Attention to energy efficiency has been growing in Azerbaijan in recent years as the country tracks its commitments under the Paris Agreement, seeks to diversify its economy and reduce its dependence on fossil fuels, which account for 90% of its export revenues, 60% of state revenues and 30‑50% of GDP. Realising the benefits of energy efficiency will become increasingly important for the country in the coming decades as demand for energy, especially electricity, increases with population and economic growth. Between 2010 and 2022, the country’s population increased 12% and average annual GDP rose by just under 2%. Although half of Azerbaijanis still live in the countryside, the country’s population has increased considerably since 2000 and is expected to continue growing, urbanising, and becoming wealthier.

Energy efficiency will also be a key tool for Azerbaijan to keep rising greenhouse gas (GHG) emissions in check, especially considering the Government of Azerbaijan’s pledge to reduce GHG emissions 35% from 1990 to 2030 under the Paris Agreement. At COP26, Azerbaijan also announced new goals to reduce greenhouse gas emissions by 40% by 2050 and to create a regional net zero emission zone, and the upcoming COP29 in Baku in November presents an opportunity to boost energy efficiency as part of wider efforts by Azerbaijan to tackle GHG emissions.

While Azerbaijan’s citizens currently have access to affordable electricity, power consumption per capita is relatively modest (29% below the global average) and tariffs are artificially low due to subsidies. However, both electricity use and end-user prices are expected to increase, and the Government of Azerbaijan has commenced subsidy reforms, as discussed later in this section. Improved energy efficiency can be an important lever to mitigate the impacts of both higher electricity demand and prices, helping to ensure that consumers are not locked into paying high prices to operate inefficient technologies.

Although Azerbaijan is an oil- and gas-rich country, oil production peaked in 2010 and has since declined. In addition, gas distribution system losses and gas supply quality remain concerning despite significant modernisation of ageing natural gas networks. The global shift to reduce carbon emissions to meet climate targets – combined with worldwide oil and gas market volatility – heightens the urgency for Azerbaijan to transition away from its traditionally heavy reliance on fossil fuels as the bedrock of its energy system and economic model. Energy efficiency can be a key enabler of this transition.

Historical emissions trends are mixed. Based on available data, GHG emissions from fuel combustion appear to have dropped significantly between 1990 and 2010. However, this decline was primarily in the industry sector, which was heavily affected by post-Soviet transformation and restructuring. Historical data quality issues may also make it difficult to accurately assess emissions trends during this period.

A different pattern emerges for the more recent 2010-2022 period. For instance, emissions rose 76% in both the industry and transport sector, and 36% in buildings. Driven by population and economic growth, these increases are reflected in higher demand for energy, which has been met primarily by greater natural gas consumption in industry and buildings, and increased oil use in transport, as discussed in the next section. On average, end-use sector accounts for more than 50% of Azerbaijan’s total emissions.

In addition to mitigating rising GHG emissions, energy efficiency could be an important enabler of one of Azerbaijan’s key clean energy transition pillars: exploiting the country’s abundant renewable energy potential, notably from hydro, wind and solar resources. While the share of renewables in Azerbaijan’s electricity supply has gradually increased in recent years, growing from just over 6% in 2022 to 8% in 2023, more efficient end-use energy consumption would support renewable energy development by reducing total energy demand, enlarging the portion of renewables in the energy mix more quickly. Developing this synergy between renewable energy and energy efficiency is also essential to expand the share of clean, affordable, unsubsidised electricity in Azerbaijan’s energy mix.

While the absence of granular data on energy efficiency is a significant obstacle for Azerbaijani policymakers (as discussed further in this section), high-level estimates made by the Government of Azerbaijan in collaboration with the Energy Charter indicate that greater energy efficiency would lead to substantive benefits in all sectors. These benefits include savings of 3.5‑4.2 bcm of natural gas; CO₂ emissions reductions of 4‑10 Mt CO₂; a budget subsidy reduction of between USD 500 million and 1 billion; the stimulation of nearly USD 3.5 million of new investments; and the creation of nearly 125 000 new jobs. At the level of the economy, estimates suggest that energy efficiency could offset over 25% of the country's primary energy needs. According to United 4 Efficiency (U4E) estimates, energy efficiency could continue to deliver significant savings and benefits for Azerbaijan in upcoming decades, including annual savings of USD 37 million in electricity subsidies and cumulative GHG reductions of nearly 1 Mt. More precise estimates and projections across clear timelines are currently not available, underscoring the need to develop more robust data sets to help increase buy-in and action for energy efficiency improvements. 

