Over the past few years, the Algerian Government has paved the way for renewable energy projects by enacting specific laws and regulations, under the supervision of the Algerian electricity and gas regulator (the CREG). Key principles have been laid down in Algerian law in order to facilitate renewable energy projects, such as the financial support scheme for promoting renewable projects, the power purchase obligation and the priority access and injection right.
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Earlier this year, the Algerian Government published the applicable feed-in tariffs (FiT) for wind and solar PV projects with an installed power capacity over 1MW. Along with this regulatory framework consolidation, the 2013 CREG'S Activity Report has shown that the Transport System Operator and the relevant Distribution System Operators (the DSOs) are developing new grid capacities and upgrading their electricity network.
However, to date, the regulatory package for renewable independent power producers (IPPs) has not been fully implemented and the dominant, active stakeholder remains the state-owned company specialised in renewables, Shariket Kahraba oua Taka tMoutadjadida (SKTM - a subsidiary of the state-run company Sonelgaz). SKTM is currently developing a portfolio of 300MW solar PV capacities across the country, with a significant part already in construction.
With upcoming regulation from the CREG seeking to complete the regulatory framework for the sector, this update focuses on the current state of the legal and regulatory framework, and the long-term perspectives for the renewable sector: (i) the overview of the regulatory framework, (ii) the FiT financing scheme and the power purchase agreement (PPA), (iii) the grid connection and injection aspects and (iv) the Algerian administrative permit scheme.
Core elements of the framework include:
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Overview of the regulatory framework
The Electricity and Gas Distribution Act dated 5 February 2002 set out the principles governing the unbundling of the production, transmission, distribution and supply of electricity in Algeria as well as the transmission, distribution and supply of gas by pipeline. The Electricity and Gas Distribution Act 2002 also provided for the liberalisation of electricity production, imposed the licensing of IPPs, and established the administrative and criminal penalties to apply in case of infringement.
The Power Producer Specifications Executive Decree dated 26 November 2006 set out a special regime for renewables IPPs. It stated the principles of grid connection and injection priority as well as the technical requirements and specifications borne by the power producers.
The FiT Application Executive Decree dated 18 June 2013 set out the administrative process and conditions for benefiting from the FiT (list of eligible projects based on their technical characteristics and installed power capacity).
The Ministerial Tariff Orders for solar PV and wind dated 2 February 2014 but published in the Journal Officiel only on 23 April 2014. They have been enacted on the basis of the FiT Application Executive Decree 2013 and provide the FiT level applicable to solar PV and wind farms installations.
FiT financing scheme and the Algerian regulated PPA
The FiT financing scheme was set out in the Executive Decree dated 8 December 2011 and completed by the Ministerial Order dated 28 October 2012, and provides that the FIT for renewables will be financed by (i) a 1% tax levy on the state’s oil revenues and (ii) by any other resources or contribution. Based on Article 103 of Law 02-01, eligible clients are indeed required to participate in the financial cover of the diversification costs managed by the National Funds of Renewable Energies (Fonds National pour les énergies renouvelables - FNER) as demonstrated below:
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However, the arrangements for the DSO compensation will be further enacted early 2015 by the CREG.
PPA templates are under consideration by the CREG and are to be published shortly. To date, the main characteristics of the regulated PPA have however been set out by the current regulatory framework (duration, production cap, termination cases etc.).
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The grid connection and injection aspects
The templates for the grid connection and injection agreements are still under discussion, as well as the grid connection procedure applicable to renewable IPPs, and should be published early 2015. However, the regulatory framework for the grid connection and injection aspects are broadly complete but the grid code remains spread over various laws and regulations.
Based on the applicable grid code, the renewable IPP is nevertheless entitled to benefit from (i) the right to connect to the grid and (ii) the injection priority right (both provided by Article 8 of the Power Producer Executive Decree 2006). The calculation of the costs sharing implied by the grid connection and injection on the electricity grid are also set out by the grid code. In regards to the distribution network, the IPP will bear the grid connection costs but only after the 5th kilometre of electricity line; and in regard to the transmission network, the IPP will bear the grid connection costs but only after the 50th kilometre of electricity line.
However, there are still open questions for power producers: what is the liability scheme in case of power shortage from the DSO or the TSO? How is paid made for electricity which is produced but not injected in the electricity grid? Will the IPP be covered by an insurance or a specific guarantee from the DSO or the TSO?
In any case, the robustness and efficiency of the electricity grid constitutes a key concern for the success of renewable IPPs in Algeria, since the connection of intermittent energy sources requires the grid operators to adapt and modernise the existing grid network and the related monitoring tools. According to the last annual activity reports issued by the CREG, some upgrades have already been initiated in order to welcome new electricity capacities from renewable energy sources, but these remain subject to a thorough and independent technical assessment.
The Algerian administrative permit scheme and the risks of interference
In regards to the regulatory framework for energy, the current regulations in force lay down a list of authorisations required for the operation of a power plant and the safety of the electricity produced. This will have to be managed with other legislation, such as construction, environmental and real estate law. Based on the applicable electricity regulations, we note that:
- First, the IPP should apply for the certificate of guaranteed origin. According to the information disclosed, limited information should be requested at this stage but it is very likely that some specifications of the plant will be required nevertheless (location, intended power capacity).
- Once the certificate of guaranteed origin is granted, the IPP will be vested to apply for the FIT granting decision. A limited list of documents will be requested: the certificate of guaranteed origin as well as the copy of the grid connection application, and some other technical elements.
- Along with the abovementioned procedures, the IPP will be enabled to apply for the operating authorisation. Such application will require the IPP to have sufficient elements regarding notably (i) the technical impact of its injection on the electricity grid managed by the operator, (ii) its financial and technical capacities for building and operating the plant, or (iii) a scale plan of the plant. At this stage, this would imply the financing scheme has been set up.
- Once the operating authorisation has been granted, the IPP will be vested to apply for a building permit, but only after being granted with the operating authorisation. This element should be taken into account from a financing perspective as it means that the financing and contractual arrangements will have likely to be set up without the construction permits having been issued.
In regards to construction law, the renewable IPP will be subject to ministerial order dated 6 February 2011 which sets out the rules for the consideration and the granting of construction permits of power plants, and derogates to some extent from the general building regulation provided by Law No. 90-29 dated 1st December 1990 and the Executive Decree No. 91-176 dated 28 May 1991, which should continue to apply otherwise. With respect to the environmental law, environmental impact assessments will be compulsory and an authorisation for the commercialisation of imported crystalline panels might be required (Ministerial Order dated 19 April 2008).
It is likely that the administrative process relating to each aspect of a project (electricity, construction, environment for example) will give rise to clashes with other regulations and will therefore require a thorough review of the potential blocking points.
As these authorisations are subject to Algerian administrative law, specific attention should be given to the general administrative rules governing their publication, challenge and expiry. Additionally, a risk assessment from an Administrative Law point of view relating to the modification implied by the technological improvements during the course of the development and the construction of the already-permitted projects, is strongly recommended.
There is a clear will on the part of the Algerian government to promote renewable energies and a stated policy. The new regulatory framework is however yet to be fully developed and the timing and scale of this new energy policy may partly depend on the political and economic decisions to be made with respect to the apportionment of hydrocarbon revenues between feed-in tariffs and other needs in a context of lower oil prices.
One should also note that even when considering the existing regulations, some key questions still remain, such as the creditworthiness of the off-takers and secured PPA revenue flows, appropriate security arrangements and securitization of the PPA in case of tariff decrease amongst many others.