North Africa represents one of the most important oil and gas producing regions in the world, and has the potential to be a renewable energy powerhouse as well. Its geographic situation makes it a crossroads between Europe, Africa and the Middle East, and an important transit corridor for global energy markets. Today, North African countries face a range of pressing socio-economic challenges, including solving the problems of poverty and high levels of structural unemployment, in the context of fast demographic growth. Energy is an essential commodity enabling socio-economic development. The current energy situation in the countries is characterized by a rapid increase of energy demand, low energy efficiency and low domestic energy prices due to extensive and universal consumption subsidies.
Non-renewable resources in North Africa
North Africa’s oil and gas landscape is centered on three producing countries: Algeria, Libya and Egypt. In these major hydrocarbon-exporting countries, hydrocarbon exports account for a dominant share of their markets and state budget revenues. Domestically, this systematically generates structural socio-economic and financial imbalances. Their rent-seeking strategies are detrimental to economic growth, and lock economies and public budgets in dependence on a single sector and one commodity market, which is furthermore volatile.
Algeria is the leading natural gas producer in Africa and is one of the top three oil producers in Africa. Algeria’s economy is heavily reliant on revenues generated from its hydrocarbon sector, which account for about 25% of the country’s GDP, more than 95% of export earnings, and 60% of budget revenues. Crude oil and gross natural gas production have gradually declined in recent years, mainly because of repeated project delays resulting from slow government approval, difficulties attracting investment partners, infrastructure gaps, and technical problems. In the past four licensing rounds, there was limited interest from investors to undertake new oil and natural gas projects under the government’s terms. Algeria is estimated to hold the third-largest amount of shale gas resources in the world. To develop these resources, Algeria will face many obstacles including the remote location of the shale acreage, the lack of infrastructure and accessibility to sites, water availability, the lack of roads and pipelines to move materials, and the need for more rigs because shale wells deplete quicker.
The 2013 militant attack on the In Amenas gas facility prompted security concerns about operating in Algeria’s remote areas, particularly in the south. Any major disruption to Algeria’s hydrocarbon production would not only be detrimental to the local economy but, depending on the scale of lost production, could affect world oil prices. Because Algeria is the second-largest natural gas supplier to Europe outside of the region, unplanned cuts to natural gas output could affect some European countries. Algeria relies on its own oil and natural gas production for domestic consumption, which is heavily subsidized. Natural gas and oil account for almost all of Algeria’s total primary energy consumption. Prices for oil products (diesel, gasoline, liquefied petroleum gas) and natural gas in Algeria are among some of the cheapest prices in the world.
Libya holds the largest amount of proved crude oil reserves in Africa, the fifth-largest amount of proved natural gas reserves on the continent, and has traditionally been an important contributor to the global supply of crude oil, which Libya mostly exports to European markets. Libya’s hydrocarbon production and exports have been substantially affected by civil unrest over the past few years. In 2011, Libya’s hydrocarbon exports suffered a near-total disruption during the civil war, and the minimal and sporadic production that occurred was mostly consumed domestically. In response to the loss of Libya’s oil supplies in the summer of 2011, the International Energy Agency (IEA) coordinated a release of 60 million barrels of oil from the emergency stocks of its member countries through the Libya Collective Action. Libya’s oil production has recovered since, but it still remains lower than levels before the civil war. Libya’s economy is heavily dependent on hydrocarbon production. Oil and natural gas traditionally covered almost entirely the country’s total government revenue and export revenue. During the 2011 civil war, the drop in oil and natural gas production led to an economic collapse, and real GDP declined by 60% for the year. Libya’s GDP growth rebounded afterwards, reflecting the increased oil production.
