Baku Summer Energy School - 21st July 2016

Iran - Towards a Resilience Economy

Caspian Energy Grid - CEG

By : Mahmood Khaghani in association with Chris Cook& Mehdi Moslehi

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 Resilience: Beyond the Resistance Economy
"It is not the strongest of the species that survives, nor the most intelligent.
It is the one that's most adaptable to change.” Charles Darwin
Resilience is the ability to adapt to change.
 Resistance Economy protects Iran from dollar system crisis as in 2008.
 Lack of dollar access prevents Iran from financing and funding new energy
infrastructure.
 Alternative pathways are the Euro to the West & the Silk Road to the East
- Euro & China debt-based systems are supported by Iran's oil
- Iran's use of EU and China technology & services reduces resilience
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 Resilience: Beyond the Resistance Economy
Petro Scotland proposes a new strategic organising principle for Iran's energy policy-

Least Carbon Fuel Cost

This is the principle that Iran should minimise the use of carbon fuel for any given
output of electricity, heat/cooling & power.
 Application of this principle extends Resistance Economy to Resilience Economy
and from Dollar Economy to Energy Economy.
 The Least Carbon Fuel Cost principle has been successfully demonstrated in
action by Denmark for 40 years.
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 Oil Market Outlook

 In Tehran in 2012 – when the oil price was over $110/barrel - our prediction
based on our market analysis was that the oil price would fall to $45 to $50/bbl
Our prediction today based on the same analysis:
 Short Term – market is over supplied and in the
absence of coordinated production cuts the oil
market price will fall and test new lows during
the second half of 2016
 Medium Term - Producers will cut production as
in 2008 & the oil price will clear & rebound.
 Long Term – Oil Price not exceed $50/barrel
again for more than a short time.
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 Oil Market Outlook

Why? Because above $50/barrel :

 High cost production enters the market e.g. US shale oil.

 Renewable energy substitutes for oil products (Dubai solar energy is now
< $23/bbl equivalent).

 Investment in energy efficiency (Nega Barrels) becomes extremely

profitable

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 Oil Producers – the Squeeze

Oil Producers are squeezed between :

 Immovable Object – Oil Price Cap.
 Irresistible Force – rising Exploration & Production (E&P) costs.
IOC Options:
 Consolidate (does not solve the problem).
 Switch to Gas (e.g. Shell).
 Vertical Integration (e.g. BP & also major traders).
NOC Vertical Integration :
(e.g. Saudi Motiva refinery) carries
 political (e.g. nationalisation), environmental,
industrial relations risks.
 CEG Energy Swap (Oil for Products) solution ;
 Enables Iran to secure oil demand & product supply;
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 While Refiners secures oil supply .
 Transition through Gas

Natural Gas is the bridging fuel to a Low Carbon Economy.

 Iran has the greatest global natural gas reserves.

Shipping natural gas internationally whether via pipeline or LNG is extremely
inefficient, costly and potentially risky .
Electricity is at the end of the Energy Value Chain “From Well to Wall.”
While the oil price fell 74% per annum, and the gas price fell by 42% per annum;
The wholesale electricity price fell by only 2 to 3% pa and the retail price fell by
even less.
Cheapest energy of all is energy saved – “Nega Watts” - every Kilo Watt Hour of
domestic electricity saves 5 to 10 times as much energy in production, generation
& distribution.
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 Power Generation Technology

Power Generation & Electricity Transmission efficiency has improved dramatically

in the last two years.

Combined Cycle Gas Turbines (CCGT) generation is now 60% efficient .

High Voltage Direct Current (HVDC) links are much more efficient .
than Alternating Current (AC) links over long distances.

HVDC is particularly suited to marine links e.g. Caspian Sea , UK

North Sea BritNed, NorNed links; numerous China links.

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Power Generation Technology

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 Caspian Energy Grid (CEG) –
a Natural Grid

Iran’s Grid – current domestic supply remains mainly carbon fuelled.

Iran has considerable scope to increase the efficiency of natural gas use and to
take advantage of Iranian solar and wind resources .

In this way, Iran may transform from a centralised National Grid to a distributed
and resilient Natural Grid.

