Spotlight: renewable energy project development in Azerbaijan

An extract from The Renewable Power Legislation Evaluate, fifth Version

Introduction

Azerbaijan is an oil-rich nation within the Southern Caucasus area, which has super potential within the subject of renewable power. In response to the Ministry of Power of the Republic of Azerbaijan (MERA), renewable power sources are estimated to have the ability to generate 27,000MW, comprising 23,000MW of photo voltaic power, 3,000MW of wind power, 520MW of mountain rivers and 380MW of bioenergy potential.

The usage of renewable power sources is afforded a fantastic stage of significance, though Azerbaijan has been closely exporting its pure oil and gasoline sources. Following the oil worth shocks of 2014–2015 and 2020, the federal government has recognised the necessity to shift reliance from conventional power sources to renewable power sources in an try and diversify the nation’s economic system.

Main steps have been taken in Azerbaijan to speed up the progress of renewables. This might be evidenced by variety of pilot tasks, in addition to new legal guidelines being launched into the prevailing authorized framework governing renewable power sources. Experience has been sought from numerous channels – similar to worldwide monetary establishments – within the pursuit of aiding the nation to attain its targets.

Azerbaijan’s geographically advantageous location affords a chance to capitalise on renewable power sources. There’s a appreciable quantity of photo voltaic, wind, bioenergy and hydro sources current all through Azerbaijan.

In response to MERA, the full capability of energy generated in Azerbaijan is 7,542.2MW, whereas the ability plant capability on renewable power sources is 1,304.5MW. This determine comprises giant hydropower vegetation and accounts for 17.3 per cent of the full capability. The capability of hydropower is 1,154.8MW (consisting of 30 stations, 20 being small hydropower vegetation); wind energy capability is 66.1MW (seven stations, two being hybrid); photo voltaic power capability is 45.9MW (12 stations, two being hybrid); and bioenergy capability is 37.7MW (two stations, one being hybrid).

In its pledge to contribute to international local weather change initiatives, Azerbaijan has taken half in quite a few worldwide conferences. Below the Paris Settlement, Azerbaijan has set a goal to maintain a 35 per cent discount in greenhouse gasoline emissions by 2030, as compared with the bottom 12 months (1990). By the conclusion of the twenty sixth United Nations Local weather Change Convention in Glasgow in 2021, Azerbaijan had adopted a brand new voluntary dedication to create a zero emissions zone within the liberated territories and scale back greenhouse gasoline emissions to 40 per cent by 2050. To have the ability to realise the targets, MERA has set a goal to extend the share of renewable power sources within the era of electrical energy to 30 per cent by 2030.

The 12 months in evaluation

From 2019 onwards, there was a gradual enhance within the subject of renewable power sources in Azerbaijan. Primarily, this has been related to the implementation of a number of pilot tasks going down with giant firms.

In early 2020, implementation agreements for pilot tasks have been signed between MERA and ACWA Energy from Saudi Arabia and Masdar from the United Arab Emirates. Below these agreements, a wind energy plant with a capability of 240MW is to be constructed by ACWA Energy and a solar energy plant with a capability of 230MW is to be constructed by Masdar. These power tasks can be instrumental in supporting Azerbaijan’s goal of decreasing greenhouse gasoline emissions and rising the share of renewable power sources as envisioned by MERA. Business operations of the implementation agreements signed with ACWA Energy for the development of wind vegetation commenced in 2022, whereas industrial operations in relation to the implementation agreements signed with Masdar for the development of the Garadagh solar energy plant are anticipated to start from 2023.

One other notable growth is the implementation settlement signed between MERA and BP in June 2021 for the development of a 240MW solar energy plant within the Jabrayil area. This settlement serves to ascertain a inexperienced power zone within the Karabakh area.

In early June 2022, implementation agreements for brand new multibillion-manat tasks have been signed between MERA and Masdar. Below these agreements, a wind energy plant with a capability of 1GW, a solar energy plant with a capability of 1GW, and built-in offshore wind and inexperienced hydrogen vegetation with a capability of 2GW are to be constructed by Masdar. It’s anticipated that the ability generated from offshore wind growth within the Caspian Sea can be exported via Turkey to Europe sooner or later.

