Author: Nigar ABBASOVA
The Covid-19 pandemic still has a detrimental effect on the global economy, including the energy sector. It has significantly changed the balance of supply and demand in the energy markets, showing the relevance of the transition to new, digital business models.
However, energy companies continue to withstand the crisis. Azerbaijan is also trying to improve the reliability of its energy system, also including against emergency situations.
Analysts of Moody’s believe that the Covid-19 crisis has less affected the demand for electrical power than for oil. The higher demand for electricity from household consumers, many of whom work from home, partially compensates the drop in demand from industrial and commercial consumers. However, the crisis can seriously change the rules of the game and even lead to bankruptcy of many energy companies.
Most experts of the World Energy Council (MIRES) agreed that the maximum level of implications caused by the Covid-19 crisis will be observed in late 2020-early 2021. “Among the most significant changes that can occur will be a sharp reduction in costs and the redistribution of capital in favour of digital solutions and environmental sustainability,” says the MIRES report on a global survey conducted among an extensive network of leaders and experts in the field of energy in almost 100 countries.
The latest results from this survey indicate that the pandemic can cause a fundamental redistribution of investments that will have a significant impact on future trends in the energy sector. A MIRES study showed that a third of companies plan to cut jobs, and almost half to keep office staff at home. Every third company also intends to close one or more divisions due to the pandemic. Four of ten energy companies report more than 10% reduction in operating costs. Capital expenditures (CAPEX) is forecast to decrease by $200-400 billion.
At the same time, according to Russian experts, changes in the power and heat supply will not be as deep and sensitive as in the oil sector. The main problems that energy companies may face during the pandemic are the situation with the collection of electricity payments from consumers and expected difficulties with tax and other mandatory payments, as well as the danger of growing debts to suppliers of fuel and raw materials.
Blackout: lessons learnt
Meanwhile, the power sector of Azerbaijan demonstrates high stability. There were no significant failures in the operation of the power system. Uninterrupted supply of power to consumers continues as usual.
Nevertheless, Covid-19 can still make certain adjustments to the terms of operation during the repair of existing facilities and, most importantly, the construction of new ones. This is primarily due to the import of equipment and the involvement of foreign specialists in their installation and commissioning. The volume of works completed so fat shows that possible delays in certain projects will not affect the reliability of the entire power system.
Over the past 16 years, 30 power plants have been constructed in Azerbaijan, including such large ones as Janub (c. 800 MW), Sangachal (more than 300 MW), Sumgayit (525 MW), Shimal-2 (400 MW), and Shimal-1 (400 MW). Large-scale repair works, which started after the infamous blackout in the summer of 2018, continue without complaints about the operation of the power system, and hot weather conditions test the durability of the system in general. Apparently, the power engineers have well mastered the lesson of July 3, 2018, when the accident at the thermal power plants in Mingachevir literally paralysed the whole country. According to the report of the special state commission charged with investigating the incident, one of the main causes of the blackout was the unpreparedness of Azerenerji OJSC for such incidents, as well as some technical and other problems in the activities of the energy operator, which prevented an adequate response to the incident. As a result of such a negligence, the management of Azerenerji was replaced and the authorities started the development of a program to increase the efficiency of the power system.
The goal of the program started in September 2018 was the reconstruction of 12 existing power plants, including six modular ones to restore the lost generating capacities. Thanks to the program, Azerenerji plans to restore about 1000 MW of lost generating capacities by 2022. The total cost of the program for rehabilitation of the energy system of Azerbaijan is estimated at ₼560 million. So far, Azerenerji has been able to restore 600 MW of its power capacity.
By the way, the most ambitious works under this program over the past two years has been carried out at the thermal power plant (TPP) Azerbaijan. The main goal was to ensure the reconstruction of eight station blocks. The 330- and 500-kV substations, which became the source of the accident in 2018, as well as the control centre, main and auxiliary sections, buildings and installations, were repaired. Moreover, during the reconstruction, the station continued to produce power. All works were conducted in parallel.
TPP Azerbaijan is a significant power plant of the country, as it is not only the largest in the South Caucasus region but also provides 43% of Azerbaijan’s internal demand for electrical power. “We saw the damage the incident caused to Azerbaijan two years ago, when it plunged the country into darkness and chaos. The only reason for the incident was irresponsibility, negligence and shamelessness of some irresponsible people. Today we have all eight blocks of the station working as they should. The generation capacity of 2,400 MW was restored, the canal was built, substations where the accident took place were reconstructed, and a modern control centre was created. Thus, the life of the station has been extended by at least 20-30, and maybe even 50 years. This will help us remain independent from external sources of energy supply,” President Ilham Aliyev said at the opening ceremony of the renovated TPP Azerbaijan.
