REPUBLIC OF AZERBAIJAN
Country Background The Republic of Azerbaijan is located in the southern Caucasus region. It is bordered by the Caspian Sea to the east, Armenia and Georgia to the west, the Russian Federation to the north and Iran to the south. The population was approximately 10 million in 2019 with about 45% still living in rural areas. Baku is the capital and the largest city, with a population of about 2.5 million.
Azerbaijan is a fast-developing economy, largely oriented toward developments in the oil and natural gas sectors, and achieved its highest economic growth at the beginning of the 2010s. Its GDP per capita (in current USD) increased from USD 1 237 in 1990 to USD 4 147 in 2017. However, GDP growth has slowed since the plunge in oil prices in 2013. The subsequent erosion of oil prices has resulted in the devaluation of the national currency and led to a fall in the country’s GDP from USD 75 billion in 2014 to USD 41 billion in 2017. The oil sector still accounted for about one third of GDP in 2017. The country’s unemployment levels have remained stable; 5.63% of the population was unemployed in 2010, falling to 5.03% in 2017. In recent decades, the country’s economy has undergone significant diversification (Table 1).the relevant opportunities and constraints. Given both the current global economic slowdown and the fact that oil prices remain volatile and well below their mid-2008 peak, there is a pressing need to further diversify the economy of Azerbaijan, and therefore to move towards a
modernised energy system. This is compounded by the fact that oil production has been progressively declining, having reached its peak in 2010 (IEA, 2015).
According to the Strategic Road Map on National Economic Perspectives (approved by Presidential Decree on 6 December 2016) the target Indicators are: (i) increasing the share of non-oil sector’s FDI from the current 1.5% to 4% by 2025; and (ii) increasing the share of non-oil sector exports from the current USD 200 per capita to USD 450 per capita by 2025 and USD 1 200 per capita by 2035. Renewable energy could play a role in supporting Azerbaijan’s drive for economic diversification.
Globally, the transformation of the energy system that aims to limit the rise in global temperature to well
below 2 degrees Celsius above pre-industrial levels requires that renewables provide for two-thirds of
energy consumption and 86% of power generation by 2050, adding 2.5% to GDP and a 0.2% increase in
global employment, compared to a business-as-usual tradjectory (IRENA, 2019)
Renewables Readiness Assessment (RRA) The International Renewable Energy Agency (IRENA)
developed the Renewables Readiness Assessment (RRA) as a tool for carrying out comprehensive evaluations of the conditions for renewable energy deployment in particular countries. The RRA is a country-led, consultative process. It provides a venue for multistakeholder dialogue to identify challenges to renewable energy deployment and to devise solutions to existing barriers. Short and medium-term recommendations are presented to governments to guide the formation of new policies or the reform of existing policies to achieve a more enabling environment for renewable energy. For Azerbaijan, the RRA process has been led by the Government of Azerbaijan, with technical support from IRENA, and has greatly benefitted from stakeholder input. These stakeholders include the Ministry of Energy, transmission and distribution utilities, power project developers, development partners, financial institutions, civil society and academia. The consultative process was initiated at an expert consultation workshop held in Baku on 31 May–1 June 2018. The workshop was based on a background paper describing the challenges and opportunities for renewable energy development.
Energy sector Azerbaijan is a net energy exporter. The country exports oil, natural gas and electricity. Azerbaijan meets its energy needs through domestic production, which is currently largely reliant on the exploitation of the country’s hydrocarbon reserves – namely oil and natural gas. Proven oil reserves in
the Caspian Basin – which Azerbaijan shares with Russia, Kazakhstan, Turkmenistan and Iran – were reported at seven billion barrels in 2018 (OPEC, 2018) and are comparable in size to North Sea reserves several decades ago. Table 2 illustrates that Azerbaijan exports five times its own total final energy
consumption (TFEC). The decrease in the primary production of renewables and waste relates to fluctuating hydropower generation and reduced usage of wood as a feedstock for energy use. Reduced wood usage can be attributed to improvements in district heating and installation of gas-fired water heaters.
An overview of the country’s electricity consumption by sector is provided in Figure 2. Households, and
commerce and public services, are the two largest consumers of electricity, with a combined share of 89% of total consumption in 2017. The third largest consumer is industry, driven by non-ferrous metallurgy, iron and steel metallurgy, and food processing industries.
RENEWABLE ENERGY DEVELOPMENT Azerbaijan is a country with vast potential for the development of renewable energy. The country has excellent wind and solar resources and sizable potential for biomass, geothermal and hydropower. With a view to unlocking this potential, the government has set a target of adding 420 MW of renewable energy capacity by 2020. Driven by this target, the country has proceeded with the deployment of projects under engineering, procurement and construction (EPC) contracting arrangements for use of renewables. However, practical deployment has been limited compared to the scale of available resources and the country’s long-term ambitions.
KEY CHALLENGES AND RECOMMENDATIONS This section presents a set of short- to medium-term recommendations to address key challenges and support the development of the renewable energy market in Azerbaijan. These recommended actions focus on providing a solid basis for creating a more conducive investment environment for renewable
energy. At the same time, the government is already making progress towards the realisation of these actions.
Technical knowledge and raising awareness While Azerbaijan has made initial inroads into developing local capabilities in renewable energy, the scale of planned renewable energy development (in line with the 2020 target and beyond) requires a broad and deep understanding of the full life cycle of renewable energy projects and the associated knowledge and skill requirements. In Azerbaijan, there is a limited existing skill base in the areas of renewable energy policy making, technologies, and technical and project development. Moreover, the wider public is not fully aware of the range of benefits offered by renewable energy. Given the targets set by the government for renewable energy uptake, substantive efforts are needed to build capacity and develop skills among employees of the
central government and local institutions (e.g. financial entities). Raising awareness of policy and regulatory fundamentals for renewable energy and its benefits in terms of economic and social development in Azerbaijan is an important element in scaling up renewables.
EXECUTIVE SUMMARY Azerbaijan is a fast-developing economy, mostly driven by developments
in the oil and natural gas sectors, with a GDP per capita that has risen from USD 1 237 in 1990 to USD 4 147 in 2017. However, GDP growth has slowed due to the substantial drop in oil prices in recent years, resulting in the devaluation of the national currency and a fall in GDP from USD 75 billion in
2014 to USD 41 billion in 2017. In the same year, the oil sector still accounted for about a third of GDP. In recent decades, the country has undergone a steady diversification of its economy, with the share of secondary economic activities growing from almost 33% of GDP in 1990 to 52% in 2016, while primary activities decreased from 29% in 1990 to 6% in 2016. Considering the volatility of oil prices, there is a pressing need to further diversify the economy of Azerbaijan and move towards a modernised energy system. The Strategic Roadmap on National Economic Perspectives (approved by Presidential Decree on 6 December 2016) calls for an increase in the share of non-oil sector foreign direct investment (FDI) from 1.5% to 4% by 2025, and an increase in the share of non-oil sector exports from USD 200 per capita in 2016 to USD 450 by 2025 and USD 1 200 by 2035. Renewable energy could play an important role in supporting this drive for economic diversification. Globally, the goal to limit the rise in global temperature to well below 2 degrees Celsius above pre-industrial levels requires that renewables provide for two-thirds of energy consumption and 86% of power generation by 2050. This transformation would also deliver a growth in global GDP of 2.5% and a 0.2% increase in global employment, compared to a business-as-usual scenario (IRENA, 2019).