Azerbaijan is putting the energy transition on the fast track

Very soon all the global community will be focused on Azerbaijan, which continues active preparations to the 29^th session of the Conference of Parties of the UN Framework Convention on Climate Change (ÑÎÐ29) scheduled in Baku from 11 to 23 November. Within the framework of preparing the agenda of this grand international event Baku organizes various meetings to discuss relevant problems of the global warming and the ways to cope with them. The Baku Climate Action Week (BCAW) was one of such events in the capital of Azerbaijan from 30 September to 4 October.

Clear course for making the energy green

The Baku Climate Action Week gathered 700+ participants from all over the world, including experts on climate and sustainable development, official representatives of governments of different countries, youth organizations, as well as private sector and civil society leaders. Over 30 various events were held within the BCAW agenda to discuss such important issues as green financing, methane emissions reduction, water resources and sustainable food systems, etc. One of the panel sessions in the first day of the forum was dedicated to the energy transition in Azerbaijan, and its participants discussed the development of the national green energy sector.

In the context of chairing COP29 Azerbaijan proposed 14 various global initiatives to counteract climate change [1]. Parviz Shahbazov, the Energy Minister of Azerbaijan, remarked during his speech at BCAW, that three of those initiatives – green energy zones and corridors, global power banks, hydrogen declaration – were focused on supporting the solutions for the global «net zero» challenge and for putting the energy transition on a faster track [2]. Parviz Shahbazov expressed confidence in that the above-mentioned initiatives will contribute to implementation of not only of COP29 objectives, but also of the global objectives for the nearest decades. According to him, the first stage of the energy transition is currently in progress in Azerbaijan, which includes decarbonization of oil-and-gas operations, creation of the green energy zones to reduce the greenhouse gases emissions.

As it is known, at COP26 in Glasgow in 2021 Azerbaijan undertook a commitment for reducing the greenhouse gases emissions by 35% by 2030 and by 40% – by 2050 (vs the 1990 level). It should be noted that the energy sector accounts for 70% of hazardous emissions in Azerbaijan, and the country is actively implementing measures to reduce the negative environmental impact and to make national energy sector more environmentally friendly. Remember that in 2023 Ilham Aliyev, the President of Azerbaijan issued a special Directive announcing this year «The green solidarity year», which is an evidence of how important the environmental issues are for the government.

In fact, Baku chose the course for making the energy sector and the economy in general green long before it was announced as the host of the global climate summit. In 2021, the strategy «Azerbaijan 2030: national priorities of social and economic development» was adopted, and one of its objectives was to turn the Azerbaijan into the green growth country with clean environment. Baku places stake on the renewable energy sources (RES) to diversify the national economy and on the development of non-oil-and-gas sector. In future Azerbaijan strives to take a lead in the alternative energy sphere and to become one of the leading producers and exporters of environmentally clean electricity received from RES.

According to the Ministry of Energy of Azerbaijan as of the beginning of this June, the installed capacity in the national RES segment achieved 1,748.6 MW making 20.1% of the overall capacity of the national power generation. This metric is expected to grow up to 33% of total generation by 2027, and to achieve 35% by 2030 [3].

At the initial stage, Azerbaijan plans to use the electricity generated from RES to satisfy its domestic demand. By that Baku wants to save its natural gas reserves currently used to generated the major part of electricity in the country, and to supply the redundant gas volumes to the external markets. Let us remember that starting from 2020, Azerbaijan has been exporting natural gas to Europe via the Southern Gas Corridor and has been increasing the exported volumes YoY simultaneously expanding its export geography.

In a similar way, Azerbaijan intends to advance in the European electricity market and to grab the leading positions as an exporter of the environmentally clean energy. Thus, Parviz Shahbazov in his recent presentation at the Wind Energy Hamburg conference stated that starting from more than 70% of the green energy generated in Azerbaijan will be exported.

The country intends to fulfil its RES potential by attracting foreign investors, whose interest towards the green energy market in Azerbaijan is growing rapidly. Leading energy companies from the Persian Gulf countries, the USA, China, Turkey, Great Britain, Germany, France, and Australia expressed their willingness to participate in the RES projects in Azerbaijan. According to the Ministry of Energy of Azerbaijan, currently international RES projects for the total capacity of 28 GW are under review.

Previously, President Ilham Aliyev stated that Baku had already signed agreements and MOUs with foreign investors stipulating the creation of 10 GW capacity based on alternative energy sources.

