Iraq is one of the world’s largest energy producers, but its people and its economy are hampered by pressures of electricity shortfalls and rising demand. The reliability of electricity services has long been an issue for the country, with violent protests breaking out last summer in the south due to blackouts from high demand. The disruption cost the old electricity minister his job.
In this edition of Columbia Energy Exchange, host Jason Bordoff is joined by Iraq’s new Minister of Electricity, Luay al-Khatteeb, the man responsible for addressing these problems and who, it has been said, has perhaps the toughest job in the Iraqi government, considering the history of challenges in the electricity sector.
Luay al-Khatteeb was a former non-resident fellow at CGEP as well as the Founder and Director of the Iraq Energy Institute. He’s had a vast career in business and in public policy, with positions at various international oil companies, as well as commercial banks and management consulting firms. He’s been a contributor to the Brookings Institution, Chatham House, the Kennedy School at Harvard, and other organizations.
Today, questions remain about how to manage power demand and supply, and whether new plans to rehabilitate transmission lines and build up resilience of the grid will pan out in light of security challenges, financing challenges, and international pressures. Jason sat down with Luay in Abu Dhabi at the World Energy Congress to discuss these challenges and much more.
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Jason Bordoff: Hello and welcome to Columbia Energy Exchange. A weekly podcast from the Center on Global Energy Policy at Columbia University. I’m Jason Bordoff. Iraq is one of the world’s largest energy producers but its people and its economy are hampered by pressures of electricity shortfalls and rising demand. The reliability of electricity services has long been an issue for the country with violent protests breaking up last summer in the south due to blackouts from high demand. Disruption caused the old electricity minister his job. Today questions remain about how to manage power demand and supply and whether new plans to rehabilitate transmission lines and build up the resilience of the grid will pan out in light of security challenges, financing challenges and international pressures. Our guest today is the man responsible for fixing all of that, Luay al-Khateeb, Iraq’s Minister of Electricity and a former non-resident fellow here at the Center on Global Energy Policy at Columbia. He’s also the founder and director of the Iraq Energy Institute. He has a vast career in business and public policy with positions in various international oil companies as well as commercial banks and management consulting firms. He’s been a contributor to the Brookings Institution, Chatham House, The Kennedy School of Harvard, and other organizations. It’s been perhaps the toughest job this the Iraqi government considering the history of challenges in the electricity sector. I sat down Luay in Abu Dhabi at the World Energy Congress to discuss these and much more. Your excellency, thank you for joining us today on Columbia Energy Exchange.
Luay al-Khatteeb: Good to see you Jason.
Jason Bordoff: So, congratulations on your new role. I guess not that new anymore but about a year in the job. Tell our listeners a little bit about what your job entails, the electricity minister of Iraq is known as one of the most difficult jobs in the energy world. Talk a little bit about the challenges that face the electricity system in Iraq and what’s been done to address them?
Luay al-Khatteeb: First, thank you for hosting me on your podcast. This portfolio in particular is known in the Iraq as kind of like the graveyard for politicians. So, it took me quite a lot of thinking to consider it even though, I wasn’t even that much of opportunity to think about because…
Jason Bordoff: And the history of electric outages.
Luay al-Khatteeb: No, no because of the nature of formation of governments in Iraq. The thing is that with the electricity challenges.
Jason Bordoff: But the electricity challenges in the past had been the demise of some of the predecessors.
Luay al-Khatteeb: Absolutely. And this issue of electricity goes way before the 2003. It was since 1991 when the power station bombarded and destroyed by the ally at that time, U.S. forces. So, the thing is that the rebuilding the sector had to take a number of steps and the past 16 years, it went through a lot of progress but cash and financial allocation were not properly spent. Yes, it added significant volume in power generation for example, I would say like quadrupled the installed capacity. But because of the nature of the tariff that is cheapest in the world because of the subsidies, we offer about 90% subsidies and because of these quarters and the power piracy and it made growing demand here to exceed 10% or at least 10%. Which means today’s average we are talking about adding 2500 megawatts every year, just to meet demand. This is on the power generation. Of course, we have a…
Jason Bordoff: Just give people a sense of what the electricity system looks like today. You’re already started from a point where you’re not just trying to meet rapid growth and demand but there is already a number of hours of blackouts a day depending on where you are in the country, correct?