An important part of the rehabilitation program was also the renewal of installations for the distribution and transmission of electricity through the reconstruction of existing facilities and the construction of new substations and power lines.
Over the past two years, these works have covered more than 20 main substations. A number of them have already been commissioned.
Along with repairs, relevant authorities prepare to start the construction of a new 300-megawatt Gobu power plant in Azerbaijan. This will increase the export of electricity and ensure the growing industrial potential of the country. The project was presented to President Aliyev in June 2020. The Ministry of Energy expects to commission the station before 2022.
“Currently, Azerbaijan produces and exports oil, gas, fuel, and electricity. There are only few countries in the world engaged in such multilateral activities. Some countries import energy resources as they do not produce them. We are absolutely independent economically and in terms of energy resources,” President Aliyev underlined.
It is noteworthy that the leading financial institutions of the world support the plans to upgrade the energy system of Azerbaijan. Despite the coronavirus pandemic, they expressed an intention to fund the implementation of energy projects.
During a recent video conference with President Aliyev, Suma Chakrabarti, CEO of the European Bank for Reconstruction and Development (EBRD), stated that the bank was ready to invest 100-200 million euros in projects to improve the power network in Azerbaijan, as well as to fund projects concerning renewable energy sources.
Asian Development Bank (ADB) is also ready to support Azerbaijan in funding projects to improve the energy efficiency and to develop vocational education in Azerbaijan.
Azerbaijan also wants to ensure the involvement of ADB to the implementation of renewable energy projects. “We have great potential for wind and solar energy, so we have plans for the development in this area. I would like you to consider this option as well,” Mr. Aliyev said during the video conference with the ADB leadership.
ADB has very rich cooperation experience with Azerbaijan in the energy sphere, including the funding of the Southern Gas Corridor. In addition, in July 2016, the bank approved the provision of $750 million until 2023 for the upgrade of Azerbaijan’s power distribution networks.
More renewable energy
Obviously, the government of Azerbaijan is interested in the development of green energy in the country more than ever.
The Ministry of Energy selected eight sites in the country for the construction of new renewable energy facilities. Three of them will be built by Middle Eastern companies ACWA Power and Masdar for the production of wind and solar energy with a total capacity of 440 MW. The total investment in these two projects will exceed $400 million. Construction works will begin in September 2020 and will take about two years. According to forecasts by the Ministry of Energy, the implementation of these projects will allow Azerbaijan to save 300 million cubic meters of gas annually, which is 10% of the total amount of local natural gas consumption.
Al so, the Ministry of Energy decided to prepare a strategy for the development of small hydropower plants. British company BP and the government of Azerbaijan created a working group and the company SNC-Lavalin’s Atkins was involved to assess the effectiveness of the construction of small hydropower plants in Azerbaijan. The company evaluated five existing operating small hydropower plants and six sections for the construction of new hydroelectric power stations. “Based on the SNC-Lavalin’s Atkins report, a development strategy for small hydropower plants in Azerbaijan will be based upon the date on the country's needs for electricity, water potential and water shortages. One of the main tasks is to develop this area by attracting the private sector,” Azerbaijani Minister of Energy P. Shahbazov said.
In addition, the Ministry of Energy and the International Finance Corporation are working on the development of a roadmap for the development of the use of offshore wind energy in Azerbaijan. Thus, the agency expects to identify potential zones in the sea and coastal areas for renewable energy auctions based on an assessment of the potential of wind energy, an assessment of network connectivity and environmental and social impacts. The document will be completed by March 2021. “The use of wind energy at sea will create opportunities for the creation of new jobs and added value. In addition, it is expected that a road map will expand the use of renewable energy sources in Azerbaijan and contribute to a 35% reduction in greenhouse gas emissions by 2030 in accordance with the Paris Accord,” experts of the Ministry of Energy said.
By the way, according to the ministry, last year, the share of renewable energy production reached 7.9%. The Ministry of Energy is trying hard to bring this figure to 30% by 2030.
The geographical position of Azerbaijan creates favourable conditions for the development of the renewable energy sector. However, despite all the government’s plans, the legal and institutional framework is still not attractive enough for potential investors. The construction and operation of facilities for the production of renewable energy is still more expensive than traditional thermal power plants. At the same time, funding from financial institutions is limited mainly to large-scale projects. The implementation of small projects is mainly focused on the private sector, which can be attracted only by offering favourable economic conditions. The preparation of a set of laws and regulations guaranteeing the protection of investments in renewable energy sector and preferences for investors is not yet complete. The process is slowly but steadily moving forward. We hope that a favourable environment will be created for attracting large players to the clean energy sector.