Unlocking Solar and Wind Potential: Streamlining Authorization for Foreign Investors in Tunisia’s Renewable Energy Sector
By: Alia JENAYAH
Tunisia has significant potential for renewable energy production, with a target of reaching 30% renewable energy capacity by 2030. In order to attract foreign investment and address the country’s energy deficit, Tunisia has implemented a specific legal framework to encourage foreign direct investment (FDI) in the renewable energy sector.
Due to challenges in obtaining financing for large-scale electricity projects connected to the European grid under the concession regime, the authorization regime is predominantly used for solar projects intended for local consumption. This article focuses on the obstacles faced by foreign investors in navigating administrative procedures for obtaining authorizations, and provides insights into securing preliminary agreements, obtaining operating permits, establishing project companies and managing risks in power purchase agreements. Resolving the critical issue of land acquisition is essential to ensure the project’s financing and safeguard investors rights’ regarding the designated project site.
Renewable energy, including solar, wind, geothermal, biomass, and organic gas, offers a major economic opportunity for Tunisia. The country acknowledges the significance of renewable energy for energy security and has prioritized its integration into the energy mix to drive development.
Despite the country’s abundant wind and solar energy potential, the renewable energy sector represented only 3% of the energy mix in 2017. The government aims to raise this to 30% by 2030, with an installed capacity of 4,700 MW[1].Bas du formulaire
To achieve this goal, Tunisia has established a legal framework to promote the sector. The key legislation includes Law No. 12/2015 of May 11, 2015, governing electricity production from renewable energies (“ENR Law“), amended by Decree-Law No. 68/2022 of October 19, 2022, which improves project efficiency (“Efficiency Decree-Law“), and Decree No. 1123/2016 of August 24, 2016, specifying implementation conditions for renewable energy projects, recently amended by Decree No.105/2020 of February 25, 2020 (“ENR Decree“).
In addition to a specific regime for self-consumption, these regulations establish two distinct frameworks for project implementation:
- Concessions Regime: applicable to large-scale production projects for export[2].
- Authorizations Regime: applicable to projects for local consumption with maximum installed capacities of 10 MW for solar energy, 30 MW for wind energy, and 15 MW for biomass[3].
The Tunisian government also offers various incentives and support mechanisms to attract foreign investors in the renewable energy sector. These include tax exemptions, customs duty waivers, accelerated depreciation, and the ability to repatriate profits. This strategy has captured the attention of foreign operators who are seeking investment opportunities, especially following the adoption of the Efficiency Decree-Law[4].
Although the concession-based system has been extensively studied, its implementation has been limited due to difficulties in mobilizing external resources for financing projects connected to the European continental grid[5]. Thus, this article specifically focuses on the authorization regime for the construction of photovoltaic power plants, which is currently the government’s primary approach to incentivize specialized companies in this field.
In comparison, Germany’s feed-in tariff (FiT) system, known as the “Erneuerbare-Energien-Gesetz” (Renewable Energy Sources Act) or EEG, has been instrumental in promoting photovoltaic development by providing fixed tariffs, long-term contracts, priority grid access, and payment guarantees. The EEG’s success has made Germany a global leader in solar energy and has attracted significant investment and technological advancements. erman Federal Ministry for Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie).
The Tunisian authorization regime involves complex administrative procedures. Navigating through the bureaucracy and ensuring compliance with regulations can be challenging, especially for foreign investors and new market participants. Despite the Tunisian Ministry of Energy offering a project development guide on its website, the guide is outdated, which further adds to the challenges.
In this context, the comprehensive understanding and effective implementation of the regulatory framework by the administration become vital considerations for foreign operators evaluating investment prospects in the promising Tunisian renewable energy sector.
- NAVIGATING PROJECT CALLS: ALIGNING WITH TUNISIA’S ENERGY ROADMAP
In any public procurement operation of significant scale, the Public Purchaser must assess their needs, considering economic, social, and environmental objectives. Similarly, foreign investors interested in bidding for an authorization must carefully consider the administration’s project calls. The number of authorizations issued annually by the Minister of Energy and the technical specifications provided in approved project specifications[6] play a critical role.
