Vancouver Island University: PESTEL Analysis for Geothermal Business

This report provides a comprehensive PESTEL analysis to assess the feasibility of establishing a geothermal energy business in Azerbaijan. It examines the political landscape, focusing on stability and corruption, alongside economic factors such as inflation, unemployment, and demographic trends. Social aspects, including education and consumer culture, are evaluated, alongside technological advancements, transportation, and communication systems. Environmental factors, like deforestation and pollution, are considered, as well as legal aspects like tax, tariffs, environmental protection, and labor regulations. The analysis aims to determine if Azerbaijan is a suitable environment for geothermal energy investments, considering both opportunities and challenges.

Running head: PESTEL ANALYSIS FOR GEOTHERMAL BUSINESS IN AZERBAIJAN
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PESTEL Analysis for Geothermal Energy Business in Azerbaijan
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Executive summary
The report presents a comprehensive PESTEL analysis for a geothermal business in
Azerbaijan. The purpose of the analysis is to determine if setting up a geothermal business in the
country will be feasible. It uses annual trends and history of the country and its implications to
the business to determine if the business is suitable. When evaluating political factors much
concentration is on political stability and corruption level of the country. Economic factors
considered which can affect the business include demographic factors, inflation, and
employment rates. Social factors that will affect the business are education level, social crimes,
and consumer culture.
Analysis of technological factors includes technology development, communication
systems, electric systems, and transportation. Environmental factors that may affect the business
include land boundaries, terrain, location, deforestation, soil degradation, air pollution, solid
waste pollution, water pollution, and climate. Legal factors considered are labor regulations, tax
and tariffs, and environmental protection laws. Most of the variables such as political stability,
low unemployment rate, improved customer demographics, developed consumer culture, low
social crimes, developed consumer culture, developed technology, and electric systems,
favorable land boundaries and location, suitable climate, deforestation, and incentives on tax and
tariffs.

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Table of contents
Executive summary………………………………….......................................................................2
Table of contents…………………………………………………………………………...................3
Introduction …………………………………………………………………………………………...5
1.0 Political factors………………………………………………….................................................5
1.1 Political stability …………………………………………………………………………..5
1.2 Corruption levels ………………………………………………………………………….6
2.0 Economic factors …………………………………………………………………………………6
2.1 Inflation rates………………………………………………………………………………6
2.2 Unemployment rate ……………………………………………………………………….7
2.3 Demographic factors ……………………………………………………………………...7
3.0 Social factors………………………………………………………………………………………7
4.0 Technological factors……………………………………………………………………………..8
4.1 Technological development……………………………………………………………….8
4.2 Transportation systems…………………………………………………………………….9
4.3 Electric systems……………………………………………………………………………9
4.4 Communication systems………………………………………………………………….9
5.0 Environmental factors ………………………………………………………………………….10
5.1 Deforestation ……………………………………………………………………………10
5.2 Air, solid waste and water pollution …………………………………………………..10
5.3 Soil degradation…………………………………………………………………………10
5.4 Climate and terrain……………………………………………………………………..11

PESTEL ANALYSIS FOR GEOTHERMAL BUSINESS IN AZERBAIJAN
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5.5 Land boundaries and location………………………………………………………….11
6.0 Legal factors……………………………………………………………………………………11
6.1 Tax and tariffs……………………………………………………………………….12
6.2 Environmental protection laws……………………………………………………...12
6.3 Labor regulations…………………………………………………………………….12
Recommendations and conclusion…………………………………………………………12
References……………………………………………………………………………………14
Appendices……………………………………………………………………………………16

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Introduction
The purpose of writing this report is to analyze the political, legal, social, technological,
economic and environmental factors that affect the geothermal energy business in Azerbaijan.
The analysis aims at determining if setting up the geothermal energy business will be feasible in
Azerbaijan. The earth generates and stores geothermal energy from continual heat loss and
radioactive decay. The business will capture geothermal energy from geothermal heat pumps and
geothermal power plants to generate electricity from steam and heat for water and buildings. It
provides an opportunity for investment as the geothermal energy is renewable (Blair, Cassel, &
Edelstein, 2012).
1.0 Political factors
1.1 political stability
Political factors in Azerbaijan impact on the success of geothermal energy business. There is
political stability in Azerbaijan since President Ilham Aliyev was elected. The president has
made decisions to encourage economic diversification opening up opportunities for investors to
invest in different sectors. The country adopted a constitution in 1995 that promotes internal
peace through the state symbols and this provides a good environment for a geothermal business
to strive (Blair, Cassel, & Edelstein, 2012). There is a low chance of political or military invasion
in Azerbaijan that can affect business. The constitution of Azerbaijan gives the president power
over executive, judicial and legislative bodies thus reducing political conflicts. President and the

