The SolarPower Europe Emerging Markets Workstream was launched in March 2018 to identify new avenues for business and cooperation, and to contribute to the global energy transition. Since its creation, the workstream has continued to grow and now comprises 150 experts from more than 70 companies with a significant portfolio of investments in emerging markets around the world.
Since March 2020, the workstream has operated exclusively online, though the strong hope is that this will soon change. Member companies are involved in other Africa-focused initiatives such as the EU-Africa Sustainable Energy Investment Platform, the renewAfrica initiative, and the International Renewable Energy Agency’s (IRENA) Coalition for Action. Recently, workstream members have been engaging with the European Commission on trade, development finance instruments and international energy diplomacy. They have also been working with the IRENA, the International Solar Alliance, GET.invest, and various renewable energy associations to shape the global energy transition.
Context Algeria has vast potential for renewable energy development, especially solar PV. Thanks to its geographical position in the solar belt, the solar potential is one of the highest among MENA countries, and this is also reflected in the clean energy targets of the country which focus heavily on solar. The average yearly irradiance value of the country is 2,000kWh/m2 with high values especially in desert areas (over 2,400kWh/ m2in some cases). The highest irradiance can be found in Illizi district, where connection infrastructure is limited compared to the northern part of Algeria.
Demographics The population of Algeria was estimated at 43.85 million in 2020, with a growth rate of 1.85% (World Bank Group, 2019). The median age is 28.5 years, and life expectancy at birth is 76.9 years (2019). About a decade after independence from France (in 1962) the fertility rate fell dramatically, from 7 children per woman in the 1970s to about 2.4 in 2000, which can be linked to improvements in women’s access to education and their increased participation in the labor market. The fertility rate has since risen again, standing at 3 children per woman in 2018. 73% of the population live in urban centres. Based on the UN Human Development Index (HDI), Algeria is classified as a high-human development country, ranking 91st out of 189 countries in the 2020 Report, and having made gradual but steady improvements since 1990. However, Algeria suffers particularly from inequalities in access to education and personal income which prevent it from scoring higher. GDP per capita was estimated at 11,100 US$ dollars at purchasing power parity (PPP) in 2020, slightly below the MENA regional average (IMF, 2020).
Business environment The country suffers from several structural issues that compound an unfavourable business environment. On the World Bank Doing Business 2020 report, Algeria ranks 157th out of 190 countries, far behind the rest of the MENA region. Its neighbours, Morocco, and Tunisia, were in 53rd and 78th respectively (World Bank Group, 2020). The country scores especially poorly in access to credit, protection of minority investors, trading across borders and property registration. Such constraints limit investments that are badly needed to sustain private sector growth and absorb the working age population. Moreover, the economy is overly dependent on oil and gas and is dominated by a bloated public sector, which has constrained the business environment and economic development.
Despite this positive development, the 49/51 rule still applies in a wide range of cases, including: retail activities, mining, oil and gas, power distribution and transportation network activities; military and defence; railways; ports; airports; and some pharmaceutical activities. The government also cancelled its right of first refusal on asset sales by foreign entities in Algeria. In addition, foreign companies investing in Algeria have been permitted to seek loans from foreign banks to finance their investments. The government also approved a new hydrocarbons law, improving fiscal conditions and contract flexibility to attract new international investors.
Algeria electricity market Energy sector overview Algeria’s energy mix consists almost entirely of fossil fuels, with gas accounting for ~63% and oil for ~36% of total primary demand. Between 2000 and 2019, total demand has grown at a Compound Annual Growth Rate (CAGR) of 4% from ~27 Mtoe to ~56 Mtoe. Demand is set to grow to ~73 Mtoe at a CAGR of 1% by 2040 (Wood Mackenzie, 2021). Although renewables – mainly solar – are entering the scene, their share is expected to remain limited to ~7% of the energy mix by 2040 (Wood Mackenzie, 2021). Today total final consumption is dominated by gas (42%) and oil (45%) as well. Electricity’s share is 13%. In the future all fuels will grow in absolute terms, but the share of oil will remain stable through to 2040. Gas’ share is expected to account for 38%. Electricity, instead, is expected to reach a share of 17% (Wood Mackenzie, 2021).
Today, almost all power is generated by gas. Algeria heavily subsidises oil, gas, and electricity consumption. This has the effect of artificially lowering prices and creating a competitive advantage for oil and gas over other energy sources. While this persists, it will remain difficult for renewables uptake to gain traction in the country. In the coming years, the power mix will diversify, mainly thanks to solar, which will reach 8% of generation in 2025 and 37% in 2040 (Wood Mackenzie, 2021). In 2020, installed solar capacity amounted to ~0.5 GW (SolarPower Europe, 2021) and is expected to reach ~20 GW in 2040 (Wood Mackenzie, 2021).
second one, launched in 2021, is currently in progress. This transition to solar PV-oil hybrid systems also has the advantage of freeing up more oil for export. The public company Sonelgaz is acting in all the main areas of the electricity sector and manages: (i) the system operation through the Opérateur Système Electrique (OS), (ii) the transmission network through the Societé Algérienne du Gestion du Réseau de Transport de l’Electricité, (iii) the distribution network and sale/retail activities through the Société Algérienne de Distribution de l’Electricité et du Gaz (SADEG). Moreover, Algeria has strong interconnection systems with Morocco and Tunisia. It is interconnected with Morocco via a single 400 kV line and two 220 kV lines with a tie line capacity of 1,500 MW.
New developments for solar power The country witnessed a slow start to the energy transition. In 2004 Algeria adopted the first renewable energy feed in tariff (REFIT) in Africa to speed up the adoption of renewable energy sources. The scheme pertained to plants with power generation capacity exceeding 50 MW. However, it was never implemented. Despite the REFIT scheme, it wasn’t until 2016 that Algeria saw substantial solar PV installations. Growth in the country’s annual market continued to rise to 181 MW of new additions in 2017. However, this rise tailed off between 2018 – 2020, with only 83 MW being added in total over this period. Despite this the future looks bright for Solar in Algeria, especially following the announcement of a target of 15 GW of installed solar capacity by 2035, from the Minister of Energy Transition and Renewables in December 2020. This is reflected in SolarPower Europe’s market data which predicts a year-on-year rise in annual installations between 2021-2025, across all scenarios. The high scenario forecasts that Algeria could become a gigawatt-scale market as early as 2024 (SolarPower Europe, 2021).
Recommendations For Algerian policy makers The previous schemes, though unsuccessful, constitute a useful and rich experience on which to build in order to set up stronger programmes and a sound legal framework in the future. There are several key challenges that policy makers should seek to address to improve renewables growth in Algeria. The first of these involves issues around the bankability of PPAs in the country. We recommend including a guarantee on the default risk of the national off taker in future PPAs. Similarly, including indexation to US$ or Euros in the PPAs. This would mitigate the risks of foreign currency exchange and help give investors more certainty. We welcome the news that Algeria’s latest tender and awarded PPAs will be designed according to international standards. This will be a big step towards improving investor confidence and attracting more competitive bidders. We recommend that all future tenders and PPAs be designed in line with international standards. This will provide positive momentum to renewables development and help the country achieve its targets.