Algeria’s experience in reforming its energy policy to emphasise feed-in tariffs, as well as its strong macroeconomic position, are likely to create a profitable environment for RE investments. Its technology being both more efficient and considerably more cost-effective than regular silicon-based PV, Solar Bankers is negotiating with local partners and regulators in countries like Algeria to take part in the region’s vigorous PV development.
It hardly is a secret that North Africa has a unique suitability and hence a unique potential for the development of solar energy. Throughout the region governments are reforming their energy policies, launching procurement initiatives to diversify their energy mix using foreign know-how and technology. Achieving this requires in turn trade policies tailored to attracting international developers of renewable energies based on a system of financial incentives, usually feed-in tariffs, and backed by a strong regulatory framework. And it is the latter aspect which is of crucial importance to developers assessing the investment risk associated with North Africa’s emerging RE markets. Profitability and true investment security can only be guaranteed to developers if an accountable set of institutions manages the costs of subsidising the novel technology in a transparent and consistent manner. Indeed, over the past decades, local institutional and political barriers have been the greatest obstacle to the promotion of a more sustainable energy mix in North African countries. Algeria is a useful example of this.
Until recently, the Algerian government’s dominant political need to provide not only stable but affordable electricity conflicted with calls for the integration of more sustainable yet less reliable energy sources. The political unpopularity of loading off the cost of RE subsidies on final consumers coincided with the reluctance of state grid operators to adjust their feed-in patterns and possibly face redundancy costs. Meanwhile heavy subsidies to dirty energies continued to drive down electricity prices. The result was the completion of half-hearted PPAs lacking rigorous legislative backing and commitment from key state players, eroding investment security for developers. Recent reforms have produced more favourable circumstances.
Tracing the evolution of Algeria’s feed-in tariff schemes will elucidate the frequently political origins of investment risk in North Africa’s PV markets.
Algeria is probably North Africa’s FiT pioneer. It became the first country in the region to introduce FiTs in March 2004, later updating the program’s aims with the “Renewable Energy and Energy Efficiency Program” in March 2011. Despite setting ambitious targets, the 2004 and 2011 constitute mere experimental efforts. As indicated above, regulatory mechanisms were far from managing the essential trade-off between consumer protection and investment security well.
According to an article by M. Meyer-Renschhausen in the Journal of Energy in Southern Africa, “the Algerian energy policy [of 2004], characterised by insufficient FITs and regulatory obstacles, obviously attempts to promote renewable energies without increasing power prices and without endangering the financial stability of the national grid company” (J. Energy South. Afr. vol. 24 n. 1, Cape Town, Jan 2013). The 2004 FiT scheme’s contradictory design demonstrates this. Instead of a fixed tariff associated with a particular capacity, RE developers were paid a bonus on the current, general market price of electricity depending on the type of technology used. Consequently revenue streams for RE developers and investors became uncertain as they were made to fluctuate with the prevailing electricity market price. Meanwhile the Algerian government continued to subsidise natural gas power stations on a large scale, causing “a decrease of retail prices for power and thus [reducing] the profitability of renewable energy technologies.” The seeming lack of communication between government, hydrocarbon producers, and regulatory authorities severely hurt the country’s RE investment climate. In 2005, the government eventually committed to fixing electricity prices at 0.03 USD/kWh, which produced not unremunerative circumstances to PV developers receiving a 300% bonus – by comparison to international tariff levels at the time. However, more immediate institutional factors neutralised any profitability presented on paper.
Algeria’s early FiT scheme did not obligate the state grid operator, Sonelgaz, to give the promoted green energy priority in feeding the grid. According to Meyer-Renschhausen, “authorization of new power plants and lacking provisions to avoid bottlenecks in the grid is protecting the incumbent power generator against stranded cost and the grid company against rising costs.” The scheme’s general cost-allocation regime was unclear and unaccountable; state utilities’ resistance against engaging at all in purchasing contracts with RE developers was both tolerated and facilitated. Due to the scheme’s legislative deficiencies with respect to priority rules and cost-distribution, the FiT’s details were essentially “left to negotiations” between developers and the state energy company, Sonelgaz, which the latter effectively controlled and tailored to its own interests. Investors were offered a highly unfavourable environment.
Algeria’s new feed-in tariff scheme, introduced in February 2015, is likely to rectify many of the institutional and regulatory deficiencies described above. With the remodelled scheme the country is able to combine a more effective cost-distribution regime with a tighter regulatory framework to provide investors and developers with greater security. The RE development aims associated with the scheme involve an increase of the total targeted installed capacity from 12 GW set out in 2004 to 22 GW now. Additionally, the current 13.5 GW target for photovoltaic development constitutes a 400% increase to the installed capacity envisaged initially by the program in 2011.
PV and other RE projects now receive a guaranteed fixed tariff, relative to their capacity, over the 20-year term of their PPA with one of the four subsidiaries of the state-owned grid operator. Improvements in accountability have also been achieved: the details of the PPAs are now legally enforced and largely standardised, no longer at the discretion of Sonelgaz.