Egypt is the third-largest natural gas producer on the continent following Algeria and Nigeria and plays a vital role in international energy markets through its operation of the Suez Canal and the Suez-Mediterranean (SUMED) Pipeline. The Suez Canal is an important transit route for oil and liquefied natural gas (LNG) shipments traveling northbound from the Persian Gulf to Europe and to North America and for shipments traveling southbound from North Africa and from countries along the Mediterranean Sea to Asia. Fees collected from these two transit points are significant sources of revenue for the Egyptian government. The 2011 revolution led to a sharp decline in natural gas production, which made the country turn from being a gas exporter to a gas importer. The situation radically changed in 2015, as the Italian energy company Eni discovered the Zohr gas field off the shore of the country – the largest gas discovery ever made in the Mediterranean. Due to an unprecedented fast-track development, gas production at Zohr started in December 2017, helping Egypt recover its self-sufficiency in gas. Zohr also marked a new phase of exploration activities in the country’s offshore waters, leading to the discovery of other important fields. The significance of Zohr goes well beyond Egypt’s boundaries, as geographical proximity with other fields off the shores of Israel and Cyprus could allow a coordinated development of the fields and, thus, the creation of the economies of scale required in order to put in place a competitive regional gas-export infrastructure
Renewables in North Africa
North African countries are richly endowed with solar and wind energy resources, which are estimated to be among the best in the world. Solar photovoltaic (PV) potential is widespread in the region and can be tapped at both household and utility levels. Concentrated solar power performs optimally in utility-scale projects situated in the region’s deserts, where the intensity of solar irradiation is among the highest in the world. Wind power also has great potential in North Africa, given the favorable wind conditions that characterize all these countries.
In recent years, North African countries have started to exploit this potential. Between 2010 and 2015, they expanded their installed wind capacity from 857 megawatt (MW) to 1,942 MW, and their installed solar capacity from 74 MW to 382 MW. The greatest share of this increase came from Morocco, which increased over the same period its installed wind capacity from 253 MW to 934 MW, and its installed solar capacity from 34 MW to 200 MW.
Notwithstanding this progress, wind and solar were still a minor contributor to North Africa’s primary energy mixes in 2015, with shares of 0.01 percent in Algeria, 0.17 percent in Egypt, 1.1 percent in Morocco and 0.8 percent in Tunisia (Figure 1).
Figure 1: Primary energy mix in North African countries, 2015
Source: author’s based on International Energy Agency.
In the context of the Paris Agreement, all North African countries have adopted post-2020 plans, known as Nationally Determined Contributions (NDCs), to reduce their greenhouse gas emissions. North African countries have also outlined clear 2030 emission reduction targets. Algeria, Morocco and Tunisia also included in their NDCs specific targets for the deployment of renewable energy, while Egypt adopted similar targets through national energy strategies (Table 1).
Table 1: North African countries Nationally Determined Contributions under the Paris Agreement
|Unconditional emissions reduction targets||Conditional emissions reduction targets||Renewable energy implementation measures|
|Algeria||7% by 2030 compared to BAU||22% by 2030 compared to BAU||27% of electricity production by 2030|
|Egypt||No specific target determined||No specific target determined||Not determined
(National strategy 20% of electricity production by 2022)
|Morocco||17% by 2030 compared to BAU||42% by 2030 compared to BAU||52% of installed electricity production capacity by 2030|
|Tunisia||13% by 2030 compared to 2010||41% by 2030 compared to 2010||30% of electricity production by 2030|
Source: author’s based on International Panel on Climate Change. Note: BAU = business as usual (pre-Paris Agreement policies).
These countries’ NDCs differ considerably in terms of their levels of ambition, but they do share a common feature: linking action to external support. North African countries have committed to only modest greenhouse gas reductions through their own efforts and have promised much more substantial action only if external financial support is made available. International climate finance thus has a crucial role to play in fostering the implementation of the Paris Agreement in North African countries and, consequently, in fostering the large-scale deployment of renewable energy.
