On September 2, Moody's highlighted that increasing the regional flow of renewable energy could help Azerbaijan mitigate risks associated with the energy transition. The agency noted that rising regional trade, improved interconnectivity, and ongoing energy sector reforms are expected to attract investment in renewable energy, primarily solar and wind, enhancing energy security and reducing social risks. For hydrocarbon-producing countries such as Azerbaijan, Kazakhstan, and Uzbekistan, greater regional renewable energy flows would help mitigate carbon transition risks by accelerating the adoption of cleaner energy sources.

Existing power generation constraints are driving a focus on regional interconnectedness and the development of renewable energy potential, including wind power in the north and solar power in the south. Intergovernmental plans are underway to establish a Caspian Green Energy Corridor to facilitate cross-border electricity trade among Azerbaijan, Kazakhstan, and Uzbekistan. Moody's emphasized that Azerbaijan and Uzbekistan are emerging as regional leaders in renewable energy development. Limited regional interconnection and insufficient energy diversification constrain the region’s ability to meet growing power demand, as seen in Armenia, which has accelerated domestic energy reforms amid deteriorating relations with Russia, its primary gas supplier.

The Asian Development Bank (ADB) and government sources estimate that by 2030, energy demand in Central Asia and the Caucasus—including Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan—will grow by 43% to approximately 134 million tons of oil equivalent, up from 94 million tons in 2020. Despite rapid growth, hydrocarbons will continue to account for around 75% of electricity generation in the region. To maintain financial sustainability, regional governments will need to share decarbonization investment costs with the private sector and international development partners. According to Moody’s, the ADB estimates that $120 billion in investment will be required by 2030 to meet decarbonization targets, equivalent to around 14% of GDP. Investments are expected to focus on power generation, particularly non-hydropower renewables, alongside energy efficiency and transmission infrastructure. Azerbaijan is the only country in the region with a 2050 target, aiming for a 40% reduction in emissions from 1990 levels, conditional on international support.

Moody's also noted that governments currently shoulder the bulk of decarbonization investments, with debt instruments comprising about 50%. Sharing the financing burden with the private sector and development partners is crucial, and green and sustainable bonds remain underutilized. Structural reforms improving economic efficiency and institutional capacity are expected to attract financing and transform the region into a clean energy hub. Sovereign ratings have improved in Azerbaijan (Baa3 from Ba1), Kazakhstan (Baa1 from Baa2), and Uzbekistan (Ba3 from B1), reflecting reform progress.

The analysis highlighted the role of international financial institutions (IFIs) in mitigating climate adaptation funding gaps and reducing sovereign credit risks for countries like Azerbaijan and Uzbekistan. Concessional loans from IFIs account for 36% of Azerbaijan’s total public external debt, compared with 26% in Uzbekistan and lower shares in other regional countries, far exceeding the 2023 middle-income country average of 10%. Moody’s stressed the growing interest of foreign investors in Azerbaijan’s renewable energy sector, which is expected to support the government’s strategic goals.

Measures to attract investment include liberalizing energy markets, reducing subsidies, restructuring utilities, and creating public-private partnership mechanisms. Independent regulators and standardized power purchase agreements have enhanced competitiveness. In preparation for COP29, Azerbaijan targets 35.5% of installed renewable energy capacity by 2030, planning solar and wind projects totaling 2,250 MW.

Key projects include:

Shafag solar power plant (240 MW, $200 million investment)

Garadagh solar power plant (230 MW, $262 million)

Masdar Mega project (1 GW capacity)

Khizi-Absheron wind power plant (240 MW, $34 million)

Additionally, Saudi Arabia’s ACWA Power has signed agreements with SOCAR to build 1 GW of onshore wind, 1.5 GW of offshore wind, energy storage systems, and green hydrogen projects. Moody’s emphasized that foreign investor involvement is a major driver in achieving these plans.