Market framework

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.

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.

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).

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.

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.