The cost structure of electricity generation from renewable energy technologies differs from thermal power generation since renewables do not use any fuels. Most of the generation cost relates to the capital cost of technologies. Financing costs, therefore, are key to ensuring cost-competitiveness and an enabling investment environment boosted by low financing costs is fundamental to create markets for renewable energy technologies. This is where climate finance comes into play. Greater engagement of financial institutions, development banks and other climate finance vehicles could leverage additional financing, in particular from the private sector, as their risk-mitigation and credit-enhancement tools would reduce risks for private investors.
Scaling-up renewable energy in the region in line with the countries’ NDCs will be costly. For instance, the World Bank Group estimates that Egypt and Morocco alone would need slightly less than $100 billion in investment in renewable energy generation between 2016 and 2030 to meet their NDC targets.
This is the reason why North African countries can substantially scale-up renewable energy with the cooperation of international private investments. However, various barriers in the region continue to prevent international investors from becoming more engaged in renewable energy sectors. Two key barriers stand out: legal and regulatory barriers and financial barriers.
Regulation and investments
All North African countries have renewable energy targets, but achieving them ultimately relies on the presence of sound and stable renewable energy regulatory frameworks. On this front, much remains to be done in the region. For instance, frequent changes in feed-in-tariff schemes and fossil-fuel subsidies are a concern for investors in Egypt, while the lack of an independent regulatory authority is a key concern for investors in Morocco. The lack of a fully developed regulatory framework continues to hinder investments in Algeria and Tunisia.
Concrete solutions to improve the regulatory framework might include measures to increase clarity and transparency of rules; to provide legal and administrative support to international energy companies willing to invest in the country; to enhance transparency and clarity of rules in dispute procedures and to shorten dispute resolution timeframes; to phase-out fossil fuel subsidies; to establish one-stop-shops for renewable energy permits.
Financial barriers, such as currency convertibility, inflation and lack of foreign reserves are concerns for investors in almost all North African countries. The cost of financing and the limited availability of debt from commercial sources for renewable projects represent a general challenge in the region, though to different degrees. These barriers are felt either through non-availability of finance or inflexible grace periods that are not adapted to the characteristics of such investments.
In this area, concrete solutions to be promoted might include measures to enhance local banks’ capacities and ranges of instruments for supporting international investors; to establish a more stable central-bank monetary policy; to encourage transactions and power-purchase agreements with a more stable currency; to establish favorable tax regimes for renewables.
Challenges and opportunities ahead
In North African countries, energy prices are held artificially low for all customers for social (but mostly political) reasons. These universal energy consumption subsidies act as strong disincentives to more rational and efficient use of energy and investment in the energy sector, including renewable energy. Moreover, energy subsidies pose heavy burdens for the countries’ state budgets, especially since the oil price surge experienced over the last decade. Such universal subsidies, which mostly benefit wealthy customers, generate imbalances, especially huge state deficits and debt. The reform of energy subsidies is therefore of paramount importance to ensure a sustainable energy and economic development for the region.
The development of renewable energy projects in North Africa offers a wide variety of advantages, starting from contributing to satisfying the rapidly increasing domestic demand for energy. In natural gas exporting countries such as Algeria, Libya and Egypt, this would also free up natural gas alternatively used in the domestic power generation sector for additional exports. Considering that an important but partly underutilized gas infrastructure connecting North Africa with Europe is already in place, this choice would involve an immediate, significant economic return for North Africa just because of the growth in the export value of gas stocks.
After the recent natural gas discoveries in its offshore waters, Egypt could become a regional natural gas hub. Using its existing LNG infrastructure to export regional gas supplies (from Israel to Cyprus) would indeed present benefits for all regional players involved. This could also provide a first opportunity to test commercial gas cooperation between Egypt and neighboring countries that, if successful, could eventually scale up in the future, should new gas resources be found in the region.
Simone Tagliapietra is an Adjunct Professor at The Johns Hopkins University – SAIS Europe. He is also a Senior Researcher at the Fondazione Eni Enrico Mattei and a Research Fellow at Bruegel.
“Ain-Beni-Mathar-2010-10-27-019” by Sambaphi is licensed under CC by-sa 2.0