To find out the optimum restrict of recent capability to be linked to the electrical energy grid, MERA has invited the German consulting firm VPC to assist obtain its purpose of accelerating the share of renewable power sources to 30 per cent. In accordance with the VPC’s report, the set up of capability of 1,500MW could be wanted to attain 30 per cent by 2030.

These developments will be seen as the inspiration for the primary international investment-based renewable energy vegetation with substantial output capacities.

Azerbaijan’s stance to actively promote the persevering with progress of the renewable power sources subject is obvious from its laws. Just lately, new legal guidelines have been launched to enhance the effectivity of different legal guidelines on this space.

Azerbaijan’s market of renewable power sources has solely just lately began to develop. Due to this fact, to this point, there haven’t been any notable mergers or different important market actions taking place on this space.

The coverage and regulatory framework

i The coverage background

In gentle of the foregoing, it appears that evidently the economic system is being diversified and the event of renewable power sources is being expedited. The strengthening of the usage of renewable power sources is likely one of the fundamental targets being carried out as a part of the power safety coverage of the Azerbaijani authorities.

The federal government started the method of financial diversification after the monetary disaster of 2007–2008 and oil shock costs of 2014–2015. In 2012, the federal government produced a growth technique below the title ‘Azerbaijan 2020 – Look into the Future’. The goal of the technique is to increase alternatives and implement stimulating measures to hurry up the usage of renewable power sources.

Moreover, in December 2016, in response to the decline of oil costs and subsequent recession in Azerbaijan, the President signed a decree adopting strategic street maps on nationwide economic system and 11 particular person sectors. This street map known as for rising the share of renewable power, the institution of a wholesale market and a gradual transition to a liberalised market.

In Might 2019, to additional increase reform efforts, the Order of the President on the Acceleration of Reforms within the Power Sector was adopted. Reiterating the 2016 market reform concepts, it units out timetables for the preparation of rules and legal guidelines for the electrical energy sector.

Azerbaijan is on the early phases of progress within the renewable power sources space. Previously, the dearth of a strong authorized framework with enough political help mechanisms has precluded it from attaining this purpose. Nonetheless, below the present state coverage and new regulatory framework (which operates on the idea of both an public sale system or direct negotiations with the federal government), help mechanisms starting from assured tariffs to extra tax concessions and other forms of help mechanisms to advertise international direct funding, lively shoppers and scientific analysis are envisaged. Equally, sure incentive measures comprising assured offtake, assured connection, precedence in distribution and transmission, and long-term land leases are being proposed for traders in renewable power sources tasks in Azerbaijan.

Different help mechanisms are noticed below the funding agreements in pilot tasks. The granting of an funding proper is certainly one of them, which incorporates:

1. the unique proper for the undertaking firm to the advantages of the plant, together with the precise to promote power generated inside Azerbaijan;
2. the unique proper to the undertaking website for the needs of the event of a plant, below and in accordance with the land lease settlement; and
3. the rights offered below the funding promotion certificates.

The holders of an funding promotion certificates are granted tax and customs exemptions. Fee enterprise by the federal government and a governmental forex convertibility obligation are the opposite two supporting mechanisms.

The Azerbaijani authorities can also be concerned in guaranteeing that issues are raised shortly and effectively with governmental authorities if an power producer makes a notification regarding unreasonable and discriminatory behaviour of the governmental authorities in opposition to the power producer in query. As well as, the federal government prompts state businesses to contemplate the power producer’s utility in respect of the governmental authorisations, and to grant, concern or reissue the governmental authorisations in a well timed method.

Below the funding settlement, additional help mechanisms are offered, together with:

1. a wind measurement marketing campaign (in wind tasks) below which the power producer shall be entitled to suggest a revised technical configuration for the plant relying on the wind measurement outcomes; and
2. forex de-pegging, below which the producer shall be entitled to seek the advice of with the federal government on the impact of such in Azerbaijan.

