Introduction

    The energy sector is one of the strategic areas of great importance in the economic development of Azerbaijan and strengthening its position in the regional energy market. This sector plays an indispensable role in ensuring the country's economic stability, expanding export opportunities and attracting foreign investments. However, the existing energy infrastructure, in particular the technological level of energy production and network stability, does not fully meet modern requirements, and this situation limits the development prospects of the sector. The application of technologies related to the use of renewable energy sources not only ensures the efficient use of energy resources, but is also of great importance for protecting the environment and increasing energy security.

    The main purpose of the article is to identify existing problems in the energy sector of Azerbaijan, to propose optimal approaches to solving these problems and to analyze the impact of investment strategies on the development of the sector. The use of renewable energy sources, especially in terms of solar, wind and hydropower potential, is of particular importance for increasing the competitiveness of Azerbaijan in international energy markets. However, legal and financial difficulties arising in the process of attracting local and foreign investments in this direction can be noted as the main problems hindering the development of the sector. Therefore, the article aims to provide recommendations on improving the investment climate and introducing modern technologies in energy production.

      To ensure sustainable development in the energy sector of Azerbaijan, it is strategically important to use international experience, take into account the economic and environmental advantages of renewable energy sources, and stimulate the application of modern technologies. One of the main priorities currently in the focus of attention in the current energy policy is the diversification of energy exports and increasing domestic production potential, which can ensure a stronger position of the sector in international markets. This approach is also important in terms of strengthening national and international efforts aimed at strengthening the country's energy security and environmental protection. This study will demonstrate how the application of modern approaches in the energy sector will contribute to the country's long-term sustainable development.

Literature review

The energy sector of Azerbaijan plays an important role in the country's economic development and increasing its competitiveness in international energy markets, which further increases the strategic importance of the sector. Within the framework of the literature review, an extensive analysis of research conducted by local and foreign authors in this field will be conducted, issues of energy resource management, application of renewable energy sources and formation of investment strategies will be examined. Research by various authors allows us to deeply understand the existing problems and potential of this field and determine the development prospects of the sector.

Badalov and Farazade (2020) devoted extensive space to the issues of energy security of Azerbaijan and the role of energy resources in economic development in their research. The authors noted that ensuring energy security is a decisive factor for maintaining the country's economic stability, and the state programs implemented in this direction have had a significant impact. In their opinion, the application of management models in accordance with international standards is necessary for the sustainable development of the current energy policy [Badalov and Farazade, 2020].

Aliyeva (2023) deeply analyzed the role of Heydar Aliyev in the development of the Azerbaijani gas sector and the importance of the Shah Deniz project. The author emphasized that this project, in addition to increasing the country's influence in international energy markets, contributed to strengthening energy security. Aliyeva also noted the successes of Azerbaijan's gas export strategy, especially the implementation of gas projects within the framework of cooperation with Europe. In her opinion, these projects are of strategic importance both from an economic point of view and in the context of regional security. As a result, the Azerbaijani gas sector acts not only as an energy producer, but also as an important energy transit country [Aliyeva, 2023]. Hajiyev (2021) studied the development of alternative energy sources in the liberated territories of Karabakh and the energy potential of these regions. The author noted that the widespread use of solar and wind energy can contribute to sustainable energy production in these areas. At the same time, Hajiyev emphasized that the use of these sources has a positive impact on environmental protection and economic diversification. As a result of implementing these approaches, significant improvements in energy supply in the regions can be achieved in terms of both quality and scale [Hajiyev, 2021].

Karimli and Aghayev (2020) analyzed Azerbaijan’s policy of transition to renewable energy sources and potential problems in this area. The authors noted that the transition from traditional energy sources to renewable energy sources is important not only in terms of economic efficiency, but also for environmental protection. In their opinion, state support, as well as the participation of the private sector, play a key role in this transition process. Karimli and Aghayev also emphasized that the application of new technologies in this direction, especially in the field of wind and solar energy, can ensure that Azerbaijan has a higher position in the energy market. In addition, the digitalization of energy production is also one of the main steps for the modernization of the sector [Karimli and Aghayev, 2020]. Tahirli (2023) paid extensive attention to the role of foreign investments in the energy sector and the efficient use of these investments. According to the author, international investments are a decisive factor for the application of modern technologies in the energy sector of Azerbaijan and the financing of new projects. Tahirli also notes that transparency and legal guarantees for foreign investors increase their interest in Azerbaijan. At the same time, the author emphasized that, along with attracting foreign investments, directing local capital to the energy sector is also one of the main priorities [Tahirli, 2023].