Luay al-Khatteeb: Very true. That we have issues with the power generation. We have, there is a major deficit of about 6,000 megawatt of electricity that need to be added to the current capacity to heat peak demand for example we need to develop our transmission lines and substations and this whole part of the power sector which requires billions and billions of dollars to clear all these bottlenecks to deliver the services and also the requirements to rehabilitate and further develop the distribution system. So, power generation, transmission and distribution, altogether need to be developed and we are talking about just for the distribution around $20 billion worth of investments required. And for the transmission lines and transmission systems, part of the sector, significant numbers, and make a deal for example with Siemens.
Jason Bordoff: That’s a $14-15 billion.
Luay al-Khatteeb: 14.7 billion Euros that basically to add 11 gigawatt of electricity, further developing major parts of its transmission system and delivering a pilot project for distribution and smart grid pilot project to use as a model if we are to go for smart grid in Iraq north to south east to west. These projects requires just for Siemens is required about four years to deliver. Provided we have the financial allocations for it and we are working on this. In addition…
Jason Bordoff: So, what are the biggest challenges to getting that sort of international investment and technology, you need is the government resources is the security situation, the political stability.
Luay al-Khatteeb: Political stability and security are not a big challenge. This is behind us. Unless, some external powers want to corner Iraq to be part of a regional issue. But like locally speaking, people want to really focus on claiming back their life. And security wise in Iraq, the country is pretty safe. I personally walk around with my family without security details in shopping malls and enjoying my evenings with friends and so on. So, these ugly days are in the past. We need to reform the commercial framework of the sector. To finance these mega projects and require tens of billions of dollars. And by no means or no way that one would rely on petro dollar to finance these projects because there are other priorities as well like healthcare, education, other infrastructure projects and so on. Even though that electricity is predominantly the most important portfolio. But we need to move into like involving private sector for example. So, we’re trying to move into privatizing at least the power generation part and the distribution and leaving the transmission under the control of the state. And to do this that we need to reform the tariff to make it more rewarding, to cost recover these kind of.
Jason Bordoff: Yeah, I was gonna ask you, when you say that there is not enough government revenue to do this, you said a minute ago, there is 90% subsidies. So, if people have an expect, if the public have an expectation that electricity should be pretty close to free, someone has got to pay for Siemens to come in.
Luay al-Khatteeb: Absolutely and although the, when we talk about like the tariffs, it’s a question of economics. Again, it’s a question of politics because historically speaking and people in this part of the world think that we are oil rich country. We should enjoy everything for free. Now subsidies could be like, having subsidies for locals could be doable for countries where the native population…
Jason Bordoff: Is quite small.
Luay al-Khatteeb: Is quite small compared to the overall including expats and so on. But when it comes to Iraq, the oil revenues, it’s not justifiable for a population of close to $40 million almost 98%, 99% are locals and the population growth, it’s on 2.8% year on year which means that by 2030, we will certainly be more than $50 million. So, all these things need to be kind of like looked at and the whole economics need to be reformed in a way to accommodate the challenges and the requirements for the future.
Jason Bordoff: So the steps you’re taking are delicate by soon more government revenue but also try to reform the pricing system.
Luay al-Khatteeb: Absolutely and also to turn these sectors into more rewarding and that’s why now, we are taking steps towards the tariff reforms. We’re working with the IEA, International Energy Agencies and with the World Bank and other international institutions to put the mechanisms.
Jason Bordoff: Do you think the Iraqi public is willing to pay more for stable, reliable electricity?
