UAE and Saudi Arabia Cut Renewables Deals to Improve Iraq Relations

At the September 2019 Iraq Energy Forum in Baghdad, two interesting Gulf players were represented alongside the usual oil corporations and ministry officials. The most senior officials of Saudi Arabia’s ACWA Power and the UAE’s AMEA Power, both renewable energy developers, were in attendance. Although they are private companies, these appearances were indicative of a new Gulf approach.

The two Gulf states realize that their lack of engagement with Iraq, political and economic, has put them at a disadvantage versus regional rivals Iran and Turkey. Iran supplies crucial gas and electricity to Iraq, while Turkey has strong influence in the autonomous Kurdistan region as a conduit for its oil and possible future gas exports. The United States for its part has encouraged engagement by others, as it is looking to offer Iraq alternatives, or at least supplements, to Iranian energy supplies, in the hope of limiting Tehran’s influence, a policy that nests nicely with these two Gulf states’ newly recast ambitions toward Iraq.

Iraqi Prime Minister Mustafa al-Kadhimi had productive visits to Riyadh and Abu Dhabi in March and April 2021, while Dubai’s ruler Mohammed bin Rashid al-Maktoum, UAE Minister of Energy Suhail Mohamed Faraj al-Mazrouei, and others made a return visit in August. An earlier virtual meeting in November 2020 with Saudi Crown Prince Mohammed bin Salman covered potential investments.

Iraq continues to flare almost half the gas it produces, which is wasteful and environmentally damaging. With peak daily electricity demand in the federal (non-Kurdistan) area around 28 gigawatts, the country’s capacity of 30.3 GW as originally designed and built cranks out 19 GW on a good day, 40% of which disappears in the decrepit grid. Iraq imports about 1.4 GW from Iran, plus enough gas to generate 5.5 GW, but these imports have been repeatedly interrupted over payment issues complicated by U.S. sanctions as well as domestic shortages within Iran. These issues lead to lengthy daily blackouts, especially in the summer, which are partly filled with noisy, dirty, and expensive neighborhood diesel generators.

Iraq’s problems have thus more to do with losses in its distribution grid, lack of fuel, and insufficient maintenance of generating plants than with generation capacity per se. These in turn stem from a lack of finance because of subsidized electricity tariffs and low rates of bill collection. Solar power and interconnections with other countries, if at competitive prices, would partly help. Iraq receives strong radiation from the sun, especially in the west. Solar farms can be located close to demand, thus helping to avoid grid bottlenecks, although the transmission and distribution system will have to be upgraded to cope with variable output.

Iraq has set numerous targets regarding incorporating renewables in the energy mix over the years with very little progress. As of 2020, the country had only reached a nationwide solar generation capacity of 216 megawatts. On October 6, Iraq’s oil minister, Ihsan Abdul-Jabbar Ismail announced Iraq’s latest goal – a plan for 33% “clean energy” production by 2030, with 12 GW coming from solar power.

In 2019, the Saudi Ministry of Energy and Saudi Electricity Company signed memorandums of understanding with the Iraqi Ministry of Electricity on electricity interconnections and renewable projects. In June 2019, ACWA offered to build a 1 GW solar power facility in Iraq itself and 1 GW facility in Saudi Arabia to supply electricity to Iraq. ACWA, which concluded an initial public offering on the Tadawul exchange in October, is currently 44% owned by the Public Investment Fund, giving the Saudi leadership strong influence.

But these projects did not progress after protests pushed the Iraqi government of Prime Minister Adel Abdul-Mahdi to step down in November 2019. A plan for connection to the pan-Gulf Cooperation Council electrical grid through Kuwait is now delayed to mid-2022. Jordan’s Ministry of Energy and Mineral Resources expects a Jordanian-Iraqi interconnection project that aims to supply Iraq with 150 MW of electricity, ultimately expandable up to 1 GW, to start operations at the end of 2022, with the concept that Egyptian electricity could also flow through it.

