1. Policy Issues for Renewable Energy in Azerbaijan Why change? How to Change and Why Change isn’t Happening

2. Dr. Randall Baker Distinguished Professor New Bulgarian University and Emeritus Professor, Indiana University. Dr. Enver Safarzade National Consultant. September, 2009. Report produced by

3. Basic details on Azerbaijan The country has vast resources of oil and gas, originally found here Now the resources are exploited in the Caspian Sea here and here New Pipelines To Turkey, Bulgaria and Europe Disturbed area of the Russian North Caucasus

4. Why Make This Journey? It is a matter of vision—the hydrocarbon energy base cannot last for ever—maybe 30 years? Use the wealth from hydrocarbons to strategically position this country for that changed situation. This is strategic management instead of crisis management—the default, or “do nothing” option. Since Policy is normally short term, Az is to be commended for thinking this far ahead and making the transition.

5. Change This study was made at a time of enormous change. Globally, countries started major practical policy initiatives to boost R&AE: UK, USA, Germany, Japan. Copenhagen Conference Dec 2009 Internally: Structural changes, gas and oil pipeline agreements, renewing Azerenergy’s capacity, the State Agency for Alternative and Renewable energy…

6. Why a “Roadmap?” A roadmap is not an end, but a means for achieving that end. The end, or destination where we want to be, is stated in POLICY, which is another word for VISION Our starting point is the current energy situation, the environment through which we drive is CHANGE (global, regional and local) The map guides, removes confusion, and takes us where we want to be.

7. Policy Azerbaijan has several clearly-stated Presidential Directives in this area. Renewable Energy Environment Regional Development As well as other commitments under Kyoto, IRENA, Pipeline agreements, CDM (which provides incentives and targets 8%)

8. Existing Situation Azerenergy has a monopoly for electricity It has its recent huge investments to protect It relies on fossil fuels, which are subsidized, and carry a very large (x6) opportunity cost for exports Its tariffs are fixed by a state body and are, by world standards, very low. Problems of unreliability being addressed, and consumption dropped as a result (by 2/3rds in some cases) Is R&AE competition?

9. Alternative Energy Now Azerenergy produces about 11% of its electricity by water power Otherwise, only about 1,5% nationally This is targeted to rise to 8 or 10% Small wind farm, some private solar development, but nothing major

10. Potential Numerous technical reports by Finnish, Swiss, German and other consultants have shown high potential (higher than Denmark and Germany) Wind power along the coastline, solar in the central Kura Valley and the hydropower in the north and northwest. However, there is not much operating in any of these sectors, but it is changing

11. Identified Structural Issues Government wants significant private participation in R&AE; but Tariffs (5-7c against 20c in Europe and more); monopoly status of AZE; inadequate financial loan structure (5 years repayment, 28% interest) No incentive program. Often no way of charging for services.

12. Central Problem Though we have policy, we do not have an integrated strategy of how to achieve this policy The initiative is diffused, sometimes working against itself For R&AE to succeed, it needs to be kick-started, as in Germany, UK, Denmark etc, and this role is always taken by the Government. Examples Then the private sector can play its role. 40% of British electrical energy is planned to come from alternative sources by 2020.

13. Costs, Returns and Benefits R&AE has many benefits to the nation, including regional poverty alleviation, environment, global responsibilities, export earnings from hydrocarbons… But benefits do not always show up on the books of private companies as profits, and they cannot be expected to provide for these unless compensated. Private sector competing against sunk costs of existing energy system Orders insufficient for economies of scale.

14. Conclusions and Recommendations The creation of the State Agency is critical—roles include: integration, finance reform, strategic plan including Azerenergy, regional policy, incentives to the private sector for initiatives, targets to be monitored. Only the government, by direct investment, can secure benefits, and get the private sector up to a scale that makes it competitive. Investment in R&AE for government property would seem to be a priority.

15. Conclusions and Recommendations The Tariff system needs a methodology to include R&AE The capacity of the State Agency must reflect the size and scope of its task There is a need to build confidence through a system of incentives, protection of investment, loan reform (line of credit), Need to study the energy purchasing capacity of poor and remote areas and people The key issue of subsidized hydrocarbons needs to be resolved soon.