Algiers skyline

Algeria to harness massive renewable potential to diversify energy sector

Algeria is heavily reliant on its oil and gas reserves, but Africa’s largest country is now looking to embrace its unique renewable potential to diversify its energy mix.

Algeria is heavily reliant on its oil and gas reserves, but Africa’s largest country is now looking to embrace its unique renewable potential to diversify its energy mix.

As definitions of "fossil fuel states"go, Algeria certainly ticks many boxes. The largest natural gas producer in Africa (and 11th in the world), Algeria’s oil and gas production accounts for 97% of its 20 GW power output, while hydrocarbons also make up 30% of GDP, 60-70% of budget revenues and almost all export earnings. With gas production peaking at almost 96 billion cubic metres in 2018, fossil fuel production is showing no signs of slowing down, but plans are also in place to massively increase solar and wind production to generate 22 GW of renewable energy output by 2030 (27% of estimated national production).

Why diversify now?

According to Alessandro Bacci, Oil & Gas Regulatory and Fiscal Analyst for the MENA Region at IHS Markit, diversification will better prepare Algeria’s energy sector for a renewable future, make it “capable of better withstanding the fluctuations in hydrocarbons prices” and if it “develops renewables at competitive prices, the country will have more hydrocarbons to export rather than consume internally.”

However, the coronavirus situation has obviously impacted the country and made life difficult for all concerned. Toufik Khitous, Wärtsilä’s Business Development Manager for North Africa, says of the pandemic: “The economic consequences of Covid-19 were immediate for Algeria. This was combined with the plunge in the price of oil to around USD 30 per barrel — far from the USD 50 on which Algeria was betting in its 2020 finance law. The budgets have been revised sharply, and therefore various investments have either stopped or been delayed. Algeria still has a bit of room to manoeuvre but not too much flexibility.”

With consumer electricity needs growing at almost 7% annually, Algeria hopes that boosting renewable energy production will satisfy domestic energy needs and create job opportunities, while complementing its top energy priority: producing oil and gas for export. 

The solar horizon

According to IRENA, non-renewable capacity accounted for 97% of energy production in 2018, with solar making up just 2% (435 MW) and wind less than 0.001% (10 MW). By 2030, Algeria wants to produce 13.6 GW of solar, 5 GW of wind as well as 3.4 GW from biomass, cogeneration, hydro and thermal. 

Increasing solar generation 30-fold in a decade may seem ambitious, but Algeria has an enviable hand. The largest country in Africa, 80% of Algeria’s 2.38 million km2 is desert that enjoys between 2,000-6,000 wh/m2 of sunshine each year; enough to power the world 10 times over. Algeria currently uses 0.003% of its solar potential and capturing even a fraction of this solar trap could easily cover its national electricity needs.

Khitous says the move to solar “makes sense, as Algeria is one of the sunniest places in the world and they want to inject this capacity into the country." Initially, Algeria had aimed to produce at least 2 GW-3GW of solar by 2020, but “in reality this didn’t happen as there are lots of complications to making projects in Algeria.”

Stumbling blocks

Algeria likes to “invest in massive projects — 800 MW-2 GW projects — which only a few companies can participate in,” says Khitous, adding that administrative barriers, a lack of political conviction and a lack of bidders has held back renewable production in previous years.

The same issues have plagued oil and gas investment.

“Algeria has not been able to attract consistent investment because prospective contractors have not seen the country’s oil and gas regulatory and fiscal framework as sufficiently attractive,” says Bacci. Rules such as the 51/49 Rule — which requires Sonatrach, the Algerian state-owned energy company, to have the majority stake in any oil and gas contract — as well as harsh fiscal terms, have scared off investors from Algeria’s energy sector. Last year, for example, the Algerian government put out a tender to secure 150 MW of solar capacity, but only chose one 50 MW project due to the lack of bidders with potential developers critical of the investment requirements. Meanwhile, Algeria modified its petroleum fiscal framework in December 2019, improving some fiscal terms for investors. However, by maintaining Sonatrach’s monopoly, it appears to be an incomplete reform.

How can Algeria overcome this?

In November 2019, Algeria adopted a new finance law that removed the 51/49 rule from non-strategic sectors, excluding hydrocarbons. “Algeria is changing its financial rules to encourage foreign companies to invest,” says Khitous, noting “Algeria knows they need to change the local rules to bring in investors and provide companies with guarantees on their investments,” if they are to achieve their 2030 aims.

Although in agreement, Bacci is cautious of the recent legislative moves, stating that “for example, it is difficult to interpret the attractiveness of the new production sharing contracts without more specific terms. And, at the same time, maintaining Sonatrach’s monopoly on the basis of political and not economic considerations, may well continue to limit the attractiveness for prospective contractors.”

The future

Given the right conditions, “foreign companies will invest massively in Algeria as there is huge potential, especially in renewable energy”, says Khitous. “Today, our assets focus on flexible engines and energy storage. This is our core-business and we will take advantage of the capacity and potential to provide the added value that our technology can bring - such as the hybrid solution management via our GEMS software platform.”

GEMS, Wärtsilä's in-house advanced energy management software platform, is the most advanced energy management tool available today for hybrid solutions. Deployed across more than 70 grid-scale systems in nine countries, it has been integrated with a multitude of thermal and renewable generation assets as well as load and weather forecasting data.

Khitous believes in the potential of GEMS for Algeria. “The flexibility side is definitely needed, and we’d like to bring the hybrid solution to assist national companies Sonatrach and Sonelgaz," he says. "GEMS can play a very big role in running power plants efficiently and saving costs for the customers, which is one of the main things the national energy companies are trying to do."

Written by
Beetle Holloway
Contributing Writer at Spoon Agency