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prime minister are elected every 7 years. This reduces the inconveniences caused during the
election which affect businesses.
1.2 Corruption levels
Despite anti-corruption measures and policies carried out by the Azerbaijan government,
the Transparency internationals ranked the country 122nd most corrupt country in 180 countries
(Barinov, 2017). The country is also criticized for excess bribing. For example, it bribes foreign
diplomats and officials to legitimize its elections. This action may affect setting up geothermal
business as corruption may affect its success. It is because more established geothermal
businesses may get more support through corruption.
2.0 Economic factors
Economic factors such as inflation rate, economic growth rate measured by gross domestic
product, unemployment rate, labor cost, exchange rates, quality of infrastructure, skilled labor
force and financial market efficiency will affect the success of geothermal business in Azerbaijan
(Nadjafova, 2019).
2.1 Inflation rates
Inflation impacts the cost of investing, the cost of living, cost of living as the price of everything
increases. Since 2018 inflation rates in Azerbaijan has remained more consistent for the
geothermal industry thus reducing prices of geothermal energy products hence increasing
potential consumer’s purchasing power. Past year's inflation trend will help the business to
forecast future trends in inflation which could affect the business positively or negatively. The
country’s average inflation rate last year was 2.33 percent compared to 2017. Projections from
1994 to 2024 show that inflation rates will increase from 2.33% in 2018 to 3% in 2020 and by

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2024 it will be 3.5% (see appendix 1). High inflation rates in the country will increase the
geothermal power cost, other commodities, the cost of investing in the business, lower savings,
increase tax, and increase interest rates when borrowing money (Nadjafova, 2019). Therefore,
return on our investment will be low making the business not feasible.
2.2 Unemployment rate
In Azerbaijan, unemployment rate was highest in 2000 with 11.8%. Since then it has
reduced to 4.91% in 2014. However, it has increased since 2015 with a 0.05% increase from the
previous years to 4.96%. In 2016 it increased to 5.00% with an increase of 0.04% (see appendix
2). There was no increase or decrease in 2017. In 2018 it increased by 0.22% to 5.22%. In
September 2019 it had dropped to 4.84%. The average rate of unemployment rate in the
unemployment rate in Azerbaijan from 2008 to 2019 September is 5.03%. In Dec 2024 it is
projected to be 4.870%. Those trends show a healthy labor market in Azerbaijan. This implies
that most people earn wages and salaries leading to higher consumer spending hence they will be
able to purchase products from the geothermal business (Yüksel, 2012). It will contribute to
more sales and profits.
2.3: Demographic factors
The current population of Azerbaijan is 10,085,277 people. The population has been
increasing since the 1990s. There was an increase of 0.99% from last year’s population of
9,949,537 and a 1.06% increase from 2017 to 2018 (Barinov, 2017). There is no year has been
recorded with a decrease. Forecasts show that the population will continue to increase and by
2030 the population will be 10,739,732. Most of the population is contributed by people aged 20-
39 years and this population will provide labor to the geothermal business. The high population
will also create a high demand for our products thus making our business feasible.

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3.0 Social factors
Some of the social factors that will affect the business in Azerbaijan are consumer culture
and education level. Azerbaijan has an improved education system and 99.79% of the adults are
literate (Barinov, 2017). This will provide skilled manpower at low cost as the jobseekers will be
many thus driving the success of geothermal business in that region. Influence of Turkic, Iranian,
Caucasian and Russian heritage develop the culture of Azerbaijan thus fostering globalized
consumer culture. This implies that their consumption pattern is developed and they will be
willing to use geothermal power. Another social factor we will consider is social crimes. In
Azerbaijan social crimes such as theft and murder which can affect the business occur less
frequently (Aydin, 2019). This implies that the wells and pipes will be secure and the staff too.
4.0 Technological factors
4.1 Technology development
Production of geothermal energy requires technology. The energy is extracted using very
high pressure to pump underground hot water. The water turns to steam at the surface due to
reduced pressure. The steam produces electricity. The process requires high technological
development. In Azerbaijan there is economic diversification and technology is the fourth target.
The country has launched E-learning programs to develop the IT market. It has also expanded e-
services and increased digital resources to support technology development (Sühlsen, &
Hisschemöller, 2014). Setting up a geothermal business in Azerbaijan will benefit the investors
as there will be skilled labor force that has technical skills to generate geothermal power.
4.2. Transportation
The business will need a good transportation system to transport materials for setting up
the business. The roads are developed although there are areas where roads are not well