Luay al-Khatteeb: Yes. And I’m coming to this point. I mean, we are trying to get the political buy in for this and but we need to create the alternative to secure the priorities for those with limited income and with those like suffer under poverty or living in poverty and instead of like offering subsidies to the $40 million Iraqis of today, we offer enough cash supplement for example to the 10% or 15% that are in need for that support through social security and so on. In addition to this, we need to introduce more reform to the institutions to allow a stronger private sector world to create jobs, this requires also not only to allow new companies to come in but also to reshape and corporatize the existing operational arms of the state and to put them in potentially, IPO for to privatize some of these state owned companies and to have the locals to invest in them and play a role in this business. I mean, if we develop, if we reform the tariff and we work in delivering the privatization successfully for the power generation and the distribution. We’ll certainly turn this and the sector that continue to siphon like the budget for many years and to a profitable sector that not only secure the enough supply to the public but also generate revenues to the economy as well as sustain the interconnectivity commitments that we are moving into with neighboring countries to create Iraq, to make Iraq more of like a vibrant energy hub for utility market.
Jason Bordoff: Now, I’m gonna ask you to comment on oil policy. That’s a different ministry but it is still the case that most revenue comes from oil sales and government spending, the government revenues still needed for the priorities you talked about. So, Iraq has the capability to grow production significantly. How is that going and should we expect to see that and does an OPEC production agreement make that more difficult for Iraq to deliver?
Luay al-Khatteeb: Well, we have our own plans of the bid rounds that we have signed in the past and although, they have been revised significantly from the historic target. So, 12 million barrels and production plateau down to 7.1. But today’s oil production around 4.5 including Kurdistan region of Iraq if you would count their production as well. With these like productions, we need to think of our strategies of how to move forward because this is closely linked with, deals with OPEC and then OPEC agreements and so on. Also it affects the associated gas because 80, 82% of our gas is associated with oil production and this will certainly impact our food stock supply and as we progress with the oil when we, as we progress with the development of the power generation, of course, we are introducing renewables and parallel to the conventional gas to power and this is including like solar farms. We’ve launched the first bid rounds and it will take place very soon. We just finalized the pre-qualifications. We’ve removed the feed in tariffs. So, we made it more competitive and we are also considering direct negotiations with major competitors, regional and international levels to break the price and to make at least 1,000 megawatts of renewables available year on year for next year.
Jason Bordoff: Some of the previous rounds, renewable rounds were not successful. So what’s changing in terms of the commercial model to try to make this new renewable solar round, I think it’s 755 megawatts successful?
Luay al-Khatteeb: It was, no, it did not work because the feed in tariff 3.5%. And there were like some limitations. The pre-qualification process was quite cumbersome and not clear for investors. Now, we have over a 120% applicants at least a third of them are pre-qualified with major names and they have significant interest and I’ve met some of the companies that they want to invest in the power purchase agreement, basically in IPP and through renewables. We have waste to power as well to consider and it’s in the process of finalizing some of the projects to make it available for the competition and especially in high density cities. Population density such as Bashar and Baghdad.
Jason Bordoff: It’s all be primarily natural gas system even with this wealth.
Luay al-Khatteeb: But gas to power role remain to be the dominant…
Jason Bordoff: And how is that… And you talked about the need for increased domestic production to meet that demand, a lot of it coming from associated gas and a lot of gas is being wasted because it’s being flaired, there has been progress to address that?
Luay al-Khatteeb: True. This is, I mean, we are working closely with the ministry of oil to have this gas utilized and achieve a target of zero flaring at some point. I mean at the end of the day, Iraq is a resource rich country and it should utilize all its assets to achieve energy independence if I may say it, even though it’s a free market at the end of the day and it’s, I mean, if we want to make basically the power sector more and more robust and sustainable by providing enough feed stock to sustain it locally as well as rewarding by reforming it commercially. And with regards to the supplies, once we reform the tariff and start removing the subsidies and make it more and more available for those in need, and using some different mechanisms, hopefully, we will control that growth on demand and lower it to more sensible rate.
Jason Bordoff: And talk about some of the progress, you’ve made, so far. So, last summer protest over power shortages, water shortages, frustrated Adil Abdul-Mahdi hopes for a second term. We didn’t see those same problems quite as much this summer. What was different?
