With its huge oil and gas reserves, Iran would seem an unlikely advocate of green energy. Yet as the country looks to foreign investors to revive its economy, the government is keen to develop the nascent but rapidly expanding renewables sector, which has recently drawn major European investment.

In the last few months, Iran has launched, and secured deals for, a series of substantial European-backed solar energy projects — the latest a $2.9bn agreement with Norway’s Saga Energy. It is the second-largest investment since the lifting of international sanctions, which followed the 2015 nuclear deal.

Though dwarfed by fossil fuel power generation, green energy is being prioritised by the country’s reformist President Hassan Rouhani. He is doing so in an effort to meet rising electricity demand, expand Iran’s share of regional power markets, export more oil and gas, and reduce air pollution. 

The need to curb pollution, in particular, is arguably one of the most pressing objectives. It is an acute problem in Tehran and other Iranian cities, which are sometimes cloaked in thick blankets of smog in the winter. Last November the air quality in the capital was so bad that all its schools were shut for several days. In January the chairman of the Iranian parliament’s environment group, Mohammad Reza Tabesh, was quoted as saying that air pollution costs Iran about $20bn annually.

Renewables are gaining traction in the Middle East with Iran possessing significant solar, wind and hydro energy potential. The country’s electricity generation capacity is currently 77,000 megawatts (MW) — green sources accounting for just 360 MW. Yet the sector has grown rapidly in recent years. From Rouhani’s election in mid-2013 to April this year, power production from renewables reportedly experienced a threefold increase, with the number of private companies generating green energy growing from three to 490. 

Iran has introduced a number of measures to encourage foreign and local investors to develop non-fossil fuel electricity generation. These include the provision of attractive feed-in tariffs (financial incentives), rising by up to 30% when domestically-sourced components and equipment are used; 20-year power-purchase agreements; and five to 13 year tax holidays if plants are located in underdeveloped areas.

Although foreign direct investment has been slow to flow into the country since the nuclear deal — primarily because of uncertainty over the agreement and remaining US sanctions — the solar energy sector has recently seen a surge in investor interest. It appears to have been driven by the falling costs of photovoltaic panels; sectoral potential — Iran has around 300 sunny days per year; and the government’s investment incentives. This year, a host of solar plant projects have been launched and secured.

In April Greek engineering firm Metka and Iran’s Ghadir Electricity and Energy Company announced that they had completed a $15mn 10 MW plant near the city of Isfahan. In July a delegation of seven German companies operating in the renewables sector signed a memorandum of understanding to develop projects in North Khorasan province. The same month saw the launch of the $27mn 20 MW plant in Kerman province — a collaboration between local operator Mokran Solar Energy Company and the German firm Adore, with Switzerland’s Durion the main investor. 

In September British green energy investor Quercus, in its first investment outside Europe, announced plans for a $580mn 600 MW plant in central Iran, which when completed will be one of the largest solar projects in the world. Iran’s ambassador to the UK Hamid Baeidinejad said the deal would help support Iran’s goal of becoming a “major hub of solar energy serving the region and beyond”. This investment was eclipsed last month by the Saga Energy deal with state-owned Amin Energy Developers. They aim to build plants around the country, with a combined 2GW capacity. 

According to Iran's Renewable Energy and Energy Efficiency Organisation, foreign investors have proposed $4.1bn worth of renewables projects since international sanctions were removed in January 2016.  The government has set itself ambitious renewables targets, with plans to add 1,000 MW of green energy capacity annually over the next five years.  

While progress is being made, there are significant challenges facing the sector. Some commentators point to an ageing power grid and a lack of sufficiently experienced domestic green energy operators. They also suggest that the debt-burdened energy ministry’s inability to pay the billions of dollars it owes conventional electricity-generating companies does not bode well for investors in non-fossil fuel power projects. 

Moreover, it is unclear whether European investment in green energy and other sectors — including manufacturing and oil and gas — will be affected by US President Donald Trump’s increasing opposition to the nuclear deal, despite Iran’s compliance. In October he refused to certify it, believing it does little to curb what is seen as Tehran’s destabilising influence in the region. Trump tasked Congress to draw up legislative amendments, establishing “trigger points” that would prompt the US to withdraw from the agreement. The move has alarmed the EU which remains committed to economic engagement with Iran. Its immediate concern is that Washington’s hardening position may prompt some European companies to review their investment plans.  

Yigal Chazan is an associate at Alaco. Alaco Dispatches is the business intelligence consultancy’s take on events and developments shaping the CEE/CIS region.