Iraq’s Electricity Crisis

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Iraq’s Electricity Crisis

In view of the power sector’s dire financial condition,and the inability of government to absorb the lossescaused in large part by its intervention in the setting oftariffs, it is imperative to rationalize the pricing ofelectricity. The highest policy priority should be torebalance the structure of tariffs and realign prices withunderlying costs, in part to restore revenue adequacyand generate internal funds for capital investmentand in part to eliminate poorly targeted andinequitable subsidies that have created an unsustainablefiscal burden.

Harry H. Istepanian

I. Introduction

The electricity sector plays a

vital role in the socioeconomic

development of post-war

countries such as Iraq (Lewis,

2004, 2006), Lebanon, Kosovo

(Avdiu and Hamiti, 2011), and

Afghanistan (Khan, 2007;

Fichtner, 2012). Iraq has gone

through three wars, civil unrest,

and economic sanctions during

the last four decades, which

crippled the power system to

devastating levels. The root cause

of the stagnation is the legacy of

bombing the infrastructure

during the 1990–1991 Gulf War,

when around 75 percent of Iraq’s

9,300 MW installed capacity was

damaged, leaving only 2,300 MW

at the end of the conflict

(Globalsecurity.org). The oil-for-

food program launched in 1996

by the United Nations, which

allowed Iraq to export limited

quantities of oil, has left the

infrastructure saddled with

Harry H. Istepanian is anindependent power consultant based

in Washington, DC who has morethan 25 years of experience in power

engineering. He is also a SeniorFellow of the London-based, non-

profit Iraq Energy Institute, whichsince January 2009 has been acting as

official advisor to the FederalParliament of Iraq on energy policy

and economic reform. He can bereached at [email protected].

May 2014, Vol. 27, Issue 4 1040-6190/$–see front matter # 2014 Elsevier Inc. All rights reserved., http://dx.doi.org/10.1016/j.tej.2014.04.006 51


neglect, poor maintenance, and

the cancellation of crucial

electricity, water, and sanitation

projects. Electricity production

was marred with exceptional

power cuts and the situation was

worsened following the invasion

by the U.S.-led coalition in

March 2003. The quick military

success was undermined

immediately by a subsequent

wave of looting and anarchy, as it

appeared later that the United

States was unprepared and ill-

equipped to deal with a post-

conflict reconstruction plan. The

country was torn unexpectedly

by violence and a nascent

insurgency; the governmental

system was completely shattered

and the electricity sector slipped

into an idle gear and was literally

switched off on several occasions.

As a result, supply to consumers

from the public system was

severely restricted. In May 2003,

electricity production was at less

than 10 percent of the already

inadequate pre-war level (Bremer

et al., 2008). According to a UN

study, the aftermath of blackouts

has led to the diminished

availability of safe water and has

doubled the rise in water-borne

disease and child malnutrition

(Vick, 2004). The limited pre-war

planning for reconstruction and

frequent shifts in strategies were

major factors in hampering the

restoration of the electricity sector

even to pre-war levels. Lack of

security was mainly blamed for

destabilizing the electricity

supply as the Coalition and Iraqi

forces struggled to provide

security for the power plants and

transmission lines. The electricity

output in Baghdad from

January to April 2005 remained at

two-fifths of its pre-occupation

level (Brookings Institution, 2005)

and nationwide electricity

consumption was at 4,000 MW,

while demand for electricity was

increasing steadily to 9,000 MW,

which left households to enjoy on

average just nine hours of

electricity a day (Ozlu, 2006). It

was not until mid-2008 that daily

electricity production edged up

above pre-war levels, with

outputs averaging 4,400 MW per

day. However, demand still far

surpassed production, and the

main substations responsible for

routing power across the grid

remained unstable and prone to

insurgent attacks. The $5.56

billion allocated by the U.S.

Congress as part of the Iraq Relief

and Reconstruction Fund for

rehabilitation of the electricity

sector was later reduced due to

the rapid deterioration of

security. The damning report,

Hard Lessons: The Iraq

Reconstruction Experience,

prepared by the Special Inspector

General for Iraq Reconstruction

(SIGIR) in 2009 concluded that

there were several irregularities

and setbacks in the electricity

reconstruction efforts and the

U.S. administration conceded

seven years after the invasion that

electricity reconstruction became

substantially more costly and

complex than anticipated, and it

had neither the structure nor

resources in place to execute the

epic relief and reconstruction plan

set up in 2003 (SIGIR, 2009; Myers,

2010). The Iraqi government’s

spending on improving the

faltering power system was close

to the US$41.5 billion during the

period 2004–2012 (including the

US$17 billion spent on upgrading

existing power stations and setting

up new generators) from the

country’s oil revenue while Iraqi

citizens spent approximately

US$80 billion on buying electricity

produced from private

generators (Hassoun, 2012). The

Electricity Master Plan, which

was prepared by the engineering

firm Parsons Brinckerhoff in 2010,

estimates the overall required

investment for Iraq’s electricity

sector—except the semi-

autonomous Kurdistan Regional

Government (KRG)—to be

around US$26 billion until 2016

and an additional US$54 billion

until 2030 (Parsons Brinckerhoff,

2010). The continuation of the

electricity crisis had one of the

most serious adverse effects on

the national economy and became

a major political issue,

undermining the credibility of the

government despite the

enormous budget allocated to

Electricity productionwas marred with

exceptional power cutsand the situation was

worsened following theinvasion by the U.S.-led

coalition in March2003.

52 1040-6190/$–see front matter # 2014 Elsevier Inc. All rights reserved., http://dx.doi.org/10.1016/j.tej.2014.04.006 The Electricity Journal


finance the sector without a

remarkable or sufficient

improvement. In June 2010, Iraq’s

electricity minister resigned after

growing public outrage and

violence during street protests.

