WB prepares recommendations on liberalization of Azerbaijan’s electricity market

The World Bank (WB) has prepared a roadmap for the government of Azerbaijan within the project “Support for the development of transition mechanisms for liberalization of the electricity market of Azerbaijan,” Report informs referring to the WB report on the project.

Preparation of this roadmap will help reaching the targets in decarbonizing the power sector and enable the security of supply.

The objective of the report is to set out recommendations of the Single Buyer Model (SBM) design and provide guidance for its implementation.

“The Government of Azerbaijan (GoA) considers the development of the SBM a critical component for transition to a competitive market, as outlined in the Strategy of Socio-Economic Development for 2022-2026.

The goal of the SBM is to improve the efficiency of the electricity sector and support Azerbaijan’s ambitions for exporting green energy. The SBM aims to reduce costs in the sector by optimizing the use of power generation sources, leading to greater flexibility in incorporating variable renewable energy (VRE) into the system. This will enable the realization of Azerbaijan’s VRE potential, attract investment, and support the country’s green energy export goals,” the WB noted.

The implementation of the SBM will occur in two phases and should be seen as a transitional measure towards establishing a fully competitive power market.

“It serves as an intermediary step towards developing a competitive bilateral contract market, where competing generators will operate based on cost reflective and competitive pricing signals. The SBM acts as the initial stage in this process, although its implementation may pose challenges and require the Tariff Council's approval for market pricing. As an interim measure, the SBM will operate as a shadow market alongside existing dispatch and contractual procedures, without affecting system operation or prices. Azerenerji currently operates a similar informal system, prioritizing generators with lower operating costs,” reads the report.

To align with best practices in the European Union (EU), this report proposes designing a capacity remuneration mechanism (CRM). Under the CRM, the transmission system operator (TSO) determines the required capacity to meet predefined reliability standards. In Europe, CRMs typically involve auctions for contracts during system stress events and capacity payments for successful bidders. The detailed design of the CRM in Azerbaijan will require further examination.

“Without fundamental institutional and regulatory changes in Azerbaijan’s power sector, the SBM will not function optimally or achieve efficiency and the desired increase in VRE investment,” the WB added.

The Single Buyer Model provides for the creation of a single state agency that buys electricity on a competitive basis from generators under long-term contracts and, accordingly, sells it at regulated prices. Many countries that didn’t like the competitive model of the electric power industry have switched to a partially liberalized model - the Single Buyer Model, because, on the one hand, it doesn’t infringe on the rights of private investors, on the other hand, it allows the state to somehow influence the growth of final prices for consumer.