Energy SecuritySECURITY

The Effectiveness of Energy Efficiency Policies and Measures Implemented in the Residential Sector of Azerbaijan

Introduction

Energy efficiency has long been deemed as an important step in the public policy agenda of many economically advanced countries. This is especially because of the importance of energy efficiency in bringing about commercial and industrial competitiveness, reducing national security risks associated with energy security, as well as in lowering the use of fossil fuels and correspondingly, CO 2 emissions (Patterson, 1996). However, relatively less attention has been paid to understanding the implications of energy efficiency for the developing world. In fact, in its 2013 report, the United States Energy Information Administration has forecasted that by 2040, developing countries will consume nearly two-thirds of the world’s energy. This is predominantly due to accelerating economic growth, urbanization, and population growth in developing countries, signaling to higher use of fossil fuels and more greenhouse gas emissions.

Azerbaijan as an upper-middle income developing country, with a gross domestic product (GDP) per capita at 17,460 USD, still heavily relies on the exploitation of its hydrocarbon reserves for energy, with oil and natural gas accounting for more than 97% of total energy supply (TES) (BP Statistical Review of World Energy, 2019). Being the biggest country among other South Caucasus states according to its territory and number of population (more than 10 million), as well as its rich fuel-energy and other resources, it borders Russia to the north, Georgia to the north-west, Armenia to the west, and Turkey and Iran to the south. The Caspian Sea forms Azerbaijan’s eastern border, where the majority of its gas and oil fields are located.  In terms of the balance of final energy consumption, natural gas has the biggest share (about 43-50 percent), followed by electricity – approximately 18 percent, motor gasoline – slightly more than 16 percent and diesel fuel – around 15 percent. When it comes to electricity production, there are neither nuclear nor coal facilities in Azerbaijan, and natural gas is the primary source for electricity generation. In fact, it is responsible for about 90% of the current electricity production of Azerbaijan, while renewable energy technologies, namely hydroelectric power stations provide only 8% of the country’s electricity.                                                                                                                                       Since Azerbaijan is rich with oil and natural gas, which are the main energy resources in the country’s energy production, it also exports approximately 80 percent of the oil and gas produced. Most recently, Azerbaijan has also launched its Southern Gas Corridor project, which has been designed to transport natural gas from Azerbaijani Shah Deniz-2 gas field to Greece and southern Italy across the Adriatic Sea through Greece and Albania. This project is one of the strategic objectives of the EU in the energy security and diversification of energy sources, and it is considered the shortest and direct way to export natural gas from Azerbaijan to the European markets.                                                                      Due to boosts in oil prices, and heavy domestic and foreign investments in oil and gas sectors, Azerbaijan was ranked among the world’s fastest growing economies and achieved the highest Gross Domestic Product (GDP) growth rate in the world in 2006 and 2007. Especially, since 1994 when the international oil contract was signed between the Azerbaijan State Oil Company and 11 foreign oil companies, a strong oil industry infrastructure has been created in over the last decades. However, the dramatic drop in oil prices in 2014 inevitably resulted in devaluation of the national currency and a substantial fall in GDP, since the economy was highly dependent on the energy sector and especially oil’s contribution to GDP exceeded 60% between 2006 and 2008, making the country pay special attention to reforms that support a more diversified economy. Despite the adoption of several strategic road maps aiming to increase the share of non-oil sector exports and non-oil sector’s Foreign Direct Investment (FDI) in non-oil GDP since the economic crisis of 2014, the government’s fossil fuel subsidies considerably grew from 2.3% of GDP to almost 4% in the period between 2014 and 2019.          In that sense, energy efficiency would be an important step in light of declining oil prices. Additionally, given the fact that the Parliament of Azerbaijan ratified the Paris Agreement with the country’s commitment to a 35% reduction of GHG emissions by 2030 compared to the base year 1990, energy efficiency would take a fundamental role in helping the country to close the emissions gap needed to meet its climate and sustainability targets. Equally important, energy efficiency policies would also increase revenues from the export of saved energy resources, since Azerbaijan exports its energy resources at a much higher price than it sells locally.

Energy Intensity of Azerbaijan

When it comes to the energy intensity of Azerbaijan, the current data shows that it has actually decreased by 14% or from 0.105 to 0.090 tonnes of oil equivalent (toe) per thousand 2011 USD PPP during 2007–2016. It followed almost the same dynamics as the energy intensity of the European Union (EU). The country’s energy intensity indicator is the lowest in the Eastern Partnership (EaP) region (Figure 1).

