Before the New Global Economic Revolution

Or what Energy Transition Algeria will go for ?

The following is a synthesis of many contributions at national and international levels on the energy transition issue I have been involved with.  Indeed, standing before the New Global Economic Revolution and taking into account the development of costs, the new global energy changes and competition from new producers, Algeria’s exports and strong domestic consumption brought about by new investment in the doubling of the capacity of power plants, this country will be importing oil within 10 years and conventional gas in 15, hence the importance, as to how to anticipate the energy transition and eventually plan for it.

1 – Identify the concept of the energy transition,

The transition can be defined as the passage of a human civilization built on energy essentially fossil, polluting, abundant and cheap, to a civilization where energy is renewable, rare, expensive, but less polluting aimed to be the substitute for oil, coal, gas, uranium based stock energy resources with wind, solar, biomass, etc. type of energy source.  The peak could according to the French Institute of Petroleum and new energy, lie in between 2015 and2025 for oil, and in 2025 to 2045 for gas; 2100 for coal.  The current development of the extraction of fossil fuels so-called “unconventional”, such as shale gas or deep offshore oil, can repel the peak, without changing the finite nature of these resources. Generally speaking, energy is at the heart of the sovereignty of countries and their security policies.

Technical advances (LNG, shale gas, improvement in the performance of exploitation of hydrocarbons) coupled with economic dynamics alter the balance of power on a global scale and also affect the political compositions within States as well as in regions. So it is a matter of identifying the concept of energy transition that would involve answering the essential questions.

First, if the whole world were to have similar mode of energy consumption as that of the rich countries, we would need resources of 4 or 5 planets thus the urgency of an adaptation for a new model of consumption.

Second, we must be realistic and avoid a unilateral vision because conventional fossil fuels are likely to remain for a long time the main source of energy.  Also, the energy transition must be based on two principles: first, on energy efficiency, involving the control of demand, awareness, but also training to forge new behaviours and thus a change of culture.  That is, we must act on the reduction of energy needs upstream by increasing the effectiveness of the equipment and their uses (for example new processes for the building and infrastructural industries for possible savings in energy, renovation of existing buildings, Ditto for the whole of transport, one of the largest consumers of conventional fossil).  Second, this refers to the energy MIX that will require adaptation of the grid to new uses, assuming a new distribution network tailored to new productions and consumptions to guarantee continuity of supply and at the best price.

Third, the energy transition refers to subjects other than techniques, posing social as much as energy taxation affecting the choice of benefits resources and issues have an impact on the distribution of income by socio-professional categories.  It is not enough to make a law because the determinant is the social base that raises the issue of a new model of growth: all economic sectors, all households are concerned: transport, construction industries, agriculture.

Today’s technical choices would involve society in the long term. The passage from the era of coal to that of hydrocarbons did not occur because of scarcity of coal and another energy sources would available tomorrow.  It is rather due to new technology with large scale production that helped cut costs which economists call economies of scale influence on the reshaping of global economic power and on local governance.

Therefore the energy transition assume a social consensus because the fundamental question is this: this energy transition, how much it costs, how much it is worth and who will be the beneficiaries?

2 – Actions for Algeria in the face of the energy transition

In 2013, 96% of the electricity produced in Algeria comes from natural gas, 3% from diesel (for instance for certain southern isolated areas of the Sahara), 1% from water.  And facing these constraints, there is like a general awareness that is pushing the Government to focus on its strategy for an energy transition that is manageable around the transfer of managerial know-how and technology, a win-win partnership that could be achieved in the context of co-development.

The first axis would be to improve energy efficiency.  Furthermore it is necessary for a new pricing policy (sale price of gas on the domestic market being about one-tenth of the international price causing wastage of resources that are temporarily frozen for social reasons.

For this purpose, a reflection must be engaged by the Algerian Government for the creation of a national compensation chamber, whose purpose is to achieve a system of equalization, segmenting activities so as to encourage the structuring sectors, taking into account the income by social strata and involving a new wage policy with any grant must have endorsement of Parliament for greater transparency.

The second axis would be, since Algeria decided to invest upstream for new discoveries, profitability of these discovered deposits that depend on the international pricing systems, making thus risky.

The third axis would be the development of renewable energy. For this, Algeria has to combine photovoltaic and thermal hard and soft wares that global costs decreased by more than 50% in the recent past.  However, with more than 3 000 hours of sunshine a year, Algeria having what it takes to develop its use of solar energy.  The Sun alone however would not be enough; technology and equipment to turn this gift from heaven into electrical energy would be required.