Luay al-Khatteeb: Well, pre-2003, a city like Basra struggled to enjoy more than seven hours electricity and since the bombing of 1991. Post-2003, this city despite its contribution to the state of like oil production and the revenues and primarily the main contributor to the federal budget and it suffered to get more than 12 to 14 hours electricity until this year when we implemented our strategy and we achieved quite a significant milestone with the new plan and our colleagues at the ministry and we managed to deliver 24 hours to downtown and 20 hours to 22 hours to the peripheries of the city and it’s unseen and unheard in Basra and people are happy. We want to replicate this success story across Iraq. Of course, we did add new power generation and major projects in transmission and distribution to other provinces but as I said earlier the gap is around between supply and demand between 5.5 to 6 gigawatt of electricity and it’s yet to be closed in addition to meeting growing demand year on year. Our target of within the next three years, we will bridge the gap gradually and progressively we will develop a spare capacity to secure our demand as well as we have enough capabilities to play within, by utilizing the interconnectivity within the next week and on the 15th of September, we are signing interconnectivity with the GCC and for power generation we are discussion with other neighbors on similar deals and the idea is to make Iraq an indispensable hub and an utility market not only to meet local demand but a transit country for power.
Jason Bordoff: One of the biggest challenges, you have to achieve in that plan over the next three years, what are you most worried that could undermine that?
Luay al-Khatteeb: It might be local politics but to a lower extent, we can handle this but it’s regional politics. We don’t want the international community or regional community to coordinate Iraq to take sides or to compromise our security or our political position in any way that could eventually hinder or compromise the region’s security. We just came out of a war that took its toll on Iraq.
Jason Bordoff: You’re talking about rising Iranian Saudi tensions or you’re talking about the GCC conflict?
Luay al-Khatteeb: I’m talking about everything. And we don’t Iraq to be cornered let it be internationally or regionally. We just came out of a war that we fought against terror, that took its toll for example on the power sector. We lost 25% of our power generation capabilities of installed capacity. The 20% of our transmission lines. The bombing devastated the infrastructure and the distribution system of at least four provinces. It compromised our investment positions as we started to develop this sector a few years back. So, all these things, I mean, not to count the losses of the human capital and other parts of the economy and so on. So, the cost on the people, on the economy, on the infrastructure etc. that was a significant loss that we don’t want to go through similar episode because Iraq cannot basically stand again and defend the Arabian peninsula to stop spill over of terrorism to other countries. One must know like when we select across the world and especially the middle east that Iraq played a significant role in defending so many countries by winning this war. This must not be repeated and the last chance that Iraq is gonna see is political scenarios that could compromise the security and politics of the country and create havoc locally. We need to focus on rebuilding the country, rebuilding the cities and claim back our life. And this requires some collective, cooperative, responsibility and it will benefit all.
Jason Bordoff: So, and you mentioned the Siemens, before you’re having success with other multinationals to come in and do commercial deals.
Luay al-Khatteeb: We are open to all just came back from, sorry the last yesterday before leaving Baghdad to the energy congress, we finalized the deal with GE on rebuilding the transmission grid of some of the liberated provinces. Specifically empower the western part of Iraq. And we are dealing with Asian companies as well and it’s a level playing field for all.
Jason Bordoff: You mentioned the risk of geopolitics intervening and players in the region and one player not in the region that is having impact is the United States is you import a lot of gas from Iran is the new pressure from this administration and its renewed sanctions is that complicating your ability to secure the gas supplies you need?
Luay al-Khatteeb: I’ve said it long ago and repeatedly that we need to be given enough time to develop our gas capabilities and to reach that level of self-sufficient and providing the feed stock, having said that and when it comes to importing gas or electricity, that megawatt or this molecule it doesn’t matter whether it’s coming from country A or country B and what really matters to me is the best offer on the table. So, I’m available and I’m ready to deal with whoever that offers me the best deal.
Jason Bordoff: And is the U.S. happy with that answer?
Luay al-Khatteeb: This is the most logical answer and people need to comply with some logic, so…
Jason Bordoff: Policy centers and you talked about subsidy reform. What are the other policy steps that you need to be taken to incentivize these power plant upgrades and international investments?
