The Outlook for Natural Gas, Electricity, and Renewable Energy in Iran

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This report presents our analysis of supply and demand for natural gas and electricity in Iran and forecasts their trends through 2040. We first discuss the outlook for Iran’s natural gas production and market demand and then quantify economic opportunity losses caused by suboptimal allocation of natural gas to various end uses. Subsequently, based on the projections made for individual consuming sectors, we forecast Iran’s future demand for electricity. Finally, we put the potential of renewable energy in Iran into context by comparing its future viability against other power capacity expansion scenarios, i.e., upgrading the existing gas-fired power plants and the addition of new units.
Stemming from the development of supergiant South Pars gas field, Iran’s natural gas industry has shifted to a new paradigm: since 2000, production has increased from 230 to 750 million cubic meters per day (mcm/d) and is likely to rise to 920 mcm/d by 2020 and 1,150 mcm/d by 2040. The envisioned drastic drop in the growth of production beyond 2021 is attributed to the smaller capacity of future greenfield projects and the expected decline in production of the existing fields—particularly the South Pars field itself. Besides demographic drivers, factors contributing to the soaring demand for natural gas include the displacement of liquid fuels by natural gas for space heating and electricity generation and the development of petrochemical plants and energy-intensive industries. During this time, the amount of gas left for reinjection into mature oil fields has remained flat and the net trade of gas has been zero or negative. Although Iran’s total gas exports (to Turkey, Iraq, Oman, and Armenia) may reach 100 mcm/d levels within the next five years, further expansion of export capacity seems infeasible. Within the domestic market, the largest growth in natural gas demand will come from petrochemical and other industries and from the power sector.
The Iranian government manages the demand for natural gas by setting sector-specific prices and quotas, with prices decided annually while the quotas are often adjusted dynamically. The mismatch between the selling price and allocation priority suggests that the demand structure for natural gas (hence the total revenue) could have been vastly different had the price elasticities of different uses been factored into the pricing models. This discrepancy highlights the urgency for the country to accelerate energy price reforms and develop a competitive market for supplying natural gas to the large buyers (e.g., petrochemical plants).
Since 1990, Iran’s power generation capacity has expanded at an average rate of 2.4 GW/y to meet the average gross demand growth of 9.1 TWh/y. With a share of 85%, the sector relies heavily on natural gas as the primary source of energy, while shares of liquid fuels and hydropower in 2016 were 9% and 5%, respectively. Our analysis shows that Iran’s electricity demand growth will likely decline from 6.8 to 3.8 TWh/y by 2040, reducing the need for annual capacity addition from 3.0 to 1.3 GW. Upgrading the existing power plants will add 10 GW capacity at a levelized cost of less than 1 ¢/kWh; the levelized cost of marginal electricity generation by combined cycle plants ranges from 1.5 to 6.3 ¢/kWh depending on the opportunity cost of natural gas. We also show that, with a future levelized cost of approximately 4 ¢/kWh, publicly funded utility-scale renewable energy (solar and wind) will become economically viable only if the selling price of displaced gas exceeds $150,000/mcm. Currently, the only uses of natural gas that satisfy this threshold requirement are transportation with compressed natural gas (CNG), gas export, and reinjection into oil fields. While gas export and reinjection have some growth potentials, the market for CNG vehicles seems to have become saturated. Hence, any further expansion would require a market stimulus such as an increase in the domestic price of gasoline. At the current selling price for natural gas, investment in renewable energy with the objective of making more gas available to boost production from the petrochemical industry is not economically viable.


Type of resource text
Date created April 2017


Author Azadi, Pooya
Author Sarmadi, Arash Nezam
Author Mahmoudzadeh, Ali
Author Shirvani, Tara


Subject Iran
Subject natural gas
Subject electricity
Subject renewable energy
Subject solar
Subject wind
Genre Article

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P. Azadi, A. Nezam Sarmadi, A. Mahmoudzadeh, T. Shirvani, The Outlook for Natural Gas, Electricity, and Renewable Energy in Iran, Working Paper 3, Stanford Iran 2040 Project, Stanford University, April 2017,


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