
  • a PPA with SATBA; and
  • a foreign investment licence (referred to as a FIPPA licence) if the equity investment is of foreign origin.

Each licence will be subject to certain terms and conditions. The issuing authority may revoke the licence should the licence holder breach the terms and conditions set out in the licence. Moreover, once the licence has expired, the issuing authority may refuse to renew it.

Before signing the PPA with SATBA, the applicant must have obtained construction, grid connection and environmental licences and secured the project land. Following the execution of the PPA, the project owner has a specified time period to construct the project and achieve commercial operation. This time period varies based on the type of project, as well as stipulations in the particular PPA. For example, the time period for the construction of a solar project is 15 months.

After execution of the PPA, any foreign investor involved will become eligible to apply for a FIPPA licence issued by the Organisation for Investment, Economic and Technical Assistance of Iran (OIETAI). Although obtaining a FIPPA licence is not mandatory under the law, SATBA in practice requires foreign investors to secure the licence after the PPA is executed.

A direct transfer of the project to a third party usually needs the prior consent of SATBA. Indirect transfer of the project through selling shares of the project company is also restricted. Usually these restrictions apply during the construction phase (that is, before the commercial operation date), preventing investors from transferring more than 25 per cent of their shares in the project company. Depending on the version of the PPA used, the above restriction may extend into the operation phase. To avoid revocation by SATBA of the construction licence or the PPA, SATBA’s consent must be obtained prior to any such restricted transfer.

Offtake arrangements

What type of offtake arrangements are available and typically used for utility-scale renewables projects?

SATBA acts as the exclusive offtaker of the electricity generated from renewable sources on a guaranteed basis and according to the FIT programme.

SATBA does not have a credit rating, but it is a government entity. As a credit enhancement measure, Iran has put in place a legal regime for issuing sovereign guarantees through the Ministry of Economic Affairs and Finance (MEAF). For renewable energy power plants, the MEAF is able to guarantee payment obligations of SATBA to the project owner (ie, the seller of electricity). As a matter of policy, however, the government issues such sovereign guarantees only for very large-scale projects.

Procurement of offtaker agreements

How are long-term power purchase agreements procured by the offtakers in your jurisdiction? Are they the subject of feed-in tariffs, the subject of multi-project competitive tenders, or are they typically developed through the submission of unsolicited tenders?

Renewable projects are exempt from the bidding process, and SATBA does not hold competitive bids for awarding renewable energy project PPAs, which are the subject of a FIT programme. Instead, the award of licences, which may lead to the signing of PPAs, is based on the qualification criteria of SATBA and at its discretion. Before awarding a project licence or PPA, SATBA may require the applicants to show a track record in developing and constructing similar projects, or to introduce a recognised local or foreign investor whose participation would be expected to help in developing and constructing the project.

Operational authorisation

What government authorisations are required to operate a renewable energy project and sell electricity from renewable energy projects?

After a renewable energy project achieves commercial operation, a licence for operation is issued to the project company by SATBA following confirmation by Tavanir (or its affiliates) of power production at the level stipulated in the PPA.

Electricity generated from renewable projects is sold to SATBA based on its standard PPA form. No government authorisation for the sale of electricity is required. Although producers can sell their electricity directly to power consumers or on IRENEX, the lower prices available usually discourage such sales.

At the national level, environmental attributes belong to consumers who save energy, and not electricity producers. At the international level, renewable energy projects can benefit from the environmental attribute regime under the Kyoto Protocol. No further authorisation is required for these.

Decommissioning

Are there legal requirements for the decommissioning of renewable energy projects? Must these requirements be funded by a sinking fund or through other credit enhancements during the operational phase of a renewable energy project?

There is no specific legal regime applicable to the decommissioning of renewable energy projects. Decommissioning could become an issue if the project company is required to evacuate the project land, and this aspect of it would be dealt with in the land lease agreement.

Transaction structures

Construction financing

What are the primary structures for financing the construction of renewable energy projects in your jurisdiction?

Direct lending (mainly by domestic banks) to the project company and equity financing are the most common structures for funding renewable projects in Iran. The current PPA standard form usually does not qualify for project financing purposes, mainly due to bankability issues and most notably because of the absence of a sound step-in right in favour of lenders.

Operational financing

What are the primary structures for financing operating renewable energy projects in your jurisdiction?

Bank financing for construction of the project usually contemplates an interest-free development period, and would be structured to cover, together with operating revenues, the operating costs of the project.

Updates & Trends

Updates & Trends

Updates and trends

After the lifting of most UN and EU sanctions against Iran in 2016, renewable projects have come to the centre of attention for foreign investors. The number of small-scale projects, which require less funding mostly via equity, grew rapidly. Beside these small-scale projects, a handful of large-scale projects began development. However, financing challenges and continuing challenges in transferring funds to and from Iran have impeded these large-scale projects and many small-scale ones from reaching commercial operation. The immediate effect on Iran’s renewables sector of the US withdrawal in May 2018 from the 2015 multilateral nuclear deal has been to exacerbate these challenges for many participants. Although slower growth in this sector can be expected in the short term, the longer-term effects remain to be seen.

As noted in question 9, under the 6th FYDPL the MoE is required to transform the current FIT programme into a market-based FIT operating through IRENEX, and to put in place the legal framework for this. Also, SATBA and MoE have been working towards a revision of the standard PPA form to address the current form’s bankability issues, but the timing for this is unclear.