5 GW of renewable plans hang in the balance following reenaction of Iranian sanctions

In refusing to renew support for the lifting of sanctions against Iran in May, as is required by the U.S. President every six months, Donald Trump has again imposed sanctions on the country, which came into effect in early August.

While the EU is struggling to find ways to calm investors, and has introduced a blocking statute intended to protect European-Iranian economic ties, voices from the solar industry are clear: Investments are shaky, projects will be abandoned, and access to a big, hitherto mostly untapped, market, could be lost.

Iran’s GW renewables plans

With its support for the Paris Agreement, high solar irradiance, plentiful wind, and sanctions relief in place since January 2016, with the signing of the Joint Comprehensive Plan of Action (JCPOA), otherwise known as the Iranian Nuclear deal, foreign energy investors flocked into Iran. In October 2017, Iranian Economy Minister Mohammad Khazaei told Forbes that European companies had invested a total of $3.6 billion in the energy sector.

According to Iran’s Energy Ministry, 124 companies, mostly from Europe, have invested in the renewable energy market since 2016. Consequently, the local solar market experienced somewhat of a boom, with a cumulative large-scale PV pipeline of 2.38 GW at various stages of development, and plans to build out over 5 GW of wind and solar by 2022. As of June 2018, however, Iran had installed just 188 MW of this, reports Iranian renewable energy agency SATBA.

Positive, despite the changes

Durion GmbH has been developing renewable energy projects in Iran for around seven years – longer than the sanctions have been lifted. The company, alongside its Iranian subsidiaries, has developed what it believes to be Iran’s largest solar plant at 20 MW, and which saw an investment of $27 million. Another 100 MW project is currently under development.

While some of his lenders are still waiting to see the impact of the sanctions, Durion CEO Uwe Kuhnle tells pv magazine that development on the large-scale project is fully underway and the groundwork has been laid. By the end of the year he expects all the materials to be delivered to Iran allowing installation to commence.

Durion has also signed power purchase agreements (PPA) for eight other 100 MW sites, although these plants are still in the very early stages of development. Since sanctions have been re-imposed, things are moving more slowly, and there are more obstacles. Defiantly, Kuhnle says that he will continue his business in Iran no matter what, “even if I have to take my money in bags to the border.”

Indeed, for Kuhnle, Iran is big enough to pursue business at a scale he deems lucrative. He emphasizes that he does not need access to the U.S. market, and for that reason, he can stay in Iran. “One mistake Obama made was to have to have sanctions lift approved every six months by the U.S. President. Providing this guarantee would have resulted in even more investors feeling confident in conducting business with Iran”, Kuhnle says. “It is important to show some character and stand by one’s decision. This is why we are staying.”

Another company investing in the Iranian solar market is Netherlands-based Global Renewables Investments (GRI), which has a 1 GW solar and 200 MW wind pipeline in Iran, which it still plans to continue with.

Speaking with pv magazine, Gerben Pek, GRI’s Founder and Director says the company has signed four PPA deals with the Iranian government – totaling 77 MW. Construction on the projects is set to commence next year, he says, and he believes the company will be able to pursue the plans, despite the recent turn of events.

“We are pulling through with our plans to develop the 77 MW initial pipeline, and we think the rest can also be developed. There would be many other companies, however, who will feel that they have to pull out of the Iranian market.”

Germany’s Visprion EPC GmbH & Co.KG, meanwhile, reports having a mid-two-digit MW-scale solar pipeline in Iran. Markus Scheungrab, Head of Sales at Visprion tells pv magazine that the first project was commercially operational in May 2018. “It is a 3.5 MW site in the Yazd Region, which we developed together with a local developer – Sherkate Toseye Energyhaye No Maxsun Deshir Co. – and experienced a very warm business climate,” he says.

If you want to do business elsewhere, get out of Iran

On May 18, the European Commission announced a blocking statue would come into effect on August 7 to protect EU companies doing legitimate business with Iran. The EC notes: “…the American sanctions will not be without effect. So, we have the duty, the Commission, and the European Union, to do what we can to protect our European businesses, especially SMEs.”

However, none of the companies pv magazine spoke to believes the blocking statute will be particularly useful in protecting either investments or businesses in Iran. A spokesperson for a major European independent power producer (IPP), who spoke on the condition of anonymity, disclosed that the company had planned a solar PV pipeline in Iran in the hundred MW range, and were moments away from breaking ground, before Trump re-imposed sanctions. The company had worked on the project pipeline for over two-and-half years.