Energy

Moreover, an analysis of international statistics also indicates that compared with 2003, in 2014 energy cost for production of GDP in Azerbaijan declined by a factor of around three times. According to the World Bank in 2001 for the production of US$ 1,000 of GDP, Azerbaijan expended energy equivalent to that contained in 292.7 kg of oil. Currently, in 2017 in order to achieve the same economic effect, the energy equivalent consumed in Azerbaijan was 89.9 kg oil, i.e. almost 3.2 times smaller. This, as seen in the Figure 2, is the best result among countries that were formerly part of the Soviet Union, including those who have turned to be members of the EU today. Azerbaijan’s achievements in this aspect of sustainable development can also be favorably compared to results achieved in the G7 countries (Figure 2).

Energy

However, when it comes to energy efficiency of the residential sector, which takes the largest share of the total final energy consumption (roughly 41% in 2017), followed by the transport sector (31 percent), and industry (13 percent), particular scientific attention needs to be paid. Especially, taking the relevant literature into account, it is still an open empirical question whether energy strategies of Azerbaijan have actually paid enough attention to energy efficiency of the residential buildings. This paper contributes to this research question by examining the effectiveness of legal, institutional and political frameworks as well as national targets, standards and action plans on energy efficiency of the residential sector in Azerbaijan. More specifically, I ask the following research questions:

  • How effectively have Azerbaijan’s national targets, road maps and action plans on energy efficiency helped to make residential buildings more energy-efficient?
  • To what extent, are energy efficiency standards of Azerbaijan for residential buildings compatible with those used in Europe and the Commonwealth of Independent States (CIS)?
  • What are the general conditions associated with heating, ventilation, and air conditioning (HVAC) systems in residential buildings?
  • Is the overall situation with regards to awareness and attitudes of households on energy savings satisfactory?

Legal, Political and Institutional Frameworks for Energy Efficiency in Azerbaijan

First of all, the legal framework for energy efficiency is outdated and mainly includes legislative documents developed during the 1990s despite some recent amendments to the legislative framework. The Law on the Use of Energy Resources is considered the key document regulating energy efficiency. The law provides the legal, economic and social foundation of state policy and governs the relations between different entities operating in this field. However, not all provisions of the law have been implemented since its adoption in 1996. Also, still there is no National Energy Efficiency Action Plan (NEEAP) in Azerbaijan, and the strategic energy policy framework mainly includes Development Concept “Azerbaijan 2020: A Look into the Future”, adopted by Presidential Decree No. 800 dated 22 December 2012 and 12 Strategic Roadmaps (SRM) approved by Presidential Decree No. 1138 dated 6 December 2016. Despite being among few key documents, they have attempted to highlight the importance of improved efficiency and the application of efficiency measures not only in the oil-gas and petrochemical sectors but also in commercial, industrial, transportation and residential sectors. Nevertheless, the Ministry of Energy is currently in the process of adopting a new Energy Efficiency Law according to best international practice with the support of the EU4Energy project.                                 The institutional framework for energy efficiency includes multiple stakeholders, such as regulatory agencies and ministries, and the Ministry of Energy is the leading responsible authority for the development and implementation of energy policies related to energy efficiency. However, clearly, there is a lack of coordination in terms of the design and implementation of energy efficiency-related activities in industrial, residential and transport sectors.

Major Energy Sources in Residential Buildings

Energy

As shown in the graph above taken from the 2019 publicly available data of State Statistics Committee of Azerbaijan, natural gas is the main source for space heating and cooking in the residential sector, accounting for 78% of energy mix used by residential consumers. The high consumption of natural gas by households can be explained by the high gasification rate of 95.7% as well as by the fact that natural gas is commonly used for cooking, space heating and hot water preparation. Moreover, individual modern boilers for space heating and hot water are widely used in individual houses in villages and in multi-apartment buildings in big cities.

Energy

Looking at the Table 15, we can see that in total, average energy consumption has decreased by around 20%.  Taking into account that no eco-design or minimum energy performance standard (MEPRs) were introduced during the analyzed period for new or renovated buildings, it is strongly believed that the following measures were the consequences of the reductions identified:

  • “Overall installation of natural gas and electricity meters;
  • Increase of energy tariffs
  • Demolition of old and emergency low-rise housing stock (mainly relevant in Baku) and the construction of new and comfortable housing
  • Application of new technologies (such as new construction materials, efficient boilers and windows) in the construction of new buildings and in the retrofitting of existing buildings despite the absence of MEPRs” (Energy Charter Secretariat, 2019).

