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Interview

Abelaali Badache – President, CREG – Algeria

03.08.2015 / Energyboardroom

The chairman of the executive committee of the Algerian electricity and gas regulator, CREG, highlights the future of Algeria‘s energy mix and the projects in alternative energies undertaken by the country.

Can you describe how the market changed to the current framework, which gives more opportunities to private investors?

For years, power generation and gas and electricity transportation and distribution were managed by a single integrated public company with centralized planning. The state, as the guarantor of the economic and social development of the country, provided the finance for this development and price subsidies.

From 2002, thanks to the economic reforms started by the authorities, a new regulation on power and gas distribution by pipelines was put in place. It opened the production segment to competition and organized power and gas distribution into concessions, with price regulation for power transportation and distribution.

Under the cover of this regulation, the private sector entered the power generation sector between 2002 and 2009, but the form this took was take or pay contracts, which did not allow for an open electricity market to emerge. Sonatrach was therefore asked to become the second public investor in power generation.

The economic recovery of the country, due to satisfactory state income, housing, transport, and socio-economic infrastructure, led to a huge growth of energy demand, which could not be delayed at the risk of popular reaction. Therefore, the state decided in 2010 that investments in power generation to meet this rising demand would be supported by the incumbent operator Sonelgaz.

It should be understood that this evolution of demand, and therefore changes in regulation and production, correspond to the development of the Algerian population. As a regulator, we must make sure that demand is satisfied across the whole country.

What is the real cause behind this increase in demand? Is it driven by industry, the private sector, or rather by relatively poor management of the grid?

We monitor demand in every sector in order to understand the development of each of them. In terms of industry, the first client is oil and gas: the more investments in hydrocarbons, the bigger increase in electricity demand. We have also seen growth in both the steel industry (Mittal Steel resumed activities in EI Hadjar, in the east), and the building sector: power needs for building materials increase with demand for construction. The food and beverage sector is also rising with the launch of several private investments. In addition to this, a large program of seawater desalination has been launched by the government. Residential demand is instantaneous and changing rapidly, as the appliance market is opening up, making residential demand more complex to predict than industrial demand. Furthermore, Algerian living standards are changing, and our climate is getting warmer, something that is especially pronounced in the deep south of the country, and winter/summer peaks also must be managed. In 2012, demand grew by 18 percent in summer. Finally, consumer tolerance is different: people used to tolerate one or two hours of power cut in the past, which is no longer the case. Public pressure on this has become very strong.

Which functions has the CREG been entrusted with by the public authorities? What goals have been set for 2014 and 2015?

For the last two years, the authorities have supported a significant level of investment in power and gas infrastructure, equipment and production, as well as in the transportation network and distribution grid, and released the necessary capital to help meet the current demand in power distribution and generation, and to double the country’s generation capacity by 2017. Currently, 15 GW of generation are under construction, a type of project that only the state can launch.

Distributors have also received support for the realization of distribution networks, such as for substations that improve local service. In 2013, approximately 6,000 substations were installed, the equivalent of three or four years of investment at previous levels. This has continued in 2014 with 4,000 substations and will continue in 2015. Additionally double-digit growth is expected both in power and gas.

In 2015 these efforts will begin to bear fruit: we should have good coverage and satisfy future demand as a result of the work we have done. Double-digit growth is expected both in power and gas: our challenge will be to control, follow up and verify every project launched by the operators to ensure fast delivery.

The CREG’s role is to provide oversight and advice to the public authorities, and to prevent and solve problems quickly, taking part in virtually all decisions. The CREG also makes sure that regulation is enforced and respected by the operators, and ensures consumer protection.

For now, only Sonelgaz seems engaged in development, yet you have by law the possibility to grant licenses to third parties. Have you managed to attract outside investors yet?

It is a matter of priorities. For the next five years, all investments have been launched: financing, realization and related decisions give no room for new entrants in conventional production. We work according to a ten-year program, updated and validated every two years, which gives us a ten-year overview on demand evolution, existing and future capacities, and demand coverage. We do not expect any new investment before 2020, since everything that has been launched so far should be enough to meet the expected demand.

Is internally consuming gas produced in Algeria, rather than selling it on international markets, a concern for you?

Investment has been made,and our overall production mainly relies on gas as its fuel. The energy mix needs to evolve in two areas: our infrastructure and improving its efficiency. To date, almost all of our investments have been made in combined cycle generation. Eventually, we will transform all our existing facilities from open cycle (i.e. gas turbines) into combined cycle, in order to reduce gas consumption. The other step we can take is to build infrastructure that moves away from gas, which is being covered by our renewable energy and energy efficiency programs, approved in 2011: Algeria’s power generation needs to move away from solely relying on fossil fuels. These programs have increased awareness for the need to find an alternative to gas, as well as to implement regulation to secure investment, and a secondary regulation providing better functioning of the system. We take part in the development of every bill. A series of decrees was recently published about national prices of electricity produced by solar and wind projects to try and improve the situation. We also assist other areas: with the Ministry of Environment for instance on the issue of household waste recovery and treatment, and with the Water Resources Ministry on the issue of methanization.

