Azerbaijan’s energy system is at a crossroads. Longstanding and substantial natural gas and electricity subsidies have disincentivised investments and progress on energy efficiency. Reliance on natural gas for energy and economic growth has limited diversification and increased exposure to global fossil market volatility. In recognition of these and other issues, which present challenges to Azerbaijan reaching its COP28 commitment to transition away from fossil fuels, the Government of Azerbaijan has introduced a series of measures to improve energy efficiency over the recent years.

In 2022, Azerbaijan’s first legal framework on energy efficiency entered into force, and several pieces of secondary legislation covering buildings and appliances standards and norms, energy audits, and promotion of energy efficient street lighting, among others, have since been adopted. The adoption of a new a Socio-Economic Development Strategy, which contains more measures targeting energy efficiency improvements and increases in the share of renewable energy, and recent creation of a dedicated fund for energy efficiency suggest policy efforts are gaining momentum. Policy efforts on energy efficiency are also in a transition, moving from the adoption of framework laws to the implementation of measures, including deploying codes and norms in markets.

This is an opportune moment for Azerbaijan to develop targeted actions for energy efficiency aligned with the country's climate commitments, building on progress made to date. Action on energy efficiency is more pertinent than ever for Azerbaijan. As host of COP29 in 2024, Azerbaijan can both demonstrate and encourage leadership in this area. Progress on energy efficiency can also support the long-term strategic development of Azerbaijan’s economy and energy sector while reducing the country’s exposure global fossil fuel market fluctuations. While precise estimates need to be developed, there is significant untapped energy efficiency potential in Azerbaijan, especially in its buildings, industry, transport and agriculture sectors. Unlocking savings and efficiencies could help Azerbaijan conserve natural gas and oil, diversify its economy and deliver multiple economic, social and environmental benefits.

To support Azerbaijan’s journey towards greater efficiency across its economy, this report examines the country’s energy efficiency status based on recent analysis by the IEA and other international bodies, as well as engagement with officials and stakeholders. It includes recommendations, in the form of a summary roadmap, designed to offer inputs on energy efficiency strategy formulation and policymaking over the coming decades to 2040. In addition to subsidy and tariff reforms to incentivise investments in energy efficiency, a key recommendation in the roadmap is the setting of energy efficiency targets. This can support the successful implementation of recently adopted secondary legislation, including the development of new technical norms related to eco-design requirements and minimum energy performance standards for buildings. Work in this area is already under way, but full implementation will require dedicated institutional capacity and co‑ordination. Special funding mechanisms and incentives, building on the creation of a new Energy Efficiency Fund, are also needed to ensure the best available technologies are available to consumers and businesses.

As many countries have already experienced exponential growth in key high-efficiency, low-carbon technologies such as heat pumps and electric vehicles, Azerbaijan could benefit from globally established best practices and lessons learned by governments that have deployed regulatory measures and incentives to promote these and other innovations. As a relative latecomer in developing rules and norms for energy efficiency, Azerbaijan now has the chance to build on other governments’ insights to formulate and implement its own robust policies and measures quickly and at scale.

Data will be critical for Azerbaijan to achieve success in its energy efficiency efforts, with effective strategy formulation, policy design and monitoring reliant on effective data governance. Our roadmap therefore recommends that Azerbaijan develop robust methodologies for compiling data on energy efficiency across sectors, in line with IEA recommendations and global best practices. In parallel, capacity building and awareness raising within institutions and markets – and among the public – are necessary to ensure policies are supported and implemented across all sectors.