All large companies that handle transactions in U.S. dollars will have to pull out of Iran, the spokesperson for the IPP says, adding that only small companies with no business interests in the U.S. and no U.S. dollar transactions, will be able to stay. And even for those companies, it will be pivotal that the EU ensures secure financing channels.

“While it is noble of [German Chancellor] Merkel and others to stand by the agreement and not concede any compromises to the U.S.; what we need now are real tangible solutions. First and foremost, we need financial channels, and we need them fast!” states Kuhnle.

James Watson of European solar PV trade association, SolarPower Europe, concurs that the EU measures will have limited effects. Speaking to pv magazine, he says he believes most European companies are selling their assets, if they have operations in Iran.

Watson further estimates the financial damages in the loss of opportunity incurred to European solar firms to be somewhere in the hundred million euros range – though he does highlight that this is an early rough estimate.

Effects on investment

Undeniably, there will be effects on the many foreign companies that have made investments in Iran. Already, with the current form of sanctions, European players must now seriously consider how to proceed.

One major issue is that even though the sanctions do not directly target them, they run the risk of losing access to the U.S. market if they continue operations. Another is the supply chain. Module, inverter, and component suppliers fear that if they supply equipment to a European EPC contractor for an Iranian solar project, they could be blocked from accessing the U.S. market in the future.

Additionally, international transactions are mostly conducted in U.S. dollars, so even if a European engineering, procurement and construction (EPC) contractor decides to ignore the U.S. market, and has found suppliers to do the same, the U.S. may freeze their U.S. dollar transactions.

Iran also has no access to foreign exchange markets following the sanctions, and investors struggle to receive earnings in a currency other than Iranian Rial. With the current high rate of inflation this, again, makes business more complicated. Lastly, there are currently no channels through which revenues generated in Iran can be transferred to Europe, as European banks refuse to take money from Iran through fear of U.S. penalties.

In an interview with pv magazine in January, Sharam Roghani, Managing Director, at Geon Group GmbH & Co.KG, said, “The banks fear billions in punishment from the U.S. government, as this has happened in the past. In this respect, the tweets of U.S. President Trump play an important role when it comes to financing projects in Iran.”

In this vein, Kuhnle adds, “The channels through which foreign investors can bring their money out of Iran are very limited. This is a problem that I would want to see addressed by politicians here in Europe.”

Kuhnle says his solar assets in Iran generate around $4 million annually, and for functional business, he needs transactional securities. He suggests that the European Investment Bank, which does not conduct business with the U.S., could, together with Iranian state-owned banks, provide a solution.

Securing transactions is a solution also touted by Visprion’s Scheungrab.“It is necessary that payment guarantees and investment protections are put in place for companies from Europe. Decisive also is that as fast as possible a regular transaction channel between Iran and Europe is reinstated. If private banks refuse to do it, the EU could, for example, make use of state-owned banks to keep alive the transactions,” he says.

Like Kuhnle, GRI’s Gerben Pek concedes that many projects in the Iranian solar market could be called off as a result of Trump’s exit from the JCPOA. Also, existing assets of many companies would be sold as refinancing cannot be attained.

For GRI, he adds, “The company could sign more PPA deals in the future, but financing has become more complicated as debt financing of banks has become impossible to attain. So far, all companies developing projects in Iran have financed them through private equity financing.”

Obtaining debt financing from Iranian banks is not an option as conditions for that are also hard to fulfill, he explains. “At least for GRI, these requirements at this stage cannot be fulfilled.”

There is, however, a glimmer of light on the horizon, according to Pek. He reports an uptake in wealthy Europeans, particularly from the Netherlands, who are willing to grant loans to GRI. These private loan givers are united by their stance against Trump’s foreign policy, and in their firm belief in the future of solar energy, and its contribution to achieving the Paris Climate Goals, he explains.

Light at the end of the tunnel

“Iran has enormous wind and solar capacities. Since the country has very high irradiation and much wind, I think that it would be possible to have 100% renewable energy generation in Iran. This would remove the necessity for Iran to rely on nuclear energy, which would be in the interest of the U.S.,” states Kuhnle.

Iran’s irradiation is so intense he says, that solar plants have twice the annual output the same system in Germany. With falling costs of solar, this makes for enormous profit margins.

Moreover, the country is plagued by energy scarcity, particularly during the hot summer months, when countless air conditioners are switched on causing demand to frequently surpass supply. The result is daily reoccurring, and hour-long power outages – a problem that could easily be addressed by solar, says Kuhnle.