Development History of the Electric Power System in the Republic of Azerbaijan

The history of the electric power system in the Republic of Azerbaijan began in 1883 in Baku with the installation of 220-volt power generation equipment by the Nobel brothers, which consisted of three steam turbines, each with a capacity of 75 horsepower.

In 1901, the Bibiheybat Power Plant with a capacity of 2,000 horsepower was put into operation, and in 1902, a power plant with a capacity of 2,000 horsepower was put into operation in the Black City (now the White City). In 1913, 109.8 thousand kWh of electricity was produced in Baku, 95% of which was directed to the oil industry, and 5% to the country’s electricity supply.

In the 1940s, the drilling and operation of deep oil wells resulted in an increased demand for electricity.

The Mingechevir Hydropower Plant (HPP), the lower tier of the chain of power plants on the Kur River, was commissioned in 1954. The Varvara HPP, a part of the same water hub complex, was commissioned three years later.

On the initiative of Great Leader of Azerbaijan Heydar Aliyev, on October 20, 1981, the first unit of the “Azerbaijan” State District Power Plant (now the “Azerbaijan” Thermal Power Plant), the largest heat and power plant in the South Caucasus, was commissioned. This marked a new stage in the development of Azerbaijan’s energy industry and laid the foundation for electricity supply security in today’s independent Azerbaijan.

After Azerbaijan’s independence was restored, a number of important regulatory and legal documents and decisions were adopted, incorporating the requirements of Directive 1996/92/EC of the European Union, in order to effectively utilize the country’s energy potential, ensure uninterrupted electricity supply to the population and economy, strengthen the sector’s material and technical base, increase the level of utilization, and improve the financial situation.

In addition to the establishment of the Azerenergy Open Joint Stock Company on the basis of the Azerenergy State Company by Decree No. 423 of the President of the Republic of Azerbaijan, dated September 17, 1996, which is of great importance in terms of the implemented successive reforms, a number of other laws and decisions can be mentioned:

• Law of the Republic of Azerbaijan “On Energy”, dated 24.12.1998, No. 541-IQ;
• Law of the Republic of Azerbaijan “On Electric Power Industry”, dated 03.04.1998, No. 459-IQ;
• Law of the Republic of Azerbaijan “On Power and Heat Plants”;
• Law of the Republic of Azerbaijan “On Privatization of State Property”;
• Law of the Republic of Azerbaijan “On Use of Energy Resources”;
• Law of the Republic of Azerbaijan “On Protection of Foreign Investments”;
• Decree of the President of the Republic of Azerbaijan “On Privatization of Enterprises of the Fuel and Energy Complex”;
• Decree of the President of the Republic of Azerbaijan “On Improving the Operation and Transfer of Management of District and City Power Distribution Networks”;
• Decree of the President of the Republic of Azerbaijan “On Measures to Improve Provision of Population and Economy with Energy Carriers”;
• “Rules for the Use of Electricity”, dated 02.02.2005, No. 18, etc. 

This legal framework has made it possible to carry out certain reforms in the electric power industry.

Initially, in 2000, the central heat supply enterprises were excluded from the subordination of Azerenergy OJSC as independent legal entities.

Unbundling of Central Heat Supply from the Electric Power System

In 2001, service enterprises specializing in the field of electrical energy and small hydropower plants were excluded from the subordination of Azerenergy OJSC, declared open for privatization, and transferred to the Ministry of Economic Development (currently the Ministry of Economy).

In addition, the same year, two separate legal entities – the Electricity Production Association and the Electricity Transmission Association – were established within Azerenergy OJSC, with the legal separation of production and transmission activities.

In 2001-2002, regional and city electricity distribution networks were excluded from Azerenergy OJSC, declared open for long-term management and transferred to the Ministry of Economic Development.

Unbundling of Electricity Distribution Networks from the Electric Power System

The district and city electricity distribution networks were included in 4 joint-stock companies by regions and declared open for management on a competitive basis. As a result, Bakielektrikshebeke JSC and Sumgayiteletrikshebeke JSC were transferred to the management of Barmek Holding A.Ş. of Turkey, and Ali-Bayramlielektrikshebeke JSC and Ganjaelektrikshebeke JSC were transferred to the management of Baku High-Voltage Electrical Equipment JSC for a period of 25 years.

Of the district and city distribution networks, only organizations located in the territory of the Nakhchivan Autonomous Republic remained subordinate to Azerenergy OJSC, on the basis of which the State Energy Agency of the Nakhchivan Autonomous Republic was established as a separate legal entity under the Cabinet of Ministers of the Nakhchivan Autonomous Republic.

Thus, the systems of generation, transmission, dispatch control, and distribution (including sales) of electricity were legally and functionally separated from each other, and the formation of market relations began in accordance with the relevant EU legislation requirements that time. In particular, the functioning of the wholesale market was ensured by establishing contractual relations between the activity areas.

Although the problems with payments were partially eliminated thanks to these measures, management contracts were terminated due to the failure to fulfill obligations at the required level, and the district and city electricity distribution networks were returned to Azerenergy OJSC in accordance with the previous subordination, and the activities of Bakielektrikshebeke OJSC were resumed.

In 2015, Bakielektrikshebeke OJSC was renamed into Azerishig OJSC, and the regional and city electricity distribution networks subordinate to Azerenergy OJSC were transferred to the subordination of Azerishig OJSC.

The decrees signed by the President of the Republic of Azerbaijan Ilham Aliyev on the State Program for the Development of the Fuel and Energy Complex of the Republic of Azerbaijan (2005-2015) and on Additional Measures to Improve the Electricity Supply in the Republic of Azerbaijan marked the beginning of a new development history of the electric power industry.

Electricity production in 2015-2024 (billion kWh)

Decree of the President of the Republic of Azerbaijan No. 1138 dated December 6, 2016 approved the “Strategic Roadmap for the Development of Utility Services (Electricity and Heat, Water and Gas) in the Republic of Azerbaijan”.

With the aforementioned roadmap, the unbundling of all links in the value chain (generation, transmission, distribution and sales) from a management perspective was identified as a priority to improve the energy sector efficiency, and a comprehensive action plan was approved. At the same time, the implementation of these measures is monitored every year.

As part of these measures, the Azerbaijan Energy Regulatory Agency was established and comprehensive measures are being taken to develop the legal framework to ensure a phased transition to a competitive liberal electricity market.

In the new stage of reforms, the “Socio-Economic Development Strategy of the Republic of Azerbaijan for 2022-2026”, approved by the Decree of the President of the Republic of Azerbaijan No. 3378 dated July 22, 2022, envisages the legal and administrative unbundling of electricity generation, transmission, distribution and supply, the promotion of independent supply entities, and the creation of the necessary regulatory environment with the application of market principles.

The goal here is to provide consumers with reliable, high-quality, accessible and uninterrupted electricity.

For this purpose, the Law of the Republic of Azerbaijan No. 858 VIQ dated April 11, 2023 “On Electric Power Industry” was adopted and entered into force on January 1, 2024.

In order for electric power industry entities and consumers to adapt to changes in the electricity market, including the implementation of free competition relations and the elimination of subsidies, the Law requires that the process of implementing electricity market elements be carried out in three stages within the following timeframes:

• the first stage will run from the date this Law enters into force, i.e., from January 1, 2024 through June 30, 2025;
• the second stage will run from July 1, 2025 through June 30, 2028;
• the third stage will start from July 1, 2028.