The large-scale production would substantially reduce costs while promoting downstream a multitude of PMI – PME, strengthening the industrial fabric from clean energy (ecological industries, etc.).  The promotion of renewable energy requires substantial financial resources and investment in research and development. The Technology Fund for renewables decided in Council of Ministers whose rates increased from 0.5% to 1% of the hydrocarbons revenues should be upgraded to 3% minimum in order to allow support between the rates guaranteed for the profitability of the investment.

With revenues of hydrocarbons feeding this Fund, Algeria can avoid making these investments on the consumer to low income, following its decision to phase out nuclear power up to 2022.  Algeria took delivery in mid-July 2011 of a hybrid power plant in Hassi R’mel that with an overall capacity of 150 MW, of which 30 MW are from the combination of gas and solar input.  Interestingly enough, this experience is the combination of 20% of conventional gas and 80% of solar seems an essential axis to reduce costs and mastering the related technology.

For this purpose, the CREG (regulatory agency) announced the publication of decrees to accompany the implementation of the Algerian program of renewable energy development.  Incentives are provided by a proactive policy through the granting of subsidies to cover the additional costs that this programme could induce on the national electric system. The setting up of a national fund to control energy (FNME) and to ensure the funding of these projects and unpaid loans and guarantees for loans made to banks and financial institutions are as planned.

The Algerian program is about having 22,000MW from renewable sources of which 12,000 MW will be for domestic demand for electricity and 10,000 MW for export.  By 2030, the goal of Algeria would be to produce 30 to 40% of its electricity from renewable energy capability.  The amount of public investment by Algeria to the realization of its development program of renewable energy, at maturity in 2030, which was initially set at $60 billion would be, according to the Department of Energy $100 billion.

The problem is whether Algeria has mastery of the required technology and knowledge of the world market; or will it not be best to carry out these projects as part of a national / international public-private-partnership and why not as part of an integration of North Africa plan.  The Maghreb as a natural bridge between Europe and Africa could be as the source of multiple challenges that by 2030/2040, could well spur the growth of the global economy.

The fourth axis, Algeria plans to build its first nuclear power plant by 2025 to meet soaring electricity demand, as confirmed on May 19, 2013, by the Minister of Energy and Mines, with the recent start of the Institute of Nuclear Engineering, to train engineers and technicians, and who will be responsible for the operation of this plant. The proven reserves of Algeria in uranium are around the 29,000 tons, good enough to operate two nuclear power plants with a capacity of 1,000 MW each and for a period of 60 years, all according to data from the Department of Energy.

Human resources are key just like for any other form of energy production and to avoid the massive brain drain facing the country, the services centre with its hard currencies release passing from $2 billion in 2002 to $10/12 billion between 2010 and 2015, of which much the hydrocarbon sector got emptied of its substance.  Priority should be given to solve the recurring problem of nuclear researchers (this applies to all researchers of any domain) whom for years are seeking clarification of their status, with an eventual revaluation of their bonuses, and aboveall an enabling environment by the removal of all redtape and bureaucratic obstacles that hinder research.

Finally the fifth axis would be shale gas.  An option introduced in the 2013 law of hydrocarbons but to definitely avoid polarising, a broad national discussion ought to be arranged because we cannot minimize the risk of pollution of the aquifers especially those in the South of the country.  Algeria being a semi-arid country, the problem of water would be a strategic issue in the Mediterranean and North African region, thus there is need for arbitration for the consumption of fresh water, (the new technology with little water consumption being not yet available at this stage, despite the recycling, the costs and the purchase of the know-how are appraised so far)

3 – No energy transition without strategic vision

Beforehand as I had on numerous occasion said, deposits security is required of all in the world; terrorism being a global threat, with coordination actions of the countries of the region a vital necessity.  For a coherent energy transition, it will be about having a consistent pricing policy which refers to the mode of governance not being in a market economy, or in the old administered economy, as if in transition still since 1986.  Determination of the fare policy is inseparable from the mechanisms of distribution of the national income and the model of consumption of the different social strata.  There is need to better target all subsidies.

These grants do not apply only to electricity, but to other segments like the price of fuels, according to the Ministry of Energy and Mines, the real price is expected to fluctuate between DZD60 and 80 a litre. The pricing of water arises in pretty much the same terms as fuels. For gas, and based on the price of $0.25 per million gas BTU, the cost of water would reach DZD69/m³ approximately.  The price charged to consumers varies according to the amount consumed between DZD16.20 and DZD24.70 per m³ for industrial use, and between DZD3.60 a m³ and DZD24.70 A m³ for domestic uses.  The differential paid by the State thus varies between DZD34 and 53 per meter. Regarding the price of the capped electricity supply, the national network SONELGAZ, suggested that the rate should be upgraded by 11% per year in order to finance its investments.

