Iraq has all the hallmarks of a country facing a climate calamity. Mesopotamia was once known for its lush palm groves and diverse ecosystems, but those have been decimated by decades of war and mismanagement. Climate change now comes with a more intensive impact: water scarcity, undeterred desertification, and frequent droughts that are adding to Iraq’s preexisting vulnerabilities.

Iraq is also experiencing rapid population growth and urbanization, which are accelerating socioeconomic development needs that the fragile oil-rentier model is unlikely to be able to sustain in the age of a global energy transition. These realities are becoming the ingredients of a “perfect storm,” according to the World Bank.

The Iraqi government, whose institutional capacity has been markedly inhibited by social and political discord, sees an opportunity in pursuing climate action. Baghdad’s 2021 updated nationally determined contribution submitted to the United Nations Framework Convention on Climate Change is dominated by energy sector targets. Iraq’s goal is to reduce greenhouse gas emissions by 15% by 2030 – equivalent to 90 million metric tons of carbon dioxide per year. The majority, or 13%, is conditional on Iraq receiving $100 billion in financing from investors and multilateral organizations.

Every summer, Iraqi cities top the list of the world’s hottest, with soaring temperatures often exceeding 122 degrees Fahrenheit. Yet despite an estimated $81 billion spent on the power sector since 2003, frequent blackouts occur because of Iraq’s inefficient power system. In the summer of 2023, the gap between peak electricity supply and demand is estimated to have widened to 13 gigawatts. Summer blackouts typically lead to protests and thus remain a source of social discontent.

On paper, Iraq’s nameplate, or installed, power capacity of around 39 GW should adequately cover demand, but as many of the current power plants consist of gas-fired turbines, Iraq has struggled to fully secure the requisite feedstock. Close to 50% of Iraq’s natural gas production, which comes associated with oil output at 3 billion cubic feet per day, is flared at the wellhead, leading to acute gas shortages and emitting some 36 million tons of carbon dioxide per year. As a result, Iraq has become reliant on expensive, and geopolitically problematic, gas imports from neighboring Iran.

Baghdad would like access to green finance to fund renewable energy projects and build needed gas capture and processing capacity to end routine gas flaring and eventually switch power generation from oil liquids to gas. However, without an integrated energy transition strategy that takes into account the urgent need to diversify the economy and political will to implement difficult reforms, Iraq’s ambitions are being handicapped by a track record of poor policy and decision making.

Solar Dominates Green Energy Focus

In early October, Iraqi Prime Minister Mohammed al-Sudani announced a goal of meeting one-third of Iraq’s electricity needs through renewable energy sources by 2030, which, based on recent demand trends, will require the development of around 18 GW of renewable energy capacity.

Iraq has an abundance of untapped solar resources that could theoretically turn such an ambitious capacity into reality. Irradiation levels are above 1,899 kilowatt-hours per square meter in some parts of the country. Additionally, the levelized cost, or cost over a project’s lifetime, of electricity produced by solar energy is attractive compared to oil and gas-fired generation.

Iraq’s solar plans announced in November 2021 call for the addition of 12 GW of solar capacity by 2030. Some 7.5 GW of the planned solar capacity is to come from utility-scale solar plants, and Iraq has reached agreements with developers – at varying stages – for projects that will add 4.5 GW of this. However, of the latter only 2.3 GW has been approved and is ready to move to the construction phase, with the rest falling behind.

The approved projects include: a 1 GW plant in Basra to be developed by TotalEnergies as part of a $27 billion megadeal; a two-stage 750-megawatt plant in Muthanna province to be delivered by Chinese state firm PowerChina; and two projects, at a combined 525-megawatts, to be developed through a consortium led by Iraq’s Al-Bilal Group.

To achieve the full target, Baghdad wants the rest of the 4.5 GW to come from “embedded and distributed” solar. This would require installing rooftop systems on government buildings and encouraging uptake by homeowners. The latter could replace, or at least reduce reliance on, expensive neighborhood generators, which cost Iraqi households more than $4 billion a year, contribute to noise and air pollution, and are a drag on government finances through gasoil provided with subsidized prices.

The World Bank highlighted that, while Iraq is not short on decarbonization solutions in its nationally determined contribution document, its targets however continue to be broad and lack “any analytical assessment of the investment costs and impacts.”

Prohibitive Market Conditions

Iraq held its debut solar bidding round in early 2021, and while it set a record 3.61 cents per kilowatt-hour tariff for the Karbala project, then led by Norwegian renewables firm Scatec, progress was delayed due to structural challenges, protracted negotiations, and a yearlong political vacuum following the October 2021 parliamentary elections. In April, Scatec exited its consortium with Al-Bilal – and Iraq altogether.

In 2018, Iraq, with the help of the United Nations Development Program, finalized the first iteration of a renewable energy law that would have regulated bidding, licensing, contracts, land allocation, investor incentives, stakeholder responsibilities, and other requirements to motivate investment in renewables. However, authorities dragged their feet, preferring to enter direct negotiations with developers, even at one stage refusing help from the International Finance Corporation to standardize Iraq’s bidding and contracts. The much-needed law has yet to be passed.