Previously, the national energy council provided an annual opinion outlining the country’s electricity needs and requirements for energy generated from renewable sources (ENR). However, this opinion has been replaced by a national plan covering 2022-2025, validated by a Ministerial Council meeting on April 12, 2022.
Between 2017 and 2021, the administration launched project calls for 340 MW of solar power and 270 MW of wind power. Following the adoption of the Efficiency Decree-Law, project launches have accelerated. For the 2022-2023 period, project calls with a total capacity of 344 MW in solar power and 120 MW in wind power have been published.
Upon publication of project calls, applications are reviewed by the Technical Commission for Private Power Generation (“CTER”), established within the Ministry of Energy.
- SECURING A PRELIMINARY AGREEMENT: A KEY MILESTONE IN THE AUTHORIZATION PROCESS
Prior to obtaining authorization, applicants must secure a preliminary agreement, commonly known as “Accord de Principe” from the Minister of Energy. This agreement is granted based on the recommendation of the CTER, which evaluates and selects applications. The CTER follows specific criteria to choose economically advantageous bids, considering factors such as the applicant’s technical and financial capacity, anticipated industrial integration, employment opportunities, compliance with environmental and safety standards, and proposed sales tariff.
Once the bids have been evaluated, the CTER presents its recommendation to the Minister, who then grants the Accord de Principe to the selected candidates.
The Ministry publishes the list of beneficiaries on its website, and successful applicants receive written notification within four months of submitting their request. It is important to include a preliminary study in the application, outlining the proposed connection of the production unit to the public electricity grid, including estimated connection costs and potential grid reinforcement expenses[7].
For photovoltaic solar energy, the Accord de Principe remains valid for a duration of two years[8]. In case of genuine implementation challenges during the initial validity period, the Minister of Energy has the authority to grant an extension[9]. Failure to commence construction of the production unit within the specified timeframe renders the agreement in principle null and void. If the administration fails to respond within two months, it is considered an implicit rejection, and the decision can be appealed to the administrative court for annulment. Notably, the President of the Republic addressed developer concerns by issuing Decree No. 299/2022 on March 28, 2022, extending the validity period of Accord de Principe for renewable energy projects authorized before December 31, 2020.
- GRANTING THE OPERATING PERMIT: TIMELINE AND EXTENSION CONSIDERATIONS
Once the agreement in principle has been obtained, the Project Sponsor must comply with certain obligations due to the energy distribution monopoly held by the Tunisian electricity and gas company “STEG“. Within a 15-day period of being notified of the agreement, the Project Sponsor must enter into an exclusive contract for the sale of all electricity produced with STEG, in accordance with a standard model drawn up by the administration, known as the Power Purchase Agreement (PPA). In addition, it must submit a request to STEG, accompanied by all the necessary documents specified in the technical specifications, in order to finalize and update the studies for connection to the national grid. STEG has a 3-month window to approve this study.
The operating permit is exclusively granted upon completion of the plant’s construction and STEG’s verification of compliance with the agreed-upon characteristics in the preliminary agreement and technical specifications. Furthermore, the Project Sponsor must conduct tests to ensure successful connection and transmission of energy to the national grid. A jointly signed report by the Project Sponsor and STEG is mandatory for this purpose[10].
If all conditions are met, an operating permit for the power plant is granted by order of the Minister of Energy, following the advice of the CTER, issues an operating license for the power plant for a duration of 20 years[11]. This authorization may be extended at the request of the interested party for a further 5 years[12].
- SETTING UP THE PROJECT COMPANY: FOREIGN CURRENCY CONTRIBUTIONS AND CORPORATE STRUCTURE CONSIDERATIONS
Due to the limited technical and financial capabilities of Tunisian investors, foreign investors who possess expertise in these types of projects often take the lead in their development. To proceed with the authorization process, these foreign investors are required to establish a project company in accordance with Tunisian law and within one year of signing the PPA contract.
