TACR: Regional: Enabling Climate Change

Technical Assistance Consultant’s Report Project Number: 42462 September 2009 R-CDTA 7274:Enabling Climate Change Interventions in Central and West Asia Azerbaijan Alternative Energy Sector Analysis and Roadmap Prepared by Dr. Randall Baker and Dr. Enver Safarzade Indiana University School of Public and Environmental Affairs, USA For Asian Development Bank This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. (For project preparatory technical assistance: All the views expressed herein may not be incorporated into the proposed project’s design. A Roadmap for Renewable Energy in Azerbaijan 2009.1 R-CDTA 7274: Azerbaijan Alternative Energy Sector Analysis and Roadmap Dr. Randall Baker Professor Emeritus, Indiana University School of Public and Environmental Affairs, USA Distinguished Professor, New Bulgarian University, Sofia And Dr. Enver Safarzade National Consultant July – September 2009 2 Contents Introduction. 4 Change. 7 Why a Roadmap? 10 The Policy Framework. 13 The Potential. 15 The Tariff Structure. 20 Costs, Returns and Benefits. 22 A Case Study of Costs, Returns and Benefits. 25 Azerenergy. 35 The Structural Issue. 39 Conclusion and Recommendations. 41 Annexes. 43 Principal Policy Statements. 44 List of Reports Consulted. 56 Officials Interviewed. 57 Simple SWOT Analysis. 58 3 Introduction This report, by ADB to the Republic of Azerbaijan, is conducted under to rubric of a regional attempt to ameliorate the effects of climate change—in this case by addressing what is widely believed to be one of the principal causes: energy generation from non-renewable sources. It is reassuring to find a country such as Azerbaijan, whose economy is so dependent on the exploitation and export of traditional hydrocarbon resources, so forward-looking as to envisage a transition to less damaging, and potentially inexhaustible supplies of energy. The continued use of natural gas and oil, the status quo as it is referred to in this report, is the ―easy option‖ though it will not always be an option since, by definition, this source of fuel is exhaustible and will become more expensive. Furthermore, it will continue to add to the global problem of carbon build-up, which the government is treaty-bound to address. On the part of the government of Azerbaijan, the various policy statements (included in the annexes) reflect a strategic approach, rather than the default option, which eventually steers us into crisis management, possibly on a huge scale. The policy statements reflect an intent to steer toward a more sustainable, healthier and cleaner future. However, having policy is one thing, and implementing it in the light of a huge existing status quo is another. The climate change question is one with very many, interlocked, components, whereas governments in most countries have a functional, or sectoral, structure that tends to disaggregate integrated problems of a high order. In the case of Azerbaijan, the various policy statements have taken the form of Presidential Decrees; something to which all arms of government must listen. At the same time, during the preparation of this report, the consultants found report after report of a high technical order on the subject of Renewable and Alternative Energy (R&AE) in Azerbaijan, representing thousands of man-hours, and untold hundreds of thousands of dollars. And yet, there is little on the ground to show the realization of these many studies. So, there is a clear gap between intent and realization, and it is this that the present report addresses. It avoids repeating the voluminous literature on potential, and every aspect of current and potential energy generation. Instead, it addresses the perceived reasons why the transition to a greater reliance on R&AE has not occurred. It has nothing to do with political will—that has been clearly expressed. It has everything to do with the fact that there has not been, and in some cases still isn‘t, an administrative, legislative and economic framework to ―make this policy happen.‖ The various components do not come together, and there is no clear strategy on how to make the policy work. But, this is not a negative view, simply an expository one. The report addresses, up-front, the enormous number of changes taking place globally and in the Republic, that address the need and modality for change. In fact, this complicates the report because so much is in transition as it is written, but the seeds of real, positive change are there and must be strengthened, with outside assistance where relevant and possible. However, this is a national initiative, best reflected in the creation, right in the middle of the report writing, of what was to be our central recommendation: the creation of a State Agency for Alternative and Renewable Energy in Azerbaijan. This mid-level between Policy and Implementation is key to integration, methodology and strategy design. It is, to a large extent, what has been missing previously, when