Under the memorandum of understanding between the two neighbours, the Islamic Republic of Iran will install a pipeline through Iraq and supply it with gas that would be used to feed two power plants in Baghdad, the electricity ministry said.
Iraq will buy 25 million cubic metres of gas each day from Iran under the five-year deal, according to international prices, which would generate 2,500 megawatts.
The gas pipeline will pass through Iraq's Mansuriyah gas field near the Iranian border in volatile Diyala province. The gas would supply a power plant in Sadr City in northern Baghdad, and another plant in the northern outskirts of Baghdad. The pipeline will be completed in 18 months.
The MOU still needs the approval of the Iraqi cabinet and parliament.
Iraq has struggled for years with power blackouts and risks years more of electricity shortages. Eight years after the U.S.-led invasion, Iraqis receive only a few hours of power a day from the national grid and the shortage has been a key complaint at recent nationwide protests.
The OPEC member signed an initial contract with South Korean group KOGAS Kuwait Energy Company, and Turkey's state-owned TPAO last year to develop the Mansuriyah natural gas field.