Algerian authorities recently confirmed their intention to launch an international request for proposals to develop a photovoltaic energy project with a capacity of 4,000MW.
This project is part of the government’s strategy aiming at generating at least 25 per cent of Algeria’s energy from renewable sources by 2030.
Algerian authorities have been paving the way for renewable energy projects for some time by enacting specific regulations and in particular a feed in tariff for wind and solar PV projects to incentivize investors. They have also been amending little by little their somewhat restrictive laws on foreign investments, in order to attract international investors and facilitate access to international debt financing for major Algerian projects.
Whilst they have not yet confirmed whether power projects such as the 4,000MW plant will be entirely structured as IPPs funded by way of international limited recourse financing, Algeria’s current economic situation, owing in particular to deteriorating oil prices, would tend to support this approach.
Although in recent years the only major investments in the power sector have been made by State-owned utility Sonelgaz, Algerian authorities are familiar with IPPs/IWPPs as in the late 1990s and early 2000s they extensively negotiated with foreign sponsors and successfully closed a series of IPPs, IWPPs and IWPs, the last of which dating back to 2006.
These projects which involved Algerian state owned companies (Sonatrach, Sonelgaz or their joint venture company Algeria Energy Company) and foreign sponsors were initially structured and documented to be financed by international investors and lenders on a limited recourse basis. Generally the risk allocation under the Algerian PPA model reflected the one commonly achieved in regional projects (Middle East and North Africa region). Accordingly many of the aspects which international lenders and sponsors would expect to see covered were raised, addressed and negotiated with the Algerian parties at the time. In particular, political risk (which was the focal point of concern of the sponsors given prevailing circumstances at the time) was addressed both during construction phase and operation phase and the sponsors were entitled to fair and equitable compensation, including in case of termination of the PPA. Although not 100 per cent satisfactory, the termination matrix achieved in this context was, generally speaking, viewed by the parties as balanced, fair and preserving the interests of all parties.
However mainly it seems for political reasons, the authorities decided late in the day that debt financing for these projects would be entirely provided by Algerian State-owned banks. These banks appeared to be less concerned with certain key points as indicated below.
Nevertheless should Algerian authorities now decide to develop an IPP program, international sponsors and lenders should benefit from Algeria’s experience with complex IPP structures, familiarity with international sponsors’ and lenders’ demands, existing dual language documents comprising Framework Investment Agreements, SHAs, PPAs and Land Lease Agreements, an improved business climate and Algeria’s genuine efforts to improve its infrastructure and simplify its cumbersome administrative procedures.
Sponsors should however expect some tough negotiation to secure items which in 2000 were either rejected outright by Algerian parties or taken out of PPAs in view of the subsequent shift to local financing such as
- The absence of a sovereign guarantee to back the termination payment under the power purchase agreement.
- The absence of a clear and simple mechanism for converting revenue into foreign currency.
- The limitation of the relief mechanism in case of occurrence of a natural force majeure event affecting the offtaker during construction period.
- The absence of compensation in favour of the sponsors in case of termination of the PPA for project company’s event of default during construction phase, even if the plant is capable of being commissioned.
Sponsors should also expect to have to navigate a particularly complex and sometimes burdensome legal and regulatory environment. For instance should the current requirement for Algerian majority ownership of local companies be maintained, international sponsors will need to include empowering and protective mechanisms in their joint venture arrangements with their local Algerian partners. Nevertheless, as evidenced by past experience, there is no reason why, if the Government decides to actively open up this route, international investors and lenders could not play a major role in successfully developing IPPs in Algeria such as a 4,000MW photovoltaic energy project.
Our Algerian experience
Our team has considerable experience in advising sponsors, development and stateowned entities in relation to IPPs, IWPPs and IWPs Africa and this experience is possibly unmatched as regards Algeria. Christophe Asselineau drafted and negotiated on behalf of the sponsors the suite of documents that was used for the development and financing of the first Algerian IWPP. These documents were subsequently used by the Algerian authorities to develop all IPPs and IWPPs in Algeria as well as some other industrial projects. Christophe advised the international sponsors on four subsequent Algerian IWPs (as well as key Algerian players on other industrial and utilities projects). Our team also advised the sponsors on the development and financing of the last IPP project launched by Algerian authorities at Hadjret Ennous (1,200MW gas-fired power plant) and is currently involved in various industrial transactions and projects in Algeria.