Key fact

At present, about 95 per cent of Algeria’s power capacity is natural gas-fired

Source: MEED

For many years, Algeria struggled to build enough power and water production capacity to meet the needs of its citizens. Major towns and cities also suffered from dilapidated networks that failed to deliver utilities to the country’s growing population. However, about five years ago, Algiers launched an ambitious capacity investment programme, developing several power and desalination plants that have helped to restore healthy reserve margins.

In 2010, Algeria had 11,300MW in installed power generating capacity, while peak demand was about 7,700MW, leaving a cushion of 3,000MW. Peak water demand that year, meanwhile, was 2.7 billion cubic metres.

“The Algerian government expects power demand to grow at a rate of 10 per cent every year up to 2020”

But with the population forecast to reach 38 million by 2016 from about 36 million today, the government cannot afford to stop building new capacity. It expects power demand to rise at a rate of 10 per cent a year up to 2020. To meet this, it plans to add 1,200MW of conventional power capacity each year, at a total cost of $30bn.

Developing renewables

At the same time, the authorities are also keen to develop alternative sources of energy to free up oil and gas for export. At present, about 97 per cent of Algeria’s power capacity is natural gas-fired and this is depleting its reserves, which could otherwise be saved or sold at a profit.

In 2011, the government unveiled plans to invest a further $80bn in renewable energy and efficiency projects until 2030. The role of the private sector and international firms in this process is still undefined. Algeria’s attempt to retain its hydrocarbon wealth and promote local companies at the expense of their foreign counterparts has brought about a difficult transition for local firms and deterred some international developers.

Algeria has one of the most ambitious renewable energy targets in the region, with 40 per cent of total power generation planned to be generated from renewable resources by 2020. One-third of the $80bn investment by 2030 will go towards energy efficiency measures. The other two-thirds will be spent on renewable power.

This will equate to 22,000MW of new capacity by 2030, of which 10,000MW will be exported. Solar power is expected to contribute 37 per cent of Algeria’s energy mix by 2030.

It has already developed the 150MW Hassi R’Mel solar/thermal hybrid plant, which includes a 30MW solar power unit.

“Singapore’s Hyflux had to accept a reduction in its ownership of Algeria’s Mactaa IPP from 51 to 47 per cent”

A key priority is to diversify the fuel mix and free up hydrocarbon reserves for export. “Algeria relies heavily on gas and oil,” says Aida Kellal from Spanish law firm Cuatrecasas. “Now they are starting to think about the future. Using solar power in the desert is being talked about a lot.” The projects are intended to be connected up to the Desertec scheme, which aims to develop renewable energy projects in North Africa to generate power for southern Europe.

Algiers’ green energy targets are certainly impressive. However, the renewable energy drive is likely to highlight a continuing problem for the country as a result of its push towards local ownership and production.

The development of new water resources has trailed behind power generation for some time, but this changed some years ago. “Between 2004 and 2010, Algeria has had an incredible desalination programme,” says Yves Baratte, a partner at the UK’s Simmons & Simmons.

A series of desalination projects are being built along the country’s coastline. About 50 per cent of the schemes are operational, while the other half are to be commissioned between 2012 and 2014. The nation’s largest desalination plant is set to be commissioned in 2012. The Mactaa facility is being constructed at a site in Oran by Singapore’s Hyflux and will have a capacity of 500,000 cubic metres a day (cm/d), taking Algeria’s total desalination capacity to 1.9 million cm/d.

Algerian Energy Company (AEC) is planning four more desalination plants, each with a capacity of 100,000 cm/d. Once these projects are commissioned, the country will have a good supply margin. A greater challenge for Algeria is water distribution as much of its network is outdated. The government attempted to resolve this issue using several water management contracts with the private sector to mixed success.

Ownership regulations

In 2009, the Algerian government enacted laws that impacted the role of the private sector and international companies in the power and water sectors. Firstly, it decided that firms in Algeria must be majority-owned by nationals. For importers, foreign investors would be allowed up to 70 per cent ownership.

The move pushed out some international firms and reversed some steps towards private ownership of utilities. Algeria was ahead of the curve with its Arzew independent water and power project (IWPP) in Oran, which was commissioned in 2005. The 1,227MW Hadjret Ennous independent power project (IPP) followed.

But the changes to the law have spooked the private sector. Companies are unlikely to want to commit to long-term agreements in which they may be forced to reduce their stake.

For example, Hyflux was forced to accept a reduction in its ownership of the landmark Mactaa independent water project from 51 per cent to 47 per cent. The law was also blamed for the cancellation in early 2010 of a build-own-operate contract awarded to the UK’s Biwater by AEC, although AEC remains adamant that this was not the case.

Well-funded banks

Upsetting international investors has not been too much of a problem for Algeria as long as the firms are content to take a minority stake. The country has enough petrodollars to pay for projects outright.

“All recent projects have been financed locally with Algerian banks and sometimes only one lender for $200m-300m projects … Financial control is so strict,” says Baratte. “Even Algerian companies face a lot of difficulties investing their money outside Algeria. All the proceeds of oil and gas are stuck in the country. There is so much cash in Algerian banks that they have to find investment opportunities. They are not very worried about risk and sharing loans because they are so desperate to find investment opportunities.”

While Algeria’s nationalist policies have only affected the independent schemes in terms of project ownership, the government’s import policies have affected IWPPs and government-procured engineering, procurement and construction projects alike.

The government decided in 2008/9 that all imported goods will need to be paid for by letter of credit. “It created a delay in the process because the banking system was not organised to absorb a huge amount in letters of credit,” says Vincent Lunel from French law firm Lefevre Pelletier & Associes.

The system has improved markedly since then, but the policy had unforeseen consequences. “Firstly, many import companies in Algeria disappeared because they were not able to finance the working capital,” says Lunel. “This is because if you are importing, you need to pre-finance it in advance in a letter of credit. Some weak players disappeared.

“On the other hand, there was a disincentive to pay for domestic items because if you import goods, your payments are secure. For foreign firms now, it may be advantageous to import goods instead of investing locally, which was obviously not the intention of the government.”

Sufficient utilities

In spite of Algeria’s civil war legacy, cumbersome bureaucracy and infrastructure weaknesses, it has managed to build up its power and water capacity at an impressive rate. Electricity is now provided to more than 98 per cent of the population and there is a healthy reserve margin. When the Mactaa desalination scheme comes online, water supply will also be plentiful. There have been delays to the water programme, but it has come to fruition nevertheless.

The country has managed to improve its electricity transmission and distribution network and connect its people to water supplies. With those challenges overcome, the government has directed its attention to future plans. Algeria has enough power capacity for now and faces a steep increase in demand in the future. It has enviable solar resources and enough cash from hydrocarbon sales to finance the projects, especially since the wealth is held captive.

But if the government expects its drive towards renewables to promote local employment, it will be bitterly disappointed. Building a home-grown alternative energy sector from scratch takes time and almost all of the equipment will need to be sourced from abroad. The push towards renewables will see nationalist policies clash with the need to diversify the country’s energy mix and provide for the energy needs of future generations.