Investigating the Harmful effects of Fossil Fuel Consumption Subsides on Power Generation Costs in Iran

Document Type : Research Article


1 Faculty of Natural Resources and Environment, Science and Research Branch, Islamic Azad University, Tehran, Iran

2 Faculty of Economics, Imam Sadiq University, Tehran, Iran

3 School of Environment, College of Engineering, University of Tehran, Tehran, Iran


The current system of fuel consumption subsides payments of fossil power plants in Iran has initiated substantial challenges such as controversies on real price and total costs of the electricity in Iran. The main objective of this study is the calculation and assessment of the total costs of electricity generation in different existing power plants in Iran including thermal and renewable power plants on the basis of figures of real and Subsidy fuel costs using a variety of discount rate. For this purpose, the technique of electricity Levelized costs has been used. The obtained results of this study indicate when the LCOE is calculated with the Subsidy cost of fuel, the least amount of electricity generation costs applies to fossil power plants. Meanwhile, this can be considered true if the real fuel value is taken into account in Iran, the least amount of power generation cost will be imposed on the renewable power plants. We also showed how the investment risk in this sector will change by changing the discount rate in the calculation method. Results showed that the energy system is strongly affected by changes in discount rates. The lower discount rate is the higher the renewable contribution. Obviously, if the policy of subside payment to the state energy sector continues, the total costs of electricity generation in Iran will still be unrealistic due to unreal costs of delivery fuel to the power plants and the employment of renewable energies will not be capable of competing with fossil fuels.


Ardestani, M., Shafieiepour, M., and Tavakoli, A. (2017). Integration of Green Economy Concept into Fossil Fuels (Production and Consumption: Iran). Environmental Energy and Economic Research, 1 (1), 1-14.
Asadi, F., Karim, M. h.., and Feshari, M. (2017). Competitiveness of geothermal electricity with conventional methods of electricity generation in Iran. Iranian Energy Economics, 5 (18), 18-27. 
Bahonar, B. (2017). How to calculate feed rate of gas petrochemical units?  Central bank of Islamic Republic of Iran. 2018. Weighted Senate average.
Bailey, J. (2012). Inter-fuel competition in electricity generation, A Latin American & Caribbean Experience. Inter-American Development Bank. IDB Technical Note; 504. 
Central bank of Islamic Republic of Iran. Statistics and data. Inflation and Consumer Price Index.
Carolina, H., and Carolina, M. (2015). Fossil fuel subsidies in Latin America: The challenge of perverse incentives structure. http://www.
CFI (2021). Levelised cost of Electricity, the average total cost of a project per unit of total electricity generated.
Chunekar, A., and Singh Rathi, S. (2012). Discount rate and energy efficiency. Discussion paper. 
Country risk classification of the participants to the arrangement on officially supported export credits. (2018).
Danish Energy Agency. (2019). Finding your cheapest way to allow carbon future-The Danish levelised cost of energy calculator.
EIA, Energy International Agency (2021). Levelized Costs of New Generation Resources in the Annual Energy Outlook 2021.
ESMAP. (2017). Energy subsidy reform, Challenges.
European Environment Agency. (2004). Energy subsidies in the European Union., A brief review.
Fernando, J. (2021). Present value. Corporate finance and accounting.
Henrickes, M. (2021). What Is the Discount Rate and Why Does It Matter? 
Garcia Gusano, D., Espegren, K., Lind, A., and Kirkengen, M. (2016). The role of the discount rates in energy systems optimisation models. Renewable and Sustainable Energy Reviews, 59, 56-72. 
IEA, International energy data and analysis of Iran. (2015). U.S. Energy Information Administration. Jun 19. 2015.
IEA, World energy outlook. (2019). Fossil fuel subsidies database
Larsson, S., Fantazzini, D., Davidsson, S., Kullander, S., and Hook, M. (2014). Reviewing electricity production cost assessments. Renewable & Sustainable Energy Reviews, 30, 170-183. 
Melina, A., Kourantidous, S., Athanasios, S., and Christodoulou, A. (2012). The discount rate in terms of evaluating investments in rangelands: the case study of Greece. Journal of environmental science and engineering, 1 (3), 344-349.
Ministry of Economic Affairs and Finance. (2016). Deputy of economic affairs. Set of laws and regulations on removing competitive production barriers and promoting the financial system of the country - approved 21/10/2015. 1th Edition.
Ministry of Energy of Iran. Tavanir Company (2017). Detailed statistics of the Iranian electricity industry, especially strategic management. 
Ministry of Energy of Iran. (2018). Statistics Network. Water and electricity statistical reports. 
Ministry of Energy of Iran. Tavanir Company (2018). Detailed statistics of the Iranian electricity industry, especially strategic management.
Norman, M. Perverse Subsidies.
Ouyang, Z., and Lin, B. (2014). Levelized cost of electricity (LCOE) of renewable energies and required subsidies in China. Energy Policy, 70, 64-73.
Pawel, I. (2014). The cost of storage how to calculate the levelised cost of stored energy (LCOE) and applications to renewable energy generation. Energy Procedia, 46, 68-77.
Renewable energy Organization of Iran. (2018). Potential Renewable Energy Resources in Iran.
Sadeghi, S., and Vahidi, H. (2020). Using Floating Photovoltaics, Electrolyser and Fuel Cell to Decrease the Peak Load and Reduce Water Surface Evaporation. Environmental Energy and Economic Research. 4 (2), 83-96.
Sergei, M. (2013). On the Choice of the Discount Rate and the Role of Financial Variables and Physical Parameters in Estimating the Levelized Cost of Energy. International Journal of Financial Studies, 1, 54-61. 
Shafiei Nickabadi, M., Ghafari Osmavandi, E., Dastjani Farahani, K., and Hatami, A. (2021). Future Analysis to Define Guidelines for Wind Energy Production in Iran using Scenario Planning. Environmental Energy and Economic Research. 5 (1), S03, 1-12. 
Sieglinde, F. (2016). Life cycle cost analysis.
Supreme Audit Court. (2017). Price of gas exported to neighbouring countries.
Taylor, M. (2020). Energy subsidies: Evolution in the global energy transformation to 2050, International Renewable Energy Agency, Abu Dhabi.
Tagliapietra, S. (2016). Regulation and investment in energy market, Solutions for the Mediterranean. 
Tashkini, A., Oriani, B., ad Deilami, M. (2009). The energy carrier subsidy payment system: problems and the need to review it. Economic Journal of Economic Issues and Policies, 101, 141-160. 
Train, K. (1985). Discount Rates in Consumers’ Energy Related Decisions: A Reivew of Literature. Energy, 12, 1243–1253.
U.S. Energy Information Administration (2015). Levelised Cost and Levelised Avoided Cost of New Generation Resources in the Annual Energy Outlook.
Zandi, M., Bigdeli, S. M. M., and Sohrabi Pirkoohi, S. (2017). Determining the annual electricity production price of Iran and comparing it with electricity production with free fuel prices in all gas-fired thermal power plants. Second of international conference on research in science and technology. Istanbul, Turkey.