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constructed. Although roads will not be transporting the energy they will transport resources
such as pipes required to setting up or improving the power plant (Aydin, 2019). The power plant
will be established in remote areas where roads are not in good conditions thus posing a
challenge to the business. Another transportation means which the business will use is air
transport. Azerbaijan has 37 airports but 6 are international. The business will need to import
machinery parts using the airport. This will increase the cost of production as air transport is very
expensive.
4.3 Electric systems
The main source of electricity in Azerbaijan is thermal power plants that use natural gas.
Small amount of electrifying is from renewable sources and hydroelectric power plants. Surplus
electricity is exported as its supply exceeds the demand in the country. The government is
developing this sector to reduce losses. It aims at reducing losses during energy transmission
from 12% to 8% by 2020 (Sühlsen, & Hisschemöller, 2014). This implies that although the
business will face stiff competition from existing power plants there will be no many losses
when transmitting energy. It also means that the business should expand to serve neighboring
countries.
4.4 Communication systems
Setting up the geothermal business in Azerbaijan will require public relations and other
communication tools to ensure effective communication among staff, with customers and
suppliers of their resources (Barinov, 2017). The communication system is poorly developed in
Azerbaijan as most people who have telephones stay in Baku but in the villages, most people do
not use telephones. People do not use internet services frequently and those who have televisions
and radios are less. This implies that the business will undergo a hard time when looking for

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workers as some qualified personnel may not be connected. Communication will be a problem
due to poor signals and resources may be delayed or miss opportunities.
5.0 Environmental factors
Analysis of environmental issues on Azerbaijan will provide an understanding of how the
investment might affect the environment and help us to develop a scope to minimize the effects.
Environmental issues in Azerbaijan include air pollution from agriculture due to the use of
fertilizers and pesticides, air pollution transport vehicles and industries, deforestation, soil
degradation, hazardous solid waste and water pollution in the Caspian Sea from petroleum waste.
Those factors will affect geothermal business (Šliogeriene, Kaklauskas, Zavadskas, Bivainis, &
Seniut, 2010).
5. 1Deforestation
There is high deforestation in Azerbaijan. Although deforestation is not good it will give
the business enough space and a chance to expand and produce more energy (Dockalikova, &
Klozikova, 2014).
5.2 Air, solid waste and water pollution
The business will be more environmental friendly as it does not because air pollution as it
does not burn fuel thus emit very low amounts of carbon dioxide as compared to fossil fuel
power plants. Air pollution will affect the workers as it raises health concerns such as harm to
circulatory, digestive, immune and pulmonary system (Šliogeriene, Kaklauskas, Zavadskas,
Bivainis, & Seniut, 2010). Hazard solid waste near where the geothermal power plant will be set
up can cause contamination to the water which the workers use. Sea pollution from petroleum
may affect underground water that will be used to generate energy to make it ineffective.
5.3 Soil degradation

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Soil degradation will affect the stability of the power plant and may lead to accidents or
injuries so the geothermal business should be located where there is minimal soil degradation.
5.4 Climate and terrain
As geothermal power is extracted from underground ad requires heat from the earth it is
necessary to understand the terrain and climate of Azerbaijan. Its terrain comprises of mountains
to the north, flatlands at it's center and sea shoreline to the east (Mukhtarov, Nadirov, &
Mammadov, 2015). This implies that the business should be set at the center of the country
where the terrain is flat land as geothermal energy resources will be closer to the surface. It has a
continental influenced climate with cold winter and warm summer. Temperatures vary
depending on the proximity of a region to the sea, temperate winds effect, and regional
landscape. Geothermal business is feasible in both cold and hot climates as heat pumps cannot
drop below 100% efficiency and earth underground temperatures range between 45-75 degrees
(Mukhtarov, Nadirov, & Mammadov, 2015).
5.5 land boundaries and location
Azerbaijan is located in Asia continent covering a land area of 82,629 km2. It shares land
boundaries with Russia, Georgina, Turkey, Armenia, and Iran. The location will make it feasible
as it has enough land to set up the geothermal power plant. Its neighboring countries will support
the growth of the business as countries like Turkey are classified as a developed country and
others are developing hence the business will export the surplus energy to those countries.
6.0 legal factors
The legal factors which will affect the business include employment law, environmental
protection laws, competition regulation, consumer protection laws, import and export
restrictions, and health and safety laws.

