Designing a fully-fledged EU-Algeria energy cooperation

Written by Simone Tagliapietra and Georg Zachmann on 8 January 2016 in Feature
Feature

Cooperation in the electricity, energy efficiency and renewable energy area could be very beneficial for both the EU and Algeria, write Simone Tagliapietra and Georg Zachmann.

In the aftermath of the 2014 Ukraine crisis, the European Union revitalised its quest for security of natural gas supply. The twin aim was to diversify its market away from a perceived over-reliance on Russian natural gas supplies and to make it more resilient against potential supply disruptions. 

Pushing ahead with this plan, the European climate action and energy Commissioner, Miguel Arias Cañete, visited Algiers last May to launch a new high-level political dialogue on energy matters, together with the minister for energy and mines of Algeria Yousef Yousfia.

This new initiative aims to enhance the bilateral energy cooperation, in particular through the creation of two groups of experts, dealing with natural gas and with electricity, renewables and energy efficiency respectively. We would argue that, while natural gas currently represents the most important area of energy cooperation, the partners should focus their attention on energy efficiency and renewable energy.


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Natural gas

For Algeria, natural gas represents a vital sector of the economy, accounting for about 20 per cent of tax revenues and 40 per cent of export earnings. According to BP, the country owns the tenth largest proven natural gas reserves in the world (4.5 trillion cubic metres).

These reserves might increase still further, considering that the Energy Information Administration (EIA) estimates that Algeria owns the third largest technically recoverable shale gas resources (~20 trillion cubic metres) in the world, after China and Argentina. 

Notwithstanding this huge endowment, the recent evolution of Algeria's natural gas balance has been meagre. After a boom during the 1990s, the country's gas production has stagnated since 2000 within a range of 79-88 billion cubic metres per year (bcm/y). 

Meanwhile, the country's natural gas consumption has progressively grown over recent decades, to reach an all-time-high of 32 bcm in 2013. Consequently, exports have declined substantially, to 43 bcm in 2013. Under these circumstances, the well-established natural gas infrastructure connecting Algeria and Europe has been increasingly under-utilised.

In 2013 Algeria exported 25 bcm of natural gas via pipeline (out of an export capacity of 54 bcm) and exported 15 bcm of LNG (out of an export capacity of 40 bcm). The magnitude of the 54 bcm of unused capacity is impressive if compared with, for example, the southern gas corridor, a major EU natural gas supply diversification project, which is expected to deliver only 10 bcm/y to the EU by 2020.

So the infrastructure and geological preconditions seem to be in place for a significant enhancement of the cooperation between Algeria and the EU in the natural gas sector. The problem is that there is not a great deal that the EU can do to help Algeria improve the sector. 

The major bottlenecks are caused by to the internal regulatory framework, which is deeply rooted in the political economy of the country. Universal energy subsidies and rent-seeking behaviour by various parts of the public sector are the major barriers to foreign investments. 

As this is a highly politicised area, the EU could only contribute by sharing best practice through different channels such as the newly established EU-Algeria group of experts on natural gas and the Association of Mediterranean Energy Regulators (MEDREG).

 

Electricity, energy efficiency and renewable energy

Domestic natural gas consumption in Algeria grew constantly over recent decades, largely because of the country's booming electricity demand, which quadrupled from 16 terawatt-hours (TWh) in 1990 to 58 TWh in 2012, while Algeria's electricity generation mix continued to be largely based on natural gas (92 per cent). Algeria's primary energy intensity (the indicator measuring the total amount of energy necessary to generate one unit of GDP) increased from 2000 to 2013, albeit within a structurally low band. 

In the same period, average primary energy intensity substantially decreased not only for the EU and the world as a whole, but also in several countries with a comparable GDP. Qatar is an exception to this trend, being one of the most energy-intense countries in the world.

If this negative trend continues it will require a further expansion of domestic energy infrastructure and also imply lower energy exports to Europe. Therefore energy efficiency should be considered as a key tool to secure the viability of future exports of natural gas from Algeria to Europe.

Considering that energy efficiency is less fraught with the political economy complications that prevent the EU from playing a greater role in the Algerian natural gas sector, it should be the primary target of a new bilateral energy cooperation scheme. With huge energy efficiency potential in the country, EU-Algeria cooperation might quickly generate results. 

The second target of a new cooperation scheme should be renewable energy. The natural gas-based electricity generation mix of Algeria appears unusual, given the huge renewable energy potential of the country. 

The country is endowed with massive solar and wind energy resources. A study published in 2005 by the German Aerospace Centre (DLR) estimated that Algeria owns the highest concentrated solar power (CSP) production potential in the world. 

At the same time, the country is also estimated to have considerable photovoltaic (PV) and wind energy potential. Renewables will become competitive as increasing electricity demand will require additional gas turbines while the cost of renewable energy technologies are expected to decline further.

The main factor determining the speed at which renewables become competitive in Algeria is the cost of capital, which is high for renewables. This is largely a question of the regulatory framework and business environment. European public banks could provide technical and financial assistance to enable better financing conditions for such projects in Algeria.

In the medium term, the exploitation of renewable energy resources could generate consistent economic benefits for Algeria. This could free up large volumes of natural gas currently used for domestic electricity generation for additional exports to Europe. Considering the underutilised export infrastructure, this would translate into immediate economic returns for the country. 

Cooperation in the electricity, energy efficiency and renewable energy area could therefore be highly beneficial for both the EU and Algeria. For the EU it might unlock additional natural gas sources.

Meanwhile, for Algeria, it would not only help to strengthen the sustainability of the country's energy future but could guarantee its macroeconomic stability, threatened by current energy trends.

The International Monetary Fund recently outlined that for the first time in nearly 15 years the current account of Algeria is expected to record a deficit, partly because of high domestic hydrocarbon consumption and lower hydrocarbon export revenues.

The EU should initiate comprehensive cooperation in this field, encompassing regulatory, infrastructure and financing issues. In particular, it should target the creation of favourable investment conditions by stabilising the country's regulatory framework. 

A key contribution might be provided by MEDREG and the Association of Mediterranean Transmission System Operators (Med-TSO), both of which share best practice across the region without being seen as tools through which the EU seeks direct legislative influence in third countries.

Finally, as far as financing is concerned, the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD) could help to develop and underpin risk-mitigation devices that allow private investors to put money into Algerian renewables and energy efficiency projects.

The newly established EU-Algeria group of experts on electricity, renewables and energy efficiency could thus also serve as a coordinating platform for a much-needed joint action of MEDREG, Med-TSO, the EIB and the EBRD in the country.

 

About the author

Simone Tagliapietra and Georg Zachmann are experts at Bruegel, a leading Brussels-based European think tank specialising in economics

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