Oil and gas exports continue to dominate Azerbaijan's economy and provide the majority of government revenue. Although they are plentiful, the long-term outlook for fossil fuel resources (and therefore for government revenue) is becoming uncertain in light of recent commitments by major importing co Contact online >>
Oil and gas exports continue to dominate Azerbaijan''s economy and provide the majority of government revenue. Although they are plentiful, the long-term outlook for fossil fuel resources (and therefore for government revenue) is becoming uncertain in light of recent commitments by major importing countries to achieve net-zero greenhouse gas (GHG) emissions by 2050.
This report proposes several ways to increase the efficiency of domestic energy supply and usage to respond to this challenge. In essence, it recommends that Azerbaijan transitions gradually from its current system – which is government-owned and -operated, vertically integrated and subsidised – to competitive markets with significant private sector participation and cost-covering energy prices. Of course, subsidy withdrawal would need to be accompanied by support measures for financially vulnerable citizens. Such a transition would help diversify the economy away from oil and gas exports while attracting new market entrants and new investments, including in renewable energy. These measures would also help reduce GHG emissions.
These recommendations actually support efforts that are already under way. Prompted by the oil price shock of 2014-2015, the government recently drafted several reform proposals, and many new laws are awaiting approval. Laws governing the electricity and gas sectors since the 1990s will be revised, and specific legislation on energy efficiency and renewable energy will be introduced. In addition, the country''s first specific energy strategy is nearing completion. The government has furthermore decided to diversify foreign direct investment away from oil and gas and towards infrastructure and industry, and it has already taken steps to improve Azerbaijan''s investment climate.
Oil and natural gas bring in around 90% of Azerbaijan''s export revenues, and they finance around 60% of the government budget. They also supply 98% of primary energy and more than 90% of the country''s electricity. Oil and, more recently, gas have been largely responsible for the remarkable rise in living standards in Azerbaijan since the late 1990s.
Although oil and gas will remain major sources of wealth for Azerbaijan in the short and medium terms, two factors in particular indicate a less important role for them in the long term. The first is that oil production, which dates to the mid-19th century, has been in decline since 2010. Although natural gas production, which became significant in the 2000s, continues to increase, total export revenues are falling due to lower oil production. The oil price shocks of 2014-2015 and 2020 highlighted the risks of short-term fuel price fluctuations and strengthen the case for further long-term efforts to diversify the economy.
Second, the emerging global push for clean energy will inevitably affect oil and gas demand. Several of the world''s largest energy importers (the European Union, Japan and South Korea) have recently pledged to reduce GHG emissions to net-zero by 2050, and China is aiming for the same by 2060. These targets therefore imply little demand for oil or gas without carbon capture, utilisation and storage (CCUS) three decades from now. Technology breakthroughs and policy changes may further accelerate this transition, and competition for export opportunities among producing countries may well intensify, increasing the risk of many oil and gas assets becoming stranded.
Managing the costs of new developments is crucial to Azerbaijan''s future success as an internationally competitive producer, and reducing the carbon footprint of production is also likely to be necessary. The State Oil Company of the Azerbaijan Republic (SOCAR), the country''s national oil company, is targeting to eliminate gas flaring completely in 2021 and is also successfully working to reduce methane emissions. The potential of using CCUS to enhance oil recovery and produce hydrogen from natural gas should also be studied. The IEA encourages the government to continue working closely with the leading oil and gas sector companies operating in the country to reduce sectoral emissions.
The government has recognised the need to reduce economic dependence on oil and gas exports. Efforts to modernise and increase oil refining and petrochemical production have been successful and continue to produce improvements. SOFAZ, the State Oil Fund of the Republic of Azerbaijan, could stimulate further diversification.
It is critical to increase efficiency, attract new entrants and investments, and diversify the energy supply in Azerbaijan''s current energy system in which gas, electricity and heat are supplied by financially burdened monopolies at strongly subsidised prices. Policy responses should therefore include energy tariff reform, electricity and gas market reform, greater renewable energy use and higher energy efficiency.
The level of energy prices is central to attract investment and encourage citizens to use energy efficiently. As part of the country''s social policy, the government sets domestic end-user prices for electricity, natural gas and oil very low, often below the full cost of supply. The IEA estimates that in 2019, Azerbaijan''s implied subsidies for oil, natural gas and decline.
The tariff system includes cross-subsidies between consumer groups and energy carriers as well as direct subsidies from the state budget. The low price of natural gas in particular creates distortions. For example, it discourages the use of renewable energy for electricity production and, as it favours individual gas boilers for space heating, it inhibits the use of potentially more efficient system solutions such as district heating and cooling, electricity and heat pumps. Low oil prices meanwhile encourage the use of large, inefficient cars that are often acquired second-hand, and the effects of this may intensify as car ownership becomes more common.
Subsidised tariffs do not encourage residential and industrial consumers to use energy more efficiently, even though it would make economic sense for the country as a whole. Tariff reform should therefore be central to Azerbaijan''s energy sector reform efforts. The oil and gas saved through improved efficiency or through substitution by renewable energy could be exported at much higher prices or turned into higher-value-added petrochemicals. Furthermore, the GHG emissions avoided would help the country meet its Paris Agreement climate target (see below).
To reduce subsidies in the longer term, more emphasis should be placed on explaining to the public that blanket energy subsidies are a highly regressive measure that benefits mainly the well-off. These subsidies should be phased out gradually and replaced by support mechanisms that protect vulnerable groups.