His successor was later dismissed

over irregular deals and

allegations of corruption. The

scale of the problem has gone

beyond any immediate repair,

and it is unlikely that the

government can solve the

problem alone. The task of

restructuring the electricity sector

and designing a new economic

and policy framework for

improving the sector’s

performance is becoming

necessary. There is no doubt that

several important elements of

reform used in other countries that

went through the same traumas as

Iraq can provide useful

benchmarks for improvement

(Williams and Ghanadan, 2006;

Pollitt, 2008; Dehdashti, 2004;

Jamasb, 2002). However, the

government has not made any

serious commitment, for obvious

political reasons, to promote

structural and regulatory reform

while the electricity tariffs are

heavily subsidized and far below

cost-recovery levels. The sector’s

three segments (generation,

transmission, and distribution)

suffer from serious lack of

autonomy, low employment

productivity, politicization, acute

skill shortages, and weak financial

and commercial practices as the

government controls all

procurements and transactions,

which signify that the sector is still

lingering in the command economy

arena. The below-cost recovery

tariffs and high levels of

uncollected bills, fraud, and

corruption are all self-imposed

problems adding further

impediments to the development

of the sector.

I n this article, we intend to

analyze the electricity crisis

in Iraq from various

perspectives. The current

structure of the electricity sector

is discussed in Section II. In

Sections III and IV, a sketch of

the political economy and

economic framework for the

development of the sector is

discussed, as well as its

performance in the context of

current policies and reform

visions required to resolve the

crisis. In the fifth section, we

discuss the key parameters that

we have used for the load

forecast, followed by calculation

of the electricity demand of

the future in Section VI. The

major energy policy challenges

and the way to move forward

with the development of the

sector are discussed briefly in

Section VII.

II. Overview ofElectricity SectorStructure

The electricity sector in Iraq has

been dominated since 2004 by the

Ministry of Electricity (wizarat al-

kahraba’), which owns the statutory

monopoly for the generation,

transmission, and distribution

(including retail) in the country,

except KRG. It also owns and

operates the majority if not all of

the installed generating capacity

and is responsible for the

electricity supply throughout the

country by operating the National

Dispatch Centre. The Ministry

oversees the operation of six

regional generators, five

transmission (400 kV and 132 kV),

and seven regional distribution

directorates general, with 10 other

directorates and supporting offices

reporting to the Deputy Minister.

According to the United Nations/

World Bank, the Ministry’s total

number of employees was about

43,000 in 2006 (United Nations;

World Bank, 2003) and escalated to

be more than 120,000 employees in

2013, according to some unofficial

sources. The KRG has a separate

ministry of electricity which

employs an estimated 7,300

employees to operate the

generation, transmission, and

distribution entities in the three

northern governorates of Duhok,

Arbıl, and As-Sulaymaniyyah (The

World Bank, 2006).

A. Generation

The Ministry includes six

directorates general for electricity

Several importantelements of reform usedin other countries thatwent through the sametraumas as Iraq canprovide usefulbenchmarks forimprovement.



production which are

geographically dispersed,

namely: waS. at (Central),

furatal‘awsat (Central Euphrates),

al shımal (North), SalahulDın,

NaS. ırıya and BaS. ra. The total

installed generation capacity for

the six directorates is over

16,800 MW (2012) made up of 478

generation units ranging from 1.7

to 300 MW per unit. The

distribution of the generation

units is in the form of eight hydro-

based stations with a combined

capacity of slightly above

2,500 MW, eight thermal stations

with a combined capacity of about

5,500 MW, 28 gas turbine stations

with a combined capacity of

approximately 8,700 MW and 15

diesel engine stations with a total

capacity of about 1,600 MW and

more than 100 small diesel

generators designed for peak

loads. The country also imports

around 950 MW (2011) from the

neighboring countries, mainly

Turkey and Iran. Figure 1 shows

the profile of electricity

generation, which is

predominantly dependent on

fossil fuels, which account for

more than 86.3 percent of the

main grid electricity sources.

T he thermal power plants run

mainly on mixed fuels

including heavy fuel oil (HFO),

diesel, gasoil, and natural gas,

while the gas turbine power

plants primarily burn liquid fuels

or natural gas. The shares of

electric capacity by fuel type vary

depending on fuel availability;

hence not all generating units

constantly operate at full capacity.

Figure 2 shows the respective

shares of fossil fuel electricity

generation using natural gas,

crude oil, HFO, gasoil, and diesel

during 2011.

The two third of Iraq’s

generation capacity is non-

operational or operates at below

their capacity levels for several

reasons including aging, fuel

shortage, efficiency deterioration,

poor operation, and maintenance

strategies. Despite the significant

increase in grid capacity since the

end of civil unrest in July 2008,1 it is

still far from being sufficient to

meet demand. In 2011, the

estimated average net capacity

available at peak was around

9,000 MW while the estimated

average net capacity required to

meet the peak demand was

15,000 MW, resulting in a need for

around 6,000 MW (IEA, 2012). The

Ministry has an ambitious plan

for pushing the production by

installing an additional

13,000 MW over the next few

years, including 10,000 MW in the

form of gas turbines (Larkin, 2011).

According to the World Bank, Iraq

has the lowest power

consumption per capita compared

to its neighboring countries as

result of lower availability and/or

lower intensity (Figure 3). The low

electricity consumption

(suppressed) per capita has

remained almost at the same level

at 1,068 kWh/capita (2011) since

the 1980s, despite the fact that

electricity consumption has grown

from 10,815 GWh in 1980 to

41,115 GWh in 2011 (The World

Bank, 2011).

Most of the existing stations in

Iraq were built between 1955 and

[(Figure_1)TD$FIG]

Figure 1: Iraq Electricity Generation Profile

[(Figure_2)TD$FIG]

Figure 2: Fuel Sources Used for Electricity Generation.



1986. Many were damaged

during the first Gulf War in 1991

and did not receive adequate

rehabilitation or maintenance due

to lack of spare parts and the

shortage of skills imposed by the

economic sanctions for more than

12 years following the Gulf War.