Shafaqatov (2014) examined the prospects for the application of alternative energy sources in Azerbaijan and proposed appropriate strategies for the country based on world experience in this area. The author showed that the application of alternative energy sources can make a significant contribution to economic development [Shafaqatov, 2014].

Veliyev et al. (2024) analyzed the impact of state policy on the development of renewable energy sources and the economic effect of projects in this area. The authors showed that Azerbaijan's solar and wind energy projects are important steps to ensure the country's energy security and increase export opportunities. They noted that expanding the state's incentive programs in this area and making the investment climate more favorable will ensure faster development of renewable energy sources. The authors also emphasized that international cooperation and exchange of experience in this area further increases the competitiveness of the country's energy sector [Valiyev et al., 2024].

The literature review shows that the harmonious application of traditional and renewable energy sources in the development of the energy sector of Azerbaijan provides a sound approach to ensuring the economic and environmental sustainability of the country. The authors' research covers important aspects such as the formulation of energy strategies, the promotion of international investments, and the application of renewable energy sources. These studies emphasize the importance of applying modern approaches in Azerbaijan's energy policy and the need to take concrete steps to solve existing problems in this area.

Renewable energy prospects in Azerbaijan

The widespread use of renewable energy sources in Azerbaijan is of particular importance in terms of strategic goals for sustainable energy supply in the near future, since this approach can not only meet the rapidly growing energy demand of cities, but also reduce the amount of harmful emissions emitted into the atmosphere. The expected progress in the development of technologies will ensure a higher level of efficiency in the application of renewable energy sources, increase the accessibility of these sources to the general public, make their use more convenient, and at the same time create advantages in terms of economy, ensuring long-term sustainability.

In addition, the approval of the "State Program on the Use of Alternative and Renewable Energy Sources in the Republic of Azerbaijan" by the decree signed by the President of the Republic of Azerbaijan Mr. Ilham Aliyev on October 21, 2004, has created a serious basis for the development of this area in the country. This order has given impetus to the formation of a legal framework for the implementation of strategies aimed at the development of alternative and renewable energy sectors in the country and the implementation of relevant measures on a large scale.

The inclusion of energy factors in macroeconomic assessment models is a global trend observed in the development of the world economy and is becoming increasingly widespread. This approach ensures the prioritization of the role of energy resources in the planning and management of economic processes. It is noteworthy that in recent times the concept of sustainable development has interacted with the ideology of the "green" economy, since the main goals of this approach include achieving high energy efficiency and minimizing the impact on ecological systems.

Solar energy has a number of important advantages compared to other types of energy, such as biomass energy, hydropower or nuclear energy. The most striking of these advantages is that there is no need for water in the process of generating solar energy, which prevents any problems that may arise in the future related to the depletion of water resources, as well as water shortages. This aspect makes solar energy a more attractive alternative, especially in regions with limited water resources.

In recent years, there has been a remarkable development in the field of solar energy use, especially concentrated solar power technologies and increasing the economic feasibility of energy production through photovoltaic panels. The significant decrease in the production costs of these technologies has made them an energy source that can compete with fossil fuels not only in temperate climate zones, but also in subpolar latitudes.

The current climatic conditions in Azerbaijan also provide very favorable opportunities for the development of solar energy. Thus, the country has an average of 300 sunny and 270 windy days per year, which further increases the prospects for the application and development of solar energy in these areas. Such favorable natural conditions provide broad opportunities for the long-term development of solar energy in the Azerbaijani region and allow for significant achievements in the field of renewable energy.

Since 2017, the European Union has been supporting Azerbaijan in the field of more efficient use of energy resources and the establishment of a regulatory framework in the field of energy efficiency within the framework of the "EU4 Energy" initiative. Within the framework of this project, the preparation of the first draft law on energy efficiency was ensured, thereby taking important steps towards the implementation of relevant policies in the country. As a result of the preparatory work related to the adoption of this law, the Law "On Efficient Use of Energy Resources and Energy Efficiency" was approved on July 9, 2021 under the leadership of the President of the Republic of Azerbaijan Mr. Ilham Aliyev. Following the adoption of this important law, the European Union, as a continuation of the activities initiated in 2021, provided support for the financing of projects implemented in Azerbaijan in 2022 to bring energy efficiency to a higher level and expand the application of modern technologies. This support has created the basis for increasing the culture of using energy resources, as well as developing a strategic approach that ensures more economical and effective management of resources. Thus, this law and the measures taken in connection with it were a significant turning point in the field of improving energy efficiency in Azerbaijan.