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6.1 Tax and tariffs
Azerbaijan’s president supports the geothermal business by allowing tax and tariff
incentives included in the law on customs tariffs. Investors in the industry will be exempted from
paying land tax, property tax and 50% of profit tax according to the amended tax code (Barinov,
2017). They will be also exempted from paying value-added tax and customs duty on
technological equipment, imported resources and machinery up to seven years. Electricity laws
state that foreign investors must have a business permit and sign a contract with state agencies
before setting up the business. This implies that setting up a geothermal business in Azerbaijan
will be feasible as it will receive tax and tariff incentives and better export terms. However, the
process of obtaining the permit until concluding a contract may be long (Zalengera et al., 2014).
6.2 environmental protection laws
Azerbaijan laws guide the geothermal business to environmentally friendly and business
that emits carbon dioxide, methane, hydrogen sulfide, and ammonia directly to the air pay fine.
This implies that our business has to adhere to those regulations.
6.3 Labor regulations
The law enforces employers to pay employees a salary above the minimum wage.
Violation of that rule regarding minimum wage attracts fine ranging between 1000-1500 AZN. It
also ensures the health and safety of employees is met, employees work without discrimination,
harassment or force. This implies that meeting the minimum wage may increase our production
costs and ensuring all those regulations increases the cost of investment (Zalengera et al., 2014).
Recommendations and conclusion
PESTEL analysis of geothermal business in Azerbaijan seeks to measure the feasibility of
the business in that region. Most of the factors are favorable such as the political, environmental,

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economic, and social factors that are favorable to the business. Technological and legal factors
bring some issues and challenges. Recommendations to follow when setting up the business
include setting up the business where there is good terrain, good transportation and
communication systems and enough land like near the center of the country. After setting up the
business the investors should adhere to all regulations that may affect its success such as labor
rights and environmental protection laws. The business should also expand and serve other
neighboring countries to give it a competitive advantage. The business should also employ
skilled labor and use technology for it to run more effectively. After analyzing all those factors it
is certain that setting up a geothermal business in Azerbaijan will be feasible.

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References
Zalengera, C., Blanchard, R. E., Eames, P. C., Juma, A. M., Chitawo, M. L., & Gondwe, K. T.
(2014). Overview of the Malawi energy situation and A PESTLE analysis for sustainable
development of renewable energy. Renewable and Sustainable Energy Reviews, 38, 335-
347.
Šliogeriene, J., Kaklauskas, A., Zavadskas, E. K., Bivainis, J., & Seniut, M. (2010). Environment
factors of energy companies and their effect on value: analysis model and applied
method. Technological and economic development of economy, 15(3), 490-521.
Mukhtarov, A. S., Nadirov, R. S., & Mammadov, V. A. (2015). Geological conditions and
business opportunities for geothermal energy development in Azerbaijan.
Aydin, U. (2019). Energy Insecurity and Renewable Energy Sources: Prospects and Challenges
for Azerbaijan.
Nadjafova, Z. (2019). The main structure and directions of diversification of the economy of
Azerbaijan.
Blair, P. D., Cassel, T. A., & Edelstein, R. H. (2012). Geothermal energy: investment decision
and commercial developments.
Sühlsen, K., & Hisschemöller, M. (2014). Lobbying the ‘Energiewende’. Assessing the
effectiveness of strategies to promote the renewable energy business in Germany. Energy
Policy, 69, 316-325.

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Barinov, A. E. (2017). Systemic and political factors affecting cost overrun in the world
economy’s large investment projects. Studies on Russian Economic Development, 18(6),
650-658.
Yüksel, I. (2012). Developing a multi-criteria decision making model for PESTEL
analysis. International Journal of Business and Management, 7(24), 52.
Dockalikova, I., & Klozikova, J. (2014, November). MCDM Methods in Practice: Determining
the Significance of PESTEL Analysis Criteria. In European Conference on Management,
Leadership & Governance (p. 418). Academic Conferences International Limited.

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Appendices
Appendix 1
Source: https://www.statista.com/graphic/1/457512/inflation-rate-in-azerbaijan.jpg
Appendix 2

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Source: https://www.statista.com/graphic/1/457518/unemployment-rate-in-azerbaijan.jpg