February 25, 2006
Iraq's electricity challenges
Those who want to see Iraq's democracy fail have targeted electricity production as one of the key strategic objectives of the conflict. Those who want to see Iraq succeed would be wise to do likewise.
Despite hopes for progress in 2005, data reported in the Brookings Institution's Iraq Index suggest that electricity availability in Iraq averaged 13 hours per day in 2004, 11 hours per day in 2005, and a little over 10 hours per day in January 2006, compared with an estimated 16-24 hours per day prior to the war. The graph below indicates that electricity production was 6% lower in 2005 than in 2004.
In part these problems are the direct result of insurgent attacks on infrastructure and personnel, the latter in particular making it extremely costly to bring in outside technicians to train local operators of generating facilities in necessary maintenance and service procedures. Spectrum Magazine, the flagship publication of the Institute of Electrical and Electronics Engineers, recently featured an article by the magazine's executive editor, Glenn Zorpette, who had some very interesting insights into some of the other problems plaguing electricity generation in Iraq.
Zorpette described what he learned about the Qudas generating station located 25 kilometers north of Baghdad. Of its 8 combustion turbines, the four GE LM6000's, which cost a third of a billion dollars, remain idle due to a lack of fuel supply. These turbines could be run, Zorpette writes, using the natural gas that currently is simply being flared off from the East Baghdad oil field across the street. Natural gas currently burned as a waste product throughout Iraq's oil fields could generate 4000 megawatts of electricity, or double current production, Zorpette claims.
So why is energy being wasted while turbines sit idle for a lack of fuel? Zorpette writes that $300 million was budgeted in 2004 for the purpose of capturing wasted natural gas throughout Iraq for generating electricity, but was never spent. Zorpette writes that the money simply disappeared, with no one having a clue where it went.
Zorpette further claims that a more modest $33 million investment to make use of the currently wasted natural gas from the oil field that is immediately adjacent to the Qudas facility would pay for itself in 3 months from saving on the costs of the expensive diesel fuel being trucked in from Turkey for the four generators that currently are running. But the money doesn't get allocated.
And the costs certainly aren't going to be covered by the revenues currently being earned from selling electricity. Zorpette writes:
Those Iraqis who are being billed for their electricity are paying the equivalent of a dollar a month, on average. The rate is 1 dinar-- 0.07 U.S. cents-- per kilowatthour for usage up to 1500 kWh in one month (average residential use is 1374 kWh a month). For comparison, Iranians, Jordanians, and Syrians pay between 1.5 and 5 cents per kilowatthour.
Of the people who are being billed for electricity, roughly 65 percent are paying what they owe, the IEEE member in Iraq reports. But not nearly enough people are being billed. To begin with, 25 to 30 percent of Iraqis do not even have working meters, because the meters were damaged or vandalized before, during, or after the war. Second, some people have working meters that aren't being read because the neighborhoods are too dangerous. Still others have meters but are paying bribes to the meter readers to underreport their usage or let it go unrecorded altogether. Other users are simply stealing electricity with unauthorized connections.
From an economic perspective, the problem of finding a revenue source to make the necessary changes is inherently very solvable. Consumers who are currently forced to sit for hours in the dark as well as potential producers sitting with expensive idle generating equipment would both be better off if customers were given the opportunity to pay for natural-gas-generated electricity. The main thing that is needed is an institutional structure that guarantees that the two parties to the transaction in fact themselves receive the benefits of those potentially mutually advantageous trades. If they do receive that compensation, that by itself creates a powerful incentive to make sure that the necessary changes in fact get made.
Indeed, Zorpette notes that private electricity-generating enterprises are springing up on their own in Iraq:
With electricity off in Baghdad much of the time, hundreds of entrepreneurs have rushed to fill the electrical power vacuum. They've set up diesel generators, and they're providing electricity to neighborhoods during the periods when the ministry's feeders to those neighborhoods are off. The embassy source estimates that there are some 1000 MW of connected private generation in and around Baghdad alone.
As a highly skilled engineer, Zorpette holds these dangerous and sometimes crudely jury-rigged private efforts in disdain. But as an economist, I'm tempted to interpret them as proof that market incentives surely could work powerfully even in the extremely challenging environment that one presently finds in Iraq.
I would suggest that the current approach, in which all decisions need to be centralized and initiated by either the military or government, is in the present circumstances an open invitation for corruption and failure. The key requirement for progress is for someone to have clear ownership of the right to produce electricity from the facility and sell it for its fair market value to a customer who wants it.
In terms of the details, I would offer a suggestion similar to the idea I proposed for ownership of Iraq's oil fields. Specifically, one could create a number of separate corporations, each of whose assets consisted of a given set of electricity-generating facilities and distribution lines. Ownership of each corporation would be divided into shares, with 40% of these simply sold to the highest bidder, the cash proceeds of which would be used to fund the sorely needed investments. The remaining 60% could be allocated among some mix of national, regional, and local governments, with the mix of government and private owners sharing the profits earned. The price at which the company sold electricity would be determined by the company itself, with the government owners balancing their competing desires of keeping prices low for constituents while keeping profits high in order to fill the government coffers.
Is that too radical a suggestion? Then how about trying it out in one community first, and see whether after 12 months the rest of Iraq is clamoring for the same deal?