Challenges and Opportunities Associated with Energy Efficiency of Residential Buildings

The results of many studies conducted specifically on energy efficiency of houses and apartments in Azerbaijan indicate that there is still a high energy efficiency potential in the residential sector. It is mainly due to the bad thermal condition of buildings. According to Aliyeva (2012), there are currently no energy efficiency standards determined specifically for buildings in Azerbaijan. As a matter of fact, Azerbaijan still uses the old Soviet standard called SNIP II-3-79 “Civil Heating Engineering” that provides values necessary for heat resistance in buildings, but does not categorize buildings according to efficiency levels as widely done in European and Russian standards.                                                    One of the energy efficiency programs of Energy Saving Initiative in the Building Sector in Eastern Europe and the Central Asian Countries (ESIB), which was funded by the European Commission and implemented during 2010–2014 undertook an energy audit of a nine-story multi-apartment building in Baku. It is worth mentioning that as a common type of panel building typically built in the majority of the Former Soviet states during 1970‐1990, these buildings consume nearly the bulk of energy of the city as a whole. A typical building comprises 162 apartments with a total heating space area of 12,204 m2. The building that was specifically analyzed by the study was constructed without the use of appropriate insulation materials to reduce heat loss and gain. Using a computer simulation, the researchers also calculated that the specific energy demand for space heating is at the level of 210 kWh/m2 /year. As a result of the audit conducted, high-quality thermal insulation acting as a strong barrier to heat flow between the building and the outside could save between 50 and 70% of energy consumption of the building. Given that almost 70% of natural gas or approximately 2 bcm was used for space heating in 2018, the technical energy saving potential can be calculated at the level of 1 bcm per year. The estimated cost of thermo-modernization works for the whole building was 580 000 AZN (430 000 CAD) and a CO2 emissions reduction was calculated at the level of 440 tonnes per year. Because Azerbaijan is considered a net energy exporter and that the energy saved will provide additional opportunities for the country’s energy export as well as for the state budget, the payback calculated in the export prices would be approximately eight years.                                                                              Despite the absence of MEPRs, there are a number of separate pilot projects led by international companies operating in Azerbaijan, which use the Leadership in Energy and Environmental Design (LEED) standards and construct those buildings on the basis of modern thermo-insulation technologies of the building envelope.

Conclusion

To sum up, my findings show that there are a lot of barriers to energy efficiency of the residential sector in Azerbaijan. There are no specific targets directed towards the improvement of energy efficiency in public and residential new and existing buildings. Also, standards determined for building thermal insulation are considered outdated. Moreover, no eco-design or minimum energy performance standards (MEPRs) have been introduced for new or existing buildings. My research also indicated that there are no financial incentives or state support currently available for the improvement of EE in buildings, making EE activities financially less favorable. Additionally, there is no eco-design (MEPS) and energy labelling requirements for energy-related products used in the residential sector. Nevertheless, there is still a high chance of receiving the benefits of energy efficiency activities in the residential sector in both short and long terms in case the necessary measures are taken seriously. These measures can include increasing awareness about no-cost or low-cost EE measures in public and residential buildings, providing households with supporting mechanisms for the promotion of more energy-efficient technologies such as incentives, subsidized loans and tax incentives as well as incentives for local municipalities to reduce energy consumption. Furthermore, awareness of households receiving the benefits of using more energy-efficient appliances and lighting should also be taken into account. Finally, in order to enhance motivation for public and residential buildings to rely more on energy-efficient measures, payback periods should not be calculated based on non-cost-reflective energy prices.

References

Alakbarov, U. & Lawrence, J. E. S. (2017). Energy Efficiency as an Indicator of Sustainable Development Policy: The Azerbaijan Experience.

Aliyev, F. (2013). Azerbaijan National Report on the Project Enhancing Synergies in CIS National Programmes on Energy Efficiency and Energy Saving for Greater Energy Security.

BP Statistical Review of World Energy. (2019). Retrieved from

https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/energy-economics/statistical-review/bp-stats-review-2019-full-report.pdf

Energy Charter Secretariat. (2019). In-Depth Review of the Energy Efficiency Policy of the Republic of Azerbaijan.

Ostapenko, Y. (2019). Azerbaijan’s first steps in energy efficiency: motivations, difficulties and Prospects.

Patterson, M. G. (1996). What is Energy Efficiency?: Concepts, Indicators and Methodological Issues, Energy Policy, 24(5), pp. 377-390

The Development Bank of Austria (OeEB). (2013). Energy Efficiency Finance: Task 1 Energy Efficiency Potential Country Report: Azerbaijan.

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Emil Aliyev

Emil Aliyev, currently studying at York University, Canada as a master's student in Development Studies.
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