Iraq’s other generating capacity

weaknesses include low

generating availability, high

technical losses and load factors

resulting in an inability to cope

with peak daily demand.

C ontinuous interruption of

the fuel supply to the

generation units has been

problematic due to the lack of

supplied quantities from the

Ministry of Oil, which is stymied

by the underinvestment in the

infrastructure of the oil and gas

industry. The limitations in the

development of natural gas

resources strained the increased

dependence on burning HFO and

crude oil to a lesser extent. The

Ministry of Oil estimates the

demand of the power stations for

HFO will increase from 42,276 m3

per day in 2012 to 45,164 m3 per

day in 2020. Natural dry and

casing head gas are the cost

effective alternative for thermal

power generation. However, only

35.8 percent of electricity

production relies on burning

natural gas. Iraq’s proven

reserves of natural gas are

estimated to be around 3.6 trillion

cubic meters (BP, 2012) with

estimated quantities of casing

head gas at about 18.4 million

cubic meters/day in 2011, which

are mostly flared at present.

T he adverse economic

consequences of shifting

from burning crude oil and HFO

to higher-efficiency natural gas

are compounded by the rapid and

coherent development strategy of

the country’s hydrocarbon

resources. According to the

Ministry of Oil, the demand on

natural gas will continue to

increase as more gas turbine units

will be introduced over the next

few years and estimated to reach

more than 127 standard cubic

meters per day by 2020 (Figure 4).

However, with the current

production rate of natural gas

(approximately 2.5 million

standard cubic meters per day in

2011), it is most likely that the gap

between the demand and

production will increase in the

next several years and could

ultimately jeopardize any future

efforts to add new gas-fired units

unless intensive investment in the

gas industry is made.

B. Transmission and

distribution

The transmission segment of

the Ministry includes five

geographically dispersed

directorates: Naqilalwasat (Central

Transmission), Naqilal-

Furatal’wsat (Central Euphrates

Transmission), NaqilalFuratal’ala

(Upper Euphrates Transmission),

Naqilaljunub (South

Transmission) and Naqilalshimal

(North Transmission),

responsible for 16,429 km of

400 kV and 132 kV high-voltage

transmission lines and 232

primary and secondary

substations with a total capacity

of 44,000 MVA. The five

[(Figure_3)TD$FIG]

0.00

2,000.00

4,000.00

6,000.00

8,000.00

10,000.00

12,000.00

14,000.00

16,000.00

18,000.00

20,000.00

2003 2004 2005 2006 2007 2008 2009 2010

Elec

tric

pow

er c

onsu

mpt

ion

(kW

h pe

r cap

ita)

Iraq Iran, Islamic Rep. Jordan Kuwait Syrian Arab Republic Turkey Saudi Arabia

Figure 3: Power Consumption per Capita for Iraq and Neighboring Countries



directorates have exclusive

responsibility for the operation

and maintenance of the

transmission lines and

substations in the entire country

except KRG.

T he distribution segment of

the Ministry is composed of

seven directorates established on

a geographical basis (tawzı’ al

rıS. afa, tawzı’ alKarkh, tawzı’

alS. adr, tawzı’ alwasat, tawzı’

alfuratal’wsat, tawzı’ aljanub,

alshimal). These distribution

directorates serve 3,275,000 end

consumers for 15 governorates.

The three governorates of KRG

serve around 663,266 customers

(Parsons Brinckerhoff, 2009, p. 3)

as shown in Table 1.

T he distribution system in

general is in poor shape and

appears to be one of the

bottlenecks in the electricity

supply, as it is marred by

inefficient administration and lack

of investment. The uncontrolled

and unplanned expansions, in

addition to the aging of the

network, have led to overloading

and suffering from high technical

and non-technical losses (non-

billed and non-collected supplied

electricity). The precise percentage

breakdown of technical and non-

technical losses in transmission

and distribution is not exactly

known. IEA put the estimated

losses at around 34 percent, the

highest in the Middle East region

(IEA, 2012). There are also strong

variances in system losses across

different governorates, which

cannot be explained by differences

in characteristics of the network

alone. For example, the technical

losses in the northern governorate

Kirkuk range between 11.80

percent for 33 kV to 60.80 percent

for 11 kV network (Mustafa et al.,

2011). Therefore, there are

significant non-technical losses

that are causing such variance in

the loss rates in addition to the

dwindling condition of the system.

There is also ample evidence of

rampant electricity theft and

pilferage, which has become a

common feature of the Iraqi

electricity landscape, especially in

slum areas (more than 110,000

dwellings as shown in Table 1).

The widespread theft of electricity

has a cultural dimension—non-

payment of government dues has

little stigma attached to it as people

are outraged by the underserved

electricity, and therefore are not

convinced that electricity pilferage

is as immoral or illegal as any other

form of theft. Electricity theft has

become a prevalent practice in

many parts of the country since

2003.

III. The PoliticalEconomy of Iraq’sElectricity Sector

There is no doubt that the

military invasion in 2003 had

devastating consequences on the

future of Iraq and the life of its

people, including lack of security,

political uncertainty,

disintegration of the country’s

[(Figure_4)TD$FIG]

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

PO

WE

R S

TATI

ON

S C

ON

SU

MP

TIO

N O

F N

ATU

RA

L G

AS

(M

MS

CM

D)

Figure 4: Forecast of Power Stations’ Natural Gas Consumption



unity, and shattered infrastructure

(Coyne and Pellillo, 2011).

Persistent electricity cuts represent

a common manifestation almost

everywhere in Iraq and constitute

a major restraint to the country’s

economic and social development,

which has negatively impacted on

the commercial, industrial and

agricultural development

necessary to alleviate the living

standard for the population (IEA,

2012). The cost to the economy

from underserved electricity is

enormous and is estimated to be

about US$40 billion per year

(Parsons Brinckerhoff, 2010).