Caspian Energy Grid will also address the crucial environmental combination of
Iran's Water & Electricity.

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 Energy Swaps
Energy Swap :
 An Energy Swap is an exchange of an energy flow for another flow.

Location Swap:

 A flow of energy into one location is exchanged for a flow of energy out of
another, e.g. the Caspian Oil Swap.

Category Swap:

 A flow of energy of one type is exchanged for a flow of energy or value of

another type, e.g. gas for power, gas for gas, oil for products etc.

Hybrid Swap:

 A combination of Location & Category Swap e.g. international Oil for Product
Swap, Iranian oil exchanged for Scottish oil products. 11
Newcomen Atmospheric Engine James Watt Steam Engine

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 Technology Swaps –
Energy as a Service

Pumping-as-a-Service :

 From 1778 the great Scottish engineer & inventor James Watt supplied new &
efficient steam powered water pumps to Tin mines in exchange for 33% of their
coal savings.

Turbines-as-a-Service:

 Mitsubishi/Siemens/GE provide 60% efficient CCGT generators to replace 35%

efficient generators and receive an agreed %age of gas savings.

Solar-as-a-Service:

 A person with no capital who for example may have an unproductive land
where he or she may be in his or her country rural area may share the
electricity production by solar PV installed on his/her land by a solar energy
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service provider.
 Energy Credits

An Energy Credit is a Promise issued by an energy producer in exchange for value
received and which he will accept in payment for energy production.

An Energy Credit is not :

 Debt Contract - the holder may not demand money.

 Forward (Derivative) Contract– the holder may not demand delivery.
 Equity Share – the holder has no asset ownership or dividend.

An Energy Credit holder may simply use the credit to pay for energy supplied by
the Promissory or by another energy producer who will accept it.

 Investors & Consumers trust producers to supply energy for which they may pay
using Energy Credits – this requires a “Trust Framework”.

Petro Scotland has developed an “Energy Clearing Union” Trust Framework. 14

 Energy Financing and Funding

Financing :

 Short term medium risk development investment,

 Energy Loans - energy credits sold at a discount reflecting

development risk.

Funding:

 Long term low risk investment in completed project,

 Energy Loans – low risk investment in existing energy flow,

 Technology/Energy Swap – technology supplier receives an

agreed proportion of energy credits.
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 Funding the Grid

Cost Sharing - Capital Partnership

 Producers & Consumers allocate an agreed % age of Grid energy flow to:
 Technology (e.g. HVDC ) Costs - Technology/Energy Swap
 Operating (People) Costs

Risk Sharing - Clearing Union

 Grid Investment through Prepay Energy Credits - “Energy Loans”

 Energy Credits issued by one producer are accepted in payment by another

 Producers, Consumers, Investors share risk by mutual guarantee (P & I Club)

 Administration, Accounting & Risk Management by Service Provider/Grid

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 Outcome - Smart Market

Caspian Energy Grid (CEG) – Physical Network:

 'Smart' Grid optimising energy production and use.

Clearing Union (CU) – Financial Network:

 Caspian Energy Clearing Union (CECU) connects producers directly to

consumers through Energy Swaps and Energy Credits.

Smart Market:

 Most efficiently produced power is always despatched first – Smart Market

Example : Rural, in any Caspian producer of solar electricity exchanges energy

credits for Danish goods & services directly from Danish energy
consumers .
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 Energy Credits - Examples

Renewable Energy:

 Wind Turbine owner sells 100,000 electricity credits each returnable in payment
for 10 kWh of production;
 Credits are returned in payment for electricity supply when the wind blows.

Gas/Power:

 Gas fuelled generator sells 100,000 electricity credits each returnable in

payment for 10 kWh of production;

Problem: If the generator's gas purchase price rises he may make a loss .

Solution: Generator agrees a Gas/Power Swap and the gas supplier receives an
entitlement to electricity credits.
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 Marketing the Grid - Producers

Education Programme:

 Wherever the sun shines and the wind blows in Iran & in the Caspian Energy Grid
(CEG) region will enable Iranians & CEG countries to access this renewable
energy.

 The value of local renewable electricity production will drive sustainable local
economic development throughout Iran & CEG region.

