With vast renewable resource potential and economic incentives to embrace clean power, Algeria is well positioned to play a major role in the energy transition of North Africa and beyond. Algeria can leverage renewable energy deployment to incentivize economic development while reducing greenhouse gas emissions and improving its fiscal health. To capitalize on this potential, the nation has launched ambitious plans to deploy large-scale renewable generation projects and local manufacturing capacity.
Algeria is the largest country in Africa by land area and the second-most populous among the North African states. An OPEC member since 1967, the country is also the continent’s third largest oil producer and the sixth largest gas exporter in the world. More than 3,000 hours of sunlight per year in many regions means that solar generation is favorable and will help reduce the cost of renewable power while facilitating financing for projects. Yet Algeria is also Africa’s third largest emitter of carbon dioxide (C02), a powerful greenhouse gas. Accordingly, its energy sector development in general and renewable resources deployment in particular will have wide-ranging implications for the nation, its citizens, and the greater region.
Economic incentive
With approximately 24,700 megawatts (MW) of installed electric generation capacity, renewable energy represents just 686 MW of the nation’s total generation mix. Algeria stands to experience ample economic gains by increasing the penetration of renewables, particularly solar energy. Notably, harnessing solar and other renewable resources through new generation projects will allow the nation to make additional natural gas available for international export.
Approximately 96% of Algeria’s installed electric generation capacity is comprised of natural gas, with about 4% made up of oil, hydro, solar, and wind. Export of incremental gas could have a meaningful impact on the nation’s fiscal health, with hydrocarbon revenues historically accounting for roughly half of the nation’s budget and 90% of its total export income. Augmenting the amount of natural gas earmarked for international markets could also equip Algeria with newfound commercial relationships and geopolitical influence.
Rising electricity consumption in Algeria further increases the incentive to serve this new demand with renewables, as opposed to meeting this demand with additional domestic gas. Electricity generation in Algeria increased by more than 5% annually in the 2015 to 2019 period, from 64,663 gigawatt hours (GWh) to 76,229 GWh. Through 2025, projections indicate that power generation may grow up to 8% annually to help meet rising demand. The evolution of Algeria’s demographics has contributed to this increase in electricity demand. In the last decade, Algeria’s population grew nearly 18%, at an average annualized rate of almost 2% per year. Similar population growth through the remainder of the decade would continue to apply upward pressure on electricity demand.
Renewable energy plans
The government of Algeria is in the process of rolling out initiatives to incentivize the development of renewable energy projects. The Ministry of Energy and Mines has established a renewable energy target of 22,000 MW of installed renewable capacity by 2030. As implemented in many international markets, Algeria has employed a tender process to competitively secure renewable energy supply from new projects. The tender provides that bidders (who are often international investors and independent power producers) offer their best price in exchange for the opportunity to win a long-term contract to sell power, known as a power purchase agreement (PPA). Competitively awarding PPAs helps to drive down the price of power and secure project financing.
Algeria held its first tender in 2019, which sought 150 MW of new renewable energy capacity. Yet submitted bids corresponded to just 90 MW, 60% of the total tender demand. The tender was undersubscribed partially due to certain tender provisions, including a mandate that required that new projects be majority-Algerian owned. This rule likely provided a hurdle due to Algeria’s lack of native experience in large-scale renewable energy projects. The tender also included provisions related to local content for solar panels and equipment as well as local financing, yet these requirements were likely ambitious relative to local manufacturing capacity and local experience in financing renewables. The novelty of the process in Algeria and the nascence of the renewable energy market may have also caused hesitance among some investors.
To reinforce the energy transition moving forward, Algeria established the Ministry of Energy Transition and Renewable Energy (METRE) in June of 2020. In late 2021, the METRE published its notice of invitation to tender for 1,000 MW of solar power capacity. The process calls for projects ranging from 50 MW to 300 MW, and will be part of a wider initiative to launch 1,000 MW of solar procurement annually until 15,000 MW are developed. This may represent the world’s most ambitious government-led competitive renewable energy procurement program.
To support the effort, the nation has revised tender provisions, such as the removal of the 51/49 rule which required Algerian businesses to own a majority stake in projects. To help ensure Algerian participation in the projects, a joint venture was created between Sonatrach and Sonelgaz, the nation’s two state-owned energy companies. Known as Shaems, the joint venture company will be permitted to own up to a 25% stake of tendered projects. This compromise may prove the correct balance to furnish flexibility for international investors, while ensuring appropriate levels of knowledge transfer and local participation in projects.
As for manufacturing, Algeria already has three operational solar panel production facilities totaling 260 MW of total output, enough to supply about 25% of capacity from a 1,000 MW tender. Further increasing local manufacturing will be key to facilitating local content requirements. In December 2021, Fimer, the Italian power inverter manufacturer, and Entreprise Nationale des Industries Electroniques (ENIE), the Algerian electronics producer, announced a joint venture to build an inverter factory in Algeria. Inverters are a critical solar project component, as they convert the direct current (DC) energy produced by solar panels to the alternating current (AC) energy delivered to the electric grid. As renewable energy projects are deployed and the staying power of Algeria’s renewable energy plans is solidified, partnerships like this one should become common in Algeria.
A cleaner future
The path toward a cleaner energy mix will not be without difficulties. Competitive procurement for renewable energy involves a range of complexities, including the design of auctions, the rules governing procurement, and the execution of the process itself. Investors will also seek certainty around items like earnings repatriations and available transmission capacity. More broadly, challenges related to energy subsidies, market reform, security threats, and political events remain as well.
Yet Algeria’s intended trajectory is clear, and the nation has the momentum of the international renewables sector on its side. The cost of renewable energy, particularly solar, has dropped precipitously over the last decade, helping make it an option too sweet to ignore. Algeria also has clear incentive to develop its renewable energy resources in terms of fiscal health, local economic development and international influence. Geography provides further impetus for the nation to develop its manufacturing capabilities. Algeria’s strategic location at the crossroads of Southern Europe, North Africa, and Sub-Saharan Africa supports the case for a renewable energy business cluster that could create thousands of jobs. For investors and others interested in the country’s sector, 2022 is certainly a year to watch.