If foreign investors choose to establish the company as a société anonyme (public limited company), it is crucial to carefully consider the articles of association. Specifically, attention should be given to clearly differentiate the roles and responsibilities of the Chairman of the Board of Directors, who may be of foreign nationality, and the Chief Executive Officer, who must be a Tunisian citizen[13].
Additionally, within 18 months of contract notification, the project company must undertake crucial tasks, including conducting an environmental impact study, finalizing the financing plan, obtaining necessary administrative authorizations, securing construction and equipment supply contracts, and commencing work[14].
Given the nature of the project’s production activities, the project company has the flexibility to accept foreign currency contributions from individuals or legal entities who are not residents of Tunisia. These contributions enable foreign investors to have complete ownership, with the ability to hold up to 100% of the company’s capital. As a result, they can benefit from assured distribution and transfer of profits, directors’ fees, or profit shares in foreign currency.
To ensure compliance with the applicable regulations, it is important that these arrangements align with the foreign exchange laws and guidelines established by the Governor of the Central Bank of Tunisia (BCT) in a circular issued on December 26, 2018. These regulations provide the necessary framework for the legal transfer and management of foreign currency within the project company, safeguarding the rights and interests of foreign investors while adhering to financial regulations.
- ENSURING SECURE PROJECT SITES: A VITAL CONSIDERATION FOR RENEWABLE ENERGY INVESTORS
In accordance with Article 5 of the ENR Law, as amended by the Efficiency Decree-Law, electricity generation projects requiring authorization can be established on either private or public land. Prior to submitting an authorization application, it is imperative for foreign investors and their advisors to conduct a comprehensive land audit.
- When dealing with privately owned land registered with the Conservation de la Propriété Foncière (CPF), the land audit aims to validate the information stated on the land title, ensuring its accuracy and legitimacy (including ownership consistency, allocation, origin of sellers’ ownership, and any easements related to public domains, etc.). In the case of unregistered private property, the audit comprises a documentary land survey based on the deeds provided by the sellers to establish their ownership rights and an on-site survey conducted with the assistance of surveyors to verify the land’s consistency, usage, and any easements pertaining to public domains (such as maritime, road, rail, aeronautical, military, etc.).
- Concerning public property, the objective of the audit is to verify the conformity of the land plot intended for occupancy permits in the case of public property or lease contracts for land within the private domain of the State or local authorities. It is also crucial to ensure that the deed for the state-owned land allocated for the project aligns with the project company’s operating authorization, particularly in terms of purpose and duration.
It is important to note that the ENR Law acknowledges the significance of promoting investor participation by allowing for the potential transfer of grid connection and reinforcement costs to STEG in cases where the state suggests the location for the power plant[15]. However, it is unfortunate that the legislator did not consider extending the same level of guarantees to licensees as it does to concessionaires. This would enable licensees to obtain a distinct real right over the constructed facilities, excluding mere ownership.
- MANAGING THE AGRICULTURAL ASPECTS OF THE PROJECT SITE: LAND PURPOSE AND OWNERSHIP CONSIDERATIONS
Once the land situation has been clarified, it is crucial to consider the potential agricultural aspect of the project site. Previously, if the land fell under the definition of agricultural land as per Law No. 87/83[16] on the protection of agricultural land, obtaining a decree to change the land’s purpose was mandatory before proceeding with the project. However, this requirement has been eliminated through an amendment to the ENR Law by the Efficiency Decree-Law. Article 5 bis (new) explicitly states that implementing electricity generation projects based on ENR no longer necessitates a change in the use of agricultural land, regardless of the provisions outlined in Article 6 and 8 of Law No. 87/83.
Additionally, foreign individuals or legal entities may face a significant challenge concerning ownership rights when attempting to acquire agricultural land. Indeed, “the ownership of agricultural lands can only belong to Tunisian nationals, cooperatives, public entities, civil and SARLs (limited liability companies) where all participants are Tunisian nationals, and limited companies established in accordance with the provisions of Law No 43/89 of March 8, 1989, governing the conditions for conducting agricultural activities by anonymous companies“[17].