Azerbaijan is at an early stage of developing its approach to energy efficiency. Historically, energy efficiency has received little attention in the country, with general awareness of its benefits being low within government departments and economic sectors, as well as among the public. Relatively abundant domestic fossil fuel reserves and heavily subsidised gas and electricity for end users have traditionally disincentivised energy efficiency.

During the period 2021 to 2023, the Government of Azerbaijan established the country’s first legal framework for energy efficiency and subsequently, in 2022, adopted strategies and programmes to advance energy efficiency, among other policy priorities. Further details of these measures are provided in the Policies and Measures section.

The Government of Azerbaijan has also engaged with international experts to draft a National Energy Efficiency Action Plan (NEEAP) that covers a range of measures across sectors and provides valuable recommendations for future action on energy efficiency. Although the draft NEEAP has not been formally adopted, some elements of it have been reflected in newly introduced legislation. We encourage the Government of Azerbaijan to continue to draw on the draft NEEAP as part of further policy formation, since it contains a range of targeted and appropriate instruments to promote energy efficiency, and we have included many of its elements in our report, notably to inform analyses of end-use sectors.

To ensure its new legal framework can be implemented effectively, critical enablers of energy efficiency – cost-reflective tariffs, minimum energy performance standards (MEPS), targeted incentives, information campaigns and awareness-raising efforts – need to be deployed across the economy and within end-use sectors (e.g. buildings, transport, and industry). While a number of these enablers are reflected as part of the newly created legal framework for energy efficiency, significant efforts will be required in the coming years and decades to create a comprehensive approach to energy efficiency across sectors, with a focus on implementation, enforcement and monitoring of secondary legislation, MEPS and other supporting measures.

The Government of Azerbaijan is aware of this challenge and has cited among planned efforts the improvement of construction norms and rules, the development of a standard calculation methodology for building energy use, the development of technical regulations on energy labelling and eco-design requirements.

While Azerbaijan’s energy intensity is below the world average and the lowest in the Eastern Partnership (EaP) region, the high share of oil and gas exports in its GDP weakens the usefulness of energy intensity as an efficiency indicator for this country. Reflecting population and GDP growth, total final energy consumption (TFEC) has risen steadily since 2000, notably in residential buildings and transport, reflecting strong energy demand growth in these sectors.

Analysing TFEC in terms of fuel, natural gas is the most used across all sectors, with its share declining from 52% of total annual consumption in 2000 to 47% in 2022. In absolute terms, however, annual gas usage rose 61% during this period. Meanwhile, motor gasoline use has increased the most, in both relative and absolute terms: its share almost tripled from 6% of TFEC in 2000 to 16% in 2022, with annual consumption climbing nearly fivefold between 2000 and 2022 as the car fleet expanded fourfold. The electricity share remained relatively constant at 17‑21% over the period, although annual consumption increased 40%.

No specific targets are currently in place for energy efficiency, either for the economy as a whole or for individual sectors. As target setting is an important pillar of energy efficiency policymaking, we will discuss it at greater length later in this report.

Azerbaijan’s Law on Rational Use of Energy Resources and Energy Efficiency was adopted in 2021 and entered into force in July 2022. This law creates a legal framework for energy efficiency and cites several objectives for using energy more rationally across the economy, in terms of both energy supply and consumption. It also provides a basis for developing several measures, such as MEPS and passports for buildings; energy labelling and eco-design requirements for appliances and equipment; mandatory energy audits for public and non-residential buildings that meet certain criteria; energy management systems; energy efficiency services; metering; consumption data collection; and awareness raising. The law also calls for the creation of specially designed financing instruments, such as grants and concessional loans, and a dedicated Energy Efficiency Fund, which has since been established.