the country had only a State Commission which, at best, was an 4 advisory group without any substantive existence in the administrative machine. Renewable energy in Azerbaijan was caught in an Administrative Trap, that without intent, made it well- nigh impossible to have a cohesive, intelligible and structured strategy. Once such a strategy is in place, and the various components have been brought on board (including tariffs, incentives, popular education and the like) then some real targets can be set and measured for the transition. There is no real ―obstruction‖ to this transition in place in Azerbaijan, just an inability to make it work to the benefit of all participants. Not least in this picture is the dramatic and costly refurbishment and efficiency-building of Azerenergy—the state monopoly, which has stated that its expanded capacity has ―the country covered.‖ We asked an Azerenergy spokesman this question directly, and we told, ―With its recent investments, Azerenergy now has the capacity to supply all the country‘s needs for electricity.‖ Does this mean that alternative energy, from which Azerenergy (apart from its aged larger hydro generating capacity) has been administratively excluded to favor the private sector, is left in a position of facing ―competition‖ rather than cooperation with the alternative sector? At the same time, the private sector, often characterized as ―risk-averse‖ is reluctant to become involved (with one potentially significant exception). Perhaps an explanation that is closer to the truth is the fact that the private sector sees a world of few demonstrated pilot projects, enormous administrative and legislative impenetrability, questionable profitability, competition from a monolithic, monopolistic giant, and almost no suitable terms for raising capital locally. In these circumstances, they can hardly be blamed for being risk averse, for the risks seem incalculable, and the terms onerous. Mention is made in many reports, and published articles on energy in Azerbaijan, of the phenomenon of ―Dutch Disease.‖ This is a condition that occurs when countries suddenly encounter an enormous increase in revenues—usually from hydrocarbon exploitation. It is not inevitable, and it sometimes seems unfair to label it with the example of the Netherlands, since there are many, much worse examples. Briefly, this rapid inflow of money is characterized, under the rubric of Dutch Disease, as follows: The revenue, especially from hydrocarbons, accrues initially to the state sector in terms of royalties, including fees for the passage of energy via pipelines over the national territory. Some jobs are generated, but relatively few directly in the context of the size of the revenue. The government, then, has a major task of ―making the revenue work,‖ in terms of job creation, incentives, infrastructure creation and the like. This situation has an in-built tendency to favor the big and quick fix—huge highways and public buildings, grandiose improvement of facilities, and the generation of endless bureaucratic ―make-work‖ jobs. This works against more modest, and long- term options. The capacity to spend is the capacity to inflate, which is something that Azerbaijan has tried to control with the State Oil Fund that sets money aside for the future. Nevertheless, unless this flow of money is regulated, it can lead to inflated currency values, a limitless capacity to import rather than produce, and a rush of money into project with limited real returns. It discounts the future because of the simplicity of ―solving‖ problems here and now. This is critical because hydrocarbons are here and now, and ultimately do not have a future. 5 Some governments reveal a capacity to cope with this, such as Norway; others fall under its spell and show signs of extreme stress, such as Nigeria. In order to counter the temptations of Dutch Disease, governments in these situations need vision, and vision is a capacity to see how the future should be, not eventually get there by riding along with the present. The statements about alternative energy in a country afloat on hydrocarbons is a sign of vision, because, quite simply, Azerbaijan doesn’t have to do anything to change the present situation, especially in a world where politics is notoriously short-term.‖ If this vision does not seem to be becoming realized, it is possible to say that the government ―wasn‘t really serious, and it was only ‗window-dressing‘‖ or it can be that the policy is getting lost in an implementing (administrative, legal and economic) system that cannot address it. The case of Azerbaijan definitely appears to be the latter, and the policy is continually readdressed, and there is some sense of frustration that more progress is not being made. So, the challenge is not technical, and that is why this report is not technical. The vision is there; the modalities are not, but they are being worked on and change is at hand.

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