The 29th Conference of the Parties to the UN Framework Convention on Climate Change (COP29) held in Baku in 2024 created the conditions for Azerbaijan to make significant progress in the field of renewable energy. Within the framework of this event, an auction was held and the winner was announced with the support of the European Bank for Reconstruction and Development (EBRD) for the construction of the 100 MW "Gobustan" Solar Power Plant.

The winner of the auction was the company "Universal International Holdings Limited", which submitted the lowest bid per kilowatt-hour of electricity. The plant is planned to be commissioned in 2027 and is expected to produce approximately 260 million kilowatt-hours of electricity annually. This will save 57 million cubic meters of natural gas per year, as well as reduce carbon emissions into the atmosphere by 124 thousand tons.

According to Energy Minister Parviz Shahbazov, COP29 was marked by significant achievements that reflect Azerbaijan’s commitment to a green energy transition. He cited the groundbreaking ceremony of a 240 MW solar power project in East Zangezur, jointly implemented with BP, and the 9th ministerial meeting on the Caspian-Europe Green Energy Corridor as examples of these achievements.

In addition, an Intergovernmental Agreement on Strategic Partnership in the Development and Transmission of Green Energy was signed between Azerbaijan, Kazakhstan, and Uzbekistan, and documents were adopted to ensure that Saudi Arabia joins this trilateral project as a key partner. Six contracts were signed with six Chinese companies, Azerbaijan announced its hydrogen strategy, and a Memorandum of Understanding on Cooperation in Energy Planning in the Context of the Paris Agreement was signed with the International Atomic Energy Agency.

Wind power generation in Azerbaijan fluctuated between 2018 and 2023, indicating that annual production is far from steady growth or stabilization. The data shows that while there was a significant increase in 2019, there have been successive declines in subsequent years. These declines are particularly pronounced with a 33.3 percent decline in 2023, which may indicate a recent decline in production capacity or technical problems. The fluctuation in annual growth rates highlights the need for a more stable and sustainable development strategy for wind power in the country. The declines from 2020 onwards may indicate delays in infrastructure development or the impact of external factors. The overall decline in production figures, with the exception of the increase in 2019, increases the need for long-term investment and policy support in this area. It is clear that Azerbaijan needs appropriate technological and financial resources for the development of wind power. This trend highlights the need for additional measures to ensure that wind power plays a more sustainable role in the country's overall energy balance.

Solar photovoltaic power generation has increased continuously between 2018 and 2023, with annual growth rates at different levels. Starting from 2018, production figures have increased every year, reaching 6.9 million kWh in 2023. The highest annual growth rate was recorded in 2023, which was 32.7 percent. A faster development was observed in 2021, with an increase of 20 percent, which indicates an increase in investments or technological improvements in solar energy during that period. Accordingly, the growth in 2019 and 2020 was more moderate, at 11.8 and 5.3 percent, respectively. This continuous increase in production shows that Azerbaijan has given solar energy a special place in its renewable energy strategy. The high growth rate in 2023 may be the result of the application of stronger resources and technologies to fully realize the potential of this sector. This trend also indicates that solar energy will play a larger role in the country's energy balance in the future and contribute to reducing carbon emissions. The growth rate of solar photovoltaic energy confirms that the sector has strong prospects for sustainable development.

Some significant changes were observed in electricity production in Azerbaijan in 2024 compared to the January-June period of 2023. Total electricity production decreased slightly from 13,907.9 million kWh to 13,557.4 million kWh. Although this indicates the stability of the overall trend in energy production, sharp changes were recorded in some energy sources.

Hydroelectric power (HPP) production showed a significant increase in 2024, reaching 1,581.1 million kWh from 891.0 million kWh. This increase indicates an increased focus on renewable energy sources in the country with a 1.7-fold expansion. Solar photovoltaic energy showed a larger increase, increasing from 32.3 million kWh to 286.6 million kWh, which is an 8.8-fold increase and reflects the rapid implementation of solar energy technologies.

A decrease was recorded in wind power; production decreased from 31.7 million kWh to 29.7 million kWh, which indicates that the potential of wind energy is not fully utilized. At the same time, production at the solid waste plant increased from 126.8 million kWh to 135.0 million kWh, demonstrating continued growth.

The share of renewable energy sources in total electricity production increased from 8 percent to 15 percent, which indicates an increase in interest and investments in the development of green energy in the country. At the same time, the share of thermal power plants decreased from 92 percent to 85 percent, which emphasizes the decrease in dependence on traditional energy sources and the transition to more sustainable energy strategies.

These trends indicate an increased focus on renewable sources in Azerbaijan's energy policy and confirm that the country is acting in accordance with its goal of reducing carbon emissions and strengthening energy security. Accelerating technological development and the introduction of new energy sources in energy production can lead to even greater positive results in the future.