Several important pieces of secondary laws have been adopted to date in the wake of the new law. These can be classed into legislation covering:

• Residential buildings and appliances: minimum energy efficiency norms for buildings as well as eco-design requirements for energy-related products and rules on labelling of energy-related products have also been adopted. Technical specifications for these measures notably kWh/m² requirements for buildings still need to be developed.
• Energy management in commercial and public buildings: requirements and rules related to energy audits, including criteria for buildings subject to mandatory audits, certification of energy auditors, submission of reports, energy management system (EMS), energy performance contract (EPC) terms and templates, and rules on energy efficiency services.
• Industry: mandatory energy audits every three years, with exemptions for ISO50001 certified facilities. Incentives for deploying an EMS are also a provision of the new law.
  

The Government of Azerbaijan developed a draft NEEAP in collaboration with the EU-funded EU4Energy programme in 2021. The draft contains numerous measures and provisions to advance energy efficiency, covering cross-sector topics such as institutional and governance reform as well as sector-specific provisions (see the Sector Trends section below for selected draft NEEAP provisions). The recommendations it contains are based on international best practices and are therefore included in our analysis to inform future policymaking and provide guidance on specific measures across sectors.

While a handful of draft NEEAP provisions have been implemented or are reflected in legislation, the Government of Azerbaijan is not planning to adopt the action plan as such. Instead, a State Programme, aligned with the Socio-Economic Development Strategy for 2022-2026, was adopted in 2022. These measures signal further policy efforts on energy efficiency, including the planned development of a National Electric Mobility Plan and a National Renovation Programme for private and public buildings. The latter is to be deployed within five to six years and is being developed in collaboration with the World Bank, which is also supporting development of the Energy Efficiency Fund.

The Government of Azerbaijan is also developing further technical regulations on energy efficiency and is planning to deploy a monitoring and reporting system, with a focus on assessing energy efficiency potentials on both the supply and demand side, in various economic sectors, and in households. In parallel, drafts of procedures related to the issuance of energy efficiency passport for buildings and rules for accessing the Energy Efficiency Fund have been prepared but are pending adoption. Improvements to current construction norms and rules taking into consideration energy efficiency in buildings and the development of methodology on calculation of energy consumption in buildings are also in the development phase.

In the transport sector, Euro-4 emissions standards have been in place since 2014. In addition, all imported vehicles must be no more than ten years old and have been required to comply with Euro-4 or higher emissions standards since 2014. The Government of Azerbaijan has also implemented several measures to promote electric vehicles (EVs) and hybrids, including a lifetime tax exemption for EVs and a three-year tax exemption for hybrid vehicles, along with reduced import tariffs for EVs. Furthermore, the Order of the Republic of Azerbaijan “On promotion of the use of electric vehicles” was adopted on 7 March 2024, and the Government of Azerbaijan is currently developing a National Electric Mobility Plan to be adopted at the end of 2024. A long-term (post-2027 – taking into account the liberalisation of the electricity market) and short-term (2024-2026) scenarios have also been developed for expanding the EV charging infrastructure.

In this context, Azerbaijan’s national energy efficiency policy is now in a moment of transition from the initial adoption of policies to their implementation. This is a key focus area that is explored further in this roadmap.

The Ministry of Energy has the lead role in developing Azerbaijan’s energy efficiency policies. For example, it develops technical regulations for energy labelling and eco-design requirements of energy-related products in collaboration with other ministries, as noted below. An Energy Efficiency Department was created within the ministry in early 2023. The department has three divisions, one for each of the following domains: buildings; economic areas; and policy and reporting. Approximately five officials support each area, but the department’s staff is expected to grow to nearly 20.

