Energy is a vital input to support growth in Azerbaijan's non-oil services and industry sectors. The power sector, along with the oil sector, plays a leading role in Azerbaijan's social and economic growth, contributing one third of the country's gross domestic product in 2007. Development of the power sector has been one of the Government's priorities. While the
country has been successful in engaging the private sector for developing and exporting its oil and gas resources, the domestic energy sector is threatened by unreliable and inadequate power supply caused by limited maintenance of aging infrastructure and underinvestment. Effective generation capacity has shrunk because of insufficient funds for
rehabilitation and capacity addition. Low power plant efficiency and high losses of transmission and distribution lead to wastage of fossil fuels that could have been exported, and nearly double the emissions of greenhouse gas and other pollutants that damage the regional and global environment.
Today, about 48.4% of Azerbaijan's 8.5 million people live in rural areas, often with insufficient access to quality basic services. Lack of sufficient power, gas, and heat has aggravated the regional imbalance in the country. Poor quality and unreliable electricity supply (i) inhibit industrial and commercial activities, constraining economic growth and employment opportunities in regional areas; (ii) promote switching to more polluting fuels and accompanying environmental impacts; and (iii) cause hardship to the population and affect their health.
The power network of Azerbaijan faces two major development challenges: (i) deteriorating and aging generation, transmission, and distribution facilities; and (ii) inadequate levels of investment and maintenance. Over 20% of all energy equipment and over half of the network facilities are well beyond their useful life. This reduces the reliability and efficiency of the power network operation. The high level of physical wear of equipment at power plants and networks leads to frequent power failures in the populated areas and affects the economic activities in the country. The inadequate capacity of transmission lines also results in a shortage of reserves in the stability of the power system, increasing the potential risk of power system operation. Rehabilitation and upgrading of transmission facilities would significantly reduce the risk of future system failure.
The Project targets key strategic transmission lines, which are severely deteriorated and need to be rehabilitated on a priority basis. The Project will also contribute to optimizing the domestic energy resource utilization and reducing fossil fuel consumption and power import. The current Azerbaijan power system is not being operated optimally because of
constraints on existing components of the transmission network. Hydropower energy generated in the west region is not efficiently delivered to the central region where demand is increasing rapidly. Replacement of the 220 kV transmission lines would allow the existing hydropower plant to increase its available outputs to the optimal level the peak power supply could be enhanced while power energy generated from thermal power plants in the central and east regions could be reduced. This would permit optimal utilization of the grid networks and generation capacity by reducing the shifting operation time of large thermal power plants, thus improving the efficiency and stability of generation units and reducing excessive consumption of fuels. The saved fuel including gas and oil would be exported to increase government revenues. Thus, Azerenergy Open Joint-Stock Company (Azerenergy)
and the country would benefit from savings in fuel expenditures, improving energy efficiency, and reducing environmental pollution.