What does the UK’s energy sector have in common with that of Azerbaijan? And what lessons might the small oil-rich country in the South Caucasus hold for an ageing petroleum province in north-west Europe?

In terms of fossil fuel production, Azerbaijan resembles Great Britain at the turn of the millennium. Both are past their prime, but the UK’s North Sea is roughly 10 years further down the decline curve. British oil production peaked in 1999 and gas followed in 2000. Azerbaijan’s oil production peaked in 2009, although gas production is still rising.

Azerbaijan lays claim to drilling the world’s first oil well in 1846 at a site outside Baku, which marked the beginning of the modern petroleum industry. Exports did not start until 1996, when the Baku-Supsa pipeline came onstream to connect Azeri light crude with global markets via Georgia. Azerbaijan’s exports of Caspian Sea oil peaked in 2019 and appear to be in terminal, if gradual, decline. Azerbaijan plans to offset falling oil revenue with a planned increase in natural gas exports.

*Ancient oil derricks outside Baku. Photo © Seb Kennedy / Energy Flux*

Not sitting on its laurels

Azerbaijan is sitting on 2.5 trillion cubic metres of gas, enough to maintain current production levels for at least the next 70 years. The UK was once in this privileged position. But unlike the UK, Azerbaijan is taking steps now to secure its energy and economic future. The government in Baku is embracing renewable energy to decarbonise power production by displacing gas-fired thermal generation from the domestic energy mix.

Caspian gas production might be rising, but so too is domestic demand, and this is eroding the surplus available for Azerbaijan to export to neighbouring Georgia, Turkey and onwards to southern Europe. To remedy this, Azerbaijan is on a mission to harness its untapped wind and solar resources. This will allow it to free up more methane molecules to pipe westwards through the Southern Gas Corridor.

The Caucasian country has 1.6 GW of operational wind and solar and is on track to add another 2 GW by 2027. This will bring the system to 30% renewables installed capacity. This is the threshold beyond which the grid cannot absorb more green power, without significant upgrades and investment, according to the state-run Azerbaijan Renewable Energy Agency.

*Masdar’s 230 MW Garadagh solar PV plant. Photo © Seb Kennedy / Energy Flux*

Power lines and geopolitics

Rather than stopping at 30%, Azerbaijan has its long-term sights set on almost total power sector decarbonisation. But it can’t get there without a new electricity interconnector (or hydrogen pipeline) to Europe. Building infrastructure across the South Caucasus faces an almost insurmountable set of geopolitical and logistical hurdles.

Running a pipeline or power cable through neighbouring Armenia is mired in sensitivities, following three decades of conflict over the Nagorno-Karabakh region and occupied territories. An alternative route is to head north to Georgia and, from there, export power via a proposed Black Sea subsea interconnector with Romania. It is hard to imagine cable-laying in the Black Sea with war raging in Ukraine, however.

Logistics and deregulation

The biggest renewables prize for Azerbaijan is Caspian offshore wind. Tentative plans are afoot to develop up to 6 GW in phases, with an eye on export markets. But there’s another catch. Logistically, delivering oversized wind turbine components to the Caspian Sea is tricky because there is no direct access to a deepwater ocean port. Developers such as Masdar are instead shipping Chinese components some 7,000 km overland along the old Silk Road.

Azerbaijan faces other obstacles. The regulated monopoly structure of its power sector needs urgent reform to allow more independent power producers (IPPs) to sign long-term power purchase agreements (PPAs). This process is yet to begin and, if market reforms in other countries are a guide, could take many years to complete.

Nation-building with renewables

None of these disadvantages are holding the country back. Wherever you go in Azerbaijan, you will see construction. Major infrastructure projects are being built at an astonishing rate, driven partly by Baku’s desire to rehouse internally displaced persons who fled during Armenia’s 30-year occupation of Azeri territory along the Iranian border.

Since regaining control of these lands in a series of stunning military offensives since 2020, the government in Baku has been quick to assert its legitimacy in the region by bankrolling the infrastructure drive.

Renewable energy is a crucial part of the nation-building initiative. Azerbaijan has built no fewer than 27 new hydro facilities with a combined capacity of 222 MW in less than four years. Many of these are situated along the Okhchuchay River, running through the previously occupied territory in the south-west district of Zangilan.

*Archimedes turbine hydroelectric power plant in Agali, Zangilan © Seb Kennedy / Energy Flux*

Streamlined incentives

From a position of extreme adversity, Azerbaijan is doing everything it can to expedite its energy transition. The UK, by contrast, is dragging its heels despite starting from a position of extreme privilege. Unlike the UK, Azerbaijan has no interconnectors with liquid European trading hubs, no access to a world-class financial hub, no real experience with electricity market deregulation, no deep-sea ports, no advanced manufacturing base to speak of.

The motivations are of course distinct. Government subsidies are everywhere in Azerbaijan, and return on investment is defined not only by internal rates of return but also by less tangible concepts, such as nationhood and territorial legitimacy. Renewable energy expansion is interwoven with post-war reconstruction, and the speed of delivery that this enables is simply astonishing.

Greenfield projects are being built in a matter of months, and the planning process takes no more than a couple of years. In this sense, Azerbaijan is playing to the strengths of its command-and-control economy, which centralises decision-making powers around a handful of institutions aligned to the agenda of president Ilham Aliyev, Azerbaijan’s autocratic head of state.

Emissions afterthought

Azerbaijan is also hosting this year’s COP29 UN climate conference in Baku, and is keen to showcase its green credentials when the world’s media descends on the capital city in November. Whether it is able to deliver on its ambitious plans is very much an open question, but this should not detract from the resources being mobilised in this endeavour and the motivation of workers on the ground.

In a sense, Azerbaijan is approaching its energy transition with the sort of ‘war footing’ mentality that many Western energy observers say is required to deliver climate action at a pace that would keep global heating in check. Ironically, emissions are not the overriding priority for Baku and Azerbaijan has not adopted a ‘net zero’ emissions target.

It is telling that a small post-Soviet backwater disconnected from European markets has embraced zero-emissions energy sources with more vigour than richer nations that are committed to climate neutrality. Baku’s positioning of renewable energy as the centrepiece of a positive vision for the nation’s future is something that is sorely missing from Britain in a crucial election year.

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