Several other institutions and stakeholders also have important roles in shaping and implementing the country’s energy efficiency policy framework. The non-exhaustive list includes:

• The President of the Republic of Azerbaijan holds executive powers over all measures.
• The Cabinet of Ministers, which is assembled by and accountable to the President, organises the work of the ministries.
• The Azerbaijan Energy Regulatory Agency under the Ministry of Energy regulates relationships between key stakeholders such as producers, transmissions system operators and distributors as well as consumers. The agency supervises efficient use of energy resources and energy efficiency by enterprises and implements measures in accordance with relevant norms. A Department of Energy Efficiency and Investments has also been established within the Energy Regulatory Agency.
• The Ministry of Economy and the Ministry of Ecology and Natural Resources work with the Ministry of Energy to set technical requirements for energy-using equipment.
• The Tariff Council sets tariffs for purchasing electricity from producers, retail tariffs for wholesale and consumer groups, and tariffs for processing, transportation, purchase of natural gas from producers. It also regulates retail and wholesale prices for motor gasoline and diesel fuel, and wholesale tariffs for bitumen.
• The Azerbaijan Standardization Institute advises on the development of technical standards, norms and labelling across sectors.
• The State Statistical Committee is responsible for managing key data sets (e.g. on energy consumption trends).
• Azerenergy, the largest energy producer and the transmission system operator, Azerishiq, the distribution system operator and supplier, and Azerigas, the gas distribution network operator, are responsible for smart metering rollout out.
• The Ministry of Agriculture is involved in developing sector-specific energy efficiency measures, such as grants for efficient agricultural pumps and awareness-raising programmes for farmers.
• The State Committee for Urban Planning and Architecture is responsible for the development, improvement and approval of construction norms and rules to ensure energy efficiency in buildings.
• Cities and municipalities play important roles in terms of procuring energy efficiency services, leading pilot programmes and raising awareness among consumers, for example.

International organisations, donors and international financial institutions (IFIs) provide technical assistance to the Ministry of Energy and other state institutions in formulating energy efficiency policies and implementing other measures, such as the Energy Efficiency Fund.

While a deep analysis of energy sector governance and tariffs in Azerbaijan is beyond the scope of this roadmap, it is important to note some elements as they impact efforts on energy efficiency. Azerbaijan’s energy sector is largely government-owned, operated and vertically integrated. More than 90% of all installed capacity belongs to state-owned companies, with the country’s largest electricity producer and transmission system operator (TSO), Azerenerji OJSC, owning 85% of all generating capacities. While the issue of energy sector regulation is complex, with experts holding a range of views, the broad consensus is that greater competition in energy markets boosts investments, including in energy efficiency and innovation.

High historical and ongoing subsidies for consumers have an important impact on incentives for energy efficiency in Azerbaijan, such as residential consumers of natural gas for heating. Between 2016 and 2021, average annual explicit and implicit subsidies for natural gas, electricity and oil were USD 2.3 billion, accounting for just over 5% of GDP. Prices, which are set by the government, are currently among the lowest in the region and do not reflect the full cost of supply. The existing tariff-setting methodology, which does not contain separate rules for calculating electricity, natural gas or heat tariffs, also provides few incentives for utilities to improve the cost efficiency of their services. Instead, it motivates them to increase their operational costs to justify a greater need for regulated revenues.

The Government of Azerbaijan has commenced reform efforts in these areas, with the introduction of free competition and removal of subsidies to be implemented in stages by 2028. Drafts revisions of methodologies for determining tariffs have been presented by the Ministry of Energy, with inter-ministerial discussions ongoing.

While the Government of Azerbaijan is considering gradual reforms to achieve a more liberalised market by 2025, the existing arrangement has important implications for energy efficiency, since tariff levels do not incentivise energy efficiency improvements (e.g. in residential buildings or in industry). In addition, high subsidies encourage greater consumption of domestic oil and gas reserves. 

Energy efficiency investment data for Azerbaijan are not available. Current energy sector investments primarily support fossil fuel extraction and electricity system development, including renewable energy – an area in which efforts are under way to improve the environment for international investors. Nearly 90% of all energy sector investments targeted hydrocarbon extraction between 2008 and 2017, with 9% devoted to developing the electricity sector, including renewable power. In recent years, however, investments in renewable energy sources have increased, with an increase in installed renewable energy sources and a major investment in a 230 MW solar plant announced at the end of 2023.

