Market framework

Government electricity participants

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

The principal governmental authority in charge of the power industry (including the renewables) is the Ministry of Energy (MoE). The MoE is primarily in charge of regulating the energy sector; developing the infrastructure for power generation, transmission and distribution; implementing privatisation; developing macro policies for the sector; and devising plans for optimisation of energy consumption.

The MoE has a renewable energy arm called the Renewable Energy and Energy Efficiency Organisation (SATBA). SATBA is in charge of issuing licence for construction of renewable energy projects; It also acts as the offtaker under the government’s programme for guaranteed purchase of electricity generated in renewable facilities. Offtaking by SATBA is based on the feed-in tariffs (FIT) applicable at the time of the execution of the underlying power purchase agreement (PPA).

Another affiliate of the MoE, the Production, Management, Transmission and Distribution of Electrical Power Specialised Holding Company (Tavanir) is in charge of transmission and distribution of electricity through its regional power transmission and distribution companies. In addition, Tavanir manages grid connections, and as such is responsible for managing the transmission of electricity generated by renewable energy power plants.

Iran Grid Management Company, also affiliated with the MoE, manages the national grid and is responsible for alignment of supply of, and demand for, 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 began in 2008, following which private sector ownership in power generation was allowed. Restrictions on private ownership remain in place for transmission and distribution, so private power plant owners may not own transmission or distribution facilities. Private sector participants, however, may be employed as contractors for development and maintenance of power transmission and distribution facilities.

Currently, there are a large number of small and medium-sized privately owned renewable power plants, mainly in the form of solar parks and wind farms. In addition, the private sector has engaged in developing renewable energy 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 semi-private companies, such as the project construction company MAPNA, which are indirectly owned or otherwise controlled by state entities. These companies usually participate in large-scale, capital-intensive projects where small or medium-sized private companies cannot or may not participate. Some of these semi-private companies are active in transfer of foreign technologies and in local manufacturing of more sophisticated equipment such as wind turbines.

Private equity investors, banks and other institutional investors also play a role in financing renewable energy projects. Domestic banks that finance renewable energy projects usually act as agent banks 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 energy’ or ‘clean power’ (or their equivalents) in your jurisdiction?

The terms ‘renewable energy’ or ‘clean power’ are not defined in Iranian law. However, the Law on Modification of Energy Consumption Pattern 2011 (LMECP) and SATBA’s Founding Statute 2016 list the following as the sources of renewable or clean power:

  • wind;
  • solar;
  • geothermal;
  • small hydroelectric (less than 10MW);
  • marine and biomass;
  • biodegradable components of agricultural products and waste;
  • forests and related industries;
  • decomposable and industrial and urban waste, that can generate electricity or heat, or produce liquid or gas fuel, or have other 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 renewable power 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 other details such as term and pricing for the sale of electricity to SATBA.

Development and construction of a renewable energy power plant requires a ‘construction licence’ (which is akin to a licence to develop) from SATBA. Once this licence is issued, a grid connection permit and an environmental licence must be obtained from Tavanir and 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, permits and agreements are secured, a PPA may be entered into between the project owner and SATBA. Once the PPA is signed, the project owner must complete the construction of the project within the period specified in the PPA. This construction deadline varies based on the type of the project, as well as any relevant stipulation in the PPA. For instance, under normal circumstances, construction of a solar photovoltaic (PV) power plant must be concluded within 15 months of signing the PPA.

There are no laws or regulations specifically dealing with financing of renewable projects. The terms of such financing are usually agreed in negotiated 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. Therefore, renewable projects can benefit from participation in emission trading once they are registered. At the national level, the Supreme Energy Council has 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 the Commission for Energy Saving.

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 renewables, the government has introduced a number of incentives including 20-year PPAs for guaranteed purchase of electricity and the FIT programme with built-in annual adjustments intended to hedge investors against inflation and foreign exchange rate fluctuations. A number of tax breaks (extending from five to 20 years depending on the location of project) and import duty exemptions are also available to renewable projects. Access to low-cost government lands for construction of renewable projects is frequently granted. To assure investors with respect to SATBA’s credit standing, a sovereign guarantee may be available for large-scale projects.