At present, the federal government is actively engaged within the promotion of many trendy applied sciences concerning renewable power sources. Particularly, it has been in shut cooperation with many worldwide firms – similar to BP and KBR (United Kingdom), Masdar (United Arab Emirates) and Equinor (Norway) – to debate the probabilities of manufacturing inexperienced hydrogen utilizing superior applied sciences. Offshore wind energy might be used to make this a actuality as preliminary research have proven that the wind potential within the Caspian Sea is estimated at 157GWh.

In response to the Minister of Power, Parviz Shahbazov, the plans for the following 5 years till 2026 is to create hydropower vegetation and small hydropower vegetation with manufacturing capacities of not less than 200MW and a community with an extra capability of 10,000kW for lively shoppers.

The President signed an order for the institution of a inexperienced power zone on 3 Might 2021 within the Karabakh area. The settlement to ascertain this zone was signed between MERA and the Japanese firm TEPSCO. The undertaking envisages to develop trendy and energy-efficient applied sciences to grasp renewable power tasks’ potential (together with photo voltaic, wind, hydro, geothermal and bioenergy) in Azerbaijan.

The Asian Growth Financial institution has offered help to Azerbaijan in a pilot undertaking titled Information Trade and Technical Help on the Growth of Floating Photo voltaic Panels System. The undertaking intends to ascertain an as much as 100kW capability photovoltaic system in Lake Boyukshor. In response to the appearing director of the Azerbaijan Renewable Power Company, Tabriz Ammayev, there can be a rising curiosity within the personal sector on this space on account of pilot tasks for the set up of photo voltaic panels on the water floor. The implementation of this undertaking is aimed to be accomplished by March 2023.

ii The regulatory and consenting framework

There are 5 fundamental legal guidelines regulating the power sector:

1. the Legislation on Power dated 24 November 1998;
2. the Legislation on Electro Energetics dated 3 April 1998;
3. the Legislation on Electrical and Thermal Energy Vegetation dated 28 December 1999 (the ETPP Legislation);
4. the Legislation on Utilisation of Renewable Sources within the Electrical energy Manufacturing dated 31 Might 2021 (the URSEP Legislation); and
5. the Legislation on Environment friendly Use of Power Sources and Effectiveness of Power dated 9 July 2021 (the EUER Legislation).

When the Legislation on Power was adopted, the event of renewables was one of many early-stage targets set to be achieved. The Legislation on Electro Energetics decided the record of the actors of power markets, together with the state electro-energetics firm, personal turbines, power provide firms and power shoppers.

Much like the Legislation on Electro Energetics, the ETPP Legislation emphasised that the state would permit personal turbines to participate within the power market. Below this regulation, the power produced by personal power producers can both be used for personal functions, or bought to public electro-energetics firms or power provide firms.

Two new substantial legal guidelines have been handed in 2021, essentially the most very important of which is the URSEP Legislation, which was the primary act to solely take note of renewables. This laws comprises ideas below which the renewable power business have to be regulated, the help mechanisms supplied to international traders, and the roles and tasks of the state and turbines. The EUER Legislation envisages the power effectivity insurance policies of the federal government.

MERA holds the central govt authority within the power subject in Azerbaijan. The implementation of presidential orders and decrees in addition to state coverage issued by the federal government are amongst its principal tasks.

The Strategic Highway Maps in the end led to the institution of the Azerbaijan Power Regulatory Company (AERA) below MERA in 2017 by Presidential Decree No. 1750. AERA regulates relations between producers, suppliers, transmission system operators, distributors and shoppers within the Azerbaijani power sector.

The duties of AERA embody:

1. establishing management over present power laws and laws on the safety of shoppers’ rights;
2. guaranteeing the event of incentives to extend the funding local weather within the subject, in addition to preparation of supporting mechanisms to draw funding by taking account of worldwide expertise;
3. contemplating disputes between producers, suppliers, transmitters, distributors and shoppers;
4. making proposals on the formation of worth (tariff) coverage within the related subject; and
5. taking measures to create a wholesome aggressive surroundings within the related subject and enhance the effectivity of power manufacturing.