Article 2 (new) further stipulates that “the exploitation of agricultural land involving foreign participation can only be accomplished through leasing without the land being contributed as capital to the company.” Consequently, if the project requires the use of agricultural land, the foreign investor must enter into a lease agreement with the landowners, even if there is no requirement to change the land’s purpose. To ensure the project’s security, the foreign investor may consider entering into a lease agreement with the landowners for a period of 20 years, renewable for an additional 5 years, aligning with the duration of the granted authorization.
- MITIGATING RISKS IN PPA: OVERVIEW OF INVESTOR CONCERNS, PERSISTENT CHALLENGES AND FUTURE CONSIDERATIONS
In Tunisia, PPAs with STEG are standardized and not subject to negotiation. The initial version of the standard PPA template[18] faced significant criticism due to vague provisions. These shortcomings raised concerns among investors regarding the feasibility of their projects.
Addressing some of these concerns, a revised version of the PPA template was approved by Ministerial Order on August 30, 2018. The updated version now includes a clarified process for handling changes in legislation, balanced contractual liabilities in case of non-compliance by either party and clearer clause for direct agreements between lenders, the project company, and STEG.
However, certain issues remain unresolved particularly upon termination of the PPA. For example, the PPA Template allows for termination upon request of both parties in the event of a prolonged occurrence of Force Majeure, lasting for a continuous period of twelve (12) months[19]. Even if this trigger event presents a certain gravity to entitle STEG to terminate, the 12-month period of prolonged force majeure event entitling the termination of the PPA appears to be a long period[20].
We also note that there is no obligation for STEG to purchase the plant and consequently, there is a risk that STEG elects not to purchase the plant and the developer would not be able to sell electricity to another customer. However, this risk can be mitigated through the terms of the finance documents and due diligence on the competence of the sponsors.
As in other PPAs in the renewable energy industry, STEG PPAs provide for take and pay mechanics pursuant to which STEG agrees to make payments regardless of whether it does not uptake the energy generated by the plant. However, the payment of the deemed energy is relatively limited and not in line with market practice. To protect project sponsors and lenders, deemed energy payments are typically due, inter alia, in the event of political force majeure, unavailability of the transmission facilities or deficiency or unavailability of the grid, default by STEG. Project sponsors and lenders should be entitled to declare deemed energy in these situations.
One of the other significant concerns revolves around STEG’s default on payments, considering its frequent financial difficulties. However, the PPA Template lacks provisions for a letter of credit or State support concerning STEG’s payment obligations[21].
Nevertheless, these challenges can be overcome. In the event of a dispute, especially if the project company is 50% foreign-owned, the affected party has the option to submit the matter for contract interpretation or performance to international arbitration before the ICC when the disputed amount exceeds $4 million[22]. Additionally, it’s worth mentioning that the Ministry of Energy has agreed to issue comfort letters as part of project funding, aiming to address some of these concerns.
Alia Jenayah is a lawyer qualified at the Paris bar. She has a Ph.D. in Public Law which was completed through a joint supervision program between the University of Paris I Panthéon-Sorbonne and the University of Tunis El Manar. Additionally, she holds an LL.M in International Business Law from the Sorbonne/Assas International School and INSEAD in Singapore. Alia spent three years working in the Infrastructure and Project Development team at Bird & Bird. She then moved to Norton Rose Fulbright, where she worked in the MENA Department. She also gained valuable in-house experience at Veolia Africa & Middle East Legal Department. Alia’s expertise lies in handling complex energy, infrastructure, and project matters, particularly in Africa and the Middle East. She possesses a deep understanding of the financial and corporate aspects involved in structuring international projects. She has extensive knowledge of Tunisian public policies and a thorough understanding of the Tunisian business culture. She is skilled in drafting and executing legal documents in French, English and Arabic.