Moreover, the energy transition based on a mix of production that is less dependent on fossil fuels is conceivable if economically competitive solutions or close to become neutral in terms of climate, generating jobs and beneficial for international trade.  There is need to reinforce interconnections of networks and their management through smart grids to contribute to energy efficiency, industrial development and growth.  Covered by the energy transition to orientation towards a new model of growth, there is room to foster the emergence of a power industry, at the service of economic integration;  the benefits granted by the State to be based on this rate. In this context, there is also room to promote a national and international public-private – partnership in order to promote competition.

Decisions in the field of energy would commit the long-term and the political security of the country under the priorities defined on the political plan as national independence, costs and pollution reduction and job creation. Every major decision should be analysed by the National Energy Council, chaired by the head of state, but only after a wide debate involving politicians, workers representatives, professional circles and competent personalities took place.  For this to go as smoothly as possible, there must be mechanisms to protect all national interests.  This being inevitable for all non-strategic sectors, otherwise technological and financial positive balances could be used instead and yet still attract potential investors.

Finally the climate action that cannot be designed within a country, should involve a wide consultation with notably countries of the Maghreb and Africa.  In general, for the Maghreb including Algeria, water resources are vulnerable to climate variations.  Water and its management are problems affecting its future; the maximum volume of water would be in deficit by 2020 according to FEMISE (Euro-Mediterranean network on the region MENA.  In the Maghreb region, the negative effects will affect production of vegetables which yields would be reduced by 10 to 30% and a decline in wheat to nearly 40 percent.  Thus, climate change could lead to a real migration crisis.

4 – Energy transition in Algeria, the problem of deepening of a comprehensive world reform

Other perspectives must be reviewed by not relying on the ephemeral hydrocarbons revenues.  I warned against the appearance of a permanent fiscal imbalance related to the fall of the price of a barrel of oil from the fact that the “balanced budget has required levels of higher than $110 per barrel in 2013/2015 and $87/90 in 2016.  So the country’s budget revenues are likely to remain highly dependent on those, volatile hydrocarbons prices.

Algeria continuing down the same road would have mopped up by end of 2016 its Regulatory Fund and would have to dip into its foreign exchange reserves, in the event of a less than $70 a barrel, with as a consequence restrictions with a limit due to the decline of the productive fabric, the current industrial policy based on the mechanical era of the past (of cement / iron and small car assembly production) being inconsistent in the face of the new global economic revolution that promises (Ref. the World Economic Forum 2016 report).

Algeria has after all potentialities to overcome its currently difficult situation and realize its economic and energy transition.  For that it would need to adjust to new, sustainable and modern institutions and have a clear view on the future with strategic vision.  As I have shown two years ago when invited in Brussels by the European Parliament, and I would reiterate it at another scheduled conference on December 8, 2016, that co-development and the co-partnership with European partners can be the field of implementation of innovative ideas, the future being in Africa and Mediterranean areas.

Written by Dr. Abderrahmane Mebtoul, University Professor, International Expert,  ademmebtoul@gmail.com

Translation from French by Microsoft / FaroL  faro@farolco.onmicrosoft.com

(1) Synthesis of Professor Abderrahmane MEBTOUL, member of international energy institutions, Director of Studies at Ministry of Energy / SONATRACH circa 1974 – 1979 – 1990 – 1995 – 2000 – 2007.

• Conference at the European Parliament in October 2013 on “the Maghreb the geostrategic challenges”
• International Seminar organized by the Institution of the German Cooperation (GIZ) Development on 17 October 2012 and its conference in the French Senate on ‘Algeria in the face of the global energy transition’ (December 2013)
• Ref. two audits carried out by Professor A. Mebtoul in collaboration with national and international experts and Ernst & Young on “Price, the problem of subsidies for fuels in a competitive environment in 10 volumes at Ministry of Energy, Algiers – 2008
• Audit for the Government on “The Oil and Gas Strategy in Algeria, Oil and Shale Gas, Opportunities and Risks” in 7 volumes 2015.

-Gas Strategy in Algeria and the European Market, facing international competition”(International magazine  Gaz d’aujoud’hui,  Paris – January 2015)