To realize its targets, MERA makes proposals for restructuring measures, undertakes power market evaluation and develops the funding local weather. Renewable power coverage can also be overseen by MERA.

The duties of the Azerbaijan Renewable Power Company, established in 2020, with respect to renewable power sources embody, however should not restricted to, the next:

1. guaranteeing the fulfilment of Azerbaijan’s obligations on points regulated by the worldwide agreements of Azerbaijan and falling inside its scope;
2. figuring out the potential of renewable power sources in numerous areas of Azerbaijan and the instructions for his or her use;
3. implementing tasks for brand new power services;
4. taking measures for the safety and monitoring of recent power services to evaluate their potential for the usage of renewable power;
5. making proposals to MERA on the route of growth and utility of innovation within the related subject; and
6. collaborating in measures taken to make sure environmental security in the usage of renewable power sources.

In 2005, the Tariff Council was established, which is concerned in regulating and figuring out wholesale and retail tariffs for gasoline, electrical energy, refined petroleum merchandise and central heating. At present, the Tariff Council implements state rules on service charges and costs associated to public companies, in addition to their assortment, by cooperating with public organisations and native or govt our bodies.

There are 4 varieties of exercise in Azerbaijan within the subject of renewable power sources for which regulatory approvals are required. These are import and export of electrical energy, electrical energy transmission, electrical energy distribution, and manufacturing of electrical energy in extra of the capability established by the related govt authority. All permits pertaining to those actions are granted by MERA.

The method for granting permits to make use of renewable power services contains plenty of steps and tasks dispersed throughout numerous ministries and govt authorities.

First, a land use allow have to be obtained from the related govt authority. Second, relying on the area the place the renewable power undertaking can be constructed, a development allow have to be obtained from the related physique decided by the President. For instance, if the renewable power undertaking is to be constructed within the administrative territory of Baku or within the administrative territories and cities coated by the Karabakh and East Zangazur financial areas, the State Committee on City Planning and Structure grants the development allow. In relation to development objects in different administrative territorial models, native govt authorities grant the development allow. Third, MERA grants an electrical energy era allow. Fourth, AERA points a commissioning act for energy era and an influence buy settlement (PPA) to be concluded with Azerenerji OJSC, which is a state electro-energetics firm. Lastly, an electrical energy connection allow is granted by both Azerenerji OJSC or Azerishiq OJSC, which is a state-owned power provider firm, relying on to which community the ability vegetation can be linked.

To acquire a allow for the import and export of electrical energy, an applicant shall submit an utility within the prescribed type (whether or not in individual or electronically) to MERA.

Upon evaluation of the undertaking paperwork, MERA shall concern a allow (i.e., signal a contract or take some other motion required of the applicant) or undertake an administrative act refusing to concern a allow.

The process for acquiring a allow for all of the above-mentioned actions is regulated by the Legislation on Licenses and Permits and the Legislation on Electro Energetics. Nonetheless, to acquire a allow for the manufacturing of electrical energy in an extra capability, consent from the Cupboard of Ministers is required. An utility by MERA shall be submitted to the Cupboard of Ministers for approval.

The primary stakeholders concerned in renewable power developments are MERA and Azernerji OJSC. Their regulatory roles are set forth in laws. Below the latest pilot tasks, MERA indicators the funding settlement on behalf of the federal government and Azerenerji OJSC acts because the assured purchaser below the PPA.

One of many fundamental legislative acts regulating environmental issues for renewable power developments is the Legislation on Environmental Affect Evaluation dated 12 June 2018. An environmental influence evaluation is to be performed upon growing a undertaking regarding wind energy vegetation with a capability of greater than 1MW in addition to tasks regarding photo voltaic, water, biogas, geothermal and electrical energy stations with a capability of greater than 10MW for the needs of:

1. implementing measures to find doable antagonistic impacts on the surroundings and human well being;
2. assessing their scale and depth; and
3. eliminating or decreasing any unfavorable impacts.

Whereas finishing up the proposed environmental influence evaluation, impacts on wildlife and materials cultural heritage, amongst different issues, are additionally thought-about.

