By Arya Kia
Iran’s electricity shortage is often presented as a problem of insufficient generation: demand rises faster than the amount of electricity the system can reliably supply, so the apparent solution is to build more power plants. However, as explained in the first article of this series, Iran’s frequent blackouts are owed to a paradox, whereby the theoretical energy generation capacity is constrained in practice by fuel and water shortages, aging equipment, transmission bottlenecks, and extreme temperatures. Add to that a pricing system that encourages consumption without facilitating investment in maintenance, grid modernization, and new capacity.
While cheap electricity helps protect household purchasing power and lowers production costs in the short term, long-term underpricing has contributed to deteriorating reliability and a widening gap between peak demand and available supply. The costs ultimately fall on households through recurring blackouts and on firms through mandatory curtailment and lost production. These obvious negative externalities raise a broader distributional question: who benefits from cheap electricity, and who bears the cost when the system cannot reliably serve everyone?
Cheap Power
For decades, Iran has kept electricity and other forms of energy inexpensive through extensive subsidies. The policy has important social objectives. Cheap electricity protects household purchasing power and lowers industrial production costs, particularly during periods of high inflation and economic pressure.
But prolonged underpricing changes the behavior of the entire electricity system. With inexpensive electricity, consumers are less incentivized to purchase efficient appliances, improve building insulation, replace inefficient cooling systems or alter the timing of consumption. Energy-intensive economic activity also becomes comparatively attractive, resulting in accelerating demand growth.
Research on Iran’s electricity sector has repeatedly identified this mechanism. A 2021 Utilities Policy study found that continuation of prevailing pricing policies eventually causes electricity demand to exceed supply. The study links low prices to excessive demand, insufficient resources for expanding generation and weakening system reliability.
The problem also extends to the supply side, with below-cost electricity weakening the financial position of the sector supplying it. Revenues available for maintenance, modernization and capacity expansion are constrained; private investment becomes more difficult to attract when the ability to recover costs is uncertain.
The scale of this distortion is visible in historical subsidy estimates. The 2018 subsidy assessment of the International Energy Agency identified Iran as one of the countries experiencing the largest increases in subsidies for oil products and natural gas, alongside a significant increase in subsidies to fossil-fuel-based electricity. Total electricity subsidies have hovered around $10-15 billion per year over the last two decades.
Iran being an energy-producing country, subsidies would be more aptly described as payments “foregone” rather than “paid.” Nonetheless, they still represent an implicit transfer of resources that could otherwise support investment, public expenditure or more targeted social protection.
But making electricity affordable by keeping it cheap has, over time, continued to make reliable electricity expensive to provide. A 2022 Energy Policy study of electricity subsidy reform in Iran found that reform could substantially lower future electricity demand, concluding that earlier, gradual adjustment performs better than postponing reform and attempting a more abrupt transition later. A 2025 retrospective study covering Iranian data from 1985 to 2023 found that prolonged subsidies had helped entrench electricity consumption patterns and reduced the effectiveness of later price adjustments. The authors advocate phased reform accompanied by targeted protection for vulnerable consumers.
The scale of Iran’s energy consumption becomes even more striking when placed in a global context. According data compiled in the Statistical Review of World Energy, Iran accounted for approximately 2.1% of global primary energy consumption in 2023, while representing only around 1.1% of the world’s population, and less than 0.5% of global nominal GDP.
This juxtaposition does not, by itself, reveal waste. Iran has a large energy-intensive industrial base, substantial oil and gas production, significant heating and cooling requirements, and an economic structure different from that of many service-oriented economies. The broader efficiency problem is also visible in Iran’s historical energy intensity, with data showing that Iran remains a highly energy-intensive economy.
The policy problem is therefore not simply that Iran consumes “too much” energy, but whether it can generate greater economic and social value from each unit of electricity and fuel. More efficient energy use delivers the same services with less input, reducing the need for additional generation, fuel supply and network infrastructure.
