Renewed energies: How the EU can persuade Algeria to join in the green transition

The EU’s major European Green Deal and REPowerEU plans commit the bloc to ambitious renewable energy goals, including greening 45 per cent of its energy supply by 2030. Given the scale of this task, any successful European green transition will necessarily extend beyond EU borders to involve key energy supply partners.

Algeria stands as a decisive litmus test in this effort. It is a major oil and gas supplier to Europe, is the largest country in the EU’s southern neighbourhood, and has some of the greatest potential in the region for both renewable energy production and export.

Yet European leaders have struggled to convince Algeria to embrace renewable energy either for its own domestic usage or for export. This is no surprise: Algeria’s leaders are reluctant to pivot away from the conventional energy reserves that have been the country’s lifeblood for six decades and counting.

In an ECFR policy brief published in October, I outlined measures the EU could take to encourage Algerian leaders to join in a shared energy transition. That same month, European and Algerian officials met in their first high-level energy dialogue since the Ukraine war upended global energy markets and injected new urgency into European transition plans. The much-anticipated meeting, however, ended without any announcements of new renewables initiatives or deals.

The outcome reflects Algerian leaders’ hesitation to place their faith in unfamiliar technologies. But it is also emblematic of the EU’s failure to make participation in the green transition attractive to Algeria.

A mixed record

Algeria has far to go to achieve its Paris Accord goal of 15,000MW of renewable power by 2035, and its power grid remains one of the world’s dirtiest.

Recent events confirm that Europeans must do more if they are to secure Algeria’s collaboration. Since the October dialogue, Algeria has made only tentative progress on renewables. It failed to issue any contracts under its first international solar tender, Solar 1,000MW, and ended 2022 with the same renewables capacity it had at the start – less than 500MW, mostly in solar photovoltaic installations. It has far to go to achieve its Paris Accord goal of 15,000MW of renewable power by 2035, and with 97 per cent of its electricity still generated from oil and gas, Algeria’s power grid remains one of the world’s dirtiest.

After President Abdelmadjid Tebboune axed the short-lived energy transition ministry in September 2022, energy minister Mohamed Arkab took the reins, and in March issued a new 2,000MW solar tender via state power utility Sonelgaz. Arkab also presided over a German-Algerian energy day in December, unveiling a new green hydrogen and ammonia pilot project with German firm VNG. With Italian partners, he is also studying a proposed undersea pipeline to transport hydrogen to Europe. And in March this year, Arkab headed a splashy ceremony at the energy ministry to announce Algeria’s first hydrogen roadmap. The document, developed with significant input from German development agency GIZ, lays out a three-phase build-up from domestic hydrogen production pilots to eventual export to Europe. (Under REPowerEU, the EU aims to augment domestic production by importing 10 million tonnes of hydrogen annually by 2030.) Critically, however, the roadmap sets an unambitious three-decade timeline and fails to commit exclusively to producing green hydrogen (made from renewable power), leaving the door open to blue or grey hydrogen (made from natural gas). Furthermore, officials have not made the roadmap public, thereby giving themselves the leeway to change targets down the road as needed – or quietly drop them altogether.

The EU had been supporting the energy ministry’s renewables initiatives through Taka Nadifa, a four-year technical assistance programme that ended last month. At the project’s closing ceremony, officials had few tangible results to show. Among the key deliverables, the programme was to have aided Algeria in revising the legal and contracting frameworks for renewables tenders. That assistance was not enough to prevent months of wrangling with bidders over terms under the Solar 1,000MW tender, which authorities abandoned in favour of the new 2,000MW offer. In the new tender, Algeria has abandoned the ‘power purchase agreement’ structure typical of such tenders in favour of a simple ‘engineering, procurement, construction’ structure. This means that, rather than seasoned foreign power producers operating the plants they build, the turnkey format will leave Sonelgaz to operate 15 new solar installations despite its limited experience in this domain.

Help to finance the transition

The new tender is expected to cost Algeria up to $2bn, which is a considerable upfront investment. On the margins of the Taka Nadifa closing ceremony, journalists asked the EU’s ambassador to Algeria, Thomas Eckert, about potential European financing for the green transition in the country. But Eckert appeared to dodge the question. Western governments have long eschewed spending scarce development funds in Algeria, owing to its considerable oil and gas wealth. But financing is a critical – and ultimately economical – way to overcome Algerian officials’ reluctance around renewables. In its flagship infrastructure investment programme, Global Gateway, and in other mechanisms, the EU has ample funds to support new renewables projects in the southern neighbourhood, some of which it should steer toward Algeria. (Indeed, the bloc should consider expanding its funding across the entire Maghreb region.) To spur Algeria into action, EU officials should be prepared to propose co-financing of ambitious renewables projects.

Changing the incentives

Where the EU has done better of late is in introducing market mechanisms that can start to shift Algeria’s calculus about the relative returns of conventional and renewable energies. In December, the EU’s council of ministers unveiled a new “market correction mechanism” – a cap on natural gas prices, following their ten-fold rise in a matter of months. Algerian leaders immediately bristled – which only confirmed the policy’s impact. “Algeria does not support the idea,” Arkab declared. “Energy markets must remain free in order to continue upstream projects and investments.” This spring, the EU extended the price cap and began publishing a gas reference price index to promote market transparency and stability.

Most importantly, last month it opened AggregateEU, a platform for energy demand aggregation across the EU and affiliated Energy Community. The platform enables participating countries and firms to pool their demand for liquefied natural gas, piped gas, and hydrogen before negotiating together with energy suppliers. It should thus help buyers avoid costly bidding wars – in which, for example, Spain and Italy found themselves over scarce Algerian gas supplies last year. As a long-time OPEC member, Algeria is well versed in the advantages of collective bargaining in energy markets; it is not eager to see its buyers team up. As such, Algeria will avoid selling to platform participants for as long as possible. It will be able to do so for now because the current rules oblige AggregateEU participants to purchase just 15 per cent of their annual gas needs on the platform. But if initial aggregation rounds are successful, the EU should raise this requirement to make the platform the centrepiece of the European gas market – compelling suppliers such as Algeria to engage with it.

The EU also made its strongest move yet in this area when it reached a deal in December to advance the implementation of its carbon border adjustment mechanism (CBAM). When the CBAM goes into effect in 2026, lucrative Algerian exports of steel, cement, fertiliser, aluminium, and energy will all face penalties if they are produced with non-renewable sources. The importance of these commodities to the Tebboune administration’s efforts to boost Algerian exports makes the CBAM a critical lever in encouraging domestic renewables production. But on its own, the CBAM will more likely generate resentment rather than encourage renewables buildout in Algeria. If the EU can help finance the renewables projects Algeria will need in order to comply with the CBAM, both sides can avoid confrontation and Algeria can green its most critical export industries.

The ambitious scale of the EU’s energy transition plans means it cannot afford to leave behind a partner as critical as Algeria. Success will require that it remain attentive to Algeria’s concerns while shaping incentives that influence its choices in a greener direction.