Oil and gas continue to dominate Azerbaijan’s economy and provide most of its export and government revenue. While these resources have sharply raised the country’s living standards since the late 1990s and remain plentiful, the long-term outlook for this economic model is uncertain. Oil production is declining and major oil and gas importing countries have pledged to reduce greenhouse gas emissions to net-zero by mid-century, implying little demand three decades from now for oil or gas without carbon capture and storage.

This report assesses the energy sector and related economic challenges facing Azerbaijan. It proposes several ways to respond by increasing the efficiency and diversity of domestic energy supply and use. The overriding recommendation is a gradual transition to competitive markets with significant private sector participation and energy prices that reflect the cost of production. The withdrawal of subsidies should be accompanied by support measures for those most in need. Such a transition would attract new market entrants and new investments, helping to develop Azerbaijan’s significant solar and wind potential, and limiting greenhouse gas emissions.

These recommendations are in line with efforts already underway in Azerbaijan. Prompted by the oil price shock in 2014-15, the government has recently drafted proposals for electricity and gas market reforms, as well as laws on energy efficiency and renewable energy. The country’s first specific energy strategy is also nearing completion. The report encourages Azerbaijan to move swiftly to adopt all these proposals and implement them effectively to ensure secure and sustainable energy in the future.