As reliability deteriorates, reform can become even harder. Consumers who already experience blackouts are understandably reluctant to pay more for electricity that has become less reliable. The resulting political pressure encourages temporary responses—rationing, emergency investment and conservation campaigns—rather than structural adjustment. Iran therefore cannot resolve the electricity crisis through generation expansion alone while leaving the financial and demand sides of the system unchanged.
Hits to Industry
Iran has frequently protected residential electricity supply by shifting a disproportionate share of shortages onto industry. From an operational and political perspective, curtailing a relatively small number of large industrial consumers can remove substantial amounts of load from the system while limiting the need for widespread interruptions to residential customers.
But the electricity shortage does not disappear. Electricity denied to an industrial facility translates into lost production. Repeated interruptions can lower capacity utilisation, disrupt supply chains, damage equipment, delay orders and weaken incentives for future investment. A peer-reviewed study published in Applied Energy, examining Iran’s steel, cement, and paper industries, identifies electricity shortages as an important constraint on industrial productivity and production chains.
Reducing avoidable household consumption, improving air-conditioning efficiency or shifting discretionary demand away from peak hours can relieve pressure on the grid while maintaining, or even improving, household welfare. Halting an industrial facility also reduces measured electricity demand, but does so by reducing economic output. The two forms of demand reduction should therefore not be treated as equivalent.
The consequences of industrial curtailment can also extend beyond the immediate production loss; those restrictions may weaken industrial output, profitability and broader economic activity, reducing resources available for future investment in electricity infrastructure. Lower investment, in turn, makes future shortages more difficult to resolve.
Costly Shortages
Although artificially cheap electricity seems attractive at first, someone still covers the true costs—although through different mechanisms. Industries may pay through lost production, while households may pay through outages, inconvenience, and damaged appliances. Businesses may face the cost of backup generation, disrupted operations or lost sales. The government also carries part of the burden through subsidies, emergency spending, and the broader economic effects of unreliable electricity supply.
These costs are not distributed evenly. Wealthier households and larger businesses can reduce their exposure to an unreliable grid by purchasing generators, batteries, rooftop solar or other backup systems. Lower-income households have far fewer options. A blackout may therefore be nominally universal, but its consequences are not. The same is true geographically. Regions with stronger networks, more local generation or greater economic importance may experience electricity scarcity differently from areas where infrastructure is weaker.
These divergences raise an important energy-justice question: even if all consumers receive subsidized electricity prices, do they experience the benefits and costs of the electricity system equally? Maintaining electricity extremely cheap may appear equitable while still contributing to an inequitable outcome. If persistent underpricing encourages excessive consumption, weakens investment and contributes to deteriorating reliability, the resulting shortages can impose disproportionate costs on those least able to protect themselves.
The policy distinction should therefore be between cheap electricity and affordable electricity. They are not necessarily the same. A tariff can remain low while the quality and reliability of service deteriorate. Conversely, electricity prices can gradually move toward more economically sustainable levels while essential consumption is protected for lower-income households through targeted transfers, lifeline tariffs, or other forms of support.
Pricing reform without adequate social protection would impose substantial burdens on vulnerable households. But maintaining universal underpricing indefinitely can also distribute benefits poorly, because high-consumption households receive larger absolute subsidies than households that consume less while the financial consequences of underpricing affect the entire electricity system.
The challenge is therefore not simply whether tariffs should rise. It is how electricity pricing can be restructured while protecting access to essential energy services by improving the financial sustainability of the power sector and reducing the unequal consequences of shortages. Seen this way, Iran’s electricity crisis manifests as a kind of “polycrisis,” encompassing a reliability problem, an investment problem, and a distribution problem.
Arya Kia is an energy systems researcher focusing on renewable energy, energy and water systems, energy policy, and system dynamics. He is a doctoral candidate in Energy Systems Engineering at Sharif University of Technology and is based in Vancouver, Canada.