The capabilities of Azerbaijan for developing the renewable energy industry are really great. According to the Ministry of Energy of Azerbaijan, the technical potential of the on-shore RES in the country is 135 GW, and of the off-shore RES – 157 GW. The economic potential of the resumable energy sources is estimated as 27 GW including 3 thou MW of wind energy, 23 thou MW of solar energy, 380 MW of bio-energy, 520 MW of power plants at mountainous rivers.

The liberated territories – Karabakh and East Zangezur economic districts – also have favorable conditions for the green energy development, RES potential there exceeds 10 GW. By 2050, Azerbaijanian government plans to turn these territories into net zero emissions zones by way of building manufacturing capacities utilizing RES. The construction of the first solar power plant Shafag with the installed capacity of 240 MW will soon commence in Jabrayil District (East Zangezur) in the area of 802 ha. The British company BP will be investing circa USD 200 mln in this project, and will be responsible for its implementation. This solar power plant will be generating 500 KW*h of electricity annually.

Starting from 2021, small hydropower plants are being actively built in Karabakh and East Zangezur, because these regions account for about 25% of inland water resources of Azerbaijan. According to OJSC Azerenergy, 32 hydropower plants totaling 270 MW have been built or upgraded here [4]. 12 small and big hydropower plants were commissioned at the end of the last year. The plan is to commission 12 small hydropower plants more in the liberated territories by the end of 2024. The government intends to assure the cumulative capacity of hydropower plants in the liberated territories at the level of 500 MW.

In general, hydropower plants account for the major portion of green energy generated in Azerbaijan today. For example, in 2023, 29.3 bn KW*h of electricity was generated in the country, and hydropower plants accounted for 1,757.2 mln KW*h of the total output, while as other alternative sources – only for 359 mln KW*h.

The plan is to turn Nakhichevan Autonomous Republic into the green energy zone similarly to Karabakh and East Zangezur, the RES potential there is estimated at the level of 5 GW. Currently the Ministry of Energy of Azerbaijan is developing the green zone concept for Nakhichevan. As of today, the capacity of renewable generation in this region is 107.8 MW (more than 44% of the total capacity). According to the plans of the Ministry of Energy, 1.5 GW of capacity will be installed in Nakhichevan before 2030 by way of building wind and solar power plants. A solar power plant with 500 MW of installed capacity is one of the priority projects [5]. The participants include ACWA Power (Saudi Arabia), Masdar (United Arab Emirates) and the State Oil Company of Azerbaijan Republic (SOCAR).

The recent two or three years can really be called a breakthrough in solar and wind energy generation in Azerbaijan thanks to major pilot projects. Thus, in October 2023, Garadagh solar power plant was put on stream, it is the biggest solar power plant in the Caspian Region and across the entire CIS, its installed capacity is 230 MW. It was the first commercial scale solar power plant built in Azerbaijan fully at the expense of foreign direct investment making USD 262 mln. The list of creditors consists of the European Bank for Reconstruction and Development (EBRD), the Asian Development Bank, the Japan International Cooperation Agency and the Abu-Dhabi Fund for Development. Masdar company (UAE), the recognized leader in the sphere of renewable energy, designed and built this power plant.

The Garadagh solar power plant allows for saving about 120 mcm of natural gas and provides for CO₂ emissions reduction by 200 thou tons per annum. It generates circa 550 mln KW*h of electricity, enough to cover the needs of 110 thou households.

Early this June, during the Baku Energy Week the kick-off ceremonies were held for the construction of three new green power plants in Azerbaijan: Bilasuvar and Neftchala solar power plants with the capacity of 445 MW and 315 MW respectively, as well as Absheron-Garadagh wind power plant with the capacity of 240 MW. The overall investment into these projects is circa USD 1 bn. Masdar company is implementing them. The commissioning of both solar power plants is scheduled for April 2026. The annual electricity output of Bilasuvar solar power plant is expected at the level of 900 mln KW*h minimum, of Neftchala solar power plant – about 650 mln KW*h. At the same time these two projects will allow for saving 330-340 mcm of gas.

Earlier, in April 2024, Parviz Shahbazov, the Energy Minister of Azerbaijan, stated during his presentation in the context of the Sustainable Development Week at the UN General Assembly in New York, that within this year Azerbaijan would commence the construction of five combined solar and wind power plants with cumulative capacity of 1,300 MW.

