Under the arrangement, Azerbaijan will receive power from its southern neighbor in the peak consumption hours in winter, and relay the energy in summer when Iran's demand is at its highest.
Azerenergy also said that the two Caspian nations had agreed to build two hydropower plants on both sides of the border river Araz, with capacity of 36 MW each.
Iran is currently under international scrutiny over its refusal to stop a controversial nuclear program, and may face international sanctions.
Azerbaijan said earlier it was in talks on natural gas exports to Georgia, which may stop buying Russian gas next year, over Gazprom's price hike demands. The Russian energy giant reacted last week by saying it would slash gas exports to Azerbaijan from 4.5 billion cubic meters to 1.5 billion next year, citing gas price increase and growing domestic production in Azerbaijan.
