Azerbaijan's Ministry of Energy of Azerbaijan and the grid operator need to conduct joint studies on long-term demand forecasting to determine new capacity requirements, according to the World Bank (WB)'s report on the project "Support for the development of transition mechanisms for liberalization of the electricity market of Azerbaijan.
Report informs, citing the document, that based on capacity requirements and load flow analysis, and in line with high-level energy policies (climate change, renewables, exports and imports, etc.), the transmission system operator should develop investment projects for both generation and transmission networks in order to integrate new generation power. Based on decisions related to the financing model, appropriate investments may be made by the generating unit of Azerenergy OJSC, or preference may be given to 'build, own and operate' models with long-term power purchase agreements, the bank believes.
As noted in the report, mechanisms for increasing capacity are becoming more common in Europe to ensure the reliability of supply. The transmission system operator sets or obtains a reliability standard (usually expressed in terms of the amount of unreleased energy that must not be exceeded) and will determine how much power will be required, with the power of any generator adjusted based on its statistical probability that it will be available for delivery in mountain peaks.
The European throughput mechanism is then typically built around contract auctions to be available when a systemic stress event is announced. Payments per MW available during stress events are specified in reliability contracts with associated penalties if they are not available when generation is required.
An alternative for Azerbaijan could be capacity contracts that are paid for availability. These contracts would pay off whether or not a generator was shipped, and so a single buyer could then only pay based on the cost of the generator. With an alternative income stream, there would be no incentive for producers to always channel energy in order to earn some money to pay off their fixed costs.
While fixed costs are obviously not currently part of the wholesale tariff set, they will become increasingly important in terms of the return that investment in new generation requires; at present, new investments are mainly made by Azerenergy and renewables at guaranteed prices, but in the latter case, commercial investors will take into account the return expected after the expiration of the price guarantee, and therefore Azerbaijan will already have to negotiate on the basis of a higher return risk ratio for already agreed renewable energy investments, the bank said, adding that it suggests developing a mechanism for remuneration for capacity.