Azerbaijan liberalises electricity market Analysis by Caliber.Az

Over the past two decades, Azerbaijan has managed to radically modernise the electric power industry, almost doubling the capacity of the power system. Simultaneously with the planned increase of generating capacities in the country, the strategy of comprehensive and integrated development of the energy market, the use of "green" energy resources and the introduction of energy-saving technologies are being implemented. Within the framework of these and other initiatives, optimization of the regulatory framework regulating the domestic electricity market, taking into account new global trends, is extremely in demand. To solve this problem, a new law "On electric power industry" was adopted in parliament’s plenary session in the third reading on April 11.

Today, Azerbaijan's electric power system is the most powerful in the South Caucasus and occupies one of the leading places in the Caspian region. Over the past 20 years, more than three dozen power plants of various types have been built with a total capacity of approximately 3,400 megawatts, thanks to which the installation capacity of the power system today is 7954 MW. The basis of the country's energy system consists of 22 large thermal power plants and about 30 hydroelectric power plants of various capacities, on the balance sheet of Azerenerji there are also over 200 substations with a capacity of 500, 330, 220 and 110 kilovolt-amperes. Thanks to such a powerful generation and distribution potential, Azerbaijan has been fully and reliably providing domestic energy needs for about fifteen years. In particular, last year the total volume of electricity generation exceeded 28.988 billion kWh, an increase of 4 per cent. At the same time, the republic is a net exporter of electricity, selling its surpluses to Georgia, Turkey, and a number of European countries.

Nevertheless, despite all the obvious achievements in energy infrastructure development, the existing administrative and regulatory mechanisms for regulating and managing the country's energy market have long failed to meet the requirements of the time. "Currently, we are witnessing very serious transformation processes in the energy system at the global level, the states of the world are intensively implementing the energy transition processes, introducing new development models that meet modern challenges," Azerbaijani Energy Minister Parviz Shahbazov said recently. Naturally, being a part of the global economic system and playing an important role on the energy map of the world, Azerbaijan cannot stay away from these processes.

According to the head of the energy department, the current legislation in the electric power industry sphere is outdated and does not fully meet modern requirements. The government has been studying options for overcoming inertial phenomena for more than a year, and more than a year ago, the relevant presidential order approved an action plan within the framework of the "Strategy of socio-economic development of Azerbaijan for 2022-2026". The concept document provided, in particular, for the preparation of transformations in the production, transmission, distribution and supply of electricity, and was also aimed at encouraging the activities of independent supply entities, the application of market principles, that is, in general, the formation of the regulatory environment necessary for this.

Under a presidential decree, measures are being taken in the country to attract private investment in electricity production using renewable or traditional energy sources. However, despite the fact that a favourable investment environment has been formed, experience confirms that the absence of an electricity market is one of the key factors complicating the implementation of these tasks.

The main goal of the transformation of the domestic energy market was to provide citizens with an affordable, reliable, high-quality and sustainable electricity supply. At the same time, Minister Shahbazov believes that these steps contribute to creating favourable conditions for modern areas of energy development, stimulating the rational use of resources, reducing the financial burden on the budget and at the same time supporting private investors. It is planned to introduce new market regulation mechanisms in stages, with a transition period consisting of three stages. The main reforms provide for the gradual separation of the transmission and distribution of electricity, which will remain in the state monopoly, with competitive areas, that is, production and sales. This will ultimately allow all market participants engaged in production and sales to use electric networks transparently and equitably. Another fundamental step is the gradual formation of the electricity market, which will eventually create conditions for the purchase and sale of energy on more favourable and equal terms due to competition between market entities.

This goal-setting formed the basis of the new draft law "On electric power industry", developed on the basis of international experience, designed to form a legal mechanism for the next stage of reforms of the country's energy market. The draft law recently passed the third reading at the plenary session of the Milli Majlis and was adopted.

What innovations does the new document envisage and do the plans for market liberalisation threaten to increase electricity prices? The new law gives all subjects of the electricity market the right to participate in the sale and purchase of electricity on wholesale markets, as well as to provide services related to this area. In turn, suppliers have the right to sell electricity to consumers in the retail market in accordance with its rules. In order to form a wholesale electricity market in the country, the new law provides for the creation of an independent operator, which will be done at the third stage of the introduction of elements of the electricity market, that is, after July 1, 2028. However, already at the second stage (in the period from July 1, 2025, to June 30, 2028), it is planned to create a separate legal entity subordinate to the transmission system operator. The law provides for the adoption of short-term (for up to five years), medium-term (for a period of five to 10 years) and long-term (for a period of more than 10 years) state programs for the development of the electric power industry in the country. In particular, it is described in detail what works in the electric power sector will be carried out on the basis of permits and conditions for issuing these permits to legal entities and individuals. Thus, the generation of electricity over 500 kilowatts at hydroelectric power plants or from biogas or other fuels, and in other cases the production, transmission and distribution of electricity over 150 kilowatts, operation of electrical installations with a capacity of over 150 kilowatts, import and export of electricity will be carried out on the basis of permits issued in accordance with the new law "On electric power" and the law "On licenses and permits".

The new regulatory act governs all aspects of power outages, and the document clearly states the parties' obligations, and possible force majeure circumstances, as well as the reasons and timing of the power outage, thereby excluding any arbitrariness and protecting consumers' rights. The document also describes in detail the actions of power grid operators in order to prevent illegal connection of users to power lines, and unauthorised interference in the operation of electricity meters, which should help minimise the theft of electricity, as well as its losses for technical reasons.

Nevertheless, even taking into account these innovations, the liberalisation of electricity prices is not envisaged in the near future. "Considering that the greatest interest of deputies during the discussion of the bill was caused by issues related to electricity tariffs, I would like to note that the new law is not aimed at raising prices at all. In the near future, price liberalisation is not envisaged, tariffs will be regulated," the energy minister said, stressing that, according to preliminary estimates, the market effect of the new transformations will manifest itself in five years. After the market model is fully operational, the competitive environment and the dominance of manufacturers offering lower prices in the market will not allow wholesale prices to rise, and as a result, retail prices. The key to this will be the preservation of the transmission and distribution of electricity in the state monopoly, which means that tariffs will be regulated by the relevant state agency.