Auctions - next step in RES development in Azerbaijan Review by Caliber.Az

In recent years, work has intensified in Azerbaijan aimed at expanding the use of renewable energy sources (RES). Moreover, the key stake is made on private investors - in order to attract them to this process, the law "On the use of renewable energy sources in electricity production" was even adopted in 2021, electricity tariffs are being optimized, preferences for market participants are provided, the concept of a Green Energy Zone in the Karabakh region has been developed. The next step in the development of alternative energy will be the organization of auctions. According to the State Agency for Renewable Energy Sources, the draft law on auctions has already been submitted to the Cabinet of Ministers.

The development of the RES segment has been identified as a national priority for socio-economic development in Azerbaijan, and the country plans to increase the share of green energy from the current 17% to 30% of the country's total generating capacity in the next decade. Meeting this target by 2030 will help to achieve its commitments under the Paris Climate Agreement (to reduce greenhouse gas emissions by 40% by 2030) and integrate into numerous international projects of importance for the country.

Nor should we forget that the current energy boom associated with the war in Ukraine, which has contributed to multiple increases in oil and gas prices, will not last forever. In this regard, Azerbaijan should not relax and count on a prolonged extension of the "oil" era; the domestic energy sector needs to be restructured step by step to reduce its carbon footprint and move globally towards a "green" post-industrial concept.

To this end, in the last two or three years, Azerbaijan has accelerated its efforts to expand the use of renewable energy sources. In particular, in the next ten years, the country plans to commission more than 1500 MW of alternative energy generating capacity, and this task is to be solved mainly by attracting private investors.

The first steps to involve private investors in the domestic renewable energy sector have been very successful, such as the construction of a 240 MW wind farm with an annual generating capacity of 1 billion kilowatt-hours that started in January 2022. The Saudi company ACWA Power will invest $300 million in this project. Masdar Company from the UAE, which intends to invest $200 million in constructing a 230 MW Garadagh solar power plant, has started implementing a similar project in March 2022. In addition, the signed executive contract provides for BP to build a 240 MW solar power plant in the Zangilan-Jabrayil zone.

In general, the Karabakh region is identified as a key platform for the development of alternative energy: according to preliminary calculations, over 10 thousand MW of renewable energy can be generated here, including about 7000 MW of solar and 2000 MW of wind energy, the remaining generating capacity can be provided by small hydropower plants. To this end, experts from the Ministry of Energy, with the support of the Japanese company TEPSCO, have been developing a draft concept for the Green Energy Zone since last year. A preliminary document has already been submitted to the government, and the General Plan for the future Green Energy Zone is expected to be finalized this year.

Plans to develop the wind potential of the Caspian Sea are seen as equally promising, and experts from the Ministry of Energy and the International Finance Corporation (IFC) are involved in the joint development of a roadmap in this segment. According to preliminary data, the technical potential of wind energy in the Azerbaijani part of the Caspian Sea is estimated at 157 GW, but real projects can cover only a small part of these opportunities, about seven gigawatts. Preparatory activities to exploit the offshore wind energy potential in a public-private partnership are scheduled to be completed by the end of 2026. Between 2022 and 2023, it is also planned to study the potential for hydrogen production and use and to draw up proposals for pilot projects in this area. And by 2024, the country will have prepared a State Programme for Low-Carbon Development and a National Electric Mobility Plan to encourage the use of environmentally friendly electric vehicles and create the necessary charging and service infrastructure in cities.

However, the implementation of these and a number of other green energy projects will require many, many millions of dollars, and it is challenging to attract such funds from the state budget. Support from international donor agencies to finance RES projects is desirable, but can only be used to a limited extent - loans will have to be repaid sooner or later, and increasing public debt in this regard is not the best solution.

That is why the main focus in the development of the RES sector in Azerbaijan is shifted to a public-private partnership, with the priority of attracting private investors, primarily foreign high-tech companies. To the same end, a legal and regulatory framework favorable to independent power producers is being developed in the country. The first steps in this direction were taken last year: on July 12, the head of state approved the Law "On the use of renewable energy sources in electricity generation," and thus a legal framework was formed, the tariffing system and rules for production and transmission of generated electricity to the unified energy system of Azerenerji were worked out. The document and a number of by-laws detail the mechanisms of power purchase and sale agreements, connection to the distribution network, and outline the benefits and fiscal preferences for investors, including those operating under the build-own-operate scheme, etc.

Among other things, the law provides for the selection of an electricity producer through auctions or direct investor participation, selecting the best proposals for certain areas with an alternative energy source. Auction mechanisms in the renewable energy sector are widespread all over the world, as they optimize project selection, protect investors' interests and ensure transparency of the capitalization process of such undertakings. Competitive auctions, in turn, encourage private investment by helping to select the best company offering the best price for the construction of RES generation plants, taking into account various technical and commercial parameters. And this often helps to reduce the cost of the final generation, ensuring lower electricity selling prices.

"Auction systems for RES projects in Azerbaijan will soon be approved. The relevant draft law has already been submitted to the Cabinet of Ministers and the document is expected to be approved in the near future," said Kamran Huseynov, Deputy Director of the State Agency for Renewable Energy Sources under the Ministry of Energy of Azerbaijan, at the third Caspian-European Forum held recently in Germany. According to the deputy director, the State Agency is working with several partners and stakeholders to develop a system of auctions for renewable energy projects, as well as templates for power purchase agreements. As part of this work, there are also plans to approve draft rules for the application of the net metering and calculation scheme in the green energy production process.

If this work is accelerated and the rules for the selection of electricity producers in the RES segment are adopted as soon as possible, the first auctions in this area could take place in Azerbaijan as early as the beginning of next year. According to the Ministry of Energy, such auctions will help to attract investors to commission about 700 MW of RES generation capacity in the long term. In the short term, the auctions will capitalize on eight projects to build five small and medium-sized wind farms and three solar power plants.