 This education programme will demonstrate how Iranians & CEG region may
become “Energy Producers” with no capital requirement.

 The benefits to local and rural economies in the CEG region will qualify the
programme for development funding from institutions such as the World Bank.
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 Strategy – Organic International Expansion

 Caspian Energy Grid (CEG) integrates physical and financial energy networks.

 Caspian Energy Grid avoids single points of failure and through flexible power
routing increases system Resilience.

 Iran currently exports/imports physical electricity to seven nations & energy

swaps enable electricity to be supplied beyond these neighbours in all
directions.

 Marine links via the Black Sea connect Caspian Grid to European Grid and
Persian Gulf links access to Persian Gulf nations i.e. Caspian Sea – Persian Gulf
Energy Accord.

 Outcome :
Eurasian Energy Grid and Eurasian Clearing Union (Network of Networks) will
extend North to Russia, West to Europe & East to China . 20
 Caspian Energy Grid - Initial Development
 A year after the success of Join Comprehensive Plan of Action agreement.

 On a mission of depoliticising energy industry by promoting electricity water & environment

industry cooperation, Iran’s Ministry of Energy Delegation Headed by Minister Hamid Chitchian,
hosted by outgoing Prime Minister Cameron Government.

 On 14th July 2016, the day that Theresa May became new UK Prime Minister, Iran’s Energy Minister
and his delegation were hosted by Petro Scotland, in London on behalf of CEG .

 On 20th June 2016 in cooperation with Iran Chamber of Commerce, Industries, Mines & Agriculture
(ICCIMA- private sector) Education & Research Institute , Petro Scotland (international entity) and
the Research Institute for Energy Management and Planning (RIEMP- public & academic sector)
launched the Caspian Energy Grid (CEG) concept for study and implementation.
 CEG is a platform for G2B, B2G & B2B dialogue, partnership etc. for production sharing in
down stream of the energy industry.
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Caspian Energy Grid- CEG – Innovation

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 Caspian Energy Grid- CEG –
Petro Scotland – Innovation

 CEG has worked with research teams in two different Scottish Universities
and the pre-eminent London University.

 CEG's unique innovation is not the physical Caspian Energy Grid but is the
legal framework, financial instruments & algorithms which fund it.

 CEG proposes an Energy Clearing Union agreement within which energy

swaps take place & energy credits are issued, exchanged & returned.

 CEG's energy market solution resolves the most crucial question faced today
by Iran ( CEG region) and international partners.

How the Republic of Azerbaijan may benefit by joining CEG ?

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Next Steps – Starting Now

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 Next Steps – Starting Now

Step 1/ Foundation:

 CEG platform has now been established, the concerned public and private
entities may now join this platform by Signing Interim Agreement to
promote the Caspian Energy Grid initiative as a project.

 Step 2/ Concept Research & Development : To actively participate in Creating

Outline Caspian Energy Grid Proposal.

 Milestone: Report to feed into World Energy Council meeting in Istanbul,

October 2016.

 Step 3/ Pre-Planning : Creating a programme of pilot projects across

themes, with diverse Public/Private participation.

 Milestone: To actively been involved for formal launch of Caspian Energy

Grid at major regional events. 25
Thank you

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Mahmood Khaghani, now retired, had more than 33 years of service in senior
international positions in Iran's petroleum industry. He held the position of the
Director for Energy, Minerals and Environment at the Secretariat of the
Economic Cooperation Organization (ECO) during 1996-2000. He is a graduate
in energy engineering at Britain's Surrey University and is a Petroleum-
development Strategy advisor (International). Mr Khaghani has participated
and presented papers in many international conferences and seminars. He is
Advisor to the ICCIMA Education & Research Institute and RIEMP .
Mr. Khaghani is Initial Member of IRAEE , http://www.iraee.org/eng/
Contact address:
UK - Chris Cook (+44) 1506 844 824 & (+44) 7770 843 087 - www.petroscotland.com
Iran: ICCIMA Education & Research Institute: www.iccim-ins.ir
Iran: Research Institute for Energy Management and Planning (RIEMP): http://tallan.ir/
E-mail: mkh50mkh@yahoo.com & mahmood_khaghani@hotmail.com
Mobile: +98(0)912-1153991 27