Why Southern Gas Corridor is a chance for energy efficiency?

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This article is part of our special report Pipeline gas diversification becomes reality.

The construction of a $40 billion project of the “Southern Gas Corridor” is completed, a 25-year gas supply contracts with European buyers are in force, and a new energy efficiency law is ready to be adopted by the Milli Majlis, the Parliament of the Republic of Azerbaijan.

Bilyana Chobanova is the EU4Energy Project Manager at the International Energy Charter.

Oleksandr Antonenko is the Head of the Energy Efficiency Unit at the International Energy Charter.

Now, new opportunities arose for the energy-rich country that has evolved from a struggling newly independent state to a major regional energy player over the last two decades.

The Southern Gas Corridor project primarily targets the export of gas from Stage 2 Shah Deniz field. The new gas corridor can deliver six billion cubic meters per annum (bcma) of gas to Turkey and further ten bcma to the EU market via the Southern Caucasus, Trans-Anatolian (TANAP) and Trans Adriatic (TAP) pipelines in a route known as the Southern Gas Corridor.

Source: British Petroleum in Azerbaijan, 2019

The new pipeline and the 25-year contract will not only bring affordable and competitive Caspian gas to the EU market but also diversify the existing energy routes and increase the European energy security. But why does energy efficiency become so crucial for Azerbaijan, especially for this historical moment of commencing the operation of the long-awaited pipeline?

An in-depth review of the energy efficiency policy conducted by the Energy Charter Secretariat in 2019 provides a straightforward answer to this question – the natural gas savings as a result of energy efficiency measures can be a reliable source for gas export.

The “Strategic Road Map on Public Utilities”, adopted in December 2016, stipulates that natural gas saved as a result of increased efficiency of electricity generation plants should be exported through TAP and TANAP. Indeed the study identifies that the potential energy savings in the energy sector only can reach up to two bcma or 20% of the planned natural gas export to the EU using the new pipeline system. However, other sectors of the economy can also provide substantial natural gas savings that can be exported using the Southern Gas Corridor after the adoption and the implementation of the new energy efficiency law.

The new Law on Efficient Use of Natural Resources and Energy Efficiency of Azerbaijan has already passed the inter-ministerial consultation and is currently at the final stage of adoption at the Parliament.  After adopting the law,  the Ministry of Energy will have only six months to submit its first National Energy Efficiency Action Plan (NEEAP) for the President’s approval and up to one year to develop and implement all envisaged energy efficiency policy instruments. Thus, the Ministry has already mobilised its resources and asked the international donor community to assist the country with the implementation of the requirements of the new law.

A broader analysis conducted by the Government of Azerbaijan in cooperation with the EU-Funded EU4Enetrgy project also identifies that gradual increase of energy efficiency in all sectors of the economy during 2021-2025 can bring the following cumulative benefits for Azerbaijan:

  • Savings of natural gas: 5-4.2 bcm;
  • Increased export revenue: $666-787 mln;
  • CO2 emissions reduction: 4-10  MtCO2;
  • Reduction of budget subsidies: $491-981 mln;
  • New investments: $2,460-3,389 mln;
  • Creation of new jobs: 118-123 thousand.

The above benefits are neither abstract nor hypothetical figures, but carefully calculated data as a part of the modelling and development of the first NEEAP of the country for the next five years. Luckily or not, the NEEAP is not overambitious, and the international donor community have already expressed some concerns that the proposed energy efficiency targets are not high enough.

For example, the NEEAP envisages that at least one year – 2021 – would be necessary to develop, adopt and implement supply-side policy instruments, and at least two years – 2021-2022 – to create and enforce demand-side policy instruments. As a result, no significant savings can be expected during the first two years of the Plan. The latter relates to the fact that the energy efficiency policies in Azerbaijan are at a very initial stage of development, and the country requires extra time, efforts and assistance to build national capacity and implement new policy instruments.

The future will show what approach is better for Azerbaijan – the realistic and relatively easy to achieve EE target, especially during the implementation of the first NEEAP, or setting more ambitious targets and streamlining more state efforts and resources to implement them.

In the end, the European practice indicates that there is a direct correlation between the potential energy savings and the efforts of the Member States. Everything is possible if there are the right motivation and regulations at the top and implementation levels of the state. As for Azerbaijan, the country has a unique opportunity to boost its export using the saved energy while preserving precious natural resources for future generations and fulfilling international climate change targets at the most efficient way.

In addition to the benefits mentioned above,  the proposed NEEAP would contribute more than 50% of the remaining net annual emissions reduction (8.6 MtCO2) required to meet the official 2030 INDC target of Azerbaijan.

Indeed, in October 2016, the Milli Mejlis ratified the Paris Agreement with the country’s commitment to reduce GHG emissions by 35% in 2030. Thus, the NEEAP can be the first national document that confirms the highest cost-effectiveness of energy efficiency measures for achieving environmental and climate change goals and international commitments of Azerbaijan.

For example, the NEEAP confirms that measures related to the adoption of new tariff policy, eco-design, labelling and other horizontal measures are the most cost-effective instruments. These measures can help the country to achieve energy savings at the lowest costs of $0.03-0.06 mln per 1 ktoe of saved energy.

In the same manner, the NEEAP identifies cost-effective measures for energy supply, transport, industry and agriculture sectors that can deliver savings at $0.21 – 0.46 mln per 1 ktoe. In comparison, the thermal renovation of old residential and public buildings may costs the Government as much as $10.44 – 10.88 mln per 1 ktoe of saved energy. However, the latter policy instruments can create the largest number of new jobs comparing with other policy measures. Therefore, the NEEAP offers the Government of Azerbaijan a useful tool on how to achieve savings and provide a reliable source for the gas export while prioritising the most cost-effective measures that can create new jobs and boost the local economy in the short term.

The scope of this article neither brings into consideration the increased carbon-dioxide emissions as a result of the increased upstream at Stage 2 Shah Deniz field nor the reduction of emissions as a result of fuel switching from coal to natural gas. The role of the natural gas for energy transition has been a well-discussed topic in the international scientific community, and the role of the Southern Gas Corridor for energy transition can be another hot topic for future analysis.

At the same time, the potential export of saved energy using the new pipeline is a win-win situation for all parties – the involved states, companies and citizens, including the EU. Low energy prices on the national market comparing with neighbouring countries have been long enough a stumbling point hindering the implementation of energy efficiency projects in Azerbaijan.

However, the launch of the Southern Gas Corridor provides the country with new momentum, decreases the payback period and increases the profitability of potential energy efficiency projects. This can also be considered as an opportunity for the EU that has officially adopted the block’s target to become climate-neutral by 2050 and declared decarbonisation to be one of its priorities.

The only question is how far the European Union is willing to promote its targets to the Union’s Neighbourhood Policy and to support the implementation of energy efficiency policies by the Governments of energy-rich countries, like Azerbaijan.

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