Middle Eastern energy giants Masdar and ACWA Power have struck agreements to make the first foreign investments in utility-scale solar and wind projects in Azerbaijan, marking a major step towards unlocking the country’s huge untapped renewable energy potential.
The oil-rich nation could generate more than 180GW in solar and wind power, according to its energy ministry and the World Bank, far outstripping today’s 1.3GW of installed renewables capacity.
In April, Abu Dhabi’s Masdar signed a $200m agreement to develop and operate a 230MW photovoltaic project, scheduled to come online in 2023. This comes three months after Saudi Arabia’s ACWA committed to building a 240MW wind project that will power 300,000 homes.
“Considering that these projects are the first green investments in Azerbaijan, they will play a great role in the country’s green transition,” said Javid Mustafayev, managing director of InvestBaku. “Besides the environmental benefits of these alternative energy sources, they can also provide new business opportunities for local small-to-medium enterprises.”
ACWA’s wind farm will be located just north of the capital, Baku, and Masdar’s solar plant will be 70 kilometres south near the Alat settlement along the Caspian Sea. Both will be structured as public–private partnerships, and are expected to quadruple the country’s wind capacity and increase solar capacity by nearly sevenfold.
The Caucasus state has struggled to diversify its economy away from petroleum, which accounts for 90% of exports and up to half its gross domestic product. Natural gas generates 90% of its electricity, with hydropower making up most of the remainder.
The government wants to increase renewables’ share of the electricity mix to 30% by 2030. That requires more private investment — particularly from abroad — in an industry dominated by state-owned power producer AzerEnerji. Laurent Ruseckas, an executive director and Eurasia expert at financial services company IHS Markit, believes Masdar and ACWA’s investments mark the beginning of that process. “Once the first deals get done, it’s hard to imagine why there wouldn’t be more,” he said.
As two of the world’s leading renewables players, their projects are a seal of approval which will likely prompt others to follow suit.
“You don’t get ACWA and Masdar coming in unless [the government] is offering terms that are the international standard,” said Mr Ruseckas. “If everyone can see them doing it, and it is going well, then the risks are low and people are more willing to invest.”
In 2019, the government signed a cooperation agreement with Total Eren, which committed the French firm to help build Azerbaijan’s green energy capacity. However, fDi understands it has made no investments to date.
Renewables rich, capacity poor
Azerbaijan is yet to tap into its significant potential for renewable energy. The country has installed just 40MW of its 23GW of solar potential, and 66MW of its 3GW onshore wind potential.
The breeziest part of the country surrounds Baku — often dubbed ‘The city of winds’ — and extends into the Caspian Sea. This sparked the International Finance Corporate to strike an agreement with Azerbaijan’s government on April 14, regarding the development of the country's offshore wind sector, which the World Bank estimates has a technical capacity of 157GW.
The cost and complexity of offshore wind create higher barriers to entry than other types of renewables, but Azerbaijan’s well-established oil and gas industry gives it a head-start. “They have a trained workforce of people with offshore experience,” said Mr Ruseckas. “A lot of the same skills apply, so I wouldn’t be surprised to see them … take the skills and learning from offshore oil and gas, and put it into offshore wind.”
Since 2017, the government has been working to establish a regulatory framework for renewable energy projects, including guaranteed tariffs, tax incentives, long-term leases, model agreements and the possibility to index payments to foreign currency. The draft laws are awaiting presidential approval and the government is aiming to conduct its first competitive renewable energy auctions by 2022.