As noted previously, the Government of Azerbaijan has established the Energy Efficiency Fund to support energy efficiency measures in buildings and economic sectors. The fund was formally established by decree in March 2024 and will be the responsibility of the Ministry of Energy, with management led by the Energy Regulatory Agency. The rules on formation and use of funds of were also approved. However, funds are to be raised through the sale of fossil resources, and the Cabinet of Ministers is to submit proposals with further details on this matter by the end of 2024.

Subsidy and energy sector reforms to spur investments in energy efficiency will be key to ensuring the success of the fund and other instruments to increase money flows into energy efficiency improvements. High subsidies also limit financing for enabling infrastructures, such as district heating and electricity networks, with implications for energy efficiency and decarbonisation. In parallel, a lack of competition in the energy sector and low end-user tariffs reduce incentives for private sector investment in energy efficiency as well as in renewables.

Since the legal framework for energy efficiency and some secondary legislation has only recently entered into force, there is little evidence yet on the success of implementation and enforcement efforts. Given the country’s energy sector governance and tariff regime legacy, putting robust implementation and enforcement systems in place is an important consideration for energy efficiency policymakers in Azerbaijan.

Azerbaijan’s current data collection system is comprehensive and broadly aligned with international norms, with monthly and annual mechanisms covering energy production, transformation and consumption under the oversight of the State Statistical Committee. Azerbaijan was also the first country of the Former Soviet Union to publish an energy balance according to international norms, and the State Statistical Committee’s website publishes updated statistics annually. In parallel, a nationwide smart meter and pre-paid meter rollout is under way, with high collection rates for grid-connected consumers. Collecting accurate end-use energy consumption data will play an important role in policy efforts, notably the monitoring and enforcement of codes and standards for buildings and energy-using equipment.

Awareness and capacity

Given Azerbaijan’s longstanding reliance on domestic fossil fuels and subsidised energy tariffs, awareness about the benefits of energy efficiency is unsurprisingly reported to be generally low among the country’s population and within economic sectors. Similarly, capacity for energy auditing, energy service provision and other important areas is minimal. However, in line with its wider policy agenda for energy efficiency, Azerbaijan has been making collaborative efforts with international partners to raise public awareness, including through EU-funded initiatives.

Energy efficiency services

The Law on the Rational Use of Energy Resources and Energy Efficiency includes language aimed at promoting energy efficiency services in Azerbaijan, and secondary legislation is now in place to define EPCs for energy efficiency services. However, scant data on energy service companies (ESCOs) and related market activity are available, and the combination of subsidised energy prices and a lack of skills have constrained market development so far. 

Azerbaijan has nearly 1.6 million residential buildings covering approximately 109 million m². Of these, 65% are single-family homes (SFHs) and the remainder are multi-apartment buildings (MABs). More than half of these dwellings were built in the pre-1980 Soviet era when few or no building efficiency codes were in place. Within the region, Azerbaijan has among the smallest floor space and lowest housing stock per capita. On average, each Azerbaijani citizen has less than 15 m² of floor space, with 200 dwellings serving 1 000 inhabitants. In comparison, the EU average is approximately 35 m² of floor space per person and over 450 dwellings per 1 000 inhabitants.

This level of density might suggest more efficient energy use in Azerbaijan’s buildings, since each unit of energy serves more building dwellers than in, for example, the European Union. However, Azerbaijan’s residential buildings still have considerable energy efficiency potential, as they are the country’s single largest consumers of energy, accounting for 39% of TFEC in 2022. Based on available data and estimates, the average energy intensity of residential buildings in Azerbaijan is 250‑280 kWh/m² per year, compared with an EU average of approximately 160 kWh/m².

Estimates suggest that energy savings of 50% are possible, notably in MABs. In addition, while Azerbaijan’s residential building consumption has grown at a modest annual rate of 1.2% since 2008, demographic and economic growth are expected to drive increasing demand for energy and floor space.

Gas accounted for 83% of TFEC in residential buildings in 2022, with gas usage (predominantly for boilers) 22 percentage points higher than in 2000 following an expansion of gas networks to residential buildings. Meanwhile, the share of electricity in residential TFEC more than halved over this period, falling from 37% in 2000 to 14% in 2022. The portion of district heating and biofuels (shown as “other” in the figure below) increased slightly from a low base in 2000 to just over 3% in 2022.