Currently the construction of a big Absheron-Khizi wind power plant with 240 MW installed capacity is in progress in one of the Baku suburbs. This project has a budget of USD 300 mln, it is implemented by ACWA Power company from Saudi Arabia. The commissioning is scheduled for 2025. This power plant will be generating circa 1 bn KW*h of electricity annually allowing for saving up to 220 mcm of gas and for reducing the CO₂ emissions by more than 400 thou tons per annum. The plan is to operate Absheron-Khizi wind power plant for 25 years based on the Build-Own-Operate principle, and ACWA Power will be its operator across the entire period. 

In general, it is worth noting that Azerbaijan vests big hopes with the development of alternative power sector, especially off-shore. According to the World Bank the available technical resource of the Azerbaijanian sector of the Caspian Sea makes about 157 GW, it is the second biggest in the world after the resources of the North Sea.

The first Road Map for the off-shore energy sector of Azerbaijan was published in June 2022. It was developed by the British consulting company BVG Associates working on the evaluation of the off-shore wind energy potential together with the Ministry of Energy of Azerbaijan and the WB. The best fit areas for installing off-shore wind generators were then defined. According to this Road Map, Azerbaijan has the potential installed capacity of off-shore wind power plants amounting to 7 GW by 2040. Parviz Shahbazov presented the results of such evaluation at the major European conference Wind Energy Hamburg this September. According to the Energy Minister of Azerbaijan, 18 GW of electricity will be generated in the Azerbaijanian sector of the Caspian Sea by 2037. Azerbaijan plans to implement these projects gradually partnering with international energy companies.

In developing its wind power generation Azerbaijan plans to be based on the successful practices of European countries. The ministry of Energy of Azerbaijan organized partnership with the Wind Power Association of Germany, and the State Agency for Renewable Energy Sources of Azerbaijan (AREA) cooperates with Wind Europe (the European Association of Wind Power) in the sphere of technology and equipment transfer [6]. Thus, recently Azerbaijan received two LiDAR (Light Detection and Ranging) units manufactured by Vaisala company from Finland for AREA specialists to perform laser measurements of wind speed and direction in the necessary spots at the seashore.

SOCAR striving for net zero

The flagship company of the national energy sector SOCAR plays the key role in decarbonization of the economy of Azerbaijan. Its business bears special responsibility for environment protection. It should be noted that back in 2008 the company adopted the founding principles of its environmental policy based on the zero-impact concept stipulating the maximum decrease of negative environmental impact. Since then, the company makes annual stock-taking of GHG emissions in all spheres of business and publishes the respective reports. On top of that, to prevent global warming and assure environmental protection, in 2014 the company joined the initiative «Reducing associated gas flaring in the normal course of production down to zero by 2030». Resulting from successful cooperation and the company’s efforts, associated petroleum gas emissions by SOCAR in 2020 made circa 2% of the total production. The CO₂ emissions at the manufacturing sites of Azneft were reduced to zero making a precedent for the Caspian Region. Every year SOCAR organizes various events focused on reducing the environmental impact of oil-and-gas operations including massive planting of trees in different localities across the country.

At the current stage, SOCAR is implementing the initiative for global reduction of methane emissions (this gas has the greenhouse effect 28 times stronger vs carbon dioxide) [7].

The plan is to achieve 0.2% of methane emissions intensity by 2035, and SOCAR has developed detailed action plans for each of its assets. One of the key priorities of SOCAR in environmental protection sphere is more accurate stocktaking of methane emissions using modern technologies. For that purpose, research is in progress together with TotalEnergies to detect and measure methane emissions using specialized UAVs equipped with sensors.

Hikmet Abdullayev, the Deputy Vice-President of SOCAR spoke at the workshop «Turning methane commitments into action» organized by the International Energy Agency and COP29 Presidency within the Baku Climate Action Week. He informed about four focus areas, which help the company to achieve reduction of methane emissions [8]. The first one is identification and elimination of emission sources, and for that SOCAR uses three types of technology solutions; the second one is the Emissions Reduction Program; the third one is multilateral partnership with different companies in mitigation programs; and the fourth one is launching the platform called Methane.AI to monitor, control and report methane emissions.

In December 2023 in the course of the global climate conference in Dubai (COP28) the company announced its mid-term and long-term decarbonization targets. They include reduction of APG flaring at all production sites and achieving zero level by 2030, reduction of carbon emissions intensity by 30% in the production segment by the same year (vs 2022), 30% reduction of corporate CO₂ emissions intensity and 20% reduction of total emissions volume by 2035 [9]. On top of that, the company sets such ambitious goals as getting closer to zero-level methane emissions in the production segment by 2035 and achieving the net zero by the middle of this century.

