A Snapshot of Renewable Energy Regulation in Azerbaijan


June 14, 2022

Azerbaijan, a historic exporter of oil and gas, is now on a path toward developing its renewable energy resources. With incentivizing regulations in place and a high potential for renewables,[1] Azerbaijan appears to be focused on increasing its attractiveness as a destination for international investors. Azerbaijan has announced a number of ambitious pilot projects in renewable energy with major international investors.

Key Targets

According to Azerbaijan’s proposed Nationally Determined Contribution submitted under the Paris Agreement in 2017, Azerbaijan targets a 35% reduction by 2030 in the level of greenhouse gas emissions compared to 1990/base year as its contribution to global climate change efforts. In 2021, at the COP26 in Glasgow, Azerbaijan adopted a new commitment to reduce emissions by 40% by 2050 as a voluntary commitment and to create a “Net Zero Emission” zone.

To achieve these ambitious goals, the Ministry of Energy has set a target to increase the installed capacity of renewable energy to 30% in the country’s overall energy balance. For this purpose, it is planned to create a total of 1,500 MW of new generation capacities, including 440 MW in 2023, 460 MW in 2023–2025, and 600 MW in 2026–2030, at the expense of renewables.

Regulatory Landscape

Already in 2004 Azerbaijan adopted the State Program on the Use of Alternative and Renewable Energy Sources in Azerbaijan. The program envisaged the steps required to improve the regulatory framework for renewable energy. However, while certain regulatory provisions in respect of renewables have been in place over the last 15 years, it has taken time for the required regulatory framework on renewables to fully roll out.

In early 2021, the president of Azerbaijan reinforced the country’s determination to develop renewables in the order “Azerbaijan 2030: National Priorities for Socio-economic Development.” Later that year, Azerbaijan adopted the law “On the Use of Renewable Energy Sources in the Production of Electricity,” No. 339-VIQ, dated May 31, 2021 (Law on Renewable Energy), that created a regulatory framework for renewables and established support mechanisms for renewable energy projects. Key regulatory models and incentives established by the Law on Renewable Energy follow.

Key Regulatory Incentives for Renewables

The key regulatory incentives for renewables, established primarily by the Law on Renewable Energy, include a guaranteed tariff and secured offtake under regulated agreements available to eligible investors (aka future power generators). The selection of eligible renewable energy generators is to be done either by an auction (whereby a winner is determined on the basis of the lowest power-generation price, subject to compliance with other applicable requirements) or by means of direct negotiations with a potential investor (to be used primarily for pilot projects or in case an auction fails).

The Law on Renewable Energy also provides that potential areas for renewable projects and information about them should be reflected in a special information system, referred to “the Atlas,” which is to be maintained by the competent authority.

The Law on Renewable Energy also declares that other measures of support are to be developed, including the promotion of scientific research and support of active renewable energy consumers.

The Law on Renewable Energy explicitly supports the creation of a more favorable investment climate in an effort to attract foreign investment in renewable energy sources for the production of electricity. Under the Law on Renewable Energy, an investor (auction winner or chosen investor in direct negotiations) would need to enter into an investment agreement with the Ministry of Energy as part of the contracts package for launching a project.

In addition to the investment agreement and the protections provided in the Law on Renewable Energy, Azerbaijan’s foreign investment law provides for standard foreign investment guarantees (i.e., adequate and efficient compensation in case of requisition or nationalization, 10-year protection against new deteriorating legislation, compensation of damages). Foreign investments are also protected by approximately 50 bilateral investment treaties that Azerbaijan has ratified.

[1] According to the Ministry of Energy of Azerbaijan, the potential of renewable energy sources is at 27,000 megawatts (MW), including 3,000 MW of wind energy, 23,000 MW of solar energy, 380 MW of bioenergy, and 520 MW of mountain rivers’ hydro energy.