BACKGROUND: The substantial and once well-developed electrical energy industrial sector in Azerbaijan is an inheritance of the former USSR. It has since fallen into a state decay and disrepair. Its infrastructure has diminished to a point where electrical engineers and technicians are having difficulties keeping the system patched together and fully functional. Much of the equipment has outlived its normal operational life. The technology and support staff is no longer appropriate to current and future consumer/industrial needs. The problem is also related to a lack of financial resources for modernization, proper maintenance, poor training, corruption and corporate management.

Presently there are 7 thermal and 5 hydro electrical power stations in Azerbaijan. Projected generating capacity of functioning power stations amounts to 23 billion k/h but in reality the reality and actual output is quite different.


STATISTICAL DATA: Officially 21 billion 360,2 million of k/h of electricity were produced in Azerbaijan in 2004 (1,5 % more than in 2003), moreover 12.5 % of all the output was produced by hydroelectric power stations, and 87.5 percent by thermal electrical power stations. In the same period, electricity output in the "AZERENERJI" system made 21 billion 344 million of k/h in 2004 (21,15 billion of k/h in 2003): 2 billion 755 million of k/h at hydro electrical power stations, and 18 billion 589 million of k/h at thermal electrical power stations.

Electricity in Azerbaijan is also produced at various enterprises of "AZERKIMYA" State Company. Some of this energy is imported over this years and this practice is expected to continue in the future. According to bilateral agreements, 1 billion 358,452 million of k/h was received from Russian energy system, 618,635 million of k/h from Iran and 378,655 million of k/h of electricity from Turkey.

Oil refineries of SOCAR delivered to thermal electrical power stations 1 million 502 thousands 314 tons of low grade oil, "Mazyt" in 2004 (30 % less than in 2003) or 82 percent of the total volume of this grade of fuel oil. Starting this year the government planned to allocate only 1,1 million tons of black oil for the energy requirements of "AZERENERJI" Stock Company However, suspension of gas import (which 80 % is used for energy production), and some may be offset from Russia as a result of planned increases in gas deliveries for power generation.

In general 95 thousands 217 tons of conventional fuel were economized at thermal electrical power stations of Azerbaijan in 2003. According to data of "AZERENERJI" SC, it was expended that it takes 4.95 grams of conventional fuel to produce 1 k/h of electrical energy. In comparison to current energy efficiency, 1 k/h of energy "AZERENERJI" is needed vs. 3,89.5 grams for the same output. And "AZERENERJI" doesn't provide up-to-date information about the usage of black oil and gas separately by energy source for production of each k/h of electricity corporately.

PROSPECTS AND PERSPECTIVE
Electricity consumption in Azerbaijan increases every year, and even by leaps and bond; this trend has impacted future developmental plans of this sector. In 2001 it increased by 2 %, in 2002, by 3 %, in 2003, 13.4 %, in 2004-1.5 %. With these trends in mind and further expected increases in electricity consumption, the construction of the 2nd steam and gas installation with capacity of 400 MW on "SEVERNAYA" electrical station and SGI with capacity of 500 MW in Sumgayit.

The projects will not only increase the supply of electricity to the Absheron peninsula but the result will be the savings in more than 200 thousands tons of conventional fuel annually. The proximity of these stations to consumers will enable more efficient deliveries of energy to end users, Now there is a drop in efficiency because of the distance that electricity must be transmitted to Absheron, which now is mainly derived from Mingachavir electrical station and that is 300 km from Baku.

Perspective plans of energy development in Azerbaijan presume the realization of rehabilitation projects energy-transmitting infrastructure (renewal of equipment and equipping of 9 system substations, completion of the 1st phase of the Central Control system reconstruction, introduction of SKADA system in the nearest future), construction of 330-kilovolt substation in Khachmaz.

Besides this, as a result of complex works on Azerbaijan and Ali-Bayramli electrical stations their energy blocks will reach projected capacity with significant reduction of conventional fuel expenditure on production of 1 k/h of electricity. And after connecting up of 330 kV IV Ali-Bayramli line of electrotransmission to Absheron substation and reconstruction of the grid of the country's energy system which will be done parallel work with the Russia Federation and Islamic Republic of Iran. Construction of 330 kV line of electrotransmission AzImishli-and Yashma-Derbend is intended with the same purpose and done as a collaborative project with close neighbors.

Ilham Aliyev, President of Azerbaijan signed an order on May 2 2005 to improve the system of production and distribution of electricity energy. The anticipated improvements are geared to maintaining continuity of supply to consumers and efficiency of production and distribution. Seasonal problems have plagued the system, especially in fall and winter when demand is at its peak. Within this in mind, and without the framework of the presidential order, "AZERENERJI" Stock Company is giving the responsibility to provide "turn key" projects that will bring on line 52 ready made power stations of the module type. Collectively they will have generated capacity of 450-460 MW. The geographical location of these stations will be throughout the country, with 10 stations in the Astara region, and 10 stations in Nakhchivan in 2006, 10 stations in the Sheki region, 10 stations in the Khachmaz region and 123 stations located throughout Baku and close suburbs.