Furthermore, a number of policies have been devised to promote renewable energies in Iran. Under some of these policies, the government must:

  • 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 government entities from renewable energy sources (the Council of Ministers Decree dated 21 September 2016);
  • allocate 30 per cent of the net government revenue from implementing subsidy reforms to extending loans or to managed funds (through the banking system) for, among others, improving energy efficiency and expansion of electricity generation from renewable sources (article 8(b) of the Subsidy Targeting Act 2010, its Implementing Regulation 2010 and the Executive Directive on the Procedure for Providing Banking Services in Implementation of Articles 8 and 9 of the Subsidy Targeting Act); and
  • increase electricity subscription fees and use the excess revenue for, among other things, 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 or regulations (developed by the Supreme Energy Council and the MoE through SATBA).

Purchasing mechanisms

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

There is no specific mechanism to facilitate purchase of renewable power by private companies. In theory, private companies can directly procure their power needs from producers (including renewable power producers) but such choice is not economically justified since Tavanir supplies electricity at a subsidised, lower rate while SATBA purchases electricity from renewable producers at a subsidised, higher rate.

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 evolving, with significant developments having happened in recent years. Further legislation and regulation is anticipated to clarify implementation of government policies to promote renewable energies, some of which are 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 develop the legal framework for implementation of this market-based FIT programme. Also, SATBA and the MoE have long been working to revise the standard PPA to address the current bankability issues and to make PPAs more attractive to local and foreign investors. SATBA has held several meetings with market players (such as producers, associations, banks and advisers) in this regard. It is anticipated that new legislative or regulatory proposals in relation to at least some of the foregoing matters will be developed in the near future.

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 key driver of the government policy to promote private sector engagement in generating electricity from renewable sources. The 20-year PPAs and the FIT programme, which offers relatively high offtake tariffs, have played a major role in transforming the renewable landscape in Iran in recent years. However, owing to structural difficulties in financing the construction of utility-scale projects, generation of electricity from renewable sources has so far fallen below expectations and Iran remains dependent on electricity produced from traditional sources.

The re-imposition of US sanctions on Iran in the past year and the resulting devaluation of Iranian rial and absence of adjustments under the FIT programme; the lack of foreign funding; the restrictions on money transfers to Iran; and the underdevelopment of debt market have adversely affected the development of renewable sector in Iran.

Disputes framework

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

Aside from the dispute resolution framework under PPAs, there is no specific legal framework for settlement of disputes 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 (eg, 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 endeavour to resolve the dispute through 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 parks and wind farms are the most common forms of utility-scale renewable projects in Iran. Most solar parks fall below 10MW, with very few plants exceeding that threshold. Wind farms usually have a capacity of 50MW or more.

Development issues

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

Securing financing remains a major impediment to the development of utility-scale renewable projects in Iran. In the past year, foreign financing of renewable projects in Iran has become almost impossible because of the reluctance of foreign financial institutions to finance projects in Iran under the threat of US sanctions, and because of practical difficulties in transferring funds to and from Iran. Local financing has been limited owing to scarce financial resources of Iranian banks and financial institutions. 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 generation in Iran. Run-of-the-river projects, pumped-storage and urban water pipe power generation have only recently gained attention. This latter group consists of small-scale projects usually with a capacity of less than 10MW and hence classified as renewable energy projects in Iran.

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.

Concerns over 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 energy demands and to sell any excess to SATBA. As a result, many small on-site distributed generation projects are being built across Iran. Depending on the current volume of the site’s electric meter and whether it uses single-phase or three-phase power supply, an on-site power generation project may be between 3KW to 100KW.

Types

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

Solar panels and small wind turbines 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 to development of microgrids is the relatively limited private sector participation in renewable projects, and their exclusion from ownership of transmission and distribution facilities.

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 attractive by the private sector in Iran. Storage technology is not locally manufactured and the need to import the equipment, such as batteries and installation tools, renders these projects quite expensive and, in light of the US sanctions, impractical in some cases. Moreover, there are legal uncertainties as to whether delivery of electricity to a storage facility by an IPP would qualify for the benefits under 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 power generation projects in Iran with no restriction on ownership.

Equipment restrictions

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

Generally, importation of foreign-manufactured equipment (including solar panels, inverters, meters and wind turbines) is subject to import duties. However, there are some exemption for equipment used for renewable energy power plants.

Renewable projects financed by Iranian public banks must generally observe local content rules and may not import equipment that are locally manufactured.