It is important to emphasize that SOCAR is one of the co-founders of the Oil & Gas Decarbonization Charter (OGDC) adopted at the Dubai summit, and one of 12 companies represented in the Steering Committee of the Charter. The main objective of OGDC is to achieve net zero by supporting decarbonization activities of the participating organizations. More than 50 international corporations accounting for 40% of global oil production signed the Charter.

SOCAR has a strategic vision of turning from traditional oil-and-gas company into a company with diversified energy portfolio by 2035. In December 2023, a new business unit of the company was established – SOCAR Green LLC, which is in charge of effective implementation of the strategic initiatives of the company in the sphere of RES, green hydrogen production, carbon disposal and storage, assisting in developing Road Maps for carbon emissions reduction across the entire country. The company is active in studying international best practices in these spheres for their future implementation in Azerbaijan.

It should be noted that SOCAR is continually extending its green portfolio. Thus, in cooperation with Masdar a series of solar and wind energy projects are planned for implementation, as well as green hydrogen production projects. On top of that, the company has agreements on RES projects with such foreign partners as ACWA Power, BP, Energy China, Fortescue Future Industries, etc.

Hydrogen-related plans

With account of its rich resources of renewable energy, Azerbaijan has ambitious plans in the sphere of green hydrogen production and export.

As we already mentioned, one of the global initiatives of Baku in the context of ÑÎÐ29 is called «Hydrogen Declaration». This action plan and the ways of its implementation are focused on assisting the initiatives of public and private sector targeted at opening the global market potential for using hydrogen with low level of emissions by way of setting the framework principles and the priorities, as well as eliminating regulatory, technological, financial and standard-related barriers.

Remember that green hydrogen is believed to be the most environmentally friendly type of hydrogen as it is received from water via electrolysis using RES. Today, only 2% of hydrogen in the world are received using this method. And the final cost of 1 kg of green hydrogen is up to USD 10. This cost is expected to go down to USD 1-2 per kilo in the near future due to intense development of RES-generation and the reduction in the cost of electrolyzers. The undeniable advantage of such clean hydrogen is that it may be used not only as fuel, but also as an energy accumulator.

Over the recent years, in the context of the growing demand in the European market and of the EU member countries planning to import green energy and hydrogen, Azerbaijan stepped up in its efforts to develop hydrogen industry.

The Memorandum on Strategic Partnership in Energy between the EU and Azerbaijan dated 18 July 2022 stipulates, among other things, cooperation in the sphere of RES and green hydrogen. Starting from the previous year, Azerbaijan organized ministerial sessions within the Consulting Board on green energy with participation of dozens of countries including the EU member states, different international organizations and energy companies, as well as high-ranking officials from Azerbaijan and European countries.

In 2023 the European Bank for Reconstruction and Development presented a primary study demonstrating that the green hydrogen from Azerbaijan would be absolutely competitive in Europe. The initial research proved that Azerbaijan has serious capabilities in this sphere. Based on the EBRD primary study, the Azerbaijanian side is working with consulting companies to develop its national hydrogen strategy [10]. Thus, the support of the green energy projects within the European concessional financing program REPowerEU and the growing investors’ interest towards Azerbaijan create favorable environment for rapid development of the national RES sector and hydrogen industry.

Signing the MoU between the Ministry of Energy of Azerbaijan and the Ministry of Investment of UAE in January 2024 was another important step towards implementing the Baku’s hydrogen-related plans. The MoU stipulates for building wind power plants in the Azerbaijanian sector of the Caspian Sea with total capacity of 6 GW. In addition, the parties intend to jointly implement green hydrogen and ammonia production projects, as well as synthetic methane projects. In particular, the Azerbaijanian party is counting on setting up the sea water electrolysis and producing green hydrogen using relatively cheap off-shore wind generators.

It is known that currently SOCAR and the Trans-Adriatic Pipeline Consortium (ÒÀÐ is the European sector of the Southern Gas Corridor) are jointly making a study of hydrogen transportation to the European market. In particular, they are studying the specifications for the equipment required for transporting a mix of natural gas and hydrogen via TAP.