PRIVATE SECTOR IN THE MANAGEMENT OF ENERGY SYSTEMS:

Four new joint stock companies were established in 2001 with the purpose of improving the electric energy distribution company. From these, "Bakielectroshebeke" was allowed to sign a long-term (25 years) management contract with "BARMEK" -- Turkish company and that agreement was concluded back in October 2001. Moreover, "Ganjaelectroshebeke", "Sumgayitelectroshebeke" and "AliBayramlielectroshebeke" SC were also allowed to operate under such agreements also 25 years) to BAYVA Energy Azerbaijani Enterprise. The Azerbaijan government pursued an objective of not only stabilizing electricity supply with help of private sector, but also to increase collection of payment for consumed energy. It is expected that payment for supplied energy will reach 100 percent compliance within the next 3 to 5 years but many have doubts.

As a result of a number of measures realization in 2001 (mainly by putting into operation Enikend hydro electrical power station and new generation thermal electrical power station in the Shuvelan settlement), and the government has managed to increase the capacity of energy system on 200 MW, and in 2002 by 400 MW and solve the problem of fuel shortage in meeting the needs of power engineers by importing natural gas from the Russian Federation.

IMPORT OF ELECTRICITY:
In connection with increase in demand for electrical energy Azerbaijan according to contract agreed back in December, 2001 to buy 1.5 billion o k/h of electrical energy from Russia SC "United Energy System", which is state electric company for the Russian Federation, (UES), is very active in the regional energy market and in recent years took control over the main Georgian utility distributor, Telasi, from the U.S. power company AES. UES chief Anatoly Chubais is clear in statements that the company does not political goal in dealing with Caucasus states but critics, notably the Americans, questioned the company's motives.

There is no secret to UES' activities abroad. It's practically part of the Russian state apparatus, and naturally the policy it pursues is state policy. UES, which exports power to countries from Norway to China, says in its statutes that its foreign business is coordinated with the Russian government and conducted in the interests of its shareholders, the largest of which is the Russian government.

According to the 2001 contract, Azerbaijan may annually import from 3 billion of k/h of electrical energy from Russia. However, for the past period Azerbaijan has never imported electricity in such large volumes. And this year the republic is planning to buy only half of this amount. The distribution system between Russia and Azerbaijan is also not ready for the expected volumes and this is why "AZERENERJI" is now negotiating over the proposed second transmission line from the Russian Federation.

Moreover, Azerbaijan has also imported electricity from Turkey and Iran. This supplied energy supplies have been used in the Nakhchivan since 1993. Before 2001, Azerbaijan's debt to Iran for electrical energy reached 43 million USD, but by payments by SOCAR are being made each quarter in reducing this debt. Nonetheless, the present debt of Azerbaijan to Turkey is yet to be restructured and a payment workout agreed. It is estimated that this debt is not substantial but some estimate that it is in excess of 10 million USD.

PROBLEMS:
According to international experts, main problems in electricity supply in Azerbaijan are uneven consumption and usage of electricity for heating of apartments. In some regions mothly consumption per head of population makes 600-800 k/h, in pthers-1400-1500 k/h. But because of the bottled or natural gas in the regions, electricity is often used for heating, which leads to stressing of the system and power outages. There are also daily ups and downs in peak demands. Electricity consumption volumes during night, afternoon and evening hours is quite different. 2000 of MW of electricity is consumed at night, 2800 of MW in the afternoon and this figure makes 3700-3800 of MW during evening hours (from 18.00 tii 23.00 p.m.)

Official "AZERENERJI" SC, Azerbaijan population uses 7 times more electricity than does industry and other spheres of the economy. In 1990 population consumed 1,9 billion of k/h, in 2000 it was consumed up to 10 billion of k/h. Again according to "AZERENERJI", 7.2 billion of k/h is produced in the country daily per capital. To compare we shall note that Russia produces 6 k/h daily per person. Taking into consideration the inclement cold climate for most of the area of the Russia Federation and uneven supply of electricity in the regions of Azerbaijan as well, many conclude that the numbers are not reliable and in some ways they have been will cooked up.

However as local experts believe one of the reasons for electricity shortage in Azerbaijan are facts of corruption in the energy sphere (AZERENERJI signed an agreement with Wartsila, a Finnish company in May, 2005 for delivery and installation in Azerbaijan of 52 module stations with total generating capacities 450-460 of MW for $390 million. However, in 2002 BARMEK Company, a competitor, offered to provide Azerbaijan with the same installations for half the price. The main point, according to this company, is that Azerbaijan does not actually doesn't produce electricity in such volumes, but by mass disconnections in the regions, and the level of anxiety is artificially raised over anticipated shortages. In turn, this situation is used as a ploy for economic gains by those with narrowly defined economic interests.

Not more than 50% of payment for consumed electricity is actually collected each year, which in turn leads to shortage of funds fot the renovation of electrotransmission line, transformation stations and other needed equipment. At the same time Azerbaijan has the lowest tariff for 1k/h among countries of the South Caucasus is in Azerbaijan, (4,5 cents in Armenia and 6 cents in Georgia)

DELIVIRIES OF BLACK OIL BY SOCAR TO "AZERENERJI" SC
(in TONS)

Rapid reduction of deliveries volumes for needs of "Azerenerji SC in 2001 is connected with the fact that last year SOCAR purchased from "ITERA" international group of companies of 3,5 billion of nature gas for needs of power engineers. (1 million 510 thousands 314 tons in 2004)