Over the past few weeks, continuous power outages have been viewed by many as yet another indication of weak and incompetent governance structures in Iran. It is indeed a shame for a rich and resourceful country like Iran to be facing such deficiencies. At the same time, over the past decade, Iran had prided itself on being a source of electricity exports to neighboring countries, investing in the potential of being a regional hub for power exports in the form of natural gas and electricity.

Some of these projects, such as electricity exports to Iraq, are continuing albeit facing disruptions. Meanwhile, by being connected to various regional grids, Iran could also import electricity—and especially in the summer, when domestic consumption peaks. As such, the argument that Iranian authorities export electricity while the Iranian population is witnessing power cuts, is not fully valid, provided that imports and exports happen in a calculated and balanced way. To understand the causes of the current state of the power sector, one needs to gauge how non-commercial factors have shaped decisions in this field.

Amwaj.media has already outlined the key facts about the Iranian dimension to the ongoing electricity shortages in Iraq. One additional data point—beyond the reported 10 gigawatt (GW) shortfall in Iran at one point amid a jump in consumption to 65 GW—that will complete the picture is that the total nominal electricity generation capacity is 85,5 GW. This means that Iran’s power sector is currently producing well below its actual capability. One segment of the shortfall, about 5 GW, can be explained by the continuing drought that undermines the production in hydroelectric plants in Iran. However, the question is why some additional 25 GW of production capacity is currently absent—a volume that cannot be compensated by imports.

The fact is that if the country could materialize its installed capacity, then there would be enough electricity for the domestic market as well as exports to neighboring countries. It is the mismatch that is creating bottlenecks.

Experts agree that the current situation could have been forecast. Two trends have contributed to this outcome: uncontained consumption growth that has emerged because of a defunct pricing policy for electricity, and a lack of investment in needed infrastructure.

In fact, President Hassan Rouhani stated on July 7 that the key problem has been a lack of investment due to sanctions. However, sanctions are only one part of the puzzle. There are a number of other reasons that are rooted in a dysfunctional decision-making process which leads to a politicization of straightforward commercial and technical questions.

First and foremost, the current pricing of electricity in Iran is misguided. Caught between an incoherent subsidy policy and an inflationary environment, electricity generation is not economical in many cases. In a recent session of the Iran Chamber of Commerce, Industries, Mines and Agriculture’s energy committee, various experts highlighted how unrealistic tariffs have undermined power generation on the one hand and led to high consumption on the other.

In fact, while inflation is above 40%, the government has only increased the tariff paid to power plants by 7%. Half of the power generation is conducted by the non-governmental sector, which in addition to low prices also faces regular delays in payments by the government. Meanwhile, negotiations between the syndicate of electricity producers and the government have not yet achieved results on finalizing a new pricing structure for electricity. As such, the Rouhani administration has failed to adapt electricity pricing to new economic realities and seems to pass on the responsibility to the next government.

Evidently, improved financial management and a correction of prices for producers and consumers could incentivize private entities to invest in power generation and also the demand side to look for energy efficient solutions. A higher tariff to consumers could also justify more imports at demand peaks. Mindful of the latter, the government has clearly sacrificed a healthy development in the sector to prevent the inflationary impact of higher prices.

One further peculiarity in the Iranian electricity sector is the fact that the non-governmental sector owns about 40% of power plants, while the power grid remains a government monopoly. Though the hesitation to liberalize the ownership of the grid can be understood as a security consideration, it is more likely that the government wishes to maintain its monopoly on electricity exports by fully controlling the grid.

Furthermore, lack of investment in the distribution of electricity has led to a waste of potential in the sector, especially considering the vast size of Iran. According to some experts, the ministry of energy faces a 3,000T IRR (12B USD at the open market rate) budget deficit per annum, which leads to major shortages in infrastructure development. The country as a whole has encountered a broader problem in this respect as it faces a negative capital formation, hence a shortage in essential investments.

Sanctions can certainly be blamed for the insufficient foreign and domestic investment, but they have also led to other considerations which are undermining the energy sector. One such consequence is the allocation of different fossil fuels to power plants. For instance, a growing segment of power plants have been using the heavy liquid referred to as mazut instead of natural gas and cleaner liquid fuels, both adding to air pollution as well as undermining their own efficiency.

In the midst of these challenges, electricity exports—including to Iraq—remain significant because they theoretically generate hard currency revenues that the sector as a whole needs. The outgoing Rouhani administration has presented a number of ideas on how to reduce domestic consumption in order to increase exports, but it has clearly failed to contain demand. Meanwhile, misguided policies and incoherent priorities have also limited the utilization of export earnings. According to the 2010 law on targeted subsidies, electricity export earnings have to be allocated to cash handout payments and not to investments in the sector. The same law had obliged the government to increase electricity prices to cover the cost of production—another goal missed by the authorities.

Like in many other areas, there are expert solutions for the current challenges. For example, Iran could take advantage of its connectivity with various power grids in the region and smoothly import electricity at demand peaks. However, such solutions are primarily hampered by sanctions and will also require relevant contracts and infrastructure. Considering the above set of challenges, it is clear that real solutions are replaced with populist statements, such as one lawmaker suggesting the cancelation of all licenses for Bitcoin mining, even though such activities only make up a fraction of consumption.

To many experts, the core issue remains mismanagement in the sector. At the end of the day, the most critical factor is the lack of confidence of the people in the governance structures. Prominent Iranian energy correspondent Reza Zandi pointed out in an op-ed on July 7 that the least the ministry of energy could do is to put in place a respected spokesperson who could inform the public about planned outages and their reasons. However, even that seems to be a big ask for the current administration.