DOES AZERBAIJAN NEED PRIVATE POWER STATIONS?

The validity of the preliminary agreement on the construction of a private power station in Azerbaijan (MoU), signed on 24 September 2007 between the Azerbaijani Ministry of Economic Development and a Korean power corporation (Korea Electric Power Corporation, KEPCO), expired on 24 June this year, but was extended for another year. The reason is that the package of agreements with KEPCO, submitted to the Cabinet of Ministers and required for the construction of the first private power station in Azerbaijan in the village of Alat in the Qaradag district of Bakut, was not examined in this period. The protracted process of interdepartmental approval of the package of agreements had predictable consequences: the construction of the power plant, with a capacity of 700 M and scheduled for June this year, has been postponed indefinitely. What is more, word is going round that "the state has rejected the project to construct the first private power station with 100 per cent foreign capital".

De-monopolization is needed

It would appear that the loss is not so great, as Azerbaijan is not experiencing any shortage of electricity at the moment. On the contrary, Azerbaijan has become a reliable exporter of electricity. Demand for electricity falls at night and the national energy company - Azarenerji - shuts down module power stations and reduces the capacity of the Ali-Bayramli and Mingacevir thermal power stations. In other words, local problems of power supply can be solved by modernizing transmitting capacity rather than by constructing power stations with 100 per cent foreign capital, especially as the country is already building new ones and reconstructing existing power generating facilities. However, the project proposed by Korea's KEPCO is not solely designed to improve power supplies in the country.

Let's begin with the fact that it is necessary to develop the power generation sector itself, as it supports the operations of many enterprises and the development of the economy as a whole. The Azerbaijani economy is developing at a fast rate, the private sector's share of GDP is increasing day by day and many new enterprises, commercial organizations, points of sale and services facilities are opening. One way or another, this all furthers a rise in power consumption (according to experts, there is an increase of 7 or 8 per cent every year).

Another factor is the construction of new energy facilities, costing hundreds of millions of dollars, initiated by the state itself several years ago. Further, a great deal of the money spent on such construction - almost 80 per cent - is borrowed from abroad. As we can see, the state is still devoting huge funds to electricity projects.

Thirdly, Azarenerji is currently engaged in power generation in the country and it operates all power stations, including hydroelectric and thermal power stations. Company shares belong to the state. Meanwhile, according to current law on electricity supply, private companies can also generate, transmit and distribute power. However, the handover of distribution networks to private investors in Baku, Sumqayit and northern districts of Azerbaijan did not yield any positive results for the state. But the fact is that, throughout the history of independent Azerbaijan, the power generation sector (not including the construction of new power stations with partial foreign capital) has remained untouched.

According to the experts we polled, the annual volume of power generated in Azerbaijan should exceed 30bn kW/h by 2010. This will be the demand from a developing Azerbaijan at that time. The operating expenses of power generation are quite high. This means that it is time to bring foreign generators to the country.

Many believe that foreign capital could not only participate in the construction of new power stations and the reconstruction of existing ones, it could also privatize numerous power stations. In a word, apart from a power station, KEPCO is also interested in the reconstruction of distribution networks, first of all, BakiElektrikSabaka (the Baku power grid) and the possible construction in Azerbaijan of a factory to produce electro-technical equipment.

This factor - the de-monopolization of power supply and the creation of a competitive environment in the generation and sale of power - was key to the decision to entrust foreigners with the construction of new power stations. The creation of private power generating facilities will create an optimal balance of price, cost, supply and demand.

The project will take off!

Meanwhile, despite all the rumours, it became clear early in October that most of the 14 state departments considering the project arrived at positive conclusions. Only one department spoke out against it. In other words, the state is still ready to hand over the construction of new energy facilities to foreigners.

In total, the package includes nine draft agreements which are necessary for implementation of the deal, including agreements on the construction, operation, financing and participation in the project by the Azerbaijan Investment Company (AIC) and on the allocation of land. The main document is the agreement on conversion which establishes the form of power generation at the power station: the Azerbaijani side (the state) supplies natural gas to the station and receives electricity in return. The investor and operator are paid for their services to transform gas into electricity. Gas will be supplied by the Azariqaz company and electricity will be received by BakiElektrikSabaka, both of which belong to the state. Thus, as investor and operator of the station, KEPCO will become a free supplier of electricity on the wholesale and retail market.

At the same time, the state undertakes to create an infrastructure to provide the station with water and gas, build access roads and export electricity from its territory. The operator will be engaged only in operating the station.

The construction of the first private power station will take three years. The project is planned to operate for 25 years. The company has suggested providing the station with two gas turbines and a steam one, with a total capacity of 818 MW and an efficiency factor of 57.27 per cent. According to calculations, the generation of 1 kW/h of electricity will take 0.185 cubic metres of natural gas, i.e. one cubic metre of natural gas will generate 5.4 kW/h of electricity. Investors propose to spend 640 million manats, or 523 million euros, on the "turnkey" construction of the station. In other words, 783 manats, or 640 euros, will be spent on the creation of enough capacity to generate 1 kW/h of electricity. Earlier, the capacity of the station was planned to be 750 MW, at a cost of up to one billion dollars.

The BNP Paribas/Allen & Overy/MGB/Mott MacDonald consortium rendered assistance in studying the Korean proposals.

Upon approval of the package of documents, the Cabinet of Ministers will authorize specific organizations to sign them.

Profitable investments

It should be noted that the Azerbaijani government hopes to build not just one, but three private power stations in the country, with a total capacity of 2,000 MW. Preparatory work is under way to identify a company to build the second power station. For the construction of this station, the Ministry of Economic Development has announced a tender inviting proposals from consultants to prepare the technical specification for the project, tender proposals and draft agreement and to support the assessment of financial proposals. Among applicants to build the second station are the companies International Power, Sumitomo Corporation, AES and Hanwa. The second power station will be located in Ganca or Sumqayit and will have a capacity of 350 or 700 MW. The main condition is the ability of the station to work on both gas and oil. The selection of a consultant to prepare the tender to select a subcontractor to build the second power station has already been completed. Currently, the process of legalizing relations with the contractor - the signing of a contract and the determination of a working schedule - is being completed. Only after the contract is signed will details of the deal be announced. Three consortia - BNP Paribas/Allen & Overy/MGB/Mott MacDonald, Latham & Watkins/Taylor-DeJongh Inc./Jacobs Consultancy and Societe Generale/PB Power/OMNI/LeBoeuf, Lamb, Greene & MacRae - have applied for the contract. The consultations will concern the technical, financial and legal aspects of the project to construct the power station, the preparation of tender specifications, draft agreements and their approval by potential investors. It is expected that it will take 10-15 months from the signing of a contract with the consultant to the signing of an agreement on the construction of the station.

One Azerbaijani expert, who requested anonymity, said in an interview with R+ that "investment in power generation is becoming profitable".

"The decision of the Tariff Council of Azerbaijan to increase energy prices in January 2007 was an important factor. Commercial power generation has now become profitable. We can only hope that the construction of a thermal power station will lay the foundation for competition between power generators," he said.

We can only add that the successful launch of the project to construct the first power station with 100 per cent foreign capital in Azerbaijan should prompt similar agreements with other investors. This fully meets the interests of the state, which intends to lift all restrictions obstructing the bringing of power generation into line with the requirements of the world economy, i.e. to rid the sector of state subsidy.