On 23 March 2017, the Minister of Energy, Mr. Noureddine Boutarfa, announced at the Global Forum on Sustainable Development in Paris that Algeria was about to launch a tender for the generation of electricity from solar PV energy.
Following this announcement, the Ministry of Energy is expected to internationally tender solar photovoltaic (PV) projects with a total of 4 GW-capacity in the next few weeks or months. Based on the information available to date, the tender will consist in 3 lots of 1350 MW to be awarded to three selected candidates, made up of PV plants with a minimum of 100 MW of installed power capacity. The projects will be spread across several sites (high lands or "Hauts Plateaux" and southern Algeria), connected to the distribution grid and subject to a PPA of at least 20 years.
Referring to Article 26 of the Algerian Electricity Law1, the Algerian Prime Minister recently signed an Executive Decree providing the legal framework for the tender of on-grid renewable energy projects.
Whilst the existing feed-in-tariffs policy has not been officially revoked, the newly enacted tender scheme is designed to become the standard procedure for launching renewable energy projects in Algeria in the next years.
|Why this reform?|
Pursuant to the terms of the newly enacted Executive Decree 17-98, any interested bidder in the upcoming tender will be required to (i) include a “manufacturing component” for a manufacturing investment project3 and (ii) partner with pre-selected national companies4 under the 49/51% rule (see further below).
Whilst the shift towards a tender system is arguably a pragmatic and efficient move, the Algerian tender system risks discouraging the participation of small and medium sized developers due to the risks and costs involved in tendering. This has the potential to encourage collusion amongst bidders and to drive up electricity prices.
This concern is further heightened by the important size of the installed power capacities to be tendered in the coming weeks/months: each selected bidder would be responsible for the construction and operation of several plants totalizing a minimum output of 1350 MW.
It is said that the tender will be launched in Spring 2017, which would be very optimistic - but it is more likely that the first tender will be launched in Fall 2017.
Main features of the new Algerian Tender Scheme
1. Control and supervision by the Algerian Government
Under Article 26 of the Electricity Law, the Executive Decree sets out two types of tender:
- An “investor tender”, directly controlled and supervised by the Government, and governed by Article 5 to Article 22 of the Executive Decree.
This is the tender which will be launched by the Algerian Government in the next few weeks/months and is expected to be the standard tender used in Algeria for renewable energy projects.
In tender systems, a set of criteria are evaluated, including notably the price.
- A “competitive auction”, controlled and supervised by the Algerian Electricity and Gas Regulation Commission (CREG) and governed by Article 23 to Article 43.
It is unclear at this stage how a “competitive auction” mechanism will be used in parallel with “investor tenders”. As such, we have decided not to discuss the mechanism further in this briefing.
In auction systems, the price is the only criterion to be evaluated.
Regarding “investor tenders”, it is worth noting that the Algerian Government is entitled to assign the preparation of tender specifications, the review of bids and the selection of successful bidders to public companies. Either, or both SONELGAZ or SONATRACH, two Government-owned utility companies, are likely to be chosen for this role.
We have no information at this stage confirming or not that this option will be implemented for the upcoming tender.
CREG's task would be to provide an “opinion” on the electricity prices proposed by the bidders in their offers, before the offer is assessed by the Ministry of Energy or a public company, as the case may be.
The fact that “investor tenders” are directly controlled and supervised by the Ministry of Energy does not infringe the Electricity Law, and notably the powers of CREG. Indeed, CREG is responsible for tenders which are issued under Article 22 and not for those launched pursuant to Article 26 of the Electricity Law.
2. Requirement for a combined offer in generation and manufacturing
An “investor tender” requires bidders to provide an offer comprising of two sub-offers:
- An “energy component”, which deals with the electricity generation project itself: the development, construction and operation of the power plant on a given site, as well as the marketing of the electricity generated at a proposed price. The connection works to the grid will be paid by the selected bidder.