There’s a separate framework that applies to coping with endangered species. Endangered species are protected by the Legislation on Specifically Protected Pure Areas and Objects. This authorized regime ensures that these objects are allotted within the specifically protected pure areas, and prohibits financial and some other actions that violate the pure state of the surroundings.

Renewable power undertaking growth

i Venture finance transaction constructions

A typical possession construction on this sphere is created via a particular goal car. On this approach, the dad or mum firm is ready to switch the financing to the subsidiary firm. As seen from latest pilot tasks, that is performed for the international investor (operator) firm to have the ability to take part in renewable power tasks. As such, the principle route is by making a separate subsidiary firm and complying with the registration necessities of the prevailing laws.

The principal items of documentation used throughout renewable undertaking finance embody, amongst different issues:

1. frequent phrases agreements;
2. mortgage agreements;
3. undertaking funds and share retention agreements;
4. accounts agreements;
5. inter-creditor agreements; and
6. safety agreements.

This record is topic to alter as extra developments happen on this subject.

The safety constructions used embody:

1. the mortgage of the ability plant to be constructed;
2. a pledge of the shares of the borrower firm;
3. a pledge of the funds within the checking account of the borrower firm; and
4. an project of rights each in opposition to the federal government and the assured purchaser (i.e., Azerenerji OJSC).

The principal individuals in renewable power tasks are the Azerbaijani authorities, Azerenerji OJSC, the international investor (each the dad or mum and subsidiary firms), the safety agent and the institutional banks or lenders. At present, there are 4 fundamental lenders supporting the implementation of the pilot tasks within the renewable power sector: the European Financial institution for Reconstruction and Growth (EBRD), the Asian Growth Financial institution, the Abu Dhabi Fund for Growth and the Japan Worldwide Cooperation Company.

One of many two most outstanding examples of the pilot tasks being carried out in Azerbaijan are those signed between ACWA Energy (the Khizi-Absheron wind energy plant) and Masdar (the Garadagh solar energy plant). The previous can be primarily financed by the EBRD, whereas the latter can be financed by all of the above-mentioned lenders.

ii Energy buy

At present, Azerbaijan doesn’t have specifically designated establishments that buy renewable power. Because the power sector’s fundamental subsectors are state owned and monopolised, as at June 2022, there is just one establishment that purchases renewable power: Azerenerji OJSC.

The underlying route to make use of and generate the power sources is to acquire a allow from MERA. As mentioned above, in line with the Legislation on Licenses and Permits, particular permits could also be granted for the import and export of electrical energy, electrical energy transmission, electrical energy distribution and the manufacturing of electrical energy in an extra capability.

There isn’t a lively marketplace for environmental attributes. Nonetheless, as seen from latest developments, there was a reference to emission credit score inside PPAs which may trace on the potential growth of environmental attributes within the close to future.

As Azerenerji OJSC is the only real purchaser, there is no such thing as a lively company energy buy market that has but been established in any type. The identical might apply to the wholesale market preparations for the sale of energy, as Azerenerji OJSC purchases the power and passes to the operator, which is itself or, in some circumstances, Azerishiq OJSC (a state-owned firm), relying on the connection grid.

iii Non-project finance growth

We now have not just lately seen any developments within the non-project finance space.

Distributed and residential renewable power

For Azerbaijan, the desired restrict for electrical set up is 150kW. If it goes past the said restrict, it’s crucial to acquire a allow from MERA. There’s a resolution of Cupboard of Ministers on this regard (particularly, on the issuance of commissioning certificates for electrical installations with a capability of greater than 150kW). Nonetheless, to this point, there is no such thing as a established marketplace for distributed power and residential renewable power, nor have there been any important developments on this space.

Mergers and acquisitions

Renewable power provide chains

In Azerbaijan, the three fundamental varieties of renewable power used are photo voltaic, hydro and wind. The primary varieties of manufacturing utilized in Azerbaijan in the middle of the newest offers in renewable power tasks are photo voltaic panels and wind generators. There are particular insurance policies and authorities mechanisms that present help for renewable power manufacturing, as mentioned above.

