A virtuous cycle of green, affordable, and financially viable energy production.

I. The Tunisian Energy Landscape

Tunisia relies on imported natural gas to meet the majority of its growing electricity needs, even though the country has a vast potential to generate renewable energy. Despite limited economic growth over the last decade, peak demand for electricity has continued to grow at a high rate, around 5% per year between 2010 and 2022. Once a net exporter of oil and gas, Tunisia has become heavily dependent on oil and gas imports to meet its energy needs, with approximately 48% of its needs imported in 2022. Natural gas is the principal fuel employed to generate electricity. This dependence on imported oil and gas is a substantial macroeconomic risk for Tunisia as it leaves the country vulnerable to the price volatility of international commodity markets. Nonetheless, Tunisia has abundant solar and wind energy resources, with an estimated production potential of 320 gigawatts (GW) compared to the current peak national demand of approximately 5 GW. This vast potential would also allow to production and export of green hydrogen. Tunisia has the potential to become energy independent and to transform itself from an energy importer to an energy exporter.

Fossil fuel imports have significantly contributed to Tunisia’s macroeconomic situation. The high dependence on the import of oil and gas increases the trade deficit and raises the cost of energy subsidies, imposing a significant burden on the government fiscal deficit as well. Public debt stood at 79.8 percent of GDP in 2022, compared to 40.7 percent in 2010, and the debt servicing cost reached 3 percent of GDP in the first half of 2023. Public debt has increased partly because of the country’s growing energy trade balance deficits. In the first 8 months of 2023, the energy trade balance accounted for 53.4 percent of the merchandise trade deficit, which equaled 7.5 percent of GDP in the first eight months of 2023. That share has doubled since 2017. High energy costs have also contributed to the growing financial deficits of the state-owned enterprises (SOEs) working in the energy sector. Consequently, these effects make it more difficult to attract private investment to the energy sector, particularly for renewable energy.

The rapid and substantial scale-up of the production of renewable energy would bring significant benefits to Tunisia. Renewable energy is an important solution to the abovementioned macroeconomic and energy deficit challenges. A major increase in renewable energy would allow the shift from a vicious circle of expensive fossil fuel imports leading to large annual trade and fiscal deficits to a virtuous cycle of lower electricity costs, improved affordability for households, higher competitiveness for businesses, increased private investment in the energy sector, reduced fossil fuel imports, exports of electricity and green hydrogen, lower energy subsidies, and improved fiscal and trade deficits. Renewable energy can also help to green the electricity sector, reducing emissions and allowing the sector to contribute to Tunisia’s nationally determined contributions (NDCs) of the Paris Climate Agreement. The planned transition of the energy sector would also lead to more economic opportunities and private sector-led job creation.

The Government of Tunisia (GoT) has embarked on an ambitious path to increase its renewable energy production. The GoT plans to reach 35% of renewable energy in the electricity system capacity by 2030, against 3% currently. Renewable energy is then expected to cover 50% of the electricity needs by 2035, and 100% of all electricity needs by 2050. This represents 75% of Tunisia’s commitments in terms of reducing greenhouse gas (GHG) emissions, which will allow the country to improve its environmental sustainability. Exploiting its renewable energy potential will also allow Tunisia to export green electricity, including green hydrogen, contributing to the GHG emission targets of the Maghreb and Europe. These ambitions can only be accomplished through public-private partnerships and a conducive investment environment as two-thirds of the renewable energy program are expected to be carried out by the private sector.

II. World Bank’s Support To The Energy Transition

The World Bank has supported Tunisia in its energy sector transition since 2018. The government’s long-term vision is the transition to a secure, viable, and sustainable energy future with an ambitious renewable energy plan. Achieving this transition relies upon holistically addressing key energy issues, including the recovery of the sector’s financial viability to attract private investments, improvements to the performance of the energy sector, particularly the scale-up of the production of renewable energy, and enhanced accountability and transparency through the establishment of a regulatory agency for the sector. The World Bank has provided technical assistance in all these areas, accompanied by lending projects such as a series of Development Policy Financing (DPFs) projects supporting policy reforms and an Investment Policy Financing (IPF) project supporting the strengthening of the transmission grid to integrate renewables and the performance of the electricity utility STEG.