Iraq’s offered power purchase agreements did not immediately meet the nonrecourse syndicated finance requirements of multilateral lenders and banks. Iraq’s failure to pass a federal budget in 2022 meant that no sovereign payment guarantees could be issued to provide assurance of Baghdad’s ability to pay for produced power. These hurdles have partially been resolved, as guarantees for solar projects were embedded in Iraq’s 2023-25 federal budget law passed in June.

That said, the power purchase agreement model in Iraq currently caters to gas-fired independent power producers. The terms of such agreements, which were also given to solar producers, have faced increasing political scrutiny from parliamentarians who see them as a drain on the government’s coffers.

The “take or pay” clauses allow payment even when electricity is not produced. And when oil revenue declines, as it did in 2020, Baghdad tends to delay payments, incurring large arrears as a result. In 2022, when the government was paying independent power producers through “emergency financing,” then-Finance Minister Ali Allawi cautioned that as more independent power producer projects came online, Iraq would face “dangerous” long-term “financing problems.”

Iraqi contracting practices, which are inherently bureaucratic and facilitate corruption, are also outdated. In 2021, solar bidding round awardees wanted a “dynamic tariff” accounting for inflation over the 25 years of their projects, but existing regulations prevented such an arrangement. Instead, the National Investment Commission offered a flat but high rate of 4.07 cents per kWh to developers across the board. The decision-making uncertainty continued with Al-Bilal’s final approved rate being renegotiated again to 3.95 cents per kWh.

The ambiguity of legal and financing terms pushed Emirati renewables developer Masdar, which agreed to develop solar projects with a total of 1 GW of capacity at five sites in Iraq, to delay its entry, preferring to sign a “legal advisory agreement” as negotiations continue.

Other firms chose to de-risk their projects differently. In late 2021, TotalEnergies secured a tariff of 3.80 cents per kWh, and it intends for its share of crude oil produced in Iraq to finance the project. Having failed to obtain engineering, procurement, construction, and financing loans from Chinese banks due to Iraq being a high-risk country, the full $520 million cost of PowerChina’s project will be borne by Iraq’s federal budget.

Beyond utility-scale solar, the conditions to support decentralized solar and rooftop installations, which contribute a minute 0.5% of Iraq’s power mix, are still nascent. Iraq is largely a cash-based economy, access to finance remains limited, and bank loans to individuals often come at prohibitively high rates, making it challenging for Iraqis to pursue small-scale installations. A $685 million initiative by Iraq’s central bank to finance renewable energy projects by individuals and small businesses is an encouraging step, but it hasn’t shown tangible results since its launch in 2021.

Integrating renewables requires a large investment in grids, and Iraq’s transmission and distribution networks are already dilapidated, with electricity dues largely uncollected, giving rise to technical and commercial losses that exceed 50% of generated power. Adding intermittent solar generation will be a novel challenge.

Missing the Bigger Picture

These challenges are a clear result of Iraq’s failed electricity market design. The Ministry of Electricity remains the country’s main regulator and infrastructure operator, largest generator, and sole retailer. This bundled approach is costly and unsustainable given the ministry’s complete reliance on the government.

In 2022, Allawi estimated the electricity sector’s costs, including direct tariff subsidies and indirect fuel subsidies, would increase from between $15 billion and $21 billion annually to $30 billion annually by 2030. A financially unsound single off-taker renders investing in renewable energy risky, making the cost of finance prohibitive. Fitch has given Iraq a “B-” credit rating, identifying commodity dependence and poor governance as key weaknesses.

Integrating renewable energy is an opportunity for Iraq to liberalize the generation side of its electricity market by creating a competitive environment for both large and small generators and making efficiency gains from its existing fossil fuel-fired fleet through privatization and public offerings. Funds obtained from the latter could be diverted to improving Iraq’s neglected transmission and distribution networks.

Target-oriented policy instruments, incentives, and protection schemes up to 2030 should be designed with the aim of gradually reducing subsidies for lower income households while removing them completely for high-income ones, paving the way for a commercially and service-oriented retail sector. Naturally, such reforms will face political and social resistance, which is why multilateral support is crucial.

Baghdad should also formulate a holistic approach to the energy transition rather than merely seeing it as an opportunity to add megawatts. Iraq has never had a shortage of plans, but as the past shows, implementation, or perhaps a lack of capacity, remains the hurdle. Since 2012, Iraq had added one-in-every five barrels of global incremental oil supplies, but has failed to implement its own Integrated National Energy Strategy first by disintegrating gas and oil development and second by missing on gas-to-power synergies.

Iraq, where volatile and cyclical oil revenue made up 61% of real gross domestic product in 2022, must recognize that climate action also brings the opportunity to create a green economy, which is vital for a sustainably diversified economy. An economic transition focused on utilizing the oil and gas sector’s competitive edge through low-carbon solutions, such as hydrogen and carbon capture, must be prioritized to sustain revenue while reducing emissions.

It is never too late, Oman until recently was trailing behind regional energy-transition frontrunners the United Arab Emirates and Saudi Arabia. The sultanate is implementing concrete measures to become a hydrogen leader by 2030. As the second-largest producer of crude oil in OPEC, Iraq has relied too heavily on oil exports to sustain its economy. But the country also has an abundance of solar energy resources waiting to be tapped and significant natural gas reserves that are currently being wasted through environmentally damaging flaring. The Sudani government has finally woken up to the impact of climate change on Iraq’s fragile ecosystems, but it now must prepare the necessary investment framework and legislation to support a new, green economy.