As for any tender, the energy component will consist of (i) a technical offer including the proposed equipment and technology to be used and (ii) a financial offer revealing the capex/opex and the proposed tariff, estimated by the “economic assessment model” provided in the tender specifications.
At this stage, we are not aware of any requirements with respect to the types of technology and equipment to be used, but it is likely that the tender specifications will promote local content to the extent possible;
- An “industrial component”, which is independent from the “energy component”: the investor must propose an offer for the manufacture of electrical equipment in Algeria (modules, inverters, cables, converters for example) in accordance with the terms and conditions specified in the tender specifications.
This component will include (i) the manufacturing offer in accordance with the tender specifications and (ii) the proposed prices of the equipment and electrical components, as well as the conditions of price adjustment.
It is important to note that bidders can nominate a third-party company to prepare and directly submit an offer for the “industrial component” to the Ministry of Energy.
It is not confirmed at this stage that the solar PV plants of the "energy component" will be required to use and operate the electrical equipment manufactured by the bidder in its "industrial component" – as it would be difficult in practice.
Furthermore, in exceptional cases, the Government is entitled to waive the "industrial component" requirement and limit the tender to achievement of the “energy component”. We anticipate that the upcoming tender will likely include the two components.
3. Requirement for a partnership with national companies
The well-known “51/49 rule” provides that at least 51% of the shares of Algerian companies must be owned by Algerian nationals who are residents of Algeria or by companies which are wholly-owned by Algerian resident shareholders.
As outlined above, in the Executive Decree, the Algerian Government anticipated the application of the "51/49 rule" by requiring bidders to partner, at the tender stage, with public companies chosen by the Government. We anticipate that the public-owned companies will likely be SONELGAZ or SONATRACH.
We note that, pursuant to the terms of the Executive Decree, the partnership between a bidder and public company will be required for (i) the “energy component” but appears to be optional for (ii) the “industrial component”.
4. Other legal and technical aspects of the Algerian Tender Scheme
In practice, the “energy component” of the selected bidder's offer will include the following items:
- Duration of the PPA: the Executive Decree provides a maximum of 25 years. The term of the PPA will be provided in the tender specifications. We do not know, at this stage, who will be the counterparty of the PPA.
- Electricity price under the PPA: the offer should propose a price per kw/h, based on the “economic assessment model”, and conditions of price adjustment during the lifetime of the project.
- Site for the plant: we understand that the site will be provided by the Government and notified to the bidder in the tender specifications.
- Licensing: the Government will grant each selected bidder with (i) the operating authorisation and (ii) the certificate of guaranteed origin. Each of these licenses is governed by a specific regulation. The selected bidder will undertake responsibility for the other mandatory licenses or permits (environmental or construction aspects).
- Costs for grid connection: grid costs will be 100% supported by the selected bidder.
Annex: update on the electricity regulatory framework in Algeria
|Executive Decree 17-98 dated 26 February 2017||Governs the rules applicable to the launch of calls for tenders for renewable energy projects|
|Tenders Specifications for the first Algerian call for tender – Spring 2017 or Fall 2017||Governs the technical and legal aspects for the tender of the “energy component” and the “industrial component”|
|Already applicable texts||Summary|
|Electricity Law 02-01 dated 5 February 2002||Governs the principle applicable to electricity production, transport, distribution and marketing|
|Investment Law 16-09 dated 3 August 2009||Governs the rules applicable to investment in Algeria|
|Executive Decree 06-429 dated 26 November 2006||Governs the rules applicable to IPPs benefiting from an Operating Authorisation|
|Executive Decree 06-428 dated 26 November 2006||Governs the rules applicable to IPPs benefiting from the special regime (ie renewable energy)|
|Executive Decree 13-218 dated 18 June 2013||Governs the tariffs and the power purchase agreements with an IPP|
|Executive Decree 15-69 dated 11 February 2015||Governs the rules applicable to IPPs benefiting from the certificate of guaranteed origin|