Despite the improvement in the

life standard for some Iraqis post

2003, the level of socioeconomic

development in Iraq remains

below expectations. Around 8

million (25 percent of the

population) are still living below

the poverty line, which is less than

US$2.20 per day (Bertelsmann

Stiftung, 2012). Iraq’s economy

remains predominantly reliant on

the oil sector, which generates

more than 95 percent of export

earnings and more than 60 percent

of the country’s GDP (Baker and

Hamilton, 2006). The value of Iraq

oil exports will continue to rise

above US$133 billion in the next

five years.2 However, funding of

the country’s development

programs will remain dependent

primarily on oil revenue

(Cordesman, 2010) and the

daunting task of channeling this

huge oil income into

reconstruction of the shattered

non-oil industry and agriculture

which are still suffering from the

war legacy,3 hobbled by low

investment and economic

uncertainties.

T he poor performance of

Iraq’s electricity sector4 is

not uncommon with vertically

integrated utilities. This is

intimately connected to Iraq’s lack

of strong legal, regulatory,

political, and economic

institutions since the 1990s during

the UN economic sanctions, rife

Table 1: Iraq’s Governorates Electricity Consumption

Governorates (muh. afazah) Customer Type

Residential Commercial Public Industrial Agricultural Illegal Total

Baghdad 708,470 224,702 6,524 2,677 3,866 28,090 974,329

Nınawa (Nineveh) 289,421 45,757 4,187 1,525 2,508 11,439 354,837

Kirkuk 114,061 18,758 1,402 352 3,106 7,449 145,128

Salah ad-Dın 126,061 15,786 1,596 494 10,549 4,167 158,653

Babil (Babylon) 187,656 20,639 1,935 625 5,031 5,087 220,973

Karbala’ 103,261 10,229 952 441 930 5,318 121,131

An-Najaf 127190 14796 1563 954 6367 7531 158,401

Al-Qadisiyyah 105,744 12,375 1,426 615 4,752 3,017 127,929

Al-Anbar 131,705 19,766 2,425 1,179 6,547 5,254 166,876

Diyala 133,212 14,309 1,568 472 2,023 13,343 164,927

Wasit 96,368 13,773 1,738 534 4,799 10,358 127,570

Al-Basrah 195,352 29,126 2,314 1,111 1,979 6,059 235,941

Dhı Qar 136,141 15,172 1,769 655 652 497 154,886

Maysan 70,037 8,193 1,261 336 1,723 1,511 83,061

Al-Muthanna 66,576 7,627 1,304 315 3,647 895 80,364

Duhok 132,354 17,184 1,940 236 199 0 151,913

Arbıl 188,468 18,043 2,203 1,090 1,265 0 211,069

As-Sulaymaniyyah 261,350 32,073 3,263 2,776 822 0 300,284

Total 3,173,427 538,308 39,370 16,387 60,765 110,015 3,938,272

Percentage 80.58 13.67 1.00 0.42 1.54 2.79 100.00

Sources: Iraq Ministry of Electricity (2011), KRG Master Plan for the Electricity Sector (2009).



with irregularities, bureaucracy,

corruption, low efficiency, and

despotic policies (Yousif, 2007).

This is further compounded post

2003 by the overbearing weight of

the political strife which removed

any autonomy from the electricity

sector when the Ministry was

formed in 2004. There is a general

view among Iraqi decision-makers

that keeping the electricity sector

within its jurisdiction will serve

the majority of people since it has

immense social, political, and

economic importance. Thus, any

radical economic reformation such

as elimination of subsidies on oil,

electricity, and food will be faced

with strong opposition among

many Iraqis and might cause

widespread rioting or

destabilization of the already

fragile political process, as well as

privatization of the state-owned

enterprises, which might put

hundreds of thousands of public

service employees out on the street

without work.

T he government’s attempts to

improve the investment

climate were hampered by slow

implementation of sound fiscal

policies and the weaknesses of

legal institutions, as well as

political and security instability.

With the slow improvement in

capacity building and the

performance of the public sector in

addition to the wide spread of

corruption,5 the general

perception will persist that Iraq is

in a state of high risk, and few

private investors will be willing to

venture into the country. It is

noted, however, that the power

sector cannot influence these

higher-level factors, and therefore

will have to take it as a given. The

importance to design clear and

coherent policies for managing the

sector will allow the Ministry

greater autonomy to formulate,

apply, and enforce the basic rules

to govern the sector and give

confidence to the private investors

that the government will live up to

its commitments for transition to

market economy, and that

regulations will be applied in a

transparent and sustainable

manner.

IV. The EconomicFramework of ElectricityDemand Post 2003

The causal relationship between

energy demand and economic

development received great

interest from economists and

policymakers when it was first

introduced in the late 1970s

(Westley, 1984; Fung and

Tummala, 1993; Weron and

Misiorek, 2004). Understanding

the interaction between electricity

consumption and income is the

key to a successful socio-economic

development and growth policy

for post-war countries and civil

unrest. For example, the causality

findings from post-conflict

countries in the Middle East like

Lebanon, support the growth

hypothesis of bi-directional

causality between electricity

consumption and income, and

restriction of electricity may

adversely affect the process of

economic growth and

development after the war

(Dagher and Yacoubian, 2013;

Nasr et al., 2000; Abosedra et al.,

2009; Narayan and Popp, 2012;

Naimeh, 2001). On the other hand,

there is evidence that

unidirectional causality running

from income to electricity

consumption had less to no major

impact on the economic growth of

post-conflict countries in Europe

such as Kosovo (Kammen et al.,

2012). To the best of our knowledge

in a literature review, there are no

published studies focusing on

issues related to various

economic aspects of electricity

consumption in Iraq. The increase

in population, high demand for

housing, and GDP’s positive

growth rate are key contributing

factors to the increase of the

demand since 2003. The growth

averaged around 4.76 percent

prior to the war in 2002 and

fluctuated between �40.3 percent

on 2005 fueled by an increase in the

insurgency attacks to +34.6 percent

in 2009 after the end of sectarian

violence (Figure 5).

