Azerbaijan faces Caspian conundrum

“Azerbaijan has effectively leveraged our oil and gas resources in the Caspian Sea for the benefit of our country’s economic development. But the world is changing, and it is time to tap into a new resource in our seas – the power of offshore wind.”

Elnur Soltanov, deputy minister of energy for Azerbaijan, explained last week that offshore wind is an exciting opportunity for the country to diversify its economy. He was speaking as the energy ministry, the World Bank and the International Finance Corporation launched a roadmap showing the country could install more than 7GW of offshore wind by 2040. It was produced in collaboration with BVG Associates.

The country has attracted interest from investors too. Saudi Arabia’s ACWA Power this month reiterated its support for the nation’s energy transition.

Last week, Abu Dhabi investor Masdar signed a 4GW agreement with Azerbaijan to develop renewable energy and green hydrogen projects in the country. This includes 1GW of onshore wind, 1GW of solar and 2GW of offshore wind and green hydrogen. The agreement also includes the potential for a second phase of 6GW.

In mid-2021, Azerbaijan state oil company SOCAR teamed up with Technip Energies to develop a pilot floating wind project in the Caspian Sea. Finally, oil giants BP and Equinor may also be able to expand their Azerbaijan operations into offshore wind.

But the report also said that realising that 7.2GW potential would require long-term vision, policy support, and investment in new infrastructure. We also believe that the market will face unique challenges because the Caspian Sea is, effectively, a lake with limited access by the vessels needed to carry and install turbine parts.

Caspian conundrum

The roadmap envisages two scenarios for how offshore wind could develop in the Azerbaijani area of the Caspian.

In the high-growth scenario, the government would take big steps early to support the investment in offshore wind. This would help reduce costs and help it to reach 7.2GW of offshore wind by 2040. That is 37% of the country’s electricity supply.

In the low-growth scenario, investment would be slower and enable development of only 1.5GW fixed-foundation offshore wind capacity by 2040. Now the government has the roadmap and must decide which of these paths it is keenest to travel.

Neil Douglas, director at BVG Associates, led the team that researched and wrote the roadmap. He said that even though the Caspian Sea is bordered by five countries – Azerbaijan, Iran, Kazakhstan, Russia and Turkmenistan – it faces limits on its potential for wind farms, as the only viable area to build offshore wind at scale is around Azerbaijan’s Absheron peninsula. This is the location of the country’s capital city Baku.

This means it would be challenging for Azerbaijan to bring down the cost of offshore wind by partnering with other nearby nations on supply chain investments. Even the potential offshore wind sites near Kazakhstan make little sense to develop, because the Kazakh government would focus on developing in its plentiful onshore wind and solar areas.

Therefore, Azerbaijan needs to commit to around 7GW itself so it can give the critical mass needed for offshore wind companies to build a supply chain in the Caspian Sea.

He added that building offshore wind at this scale would enable the country to focus on how it could export power from the offshore wind farms, or use that electricity for its domestic needs so it can export more natural gas overseas: “From the government’s perspective, the more natural gas that Azerbaijan saves in terms of not burning it to produce domestic electricity, the more opportunity it has for significant exports to Europe,” he said.

The Caspian Sea’s geographical challenges go beyond its limited wind areas.

The country also faces a challenge because its primary access routes for vessels are via the Volga River in Russia, which links to both the Baltic Sea in the north and the Black Sea in the west via the Volga-Don canal. This means that while it may be accessible to vessels carrying turbine parts, the same cannot be said for installation vessels. Offshore wind installation vessels would need to be built for the Caspian.

“There’s a lot of work to be done beyond the scope of the roadmap to determine that,” admitted Douglas. But he added the country has a very mature supply chain for the offshore oil and gas industries, which could be leveraged for offshore wind.

Investors must now await the government’s next steps.