Our Insights

Going Green: Policy Aspects of Renewable Energy

With Azerbaijan set to host the COP29 climate change summit in 2024, we take a closer look at the region to understand the policy implications of green energy transit. Beyond delivering on Paris Agreement commitments, for most countries in our region green energy transit is primarily driven by the acute necessity to balance the growing domestic demands. Their approaches to renewable energy sources (RES) however are shaped by widely different economic, geographical, and institutional realities.

Putting the regional aspects aside, with regards to RES capacity the countries in Central Asia and the Caucasus can be seen as comprising two distinct groups. The first group, where most of the electricity is already produced from RES - predominantly hydropower - includes Tajikistan, Kyrgyzstan, and Georgia. The second group includes countries with significant hydrocarbon (HC) resources, powered by fossil fuels (Azerbaijan, Kazakhstan, Mongolia, and Uzbekistan). The standalone examples are Armenia, where RES accounts for about a third of total capacity, and Turkmenistan with less than 1% of electricity produced from renewable sources.
RES > HC (Georgia, Tajikistan, Kyrgyzstan)
At a glance, the first group of countries may be seen as champions in renewable energy. Tajikistan, for instance, is considered the sixth largest green energy producer worldwide, generating 98% of its electricity from hydropower plants (HPP). However, attempts to expand RES electricity production in the country face significant political, economic, and environmental roadblocks. The construction of Central Asia's largest Rogun HPP has been significantly slowed by the years-long tensions with neighboring countries and insufficient funding, and the government continues to seek international investors and donors to partially cover the whooping USD 5bn required for the project completion.

Georgia, despite receiving 70-80% of its electricity from hydropower, remains a net importer of electricity. To compensate for the growing domestic consumption and explore green energy export opportunities, the country plans to more than double the capacity by 2033 which would require almost doubling its hydropower capacity and a fortyfold expansion of wind farm capacity. Similarly, Kyrgyzstan where HPPs account for a notable 90% of domestic electricity production, was unable to build new generation capacities for almost a decade despite the widening gap between power production and consumption.
RES < HC (Azerbaijan, Kazakhstan, Mongolia, Uzbekistan)
For the second group, notwithstanding significant potential in solar, wind, and biofuel generation, renewable energy accounts for less than 10% of electricity production. Kazakhstan and Mongolia receive most of their electricity from burning coal, and Azerbaijan and Uzbekistan heavily rely on gas. Azerbaijan, Kazakhstan, and Uzbekistan committed to a steep rise in renewables share to 30% by 2030 and Mongolia’s earlier commitment to generate 20% of its electricity from renewable sources by 2023 came two-thirds short.

Importantly, within this second group, only Azerbaijan generates electricity in excess of its domestic needs - the export figures remain consistently higher than imports, and in 2023 electricity exports accounted for almost 2% of the country’s total export revenues. Nonetheless, since 2020 the country has pursued an ambitious renewable energy program under the newly established Azerbaijan Renewable Energy Agency (AREA) and in 2023 signed several agreements for onshore and offshore solar and wind installations.

For the large industrialized economies of Kazakhstan and Uzbekistan, in addition to bringing environmental benefits, renewable energy is considered an important supplement to the countries’ traditional energy production that struggles to meet the growing demand from households and the industrial sector. For instance, while in Kazakhstan 70% of electricity is generated by coal-powered plants, Uzbekistan in the last few years had to dramatically reduce its gas exports, an important source of hard currency, to sustain its mostly gas-powered electricity and heating supply.

In this context, the massive investments into expanding solar and wind capacities in both countries are impressive, but probably not surprising. In Kazakhstan over 30% of total FDI volume between 2015 and 2022 went to renewable energy projects with 16 new projects launched last year. Uzbekistan in 2023 alone launched seven new wind and solar plants with a total capacity of 2,600 MW, exceeding the entire country’s RES capacity only five years ago.
Mixed RES / HC (Armenia)
Armenia represents an interesting case of opportunities and limitations of renewable energy. On the one hand, its diverse energy generation has a significant share of hydropower, half of which is produced by the small private plants constructed in the last 15 years. The country is also expanding its solar capacity with half of all the existing solar farms launched in 2022 alone. However, Armenia continues to depend on imported fuel for its thermal power generation, accounting for over 40%. The remaining third of the nation’s electricity is produced by the only operational nuclear power plant in the region, with its lifecycle now extended well beyond the planned decommissioning in 2026.
The Future of Renewable Energy
Despite the differences between the groups and countries within them, there are several common features defining the future of green energy transition in the region. The RES generation and distribution capacities largely inherited from the Soviet Union, including major hydropower plants, became inadequate to the growing demand and require significant modernization. The further expansion of renewable electricity - especially solar and wind - would have to account for generally higher production costs per kilowatt and limited generating capacity of RES. In both cases, scaling renewable electricity production will continue to require a massive influx of investments for the foreseeable future that state budgets would not be able to shoulder on their own.

Among the key barriers to attracting private capital into the sector is the widespread state-ownership model in generation and distribution alongside subsidized electricity prices. The governments are now experimenting with both market-like incentives and normative requirements, including adjustments of the fixed RES tariffs in Kazakhstan, the creation of an electricity trading platform in Georgia, and guaranteed purchases of excess solar energy from households back to the grid in Uzbekistan.

The long-term ability to attract and sustain investments in the sector, while simultaneously addressing the shortages in domestic power consumption, will be the ultimate test of the countries’ green energy commitments and aspirations. Inevitably, the policy approaches to achieving this shared goal will vary. Azerbaijan may capitalize on its role as a major energy producer, redirecting hydrocarbon profits to RES capacity expansion. Larger economies, such as Kazakhstan and Uzbekistan, have opened up their growing markets to major green energy investors from the Gulf and beyond. Economies of Armenia and Tajikistan will greatly benefit from grants and funds from European and Asian development organizations. Most importantly, major RES initiatives, such as the joint construction of Kambar-Ata HPP by Kyrgyzstan, Kazakhstan, and Uzbekistan, and the strategic green energy partnership between Azerbaijan, Georgia, Hungary, and Romania, will continue to deepen regional cooperation and integration.