French engineering group Alstom signed an initial agreement with Iraq to build a power plant that could cost up to $2 billion in southern Iraq, a senior French diplomat said on Thursday.

French Ambassador to Iraq Boris Boillon said a final agreement between Iraq's Ministry of Electricity and Alstom, the maker of industrial power plants and high-speed trains, is expected to be signed before the end of the year.

The steam power plant, which will be built near the southern oil hub of Basra, will add 1,200 megawatts of capacity to a country starved of power after years of war, sanctions and economic decline.

The plant will consist of three oil-fired steam units, each with an output of 400 MW, Alstom said in a statement on its website. 'This is just the beginning for other power plant projects,' Boillon told Reuters.

'The cost is under negotiation but it is between $1 billion to $2 billion,' he said, adding the project would need two to three years to complete.

Iraq's available power capacity is about 9,000 MW, and installed capacity at 11,000 to 12,000 MW. Demand is estimated to reach 14,000 MW during summer when temperatures frequently exceed 50 Celsius.

Seven years after the US-led invasion, Iraq's national grid still only supplies a few hours of power each day. Intermittent electricity is one of the public's top complaints.

The memorandum of understanding includes work to revamp a 180 MW power plant which was built by Alstom decades ago, the French company said.

Under the deal, Alstom will also supply and supervise substations in various locations across Iraq and will help train Iraqi technicians and engineers.

Iraq's Oil Minister Hussain al-Shahristani, who has temporarily taken over the electricity portfolio, said the turn-key project will be on deferred terms.

'This plant will contribute enormously in increasing power generation in Iraq,' Shahristani said on Wednesday at a news conference.

The minister said Iraq's electricity consumption is expected to rise by 10 percent every year over the coming 20 years.

'So Iraq needs power plants with 1,000 MW to 1,500 MW capacity each year for the 20 coming years,' he said. Iraq plans to boost power capacity to 27,000 MW in four years and would need to invest at least $3 billion to $4 billion per year to reach that target.-Reuters