Over the past decade, the Iranianelectricity sector's ability to supply reliable servicehas come under increasing pressure. This is evidenced bymore frequent gas supply constraints to generation plants,high levels of debt and increasing losses in the network.The key roots of the problems in the sector are theunder-pricing of natural gas which fuels the majority of thepower generation, and the low retail electricity tariffswhich lead to high per capita consumption of electricity andthus large investment requirements in new generationcapacity to keep up with the demand. The Government of Iranis aware of the challenges and is pursuing a number ofreforms to improve the performance of the sector, includingprivate sector participation in the generation ofelectricity and implementation of a power pool with a viewof developing a competitive market. While these reforms willeventually contribute towards a more sustainable sector,their implementation and success will require tackling theunder-pricing of natural gas and electricity. Withouttackling these issues, the impact of reform efforts willremain limited and to some extent academic, and run the riskof increasing the Government's fiscal exposure asunder-writer of the policies and transactions in the sector.This Note reviews some key challenges in the sector andhighlights their strategic implications. The Note alsoprovides some suggested next steps in the form of a"road-map" to address these issues.
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