Electricity demand in Azerbaijan is set to grow in the years and decades ahead. The whole population has access to affordable electricity, and wider electrification is expected to raise demand considerably from the currently low 2500 kilowatt hours (kWh) per capita per year. The country needs a more dynamic electricity sector, and investments in new and more efficient generating capacity and electricity grids are essential. The IEA welcomes the government''s determination to reform the electricity system and gradually move from a state-dominated, vertically integrated system to a more dynamic, efficient and environmentally sustainable one. The challenge now is to deliver it.
Azerbaijan''s 2016 Strategic Roadmap recognised the need for electricity reform, and several reform proposals have been drafted. These include the draft laws on electricity, on the role of the regulator in energy and public utilities, and on the use of renewable energy in electricity generation. The IEA urges the government to adopt the pending legislation and proceed to implement an ambitious electricity market reform for the benefit of the country and its economy.
The establishment of the regulator in 2017 was a major step in electricity market reform. Since the Azerbaijan Energy Regulatory Agency (AERA) remains closely overseen by the Ministry of Energy, just like the electricity sector monopolies Azerenergy and Azerishiq, it will be essential to grant it the legal right to take binding decisions and issue recommendations. This also applies to its work in natural gas and district heating.
Having an uninterrupted supply of electricity is critical for a modern society. In their efforts to ensure electricity security, many IEA member countries have found it useful to put in place a comprehensive framework, supported by laws, regulations, policies and measures that address generation, transmission, distribution and supply challenges. The IEA urges Azerbaijan to consider a similar framework approach that takes account of electricity infrastructure needs and long-term network development. The government should ensure that it has sufficient personnel qualified to carry out the tasks required under the framework. It should also organise emergency response exercises, as they have proven effective in boosting preparedness and response capability in other countries.
As other countries with legacy infrastructure and subsidised energy prices, Azerbaijan has plenty of scope to improve its energy efficiency. The IEA strongly encourages the government to recognise that greater energy efficiency can benefit the economy, reduce pollution and create additional jobs, and to rapidly adopt the laws, strategies, policies and measures needed to realise this potential. Strong policies on energy efficiency will become increasingly relevant because more buildings will be constructed, more appliances and equipment sold, and more vehicles purchased in the years and decades ahead. A long-term approach is therefore needed to keep the country on an environmentally sustainable energy pathway.
Instead of subsidising energy use for everyone, the government should focus social policy measures on those in real need while gradually switching to more efficient energy use. As part of its targeted support measures, it could, for example, launch programmes to replace the least efficient household appliances (refrigerators, washing machines, etc.) with new, highly energy-efficient models, offering subsidies for the least well-off.
As renovations to improve the energy efficiency of the existing building stock, especially residential and public buildings, would also save energy while benefitting citizen health, the case for introducing financing mechanisms for energy-efficient housing is strong. The government should also ensure that residential buildings comply with energy efficiency regulations. In many IEA countries, compliance is verified by public sector building inspectors, which is an approach Azerbaijan''s government should consider.
Experience in IEA member countries shows that minimum energy performance standards are among the most effective and cost-efficient energy efficiency policy instruments. The government should therefore introduce stringent standards across all sectors to cover buildings, vehicles, appliances and equipment. These standards should be underpinned by an effective energy efficiency audit mechanism. It should also update the standards regularly and, when applicable, accompany them with energy labelling.
Azerbaijan''s population, half of which still lives in the countryside, is expected to continue growing, urbanising and becoming wealthier. The country will thus need to build more urban infrastructure in the coming decades, including new heating systems. Space heating is currently based on individual boilers that burn subsidised gas. However, modern district heating and cooling (DHC) systems, combined with more efficient electricity generation, heat pumps, waste heat use and thermal storage, could offer a solution that is more efficient and cost-effective while reducing CO2 emissions.
Tackling the rise in transport fuel demand (unrestrained by prices or taxes) and the hike in natural gas use (subsidised in all sectors) is also necessary for Azerbaijan to achieve its Paris Agreement goal of reducing net GHG emissions by 35% from 1990 to 2030. In 2018, the latest year for which data are available, net GHG emissions were 2.5% above the 2030 target. Cutting GHG emissions from oil and gas production would also reduce total GHG emissions considerably.
Energy research, development and innovation (RDI) is necessary to help Azerbaijan maintain and improve its economic competitiveness, and to enable diversification away from oil and gas. For these reasons, the IEA encourages the government to step up its energy RDI efforts significantly.
Reliable data is the basis of sound policymaking. The IEA congratulates the State Statistical Committee of the Republic of Azerbaijan (SSC) for improving energy efficiency data collection and monitoring, and it encourages the SSC to further develop national energy statistics to improve data coverage and quality and to inform policy decisions.
IEA (2020), Gas 2020.
IEA (2020), Gas 2020.
IEA (2021), Azerbaijan 2021, IEA, Paris https://, Licence: CC BY 4.0
Thank you for subscribing. You can unsubscribe at any time by clicking the link at the bottom of any IEA newsletter.
About Azerbaijan energy storage for grid stability
As the photovoltaic (PV) industry continues to evolve, advancements in Azerbaijan energy storage for grid stability have become critical to optimizing the utilization of renewable energy sources. From innovative battery technologies to intelligent energy management systems, these solutions are transforming the way we store and distribute solar-generated electricity.
When you're looking for the latest and most efficient Azerbaijan energy storage for grid stability for your PV project, our website offers a comprehensive selection of cutting-edge products designed to meet your specific requirements. Whether you're a renewable energy developer, utility company, or commercial enterprise looking to reduce your carbon footprint, we have the solutions to help you harness the full potential of solar energy.
By interacting with our online customer service, you'll gain a deep understanding of the various Azerbaijan energy storage for grid stability featured in our extensive catalog, such as high-efficiency storage batteries and intelligent energy management systems, and how they work together to provide a stable and reliable power supply for your PV projects.