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, permits and agreements prior to construction:

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

Each licence or permit will be subject to specific terms and conditions. The issuing authority may revoke the licence or permit should the holder breach these terms and conditions. Once the licence or permit is 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 will become eligible to apply for a foreign investment licence (known as FIPPA licence) issued by the Organisation for Investment, Economic and Technical Assistance of Iran (OIETAI). Although obtaining a FIPPA licence is not mandatory, in practice, SATBA requires all foreign investors to obtain the licence after the PPA is executed.

A direct transfer of a renewable project to a third party usually requires the prior consent of SATBA. Indirect transfers through selling the shares of a project company is also restricted during the construction phase (that is, prior to the commercial operation date) when investors may not transfer more than 25 per cent of their shares in the project company without SATBA’s prior consent. Depending on the version of the PPA used, the 25 per cent restriction may have been extended to the operation phase. To avoid revocation of the construction licence or breach of 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 offtaker of electricity generated from renewable sources on a guaranteed basis and, according to the FIT programme. However, there is no legal prohibition for sale of electricity directly to other offtakers (i) if according to its construction licence the project is set to sell the electricity to other offtakers (such as in case of electricity exporting plants); (ii) if consented by SATBA with respect to the electricity generated within the capacity set forth in the underlying PPA; or (iii) in respect of the electricity generated occasionally in excess of the capacity set forth in the underlying PPA.

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 awardof 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?

Once a renewable energy project reaches commercial operation, an operation licence is issued to the project company by SATBA (provided that Tavanir or its affiliates confirm the project power production meets the levels stipulated in the underlying PPA).

Electricity generated from renewable projects is sold to SATBA based on the executed PPAs. No further government authorisation for the sale of electricity would be required. Power producers can sell their electricity directly to consumers, or on IRENEX, but the lower prices (compared with subsidised SATBA offtake rates) discourage this practice.

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 for the decommissioning 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 does not usually meet the expectations of sophisticated institutional investors owing to bankability issues and most notably because of the absence of sound step-in rights in favour of lenders.

Operational financing

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

Local bank financing for construction of projects usually allows for an interest-free development period and would be structured to cover, together with any operating revenues of the project, the operating costs of the project.

Updates & Trends

Recent developments

Describe any market trends with respect to development, financing or operation in the renewables sector or other pertinent matters.Describe any notable pending or anticipated legislative proposals.

Market trends31 Describe any market trends with respect to development, financing or operation in the renewables sector or other pertinent matters.

In the Annual Budget law 1398 (2019-2020), electricity subscription fees have increased by 2 per cent and reached a peak of 10 per cent. As mentioned in question 6, all these amounts will be used for the development and maintenance of rural electricity grids as well as for generation of electricity from clean and renewable sources.

In addition, under the Annual Budget Law 1398, the local banking system has been mandated to provide loans to at least 100,000 individuals - totalling 50 trillion Iranian rial- for funding the setting up of solar power plants each with capacity of at least 5KW in rural and less developed areas. The loans term is 60 months and bear an interest rate of 4 per cent. Granting these loans will be subject to execution of the underlying PPA.

Iran’s neighbouring countries are markets for the export of electricity because of low power generation cost in Iran and the higher sale price in the neighbouring markets.

The new conditions for export of electricity generated in renewable power plants is set forth in the MoE directive number 97/22029/20/100 dated 4 July 2018. According to this directive, export of electricity generated from renewables - as well as construction and operation of the renewable power plant - requires obtaining the relevant licences from SATBA, which will be responsible for obtaining the grid connection licence from Tavanir for such electricity exporting plants. In such a case, no PPA will be entered into with SATBA and the exporter is charged for the transmission costs. Subject to compliance with applicable laws, regulations and standards, investors are responsible for the marketing and execution of agreements with foreign offtakers.

Legislative proposals32 Describe any notable pending or anticipated legislative proposals.

Although the FIT programme has not changed for 2019, it is expected that the power purchase price will be increased for this year or the coming year owing to the rising inflation rate and the devaluation of the local currency. Therefore, an increase of the current FIT programme or alteration of the formula for adjustment of the FIT programme in favour of sellers is expected.

The MoE has always had the ambition to attract foreign investment by putting in place supporting directives and regulations, such as the above-mentioned directive for exporting electricity. In this respect, additional laws and regulations are expected from the legislature or the MoE.