Some believe that the sharp

growth in demand after 2003 was

due to the public sector’s salary



hikes induced by a boom in

electricity consumption due to a

sharp rise in imports of electrical

appliances which was facilitated

by trade deregulation and the

relative stability of the Iraqi dinar.

Such high demand was not fully

anticipated and adequate

provisions were clearly not made.

Indeed, the last few years have

been characterized by a totally

inadequate and disproportionate

response at the supply end despite

the impressive increases in

installed generating capacity

which was achieved partially

through what is called the ‘‘mega

deal’’ to supply 80 gas turbines

(equalling 9,700 MW), even

though many have criticized such

a deal as far ‘‘too little, too late.’’

V. Key Parameters forElectricity Demand

A. Population

The growth in population is one

of the contributing factors in the

increased demand for electricity.

Iraq had a population of 33.3

million as of June 2011, and

expected to reach 55.85 million by

2030.6 It is evident that in the next

20 years or so, the population will

exert tremendous pressure on the

energy resources of the country.

The electrification of urban areas

will continue to increase, as more

houses will be required over the

coming years with the current

continuous deficiency in housing

of more than 1 million housing

units (Ministry of Planning, 2010).

The estimated number of housing

stock will reach 8.4 million units

by 2030 with the current average

ratio of population to housing

stock. It is envisaged that 97

percent of the households will be

connected to the electricity grid

by 2030 compared with 79 percent

in 2012. Hence, the number of

customers is expected to double

from 3.94 million connected

households to 8.40 million in 2030.

B. Gross domestic product

Iraq’s GDP growth has been

distinctively volatile in the past 30

years, reaching unsustainable

peak in the 1980s before

plummeting in the 1990s and

soaring back in 20107 (Figure 6).

T he substantial increase in the

growth rate post-2003 was

due to a sharp increase in crude

oil prices. However, as the world

demand for oil changes, it will be

difficult to accurately forecast the

exact growth in Iraq’s GDP.

Nevertheless, the annual growth

has almost exceeded 10 percent in

2012, and reasonable growth

levels are expected over the next

few years. In this article, we have

used the forecast of the

International Energy Agency

(IEA) as the basis for future

growth rates. This forecast

estimated the central scenario for

the GDP growth will be 10.6

percent per annum during 2010–

2020 and is expected to decline

gradually thereafter to settle at

around 8.78 percent in the next

two decades (IEA, 2012).

W e have assumed that the

growth rate for

aggregated commercial,

industrial, and agricultural

[(Figure_5)TD$FIG]

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Electricity Consumption (GWh) 31,537 26,673 31,594 22,521 24,996 21,774 21,730 33,223 37,025 41,114Percentage Growth Rate (%) 4.76% -18.24% 15.58% -40.29% 9.90% -14.80% -0.20% 34.59% 10.27% 9.95%

-50.00%

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

Perc

enta

ge G

row

th R

ate

(%)

Elec

trici

ty C

onsu

mpt

ion

(GW

h)

Figure 5: Electricity Consumption and Percentage Growth during the Period 2002–2011



consumers will be one percentage

point above the average growth

rate of GDP for residential and

public consumers, as the industrial

sector, given its current low level,

is expected to increase its share in

the economy with government’s

future plans to diversify the

economy and reinforce the

importance of the growth of non-

oil economic sectors (Ministry of

Planning, 2010, p. 39).

C. Income elasticity of

demand

The estimated values of Income

Elasticity of Demand (IEoD) used

in the load forecast calculations

are based on actual values from

other countries (Khanna and Rao,

2009) since actual IEoD data for

Iraq are not available. In general,

the IEoD has to be applied for

each of the five main consumer

categories individually. However,

the IEoD for residential customers

is expected to show larger

variations than commercial,


sectors and slightly less than the

public sector. It is often argued

that in developing countries with

relatively low-mid income such as

Iraq, the IEoD for the residential

sector might reach values as high

as 1.3 to 1.6 in the next two

decades including additional

demand from new connections

due to further economic

development of the country. The

approach taken in this article

makes a distinction between the

future demand of existing

customers and added demand

from new customers as a separate

item. Thus income elasticity

applies only to customers that are

currently connected to the grid. A

higher household income will

increase the affordability for

purchasing new electricity-

consuming appliances, which

might reach some level of

[(Figure_6)TD$FIG]

0

100,000,000

200,000,000

300,000,000

400,000,000

500,000,000

600,000,000

2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

Elec

trici

ty C

onsu

mpt

ion

(MW

h/YE

AR)

Net Total Calculated Demand Forecast Master Plan Total Demand Forecast

Net electricity demand, residential Net electricity demand, commercial/industry/agricultural

Net electricity demand, public sector

Figure 6: Forecast of Electricity Consumption for Various Sectors



demand saturation for upper

income groups. This means that

IEoD might be slightly above 1,

therefore we used a value of

2 = 1.1 as a mean value. For the

commercial, industrial, and

agricultural sectors, the income

elasticity of demand depends

entirely on the type of future

investments in or rehabilitation of

non-oil industries. For heavy and

energy-intensive industries such

as petrochemicals, cement and

fertilizers, the income elasticity

can considerably exceed one. It is

expected that the growth in the oil

revenues will push the current

growth in commercial trade and

services mainly, and light

industries to a lesser extent, rather

than pushing heavy industries to

become the driving forces in the

future for Iraq’s market economy.

While we tend to assume that

current prospects for

rehabilitation of heavy industry to

pre-war levels are not that

promising, it is practically

impossible to reasonably predict

the future structure and

respective shares of heavy

industry. Therefore, we consider

it prudent to take a value of one

(2 = 1.0) as a kind of average

assumption for the IEoD. For the

public sector, the general

assumption is that the current

government spending will

continue, and we therefore

assume that IEoD is slightly

below one and amounts to2 = 0.9.