I grant that such a system invites inefficiencies from monopoly pricing and not taking full advantage of sharing energy surpluses and deficits across regions, matters that a stronger Iraq would want to revisit in the future. But at the moment, such inefficiencies seem to me to be utterly dwarfed by the gross failures of the present arrangement. The need for some workable plan to get Iraq moving forward is surely rather compelling.
Posted by James Hamilton at February 25, 2006 09:32 AMdigg this | reddit
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Tracked on February 26, 2006 04:06 PM
I read the entire article. There are a few statements that I disagree with, but it has been clear from the beginning of the U.S. occupation that restoring operations to the electric grid would be difficult.
I know a very senior DoD decisionmaker who allowed some of his key electrical and construction engineers to be reassigned to support the Iraqi reconstruction. Those individuals were to be assigned to Iraq. The lead engineer most knowledgeable about reestablishing the grid and getting some of the units back on line never served in Iraq as he was kept in Kuwait. A total waste of his extensive skills. He asked to go on to Iraq. No deal. "Too valuable".
In the article, Zorpette and Craig made statements that I challenge on the merits, but I'll save those comments for later. Similarly, there was a bit of arrogance and improper disclosure mixed in a few places. I would have never identified any of the substations by name and then shared what an operator at the facility had to say. It wouldn't take long to track down the party. Ignorance in journalism.
The concept of using turbine generators in the initial Iraq recovery effort to bring the grid back up was a sound approach. That the full support package including fuels wasn't established is unfortunate, but the concept was dead on. I have every confidence that one could position and bring one on line in less than 18 months, as stated in the article. That's rather absurd.
When I was a coop student during my university years (in addition to my academic scholarship, fortunately), I was a mechanical engineering student working at a dual power plant operation. Whenever any of the four main units tripped off, we used our new turbines for quick backup. Of course, as I recall, we were using JP4 or kerosene until the units were switched over to natural gas later on. But the use of the turbines saved us many times. There is nothing quite like the experience of being called at 2 AM and told that the diodes needed to be replaced on one of the turbines. Of course, that was explained in dollar terms during the conversation, and the plant engineer was running a stopwatch until we brought the unit back on. The drive to the plant was Mach II hair on fire. Anyway, a great learning experience.
Yes, there are many problems in Iraq regarding the electrical grid. But the use of diesel generators can be done safety and effectively if one knows how to build the local small grid a generator can support and can keep the unit in phase. Similarly, the gas turbines should be in use. There's just no excuse for not resolving those problems as a first order of business.
Appreciate the article.
Posted by: Movie Guy at February 25, 2006 06:10 PM
Yes, if honest competitive companies, assured of protection by rule of law ran the energy businesses with the common long term good as the objective, this idea would be utopia.
However,even in America, Enron economics triumphs. Merge, rearrange the bookkeeping, gut the conglomerate, and retire with wealth beyond the dreams of 50 year drudges in a few years.
In Iraq, who knows who will rule in the next six months, let alone the next century? Grab and run before another predator hits.
A fast nickle is better than a slow dime.
And money is not created by supplying value, it is transferred from "The Coalition" to favorites...a recipe for looting.
Posted by: outsider at February 25, 2006 08:26 PM
Because of widespread corruption and sabotage by the insurgency, it seems that these small corporations could only function in areas like Sadr City that are secured by local sectarian militias. This doesn't do much for building a secure nation.
In the news today the Pentagon announced that the number of Iraqi battalions capable of operating on their own without American troop support has decreased from one to zero. This together with the recent moves toward civil war present depressing evidence of backwards progress.
The most shocking part of Zorpette's article is that $60 billion is being spent on recontruction in Iraq -- and we have almost nothing to show for it. This compares to $90 billion spent on the Marshall Plan for all of Europe. Colin Powell's Pottery Barn rule is turning out to be very expensive indeed.
Posted by: Joseph at February 25, 2006 11:25 PM
I was watching CSPAN yesterday, and it seems that this electrical power suggestion falls in line with a swing in thinking toward a "controlled breakup" of the central government. I mean, if decentralizing electrical power generation allows you to build "ownership" which prevents sabotage ... why not decentralize more instituions?
I really have no idea which plan is best, but it is interesting to note that this is what we are thinking in February 2006.
Posted by: odograph at February 26, 2006 07:27 AM
Hmm, private enterprise and individual economic iniative were one of the buzzwords of the young inexperienced rightwingers we let run the occupation for a year.
Turned out to be nothing but flat taxes in a country without taxes and other abstractions. It's a bit late.
But domestically we should know that to Republicans "private enterprise" does not mean free enterprise or markets. All kinds of people were yelling to let Iraqis in on the (usually Iraqi) money we gave to the cronies.
Same thing in Katrina, we see it in the Medicare drug bill. Feudalism is called capitalism, protected niches are called free.
Posted by: angela at February 26, 2006 02:17 PM
Let's hand out solar panels.
Posted by: Alex at February 27, 2006 02:28 AM
We are talking decentralisation because we have given up home of ever being able to stabilise this place.
What we are shaping up for is for the Shia and Kurdish militias to suppress the Sunni rebellion for us. Whilst we bug out.
It's a matter of 'when' not 'if' now. And you can bet it will be described by Blair and Bush as 'exit with honour'.
See Lawrence of Arabia (the Director's Cut) for a very good moment-- when the tribesmen seize Damascus and start arguing about why the power has been cut.
Posted by: John at March 1, 2006 09:26 AM