To advertise renewable electrical energy era and different power manufacturing, the federal government affords tax and tariff exemptions. Most remarkably, for a interval of seven years, entrepreneurs and qualifying firms are exempt from worth added tax for technical tools and services, in addition to being exempt from having to pay customs duties. Moreover, by regulation, they may also be exempt from paying property, land and half of their earnings tax.

The tariffs are set out beneath.

A purchase order tariff doesn’t apply to a big hydropower. Since 2021, the wholesale electrical energy tariff in Azerbaijan has been established at 0.066kWh.

It’s encouraging that the federal government’s present funding coverage is to draw international traders and privatise the power provide chain.

There isn’t a identified localisation requirement in relation to renewable power in Azerbaijan. To reiterate, sure assure and fee undertakings are offered by the federal government to the international investor or traders and Azerenerji OJSC purchases the power.

Different key issues

In relation to the operations and upkeep panorama, some tasks are nonetheless ongoing and there’s no such developed market in Azerbaijan.

Steps taken in direction of rising multi-technological developments have been prevalent in Azerbaijan over the previous few years. The federal government has been in lively cooperation with many worldwide organisations and corporations, as mentioned above. The particular stance of the federal government on this route is noticeable from its Azerbaijan 2030: Nationwide Priorities for Socio-economic Growth doc. Below the framework of this doc, particular consideration is paid to renewable power sources utilization in addition to the growth of inexperienced applied sciences, each for present and future intervals.

There have been no merger and acquisition developments concerning renewable power tasks, as this space is pretty new in Azerbaijan in comparison with different nations. Such actions are regulated by the Civil Code.

The identical can also be true for repowering, as there is no such thing as a particular framework or related apply on this regard. Recommissioning, against this, is regulated by the City Planning and Building Code, the place there’s a reference to the demolition of development services. Reference is also made to the pilot tasks, that are nonetheless within the means of being developed, for any extra issues in relation to decommissioning.

Conclusions and outlook

Azerbaijan has made an exemplary contribution to the renewable power sources subject. After years of stagnation within the sector of renewable energies, the federal government has begun to grasp its different power potential by implementing state insurance policies, which proved to be influential in helping the decision-making course of by related state establishments similar to MERA to facilitate developments on this space.

Nonetheless, there are nonetheless many intricacies concerned in finishing up renewable power tasks in Azerbaijan. The laws involving renewable power sources is pretty new and there are nonetheless some nuances related to it, as there should not many related implementing practices on this space. Acknowledging all of the peculiarities of the sector, Azerbaijan has chosen to seek the advice of with many worldwide establishments and organisations in its mission to maintain bettering this space and make it operate successfully.

Making an allowance for related suggestions from worldwide consultants, Azerbaijan has accepted recommendations to draw extra international funding by utilizing pilot tasks to realize experience from key gamers within the sector.

The entire means of getting the related permits from authorised ministries and govt authorities is being simplified, and, as well as, the power market must be reformed. The federal government has proven a constructive angle on this sense by taking steps to minimise state participation and making an attempt to shift its burden to the personal sector, making it extra interesting for a possible international investor to put money into renewable power tasks in Azerbaijan. At present, the EBRD and a consortium of worldwide consultants are concerned within the growth of a authorized framework to control the manufacturing {of electrical} power from renewable sources in addition to to set guidelines regarding the conduct of auctions for granting licences for renewable power tasks. Such rules and guidelines, as soon as enacted, will increase the curiosity of potential traders within the sustainable power supply sector in Azerbaijan.

By adopting a renewable power goal of 30 per cent to attain by 2030, Azerbaijan has demonstrated a agency stance in its pledge to honour its obligations below the Paris Settlement. In doing so, it has succeeded in offering long-term readability for potential traders and facilitating renewable power tasks within the course of. These targets are seen as important and difficult by representing the envisioned trajectory of market progress if backed by supportive coverage.

Offered that each one the above-mentioned suggestions are adopted and regulatory deficiencies are cured inside an affordable time, Azerbaijan will proceed to make a reputation for itself within the renewable power sources subject.