Ahead of the October 10 Iraqi elections, the Kadhimi government signed a number of agreements aiming to increase Iraq’s access to electricity. The prime minister may have hoped to bolster his chances of a second term in office, while Gulf neighbors saw him as someone they could work with.

On October 7, the UAE’s renewable energy developer Masdar concluded an agreement to build five solar projects in Iraq with the total capacity of 1 GW of solar generation in Iraq; both Mazrouei and Kadhimi attended the signing. The projects are divided between 450 MW in the Dhi Qar governorate, 100 MW and 250 MW in Ramadi, 100 MW in Amara, and 100 MW in Mosul. Although concentrating more on the south, the plants will be spread out across Iraq, including the Sunni-majority Anbar and Ninewa governorates.

Further, Iraq’s acting electricity minister, Adel Kareem, said on October 24 that a contract would soon be signed with ACWA for a 1 GW solar power project in Najaf governorate. Delta Oil, a private Saudi company founded by the well-connected Al-Aiban family, is also negotiating for development of the Akkas gas field in far western Iraq with U.S. services giant Schlumberger and Canada’s Gran Tierra as partners. On November 1, Ismail spoke of “tens of billions” of dollars of joint Saudi-Iraqi projects to be signed under the outgoing government, including petrochemical, desalination, and solar power projects.

These deals should not be seen solely in terms of regional politics, though. Iraq has also concluded several deals with companies outside of the Gulf region for gas capture and renewables, notably with France’s TotalEnergies in September for a 1 GW solar project and up to 600 million cubic feet per day of gas capture installations to produce 3 GW of electricity. In August, PowerChina announced a 750 MW solar project with plans to be expanded to 2 GW.

The country’s first solar bid round is also in evaluation, covering 755 MW across seven sites in central and southern Iraq. The two largest of these were awarded to a consortium led by the Norwegian renewable energy producer Scatec with Egyptian and Iraqi partners on October 7.

Gulf solar projects, including those led by ACWA and Masdar, have achieved world-record low-priced power purchase agreements around 1 cent to 1.5 cents per kilowatt hour. The bid price for the bigger Scatec plant was about 3.6 cents per kWh, which reflects the higher risk in these projects than in the Gulf. These higher risks relate to the better-established track record of GCC countries in power purchase agreements as well as their stronger credit ratings and lower security risks than in Iraq. The original ACWA projects were proposed at 6.6 cents per kWh for the Iraq-based project and 1.65 cents to 2.5 cents for the Saudi-based one. But this is still very attractive for Baghdad compared to a fuel price alone for oil generation of about 15 cents per kWh at current prices. The cheaper price achieved from Scatec helps bridge the gap with the more costly earlier ACWA offer. Nevertheless, compared to the cut-throat competition for new Gulf projects, developers are willing to take on the higher risk in Iraq for the promise of better margins.

As this lengthy catalogue of plans, delays, and plans slipping into abeyance shows, these solar, interconnection, and gas development projects still have a long way to go to reach fruition. The Iraqi government does appear much more serious about solar power this time and has signed up some impressive names. But the lengthy process of post-election maneuvering has yet to be completed before a new government will be ready to progress or rethink its energy strategy. Political groups seen as close to Iran, which had previously expressed hostility to projects with Gulf Arab states, did poorly in the vote on the whole. But the bloc of former Prime Minister Nuri al-Maliki, who in 2020 had described Saudi land investments as “colonialism” and “a threat,” did score well.

The economic and environmental logic of these projects is clear. The solar projects at least do not hold the danger to Iraq that gas and power imports do – that of a sudden shut-off if external relations deteriorate, it falls behind on payments, or its supplier runs short on energy resources at home. But as always, Iraq’s domestic politics and its entanglement in international politics remain, alongside the perennial problems of bureaucracy, corruption, vested interests, and financial weakness. The Gulf states are making a serious effort, but the fruits of the discussions of 2019 may take time to appear.

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