In its financial set-up, the scheme is not only generous by regional comparison, it also adjusts to the effective productivity of projects over time. Initially, for the first five years of the 20-year subsidy period, solar projects with capacities between 1 MW and 5 MW receive a fixed tariff of DZD 15.94/kWh. For projects larger than 5 MW, tariffs stand at DZD 12.75/kWh. After the initial five-year period, tariffs are individually revised for each project according to its effective operating hours. Tariffs to projects with low productivity are increased up to 15%, rates received by more productive plants are decreased in the same manner. This adjustment measure may require a bureaucratic effort, but it renders the cost-allocation regime more flexible.
Although PV magazine has raised the issue that the FiT applies only for a fixed number of hours every year, in excess of which the electricity is apparently sold at the unsubsidised price, the current tariff structure shows significant improvement in investment security compared to the bonus-system of the past. Other institutional reforms confirm this picture. The state grid company, Sonelgaz, is now also legally bound to give RE priority grid access, further giving developers security concerning the consistent deployment of their energy. Furthermore, the distribution of the FiT scheme’s cost has been clearly set out by the Algerian government. According to law firm Jones Day, “The subsidized feed-in tariffs will be financed through a National Fund for Renewable Energies and Cogeneration (Fonds National pour les Energies Renouvelables et la Cogénération), established by a 1 percent tax levy on the state’s oil revenues, and through other resources or contributions, including a premium paid by end-users.” One could go on to question the long-term viability of the principle of linking the funding of RE development to the health of Algeria’s oil trade. Growing demand could turn Algeria into a net importer of oil or insurgent exploitation methods in North America could hold down oil prices and, therefore, the country’s oil revenues.
But, beside the fact that Algeria controls substantial alternative sources of finance (having larger foreign exchange reserves than France, Germany, or Britain), the improvement in cost-allocation is of a more fundamental, structural nature. It is not the lack of finance, as in many sub-Saharan African countries, that has obstructed RE promotion in the past, but the administration thereof. Current reforms will ensure that the conflicts produced by the government’s insistence on protecting the grid operator’s financial health are resolved. Similarly, with the introduction of consumers into the cost management of RE subsidies, consumer protection is diminishing as a significant political barrier to a fair and effective FiT scheme.
Projects are run on an IPP basis and foreign developers will usually have to partner with a local, state-owned power company, such as a branch of Sonelgaz’ power generation subsidiary. Land ownership for development by foreign investors requires state authorisation; the majority of projects have to settle on state-owned land under a concession regime.
A vital aspect of the developer’s investment appraisal yet outstanding is the exchange rate risk associated with Algeria. The Algerian government does not appear to be assuming exchange rate risk directly, implied by the fact that tariffs are listed in the national currency, the dinar. Egypt’s FiT scheme, by comparison, also pays developers in its national currency, but explicitly assumes at least part of the exchange risk by allowing investors to convert a portion of the Egyptian pounds they receive with every invoice into US dollars at a fixed rate. Despite having a very tightly managed floating exchange policy, the Egyptian pound’s relative volatility makes the government’s assumption of exchange rate risk in its FiT scheme an essential security offered as part of the deal. Yet from what can be surmised from commentators, Algeria’s government is not making similar explicit provisions.
Closer analysis will reveal an ambivalent picture. On one hand, according to the IMF, the Algerian dinar has a composite soft peg, largely guided by the US dollar (mainly due to Algeria’s specialisation on hydrocarbon exports). Thus Algeria’s exchange rate policy is designed to ensure that at regular intervals the dinar returns to a specific benchmark exchange rate with a variety of international currencies. More importantly, Algeria has comparatively large foreign exchange reserves (the 12th largest in the world), giving the government flexibility in the control of exchange rates and unexpected inflationary/deflationary events. And it is probably these reserves – greater control over the value and volatility of its currency, as compared to other North African countries – which allows Algeria to provide at least a certain degree of exchange rate security without directly and formally assuming currency risk through legislation.
Yet the Algerian dinar’s inherent volatility must be acknowledged. With oil and natural gas exports forming the country’s economic base, its currency remains very sensitive to commodity markets and vulnerable to domestic inflationary pressures. Oil prices usually determine the strength of the dinar: the recent fall in oil markets caused its value to depreciate from 78.6 DZD per USD in spring 2014 to 98.8 DZD per USD in April 2015. BMI Research expects the currency to stabilise over 2015; but even with the deployment of its extensive for-ex reserves, the Algerian government will only be able to return the currency’s value to around 95 DZD per USD. A poor harvest season in 2014-15, entailing large-scale imports of grain due to Algeria’s limited production base, contributed to this trend and pushed inflation up to over 5.7% in early 2015.
Yet, in any case, a comparatively high exchange rate risk is an inherent feature of most investment in emerging economies. It has been our thesis that rather institutional and political issues have been the primary obstacle to the advance of FiTs and sustainable energy production. As North Africa’s strongest economy, Algeria is leading the way in overcoming these structural problems.