5 September 2016


Weighing up the bankability of Iran’s renewable energy PPA

Author: Heba Hashem, Solarplaza

Despite the recent decrease in Iran’s Feed-in Tariffs (FiT) for renewable energy, the new payments, announced in May 2016, are still considered to be attractive. Solar power plants with a capacity between 10 MW and 30 MW, and wind farms below 50 MW will now receive EUR 0.12 per kWh.

“Iran could be one of the largest markets for renewables in the next 5 years,” says Rik Teeuwen, project manager at Solarplaza. “the government targets 5 GW of RE capacity to be added; the question is not when, but by whom.”  


The level of FiT is determined by the Ministry of Energy (MOE) depending on the current oil price, environmental cost, and conversion of oil to electricity. While the ministry’s intention is to set a fixed FiT once a year, if there are substantial changes to any of these three elements, it reserves the right to modify the FiT. Last year for instance, there was a substantial change to the FiT due to the dramatic shift in oil prices.

“Changing the tariffs by 18-43% from the initial rates, which were introduced in 2015 for the first time, signalled an institutional issue and a lack of stability in policies”, says Hedieh Kianyfard, senior financial analyst with Themis Energy, an Abraaj Group company that develops energy projects in growth markets through early-stage capital investment.


The new tariffs will not affect the already-signed PPAs, but since there are no penalties or regulations in case of law violation by government agencies, the effectiveness of the current tariff throughout the duration of the PPA is uncertain and at risk, says Kianyfard.

According to Clint Dempsey, principal associate at global law firm Eversheds and head of the UAE’s banking and finance team, Iran’s PPA is not bankable in its current form.

“On the whole, there remains a reluctance for international lenders to enter the Iranian market. In relation to the PPA for renewable projects, in its present form it is not bankable by international standards,” says Dempsey. “Part of the final FiT to be paid is determined by the oil price on the day you sign the PPA, so you have no certainty on what you’re going to get.”

For the time being, the Renewable Energy Organization of Iran (SUNA) – an affiliate of the MOE – is the counterparty under the PPA, which is guaranteed by a six-month revolving letter issued by an Iranian bank.

While the first six months are at the cost of SUNA, any extension thereafter for the term of the PPA is at the cost of developer. “That’s quite an unusual provision,” notes Jean-Pascal Boutin, partner at Eversheds and head of the energy regulatory team.

“Not only is the cost of that letter an issue, but also the fact that if the letter of credit is not renewed, then the developer is completely exposed because all it can do is bring a claim under the PPA. But there’s nothing backing up that claim in terms of security at this point of time,”

This was one of the issues raised by Eversheds during a recent conference in Tehran, and the country’s deputy minister of finance had suggested that a government guarantee or a guarantee from the Central Bank of Iran might be available.

“International banks funding renewable energy projects in Iran will be expecting a guarantee from the MOE, as we have seen in other emerging markets around the globe,” highlights Dempsey. “But in Iran, you’ve got a six-month letter of credit issued by an Iranian bank which, at present, does not have a credit rating from international rating agencies,” he says.

Doing business in Iran

To secure a renewable energy PPA in Iran today, developers need to apply for a construction license from SUNA, after which they would need to obtain permits from various entities. These include the land acquisition or lease contract, environmental permit and grid connection permit. Once these are obtained, the PPA should be ready for signing with SUNA.


The PPA typically grants six months for the development of the project – extendable by up to three months. This is followed by 12 months for construction, again extendable by up to six months. Commercial operation covers 20 years including the construction period.

“Due to the number of projects that have already been issued with a license and the lack of progress to date, SUNA informed us that moving forward, construction permits will be limited to one developer and to smaller projects of 20 MW,” highlights Boutin. Once developers start proving themselves, SUNA would be able to issue multiple licenses and permits for larger projects, he says.

While the UN and EU sanctions on Iran have been effectively lifted, US sanctions remain in place. This means US companies cannot clear payments out of Iran and cannot enter the market or do business there because they’ll be breaching their sanctions.

“There are also risks associated with the secondary sanctions that the US has in place, which affect companies with US shareholders,” says Dempsey. Additionally, foreign investors looking at the Iranian market have questioned the transferability of funds out of Iran. According to Kianyfard, guarantors cannot include in their Political Risk Insurance the free transferability of funds.

“This may pose an issue not only to investors but to our potential lenders in hard currency, which may be needed for large power projects,” she says. “The main issue in the current PPA is not the bankability and rates, but the regulatory environment and law enforcement, and a reliable source for securing the payment of renewable projects for the coming 20 years.”

When it comes to structuring a special purpose vehicle, Boutin recommends that companies look closely at the available bilateral investment treaty, which will be linked to the where the shareholders are based. Such a treaty would offer protection in terms of expropriation of assets or non-payment by SUNA or the Iranian government.

Partnering with local developers

Altogether, it should take about one month to prepare all documents required for registering a local company, and from the time of submitting the paperwork, it should take 3-4 weeks to finalize registration, according to Iranian law firm Atieh Associates.

Kianyfard highlights that about a year ago, several renewable energy developers in Iran secured licenses along with some of the best lands, but their main issue was financing. This was the result of a streamlined licensing process implemented by SUNA.

“What came out of this policy was awarding licenses to unknown developers to the extent that today, it is not known how many licenses have been awarded,” she says. As these licenses are not transferable, Kianyfard recommends that foreign investors partner with experienced local developers who have purchased licenses.

“Many developers are looking how to secure projects in anticipation of the funding market opening up,” confirms Teeuwen of Solarplaza, “This is probably the last opportunity to connect with all the key stakeholders, including SUNA and local developers, before the market under the current FIT scheme is saturated.”

“That is why attending an event like the upcoming Renewable Energy Trade Mission Iran organized by Solarplaza is a great opportunity for foreign investors to get to know the main players in the Iranian renewable market,” confirms Kianyfard.

Meet with the most relevant players and experts in our upcoming RE trade mission to Iran, with speakers confirmed from Central Bank of Iran, SUNA and OIETAI, the PPA its bankability and RE investments can be discussed in-depth with the decision makers on Iranian side.

Stay on top of the global solar market by joining one of our upcoming events.