Co-funded by the European Union Azerbaijan 2021 Energy Policy Review Co-funded by the European Union Azerbaijan 2021 Energy Policy Review INTERNATIONAL ENERGY AGENCY The IEA examines IEA member IEA association the full spectrum countries: countries: of energy issues including oil, gas Australia Brazil and coal supply and Austria China demand, renewable Belgium India energy technologies, Canada Indonesia electricity markets, Czech Republic Morocco energy efficiency, Denmark Singapore access to energy, Estonia South Africa demand side Finland Thailand management and France much more. Through Germany its work, the IEA Greece advocates policies Hungary that will enhance Ireland the reliability, Italy affordability and Japan sustainability of Korea energy in its 30 Luxembourg member countries, Mexico 8 association Netherlands countries and New Zealand beyond. Norway Poland Portugal Slovak Republic Spain Sweden Switzerland Turkey United Kingdom United States The European Commission also participates in the work of the IEA Please note that this publication is subject to specific restrictions that limit its use and distribution. The terms and conditions are available online at www.iea.org/t&c/ Source: IEA. All rights reserved. International Energy Agency Website: www.iea.org Foreword The International Energy Agency (IEA) has been conducting in-depth peer reviews of the energy policies of its member countries – and of other countries – since 1976, and it recently modernised these reviews to focus on some of the countries’ key energy transition and security challenges. FOREWORD Azerbaijan is one of the focus countries of the EU4Energy programme, which is carried out by the IEA and the European Union along with the Energy Community Secretariat and the Energy Charter Secretariat. The other EU4Energy focus countries are Armenia, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Ukraine and Uzbekistan. The programme is designed to support the goals and aspirations of the 11 focus countries to implement sustainable energy policies and foster co-operative energy sector development at the regional level. As part of this programme, the IEA conducts in-depth reviews of each focus country. Azerbaijan’s oil and gas production continues to support the country’s economy and energy supply and provide most of its exports and government revenue. However, many major oil and gas importing countries have recently pledged to reduce greenhouse gas emissions to net zero by mid-century, adding an extra element of uncertainty to the long- term economic outlook for countries like Azerbaijan that are heavily dependent on hydrocarbon exports. To help Azerbaijan respond to its energy sector challenges, this report proposes several ways it can make both its energy supply and consumption more efficient and diverse. The review recommends that Azerbaijan transition 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. The withdrawal of subsidies should, however, be accompanied by support measures for the country’s economically vulnerable citizens. Such a transition would attract new market entrants and new investments, including to develop Azerbaijan’s significant solar and wind energy resources. These measures would also help limit greenhouse gas emissions. This in-depth review aims to guide Azerbaijan in its energy sector reforms and help it achieve its energy policy goals of making the most of its abundant resources and providing affordable, secure and clean energy to its population. reserved. rights All 3 IEA. ENERGY INSIGHTS Foreword ..............................................................................................................................3 1. Executive summary .....................................................................................................11 Scaling down the long-term importance of oil and gas .....................................................11 A path to a more efficient, dynamic and sustainable energy system ................................12 Gas and electricity market reform .....................................................................................13 Securing larger electricity supplies ....................................................................................15 Using energy more efficiently ............................................................................................15 Energy research, development and innovation merit additional effort ..............................16 CONTENTS OF TABLE Further energy data improvements ...................................................................................17 Key recommendations .......................................................................................................17 2. General energy policy .................................................................................................19 Country overview ...............................................................................................................19 Energy supply and demand ...............................................................................................21 Energy production and domestic supply ...........................................................................22 Energy consumption ..........................................................................................................23 Energy sector governance ................................................................................................25 Key policies and reform efforts ..........................................................................................27 Energy statistics ................................................................................................................30 Assessment .......................................................................................................................31 Recommendations .............................................................................................................33 ENERGY SECURITY 3. Oil and natural gas ......................................................................................................35 Overview ............................................................................................................................35 Supply ................................................................................................................................36 Exploration and production ................................................................................................39 reserved. Trade .................................................................................................................................44 rights All 5 IEA. TABLE OF CONTENTS State oil and gas revenue ..................................................................................................51 Demand .............................................................................................................................52 Regulation ..........................................................................................................................54 Domestic operations and infrastructure ............................................................................57 Security of supply ..............................................................................................................61 Assessment .......................................................................................................................61 Recommendations .............................................................................................................65 4. Electricity......................................................................................................................69 Overview ............................................................................................................................69 Supply and demand ...........................................................................................................69 Electricity sector structure and reform ...............................................................................75 Networks ............................................................................................................................78 Prices and tariffs ................................................................................................................80 Security of supply ..............................................................................................................82 Assessment .......................................................................................................................84 Recommendations .............................................................................................................88 5. District heating ............................................................................................................91 Overview ............................................................................................................................91 Supply and demand ...........................................................................................................91 Regulation and prices ........................................................................................................92 Modernising DH infrastructure ...........................................................................................94