Luay al-Khatteeb: We are moving towards more of like a market economy. We are dismantling all these barriers of old practices that keeping such sectors, state controlled, government controlled and so on. We are happy to welcome international, regional, conglomerate to participate in mega deal across the sector and basically have a stronger role in developing and so, very rewarding business, the power sector and as I said, provided that we reform the tariffs and we are working on it and it will happen. Because they keep it doing more of the same and expecting different result is going to be impossible certainly not sustainable for future economy.
Jason Bordoff: And you gave the answer on the subsidy reform question because that is important, network losses are some of the highest in the world, the IEA report recently pointed this out about Iraq, lowering subsidies for tariffs but in other parts of the gulf can help use energy more efficiently. Some of the right price signals. And we could put a stack of reports on this table from economist at multilateral organizations who have written about, you should have market based prices and then as you said, take other steps to compensate people who are low income or have difficulty meeting those bills. That doesn’t always work as a political matter in terms of helping actually get this through and build political support for it. I mean, what step, how much progress have you made trying to communicate this to people so they understand what’s being done and why and build public acceptance?
Luay al-Khatteeb: You’re absolutely right and we’ve been working on this and to get this political buy in and accept these new reforms. I’ve been campaigning for some time. Though, there was a more of like a focus on summer 2019 as of like the Armageddon that to happen and thus to change the whole political landscape in Iraq because so many parties and so many countries felt like, the Iraq will face a significant issue in summer, in Basra and specifically to and specifically on the power sector that could ignite a major civil unrest or uprising. This did not happen and we turned Basra into an achievement as opposed to the threat that was portrayed when this administration was first formed 11 months ago. Now, the focus of the news like very much summer 2019 how it. Summer is behind us and now, people thinking of like okay, they’ve achieved something and they are adamant to deliver more and more. Our challenge is to sustain that success story and expand more in parallel to this when you will have enough time to focus in marketing these ideas to the people, to the political parties, to the MP, to the media. And this requires a collective effort international, regional and national. This is what I’m working on. And we’re moving slowly but surely and with a bit of like luck, I think we can achieve something by next year or towards the end of next year. You see, we want to deliver enough services and then technical improvement to the grid. That’s when we talk about the reform at least we have like an acceptable level of services. If I would just go and say that we have to remove all the subsidies right now whatever people will say but where is the 24 hours of electricity. Right, so it’s a Catch-22. But we need to deliver at least across Iraq 20 hours of electricity and then after that when we talk about like the reform. We reform to sustain this and add more capacity and improve the situation where we need to look this from commercial perspective. So, I need to show them not only the hanging fruit but clear results that they will test. This is what we are working on. Next, we are trying to achieve at least 20,000 gigawatt of electricity and I mean, this year, we achieved 19 and a half, 19.2 and compared to last year for example, the peak hardly crossed 15, 15 and a half.
Jason Bordoff: You mentioned the proposed interconnections with the rest of the GCC. What’s the timeline for connecting with Jordan and the GCC?
Luay al-Khatteeb: Hopefully by summer 2020, by June, we’ll have the lines available.
Jason Bordoff: And how is the corporation going with the Kurdistan region on gas and power?
Luay al-Khatteeb: We are working closely between. The relationship between the federal government and the Kurdish government is quite healthy. We are cooperating and at the end of the day, it’s a one country.
Jason Bordoff: Well, you do have one of the most difficult jobs in the country, in the region and we miss you at Columbia as a fellow, as you in your prior role. But it’s an important job for stability in the country and in the region. So, it’s good to have you and we wish you the best of luck. Thanks for making time to join us today.
Luay al-Khatteeb: Thank you and rest assured, the day I leave public service, I will turn back to Columbia.
Jason Bordoff: Luay al-Khatteeb, your excellency, thanks for spending time with us today. Thanks to all of you for listening. For more information on the Columbia Energy Exchange, please follow us online at Energypolicy.columbia.edu and on social media at Columbiauenergy. I’m Jason Bordoff. Thanks for listening. We’ll see you next week.