D. The electricity tariff

The current tariff levels for the

five consumer categories are

heavily subsidized, ranging

between 0.85 and 4.50 US¢/kWh

(weighted average is US¢1.85/

kWh), which is far from being

enough to cover the costs and

almost eight times lower than the

OECD average household

electricity price in 2010 of 16 US¢/

kWh. According to the Ministry of

Electricity website, the cost-

covering tariff is around

11.30 US¢/kWh.8 The high

technical and non-technical losses

in the transmission and

distribution system in particular

are contributing heavily to the

high cost-covering tariff. The

increase of the electricity tariff has

been treated carefully in the past

as it is a politically sensitive issue

that requires considerable time to

achieve. Therefore, we assume

that it will take the Iraq

government 15 years or more to

increase the tariffs to attain the

current cost-covering level. This

means that average residential

electricity tariff increases should

be between 5 and 15 percent per

annum, depending on the current

level of tariffs at the load centers

in the period up to 2030 as shown

in Figure 9, with an assumption of

no further increases in real terms

of the cost-covering level.

E. Price elasticity of demand

There have been no specific

analyses of price elasticity

available for the Iraq electricity

sector in the past. It is therefore

necessary to deduce the values for

Iraq from other developing

countries. Experience from other

countries with a similar economic

background and framework

indicates that the price elasticity

for electricity is very low, on the

order of magnitude of �0.1 to

�0.3. We will therefore apply this

range for our analysis and

demand forecast. However, we

will use slightly differing figures

for the various consumer

categories. The expected attitude

of the residential sector toward

price increase is between the other

four categories (tR = �0.2). As

mentioned above, there are major

deviations from the estimated

cost-covering tariff for residential

customers; therefore, only the

price elasticity of demand for

residential customers will

ultimately play a role in the

forecast. The commercial,


consumers usually have a larger

interest—driven by economic and

profitability considerations—to

react to increasing electricity

tariffs; they mostly also have

some means available to

implement energy efficiency

measures that can cut

consumption. We therefore

assume that these three categories



are at the upper limit of the range

mentioned (tC = �0.3). For public

consumers, we used tC = �0.1

since it is expected that less

pronounced reaction to tariff

increases, as it is generally

‘‘government’’ money that is

spent on electricity, especially

with no energy conservation

policies in place for saving energy

in public entities.

T he above estimation of

elasticity presents

additional challenges for most

post-war countries because of

their unique characteristics that

influence the choice of model and

data used since the electricity

demand is supply-constrained

and not demand-driven. This can

limit the meaningful inclusion of

price in the electricity demand

equation with severe rationing

such as Lebanon (Nasr et al.,

2000), where consumers rely on

private generation devices or

there is significant theft of

electricity, or energy is not

metered (Khanna and Rao, 2009).

VI. Electricity DemandForecast

The load forecast for Iraq is

complex due to the presence of a

high level of suppressed demand

and lack of accurate historical

data for actual demand. The data

used in this report is mainly taken

from the publications of the Iraqi

ministries and international

institutions such as the World

Bank. In order to determine the

specific consumption of the

existing residential consumers,

Iraq’s 2008 Household Socio-

Economic Survey (COSIT, 2007) is

used with cross-regional

examination to obtain the income

elasticity for estimation of

residential pricing elasticity.

Iraq’s GDP growth is used as the

key socioeconomic variable and

the average tariff level and

household connection rates are

also used in the assessment. The

forecasting method used for the

demand estimation is based on

common econometric

approaches, and the results are

compared with the forecast as

reported in the Ministry’s Master

Plan (Parsons Brinckerhoff, 2010).

The applied methodology

correlates between explanatory

and target parameters, as in the

case of econometric analysis (Al-

Faris, 2002; Ziramba, 2008; Vita

et al., 2006). However, it is not

based on the actual values of the

explanatory parameters of

regression calculations, but on

estimates that are put together

using models from other

developing countries with a

similar economic environment

using explanatory and target

parameters for the same

consumer categories specified in

the Ministry’s Master Plan. The

approach is limited to two main

explanatory variables, (1)

percentage growth in GDP and,

(2) electricity price development.

In the case of the residential

sector, which has been the main

focus of the government post

2003-war, the current approach

uses the additional demand that

will result from the expansion of

the electricity production and the

subsequent increase of the

connection rate of households

across the country. Hence, the

annual growth of expected

electricity consumption in the

residential sector is expressed by

the following equation:

FRt ¼ f½1þ aR

t � 2 Þ� ð1þ Tt � tRÞ � 1�g

þ ðnt � uÞ=mRt�1Þ

100

� �

where FRt ð0 � FR

t � 1; t ¼1; 2; 3; . . . ; nÞ is the growth rate of

residential electricity

consumption at the year t, aRt is

the growth rate of real income at

year t, 2 is the income elasticity of

demand (IEoD), Tt is the tariff

increase at year t, tR is the price

elasticity of demand for the

residential sector (tR � 1), nt is the

number of new residential

customers at year t, u is the

average electricity consumption

for the new residential customers,

and mRt�1 is the residential

electricity demand in year t � 1.

Future residential demand is

obtained by determining the

future connection rates of



households, which leads—

together with the development of

population—to the number of

households connected, average

household consumption, and its

development over time.

T he commercial, industrial,

agricultural, and public

sectors represent 15 percent,

0.4 percent, 2 percent and 1

percent of total consumption,

respectively, which are mainly

driven by the economic output or

value added by the existing

establishments rather than

development of real income.