Thanks to a unique combination of all the factors required for the green hydrogen industry development, Azerbaijan can become a regional leader and a reliable supplier for the European Union, according to Vladimir Rogov, the Managing Director and Partner of Boston Consulting Group. Rich renewable energy resources and the available infrastructure of the Southern Gas Corridor directly connecting Azerbaijan with the European consumers are among these factors. Extremely high potential in RES provides for an important competitive advantage of Azerbaijan – low cost of green hydrogen production. The country may receive about USD 230-500 mln revenues per annum with account of the estimated price of green hydrogen in Europe at the level of approximately USD 5.8 per 1 kg. Hence, the full cost of green hydrogen when supplying it via pipeline may demonstrate high competitiveness and guarantee material margin. Azerbaijan is able to efficiently and feasibly transport hydrogen (up to 10-15% of the flow) via the existing pipelines going to Europe.

Green energy corridors

At the current stage Azerbaijan is active in developing green energy corridors to Europe. This is the project «The Caspian Sea – The Black Sea Energy», which Baku will be using to export environmentally clean energy via Georgia and the Black Sea to Eastern Europe. 4 GW will be supplied at the initial stage. In December 2022 Azerbaijan, Georgia, Hungary and Romania signed the agreement about this project in Bucharest. Recently the JV was established there for implementing this project. Bulgaria also plans to join.

The Energy Minister of Azerbaijan mentioned that Baku is viewing the project «The Caspian Sea – The Black Sea – Europe» not only as an electric cable, but also as a transportation route from the Caspian wind generators to Europe. Brussels believes this project to be fully in line with the strategic interests of the European Union, and in connection with this the European Commission already promised to allocate EUR 3.3 bn for its implementation.

The initial Feasibility Study for the project is about to be finalized, it will be presented at the forthcoming global climate summit COP29 in Baku.

Azerbaijan intends to organize the second green energy corridor to Europe via Turkey. It will be transporting about 1 GW of environmentally clean energy from Nakhichevan. The contract with one of the leading global companies for preparing the Feasibility Study for the project «Azerbaijan – Turkey – Europe» is expected to be signed soon.

One more project of transporting green energy from Azerbaijan to Turkey is currently under discussion – AZURE (Azerbaijan Scaling-Up Renewable Energy Project), in which the World Bank and other potential investors are interested. Previously the WB via the International Bank for Reconstruction and Development announced the possibility of allocating USD 250 mln for AZURE. The situation with this project is expected to be finalized by the end of this October. 

Azerbaijan strives not only for the green energy generation and export leadership in the South Caucasus Region, but also for the status of the energy bridge between Europe and Central Asia.

Let us remind here that starting from the fall of 2023, Baku, Astana and Tashkent have been negotiating the ways of cooperation in the energy sphere and supplying green energy to Europe via Azerbaijan. Note that Kazakhstan and Uzbekistan also have strong potential in RES and are striving to enter the European energy market. To do that, they intend to combine their energy systems with that of Azerbaijan by way of laying the high-voltage cable across the Caspian Sea bottom [11].

Baku, Astana and Tashkent have already agreed to develop the Feasibility Study and to establish the JV to export green energy with the headquarters in Baku. The trilateral inter-government agreement on strategic cooperation in green energy development and export is expected to be signed at the global climate conference COP29. It is quite possible that Turkmenistan will join the project in future, as it is also interested in supplying electricity to the markets of the EU and Turkey. EBRD also expressed interest towards the project of green energy corridor «Azerbaijan – Central Asia – Europe».

Conclusions

To summarize, it is worth noting that in the context of gradual refusal of European countries from fossil fuels and growing demand for green energy and hydrogen Azerbaijan has got a strong incentive to develop the green energy sector. Thanks to rich resources in the renewable energy sphere and the interest of European financial institutions and private international investors to participate in funding RES projects in the territory of Azerbaijan, the country has all the necessary pre-requisites for turning into one of the major centers of environmentally clean energy generation. This will strengthen the leading positions of Azerbaijan on South Caucasus and improve its status in the global arena.

Continuous progress of Azerbaijan along the energy transition route stipulates for several objectives. First of all, being the oil and gas producing country Azerbaijan understands the global responsibility and strives to contribute to counteracting the global warming having set clear climate targets for itself. Implementation of multi-faceted measures initiated within the preparation to ÑÎÐ29 should result in significant improvement of the environmental situation in Azerbaijan and play a great role in environment protection. On top of that, considering the efforts of the Azerbaijanian government to diversify the national economy, mainly by developing the non-resources-based sector, the alternative energy is viewed as one of the new points of growth and sustainable development assurance. Hence, the future transition to green energy will allow for Azerbaijan to expand its export capacities and reduce the dependency on oil and gas.