Little granular data is currently available on non-residential (e.g. commercial and public) buildings since Azerbaijan’s statistical services do not collect this information in any systematic manner. However, estimates suggest that the footprint of the country’s non-residential buildings is approximately 23 million m² (21% of the residential building footprint), with average annual energy consumption in non-residential buildings estimated at around 220 kWh/m² and energy efficiency potential at 50%.

Space heating

Natural gas is Azerbaijan’s dominant heating fuel, covering 99% of space heating needs. While granular data on heating technologies is limited, it is estimated that over 80% of residential buildings rely on gas boilers. Since the collapse of the Soviet Union, the natural gas grid has been expanded to most of the population, reducing reliance on legacy district heating systems. Less than 3% of residential buildings remain connected to district heating, although in 2017 these systems still provided heating services to 26% of hospitals, 9% of preschools and 6% of schools.

Little information is available on the number and energy performance of standard appliances such as refrigerators and washing machines, or lighting technologies being used in Azerbaijan. Also, numbers and growth rates for air conditioning units, fans and other cooling equipment are not currently publicly available. Historically, Azerbaijan has never implemented MEPS or import controls for energy-consuming appliances or for lighting and cooling equipment, although MEPS are being introduced in its new legislation.

Azerbaijan’s transport sector TFEC more than tripled between 2000 and 2022 – the strongest energy demand growth of any sector. In the same period, gasoline demand for road transport increased nearly fivefold while diesel and light fuel oil use rose well over threefold.

The transport sector has significant energy efficiency potential, as nearly 80% of vehicles on Azerbaijan’s roads are more than ten years old. Azerbaijan also imports a significant number of used cars – it is estimated that 40% of cars imported in the last decade were second-hand. While a metro system expansion in the capital of Baku has made public transport more readily available, vehicle use remains predominant.

Transport sector energy demand is expected to continue rising in tandem with economic and population growth, based on historical trends. Vehicle ownership doubled between 2005 and 2018, with many cars considered inefficient due to their age, and during 2017-2022 the number of registered cars (fuelled mainly by gasoline and diesel) increased a further 20%. The number of hybrid cars has begun to expand, with just over 30 000 registered in 2022 out of a total car fleet of over 1.4 million. Owing to tax incentives, EVs are also beginning to appear on Azerbaijan’s roads, albeit in very modest numbers, with less than 600 registered in 2022.

Representing 30% of the country’s TFEC, Azerbaijan’s industry sector is roughly equivalent to the transport sector. However, it is noteworthy that more than half of this consumption is for non-energy uses (e.g. natural gas for fertiliser and chemical production). In only a few other countries does consumption for non-energy purposes exceed that of energy uses in the industry sector.

From the perspective of improving energy efficiency, consumption for non-energy uses is commonly excluded from the analysis. Thus, the share of energy consumption is 16% of TFEC.

Gas is the predominant fuel used in industry, although the share of gas in industry TFEC has decreased slightly, from 60% in 2000 to 57% in 2022. Annual gas usage in industry fluctuates based on economic factors, with the global economic crisis leading to a significant drop between 2008 and 2012. Meanwhile, annual electricity consumption in industry has increased nearly sevenfold, rising from around 5% of industry TFEC in 2000 to 26% in 2022.

Regarding the growing share of electricity, it should be emphasised that the power consumed by industry (and other sectors) is generated almost exclusively from natural gas, which has largely displaced other energy sources such as heavy fuel oil (HFO) and hydropower.

Reflecting the magnitude of the country’s oil and gas industry, the chemical and petrochemical subsector stands out as the largest energy consumer in Azerbaijan’s industry sector, accounting for 34% of the total.

Compared with other sectors, energy use in agriculture and services is relatively low, at around 16% of TFEC in 2022, with electricity accounting for nearly 50% of total demand. However, almost 40% of Azerbaijan’s working population is employed in the agriculture sector alone, which contributes 6% of the country’s GDP according to 2021 data. Little information is available on the number, types and energy consumption of technologies used in agriculture.