What is the long-term plan for the introduction of renewables into Algeria’s energy basket?

On our current plan, we are targeting 2030 as the year when 30 to 40 percent of Algeria’s energy production will come from renewable sources including solar, wind, and solar thermal. The choice of technology is key, as investment costs are high: clearly, wind technology dominates in the world. There are relatively windy coastal zones in Algeria where wind speed can exceed 6m/s, which would allow good wind farms, and also other areas in the Algerian highlands. Solar also has a lot of potential for us: Algeria is sunny and warm, the potential is unlimited. This leaves solar thermal. Its costs are still too high, four or five times the cost of the conventional equivalent. It is there in our plan but we are monitoring the evolution of technology and costs.

Renewables are expensive today compared to conventional equivalents, but this needs to be taken into consideration along with the fact that the more renewables we have in our energy mix, the more gas we can sell on international markets. Gas is a solid asset: we might as well value it correctly.

Algeria’s first solar plants were created 20 years ago in the south of the country. Then in 2009, we realized a 25 MW gas and solar hybrid plant. In 2014, a 10 MW wind farm was established in Adrar, operated by a Sonelgaz subsidiary. We also have a 1 MW solar farm in Ghardaïa, operated by another subsidiary, which includes almost every latest PV technology, making it a small-scale test laboratory. But the most important project is the one launched in 2013 by the government, which will provide 400 MW in photovoltaic by mid-2015. To realize this project, feed-in tariffs (FITs) were put in place, as in Europe: this principle guarantees a purchase price to the producer in advance, within an efficient regulatory framework, to favor investment in a market which is open to both the private and public sectors.

Will the CREG be in charge with granting licenses? Also, will it be a tender system?

Operating licenses will indeed be delivered by the CREG, both for public and private initiatives, in conventional and renewables. When you choose FIT, you guarantee a purchase price with conditions and rules. The initial mechanism included calling for tenders, but the actual regulation now provides entrepreneurial freedom for project holders; on your property, in the locality of your choice, you can introduce your case, in a file describing the installation process, to the regulatory commission. There is a standard contract; you know who you are going to sell to. By ministerial order, there is a legal requirement to have a contract with the distributor, with a purchase price set in advance.

Do you already have ongoing partnership discussions?

Many discussions are ongoing; we receive on average three or four requests per week, and have issued a brochure with all the relevant information. To date, the FIT funding pool is supported by a national fund for renewable energies, financed with 1 percent of oil royalties. This funding pool is used to compensate the price differential between renewables and conventional for the buyer. It is guaranteed and regulated; there are three regulatory texts regarding this aspect. We also committed to developing a text to govern power generation through the use of household waste by the end of 2015, as well as energy through water treatment and geothermal.

In April, it will be the first anniversary of your mandate. What would you like to accomplish in the coming two or three years? How would you like the CREG to be seen on the local stage and internationally?

Everything must be done to solidly establish the companies born out of the sector’s restructuring, particularly in terms of complementary regulation. We have started to accelerate the pace of development of these texts so that the companies will be able to work in a transparent regulatory framework enforceable against all. Even the government is making sure that this secondary legislation is finalized quickly.

Second, we need to make the dealer-customer relationship change completely. The dealer, that is to say the power and gas distributor, will have to make efforts in that direction, stop the technical-only relationship with users, and start a true service-provider/customer relationship. The regulation is in place and we expect this aspect to improve. We must encourage participation in the energy debate from consumers, localities, associations and so on.

Third, we need to introduce the concept that power generation doesn’t just have to be provided by big companies as it has been so far, but also can be provided by consumers. This is also a way to support renewable energies.

Finally, since April 2014, the committee has been working to ensure that regulation is truly enforced in our public structures. We cannot continue to manage our huge infrastructure as we have in the past – by 2023 we will have 25,000 MW of generation capacity – because it is no longer just a technical problem, but an organizational one. We will have to create a culture of economic regulation. We must make sure that costs are kept as low as possible; that the consumer plays a role in the energy environment, and that the authorities take on their part too.

Oil companies around the world have renewable energy assets. What is your final message to these actors?

Although we are a major producer of oil and gas, we have embarked on renewable energy and energy efficiency development. We are indeed well aware that we need to take a part in enhancing the living environment, both local as well as universal, through the reduction of greenhouse gases, the improvement of green energy use, and the sustainable development of the Euro-Mediterranean environment.

Click here to read more articles and interviews from Algeria, and to download the latest free oil and gas report on the country.

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