Similarly to the approach used

for the residential sector, the

annual growth of expected

aggregated electricity

consumption in the commercial,

industrial, and agricultural sector

can be expressed as follows:

FCt ¼ f½ð1þ aC

t � 2 Þ� ð1þ Tt � tCÞ� � 1g

where FCt � ð0 � FC

t � 1; t ¼1; 2; 3; . . . ; nÞ is the growth rate of

commercial, industrial,

agricultural, and public sector

electricity consumption at year t,

aCt is the growth rate of value

added in the commercial and

industrial sector at year t, and tC is

the price elasticity of demand for

the commercial and industrial

sector (tC � 1).

T here is a major concern

regarding the integrity of the

published data on Iraq’s annual

electricity consumption per capita

(kWh per capita), since such data

reflect suppressed demand rather

than actual demand. For this

study, we have used the

estimated demand as reported by

IEA for 2011 as an initial estimate

for the forecast. The results have

shown that demand will increase

substantially over the next two

decades to reach 538,250.5 GWh

in 2030, as depicted in Figure 7.

The demand estimation using

current methodology is 88.7

percent higher than originally

anticipated by the Ministry’s

Master Plan and much closer to

the higher base forecast.

However, the growth rate in

demand (Figure 8) is expected to

decline steadily from the current

level of 11.91 percent in 2013 to

[(Figure_7)TD$FIG]

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

203020292028202720262025202420232022202120202019201820172016201520142013

Grow

th ra

te o

f Ele

ctric

ity D

eman

d

Figure 7: Growth Rate of Electricity Demand



settle around 5.78 percent in 2030

with total peak demand expected

to reach 61,400 MW compared to

the base case forecast reported in

the Ministry’s Load Master Plan

forecast (35,750 MW in 2030).9

VII. Iraq Energy PolicyIssues and Challenges

The current vertically integrated

structure of the sector is

exacerbated by the lack of clear

policies, government

micromanagement, and poor

regulation, which have been

raising significant doubts about

market incentives for private

investors (Sachs et al., 2011).

Meeting the demand objectives

will require substantial progress

across a wide front of the country’s

energy institutional, legal, and

regulatory frameworks to enhance

the conditions for private

investors’ participation in

resolving the crisis (GAO, 2007).

The government incremental shift

from centralization is important

for the private sector to play a

supporting role and overcome the

current debilitating problems

while the government maintains a

strategic presence and exercises its

regulatory function supported by

established functioning

institutions. This approach has

been implemented successfully in

Iraq’s neighboring countries,

including Saudi Arabia, Turkey,

Jordan, and Iran. Iraq’s current

investment policies and

regulatory framework do not

encourage private investors to

play a substantial role in resolving

the country’s electricity crisis (The

World Bank, 2008; Sachs et al.,

2011) despite the very attractive

terms and conditions of The

National Investment Law (NIL) of

2006 and the Competition and

Monopoly Prevention Law of

2010, which provide a benchmark

for competitiveness and

prevention of monopoly, and are

intended to encourage the private

sector to promote its productivity

and contribution to the GDP. Very

little foreign investment, mainly to

KRG, have flowed into the

electricity sector (Bertelsmann

Stiftung, 2012). The inefficiency of

[(Figure_8)TD$FIG]

0

20

40

60

80

100

120

20102005200019951990198519801975197019651960

Gro

ss D

omes

tic P

rodu

ct (C

urre

nt U

SD B

illio

ns)

YEAR

Iraq -Iran war started (September

1980)

Iraq -Iran war ended

(August 1988)

Iraq war started (March 2003)

Civil Unrest (February 2006 -July

2008

Oilna�onalisa�on (June 1972)

Gulf war started (August 1990)

Figure 8: Iraq’s GDP during the Period 1960–2012



the implementation of the

independent power producers

(IPP) program in 2010 has

exhibited the Ministry’s tendency

toward micromanagement, which

exacerbated strong fears of

political quasi-expropriation

among private investors. In

addition, continuing perceptions

of fragile security situations and

political instability, nepotism and

corruption, a weak financial

banking system, and the lack of an

unambiguous, business-friendly

environment remain major

stumbling blocks for private

investors. There is an urgent need

for a mechanism that provides

appropriate limits on the

discretionary exercise of

government’s regulatory powers

that will not explicitly or implicitly

expropriate the market economy

values. Until the above issues are

resolved, foreign investors will

remain reluctant to invest in the

sector or will make

disproportionately low

investments characterized by

large sunken costs and high risk

demands.

A. Restructuring and

privatization

Demand for electricity in Iraq, as

discussed in Section V, is occurring

at a rate that is considered one of

the highest in the world. The high

cost and inefficient management

of resources makes restructuring

of the electricity sector

unavoidable and might

consequently yield to

privatization in similar fashion to

the neighboring countries such as

Jordan, Saudi Arabia, Iran, and

Turkey in order to improve the

performance and efficiency of the

sector in the future. The

development of a new paradigm

for resolving the electricity crisis in

Iraq is necessary to make the sector

more attractive for potential

independent investors. As in

many developing countries,

careful consideration to the

socioeconomic situation of Iraq

needs to be considered while

breaking up or ‘‘unbundling’’ the

incumbent and highly structured

government institutional and

organizational monopolies in

[(Figure_9)TD$FIG]

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

0.00

2.00

4.00

6.00

8.00

10.00

12.00

20302029202820272026202520242023202220212020201920182017201620152014201320122011

US

cent

s/kW

h

Development of tariff (US¢/kWh) Development of residential tariff (%)

Figure 9: Forecast of Electricity Tariff



order to solve the problem of the

unique ownership, which is

present in almost all of the sector’s

hierarchy. The government has

been reluctant so far to take any

serious measures to privatize the

electricity sector, despite several

calls to take initial steps to resolve

the electricity crisis, arguing that

neither the country’s status nor

end users are sufficiently prepared

for such an arrangement.

Privatization of the distribution

directorates will perhaps be the

logical step for the Ministry to take

in order to address revenue

shortfalls at the distribution end.