Holistic support is being provided to the GoT’s initiatives to transition towards renewable energy. The GoT plans to attract private investment in renewable energy through three regimes: i) concessions for large projects, ii) authorization for small and medium projects (up to 10 MW for solar photovoltaic and 30 MW for wind), and iii) self-generation for industrial customers. Technical assistance has been provided to advance all three regimes. Under the concession regime, the World Bank is helping to enhance the bidding documents for the call for proposals for 1,700 MW of solar and wind energy in 2022. Under the authorization regime, the World Bank helped the GoT to improve the manual of procedures for the bidding process and establish an online platform to allow investors to evaluate the project risk and improve their applications. Under the self-generation regime, the World Bank completed two analyses to provide inputs to the GoT in preparing two remaining decrees on (a) the wheeling charge for the medium voltage network and (b) the contractual framework for the sale of excess power to STEG. It also facilitated a variable renewable integration (VRE) study to identify the investments needed to allow for large-scale renewable energy deployment to the national electricity grid. Additional technical assistance was provided to build capacity to launch the production of green hydrogen.

Further support is being provided to ensure a conducive environment for private investment in the renewable energy sector, particularly in terms of available financing and potential profitability. The World Bank is supporting the GoT to ensure that the necessary financing is available for the ambitious scale-up of the production of renewable energy. To ensure that financial institutions can facilitate this scale-up, capacity building has been provided to local banks through workshops, training sessions, and field visits to ensure that they can properly evaluate and finance renewable energy projects. To establish an additional financing mechanism for the renewable energy sector, technical assistance has also been provided to the GoT to launch green bonds for the first time. The scale-up of renewable energy in Tunisia will depend on the availability of financing and the existence of profitable opportunities to attract the necessary private investments.

The collaboration between the World Bank and the GoT has already led to tangible achievements in Tunisia’s energy sector. The revision of the transversal law enabled a legal framework for private energy producers to sell energy to each other and back to the STEG. The capacity of the local banking sector has been strengthened, preparing the sector to finance more renewable energy projects. The first major photovoltaic concession was granted in 2021, while the technical support in the form of an online bidding tool, review of bidding documents, and improved tendering manuals have helped to improve private sector confidence and responded to their concerns. In June 2023, the World Bank approved US$268.4 million in financing for the Tunisia-Italy interconnector (ELMED) project that will link energy grids between Tunisia and European markets, with the eventual aim for Tunisia to export excess renewable energy. ELMED is expected to become operational by 2028 and will strengthen Tunisia's energy network, facilitating both renewable energy trade and grid stabilization to integrate more renewable energy.

III. TERI Umbrella Program Support

The Tunisia Economic Resilience and Inclusion (TERI) Umbrella Trust Fund financed multiple technical assistance activities to support and accelerate Tunisia’s energy transition. The multi-year support to Tunisia’s energy sector, particularly to increase renewable energy generation, has been financed by both the TERI Anchor Trust Fund and the Compact with Africa Trust Fund – an associated Trust Fund to the TERI Umbrella program. The TERI program has supported the review of the transversal law, establishing the framework for the launch of green bonds, capacity building of local banks, piloting the decarbonization of transportation, assisting the GoT in launching major renewable concessions, establishing the bidding platform for small and medium scale tenders, and preparing the national electricity grid for the large-scale deployment of renewable energy. TERI’s support has ensured technical assistance to the ongoing bidding for concessions to produce 1,700 MW of solar and wind energy, with additional plans to support the ambitious launch of 2GW of renewable independent power producer (IPP) projects, which will require private investment of approximately US$ 2 billion.

IV. Next Steps For The Tunisian Energy Transition

The World Bank and the TERI Umbrella Program will continue to support Tunisia to make its ambitious energy transition a reality. As previously mentioned, the World Bank will support the launch of 2GW of renewable independent power producer (IPP) projects as well as partly finance the construction of the transformational ELMED project. The World Bank will continue to provide technical support to the GoT to advance its main priorities on i) the financial viability of the sector, ii) reforms to the electricity sector through modernizing the STEG and establishing a regulatory authority, and (iii) sustainable and optimized deployment of renewable energy, including for trade and green hydrogen production.

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To learn more about the sector’s challenges and opportunities, please read our recent blog entry on how Tunisia's energy sector can become an engine of green growth.