How energy subsidy reform can drive the Iranian power sector towards a low-carbon future

Abstract

Substantial energy subsidies are recognised as the leading cause of Iran's inefficient electricity generation and consumption. This paper investigates the impacts of subsidy removal on future electricity demand and the required generation mix. A hybrid modelling framework is developed to analyse supply and demand sides under harmonised assumptions. An autoregressive distributed lag (ARDL) model combined with an autoregressive integrated moving average (ARIMA) model forecast electricity demand under subsidy removal scenarios at different paces. A partial equilibrium energy systems model (MESSAGE) offers a cost-optimal configuration of power generation technologies to meet the forecasted demand during the period 2017–2050. The findings demonstrate that energy subsidy reforms can reduce total electricity demand by 16% and could ensure a 31% cut in cumulative CO2 emissions. The scenario analysis also shows that under an early and steady reform scenario and with gradual removal, the development of renewable energy technologies and energy efficiency plans become cost-competitive. In contrast, the late and rapid subsidy removal path should tackle the lock-in effect's risk. This reveals that the early action in energy subsidy reform should be considered a priority over the removal speed. Finally, this paper discusses the potential policy implications beyond Iran.