This would include separation of

the seven regional distribution

monopolies from the rest of the

Ministry, and the subjection of

them to price or revenue cap

regulation. The governorates

should be allowed to develop their

own generation companies, which

could then sell electricity to the

public. Another possibility is

introducing a hybrid model where

mid- to large-size private investors

can operate alongside the state-

owned electric utilities and might

become an important source for

new investment in Iraq. The

success of private investors’

schemes is contingent upon a

coherent policy framework that

pays explicit attention to planning,

procurement, and contracting

issues, i.e., effective governance.

Effective regulatory oversight can

lead to reduction in specific capital

costs (capital costs per unit of

installed private investors’

capacity) as well as to improved

operating efficiencies. As

discussed above, Iraq’s experience

highlights the detrimental

consequences of the lack of

credible regulatory and political

commitment for the viability of

private investors’ investments.

B. Inefficient utilization of

natural resources

Iraq has the world’s eleventh-

largest proven gas reserves—

around 3.6 trillion cubic meters

(2010). Yet natural gas production

did not exceed 1.9 billion cubic

meters in 2011 (BP, 2012). It will be

exceedingly difficult, if not

outright impossible, to resolve the

electricity crisis without more

aggressive deployment of the

country’s immense natural gas

resources. Indeed, natural gas

might ultimately present itself as

the key solution to the crisis in the

face of the escalating price of

crude oil and falling supplies of

indigenous natural gas. The

expectation is that the inadequate

investment in the natural gas

industry and the fact that most of

the newly built electricity

generators are gas-fired turbines

requiring around 7 to 10 million

cubic meters of gas per day will

force Iraq to continue its heavy

reliance on imported gas from

Iran, which could further

undermine the country’s energy

and economic security.

C. Tariff structure

Tariff policy is one of the most

controversial issues for the

electricity sectors in postwar

countries (Sfeir, 1999). Inefficient

and below-cost recovery tariff

structures have been one of the

most important causes for heavy

dependence of the sector on

government subsidies (Krause,

2005; Fattouh and El-Katiri, 2012).

The financial viability of the

electricity sector is substantially

undermined due to several

reasons including: deterioration

over time of the performance of

the sector, the exponential

economic inflation due to

economic sanctions during the

1990s and early 2000s, and the

failure of past governments to

realign prices with underlying

costs as well as failure to establish

adequate rate increases,

especially during periods when

oil prices have increased

dramatically. The current tariff

rates for all segments of the

market—domestic, commercial,

industrial, agricultural, and

public—are among the lowest in

the world, with collection rates

below 30 percent or less of the

billed amounts. Although the

private generators’ fee cannot be

accurately calculated because it is

essentially a function of the total

number of hours the alternative



supply operates, it is in any case

much higher than that charged by

the Ministry.

T he tariff differential subsidy

has imposed a very heavy

burden on the Ministry’s budget

and is clearly unsustainable.

During FY 2013, the Minister

requested from Parliament the

approval of an additional 7

trillion dinars (US$6 billion) in

addition to 6 trillion dinars

(US$5.3 billion) of allocated

budget monies. Still, the

government’s subsidies have not

been sufficient to fill the gap

between the cost of electricity

and the tariff. In view of the

power sector’s dire financial

condition, and the inability of

government to absorb the losses

caused in large part by its

intervention in the setting of

tariffs, it is imperative to

rationalize the pricing of

electricity. The highest policy

priority in the electricity sector

should be to rebalance the

structure of tariffs and realign

prices with underlying costs over

the next 15 years, as discussed in

Section V.D, in part to restore

revenue adequacy and generate

internal funds for capital

investment and in part to

eliminate poorly targeted and

inequitable subsidies that have

created an unsustainable fiscal

burden.

VIII. Conclusions

Iraq has been facing a severe

electricity shortfall since 2003.

Since then, the government has

been focusing on raising the

installed capacity of electricity

generation using expensive

thermal power stations without

the ability to close the gap

between supply and demand.

This study has briefly

investigated the future demand

in relationship with the country’s

GDP, income elasticity of

demand, tariff rate, and price

elasticity. The calculated

demand for the period 2012 to

2030 was compared with the

forecast reported in the

Ministry’s Master Plan. The

results have depicted that

the demand is higher than the

base caseload estimation

originally anticipated by the

Master Plan.

T he current deficiency of the

sector is a direct result of

imprudent policies over the last

three decades. These policies have

impeded the development of the

sector, and ultimately caused

massive institutional and

governance failure due to

inefficient management of the

sector. Iraq’s electricity crisis

requires radical reform in order to

operate on a commercial basis,

especially at the level of electricity

generation and distribution. The

public monopoly should be

replaced with a spot market, and

natural resources should be

efficiently utilized with tariff

restructuring in order to fill the

investment requirements of the

sector.&

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Endnotes:

1. Net annual production in 2011 wasaround 35 percent higher than in 2003.

2. Source: http://world-economic-outlook.findthedata.org/l/7154/Iraq

3. Agriculture and non-oil industriesaccount for no more than 4 percent ofthe gross national product.

4. Iraq has the lowest performanceindicators compared to theneighboring countries, including netelectricity generation per capita of the

population, installed generationcapacity per capita of the population,net electricity generation peremployee in the industry, andelectricity generation to averagecapacity (capacity utilization).

5. Iraq is ranked 175 out of 178countries on the CorruptionPerceptions Index list, according toTransparency International, at http://www.transparency.org/cpi2010/results

6. Source: United Nations, WorldPopulation Prospects: The 2010Revision.

7. http://data.worldbank.org/country/iraq

8. http://www.moelc.gov.iq/en/index.php?name=Pages&op=page&pid=87

9. The KRG Master Plan estimates forthe base case load forecast for the threeGovernorates Duhok, Arbıl, and As-Sulaymaniyyah are added to theMinistry’s Master Plan data todetermine the total demand for Iraq’s18 provinces until 2030.

The highest policy priority in the electricity sector should be to rebalance the structure of tariffs.


Iraq’s Electricity Crisis

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