Mixing it up: Renewables look set to become increasingly important

Though largely part of the informal economy, Mongolia is nevertheless no stranger to renewable energy – solar panels are a common sight perched outside gers (herders’ felt tents) across the country, used to power televisions and lamps. These account for only an estimated 0.1% of the country’s electricity mix, however. Yet the renewables story in Mongolia is set for major development, with the opening of a large-scale wind farm expected in early 2013. It will be the first to tap into what is a significant resource, and is unlikely to be the last. The government has adopted a long-term vision to boost renewables, and private sector interest is growing. “I see the future of Mongolia as a clean energy exporter to Asia through more green and renewable energy projects, like wind and solar farms,” B. Byambasaikhan, the CEO of Newcom Group, one of Mongolia’s largest conglomerates, told OBG.

NEW OPPORTUNITIES: The renewables option in Mongolia presents a compelling argument for investment. The country’s geography makes imported energy exceptionally expensive, while domestic capacity to leverage local conventional resources is limited and the potential for renewables is very high. About 40% of territory, mainly in the south-east, is considered suitable for wind power, with speeds averaging 5.6 to 6.4 metres per second. The country is also among the world’s sunniest, with an average of 257 days a year with cloudless skies. Overall, the total potential is 2.6m MW of wind, solar, geothermal and hydropower, according to data collected and analysed by the US National Renewable Energy Laboratory and the Mongolian National Renewable Energy Centre. Renewables are also a good fit on a small scale for semi-nomadic herders. Their lifestyle requires portable solutions such as the single photovoltaic panels that have proved so popular. Small-scale, off-grid installations are also ideal for providing electricity in remote villages that are too costly to connect to the regional power grids.

The Mongolian government has boosted the prospects of the renewable energy sector through its long-term National Renewable Energy Programme, which envisions 20-25% of total installed electricity-generation capacity sourced from renewable options by 2020. A mid-term goal of 3-5% of capacity by 2010 has been achieved already, though almost entirely by hydropower. As of September 2012 dams accounted for 3% of the country’s total installed capacity of 897 MW. Wind and solar energy together comprised 0.1%.

The Energy Regulatory Commission, regulator over the electricity sector, reported that four wind-farm licences were issued in 2011, with a total planned capacity of 452.4 MW. A licence was also granted for a 443-KW solar plant, according to the agency’s annual report.

GOALS TO MEET: Another goal for renewables, to provide 100,000 gers with solar panels by 2010, has not yet been met. As of the end of 2011 98,322 ger-dwelling families had been given panels as part of a programme started in 1999 with the aid of development financing known as “100,000 Solar Gers’’.

In hopes of encouraging additional renewables development, the government’s 2007 Renewable Energy Law set a friendly tariff regime for wind, solar and hydropower projects. In Mongolia, each electricity provider typically negotiates its own power-purchase agreement with the state’s buyers – the four regional electricity systems. The current coal-fired power plants are getting between $0.05 and $0.06 per KWh, according to D. Gankhuyag, a business-development manager for Newcom. For wind power, the renewables law set a range of $0.08 to $0.95 for those that feed into the regional grids, and $0.10 to $0.15 for standalone projects. For solar projects, the rate is $0.15 to $0.18 for grid-connected facilities and $0.20 to $0.30 for those off the grids. Hydropower projects have a rate of between $0.04 and $0.10.

RELIANCE: Another incentive for private participation is a current overreliance on the public sector.

Energy production is one of the most government-intensive sectors of the economy, with over 90% of activity coming from the state, according to Gankhuyag. That makes it an attractive area for private companies, he said. “The government is willing to liberalise and get the private sector involved,’’ he told OBG. “We’re looking for opportunities in energy because it is the area with the most government involvement.’’ New projects in solar and hydro are ongoing as well, though not to the scale of the wind farm at Salkhit. Newcom’s venture will be Mongolia’s first scaled-up renewables installation, its first independent power project, and also the first major power plant built in 30 years. Newcom and its minority partner, the European Bank for Reconstruction and Development (EBRD), have formed a joint venture called Clean Energy to run the project, and expect to spend $122m building it. In the non-renewables sector, Newcom and several foreign partners are aiming to build a major power plant that would be Mongolia’s first public-private partnership (PPP). As of late 2012, negotiations for the project were under way.

PIONEER PROJECT: Salkhit, which means “windy’’ in the local language, is planned with 49.6 MW of capacity at a site 75 km south of Ulaanbaatar. It will fulfil 5% of electricity demand once it is complete. Clean Energy will be buying 31 turbines from General Electric, and Salkhit’s electricity will be purchased at a rate of $0.095 per KWh, said Newcom’s Gankhuyag.

According to Newcom, Salkhit will reduce carbon dioxide emissions in Mongolia by 180,000 tonnes a year. It will also save 1.6m tonnes of fresh water and reduce coal usage by 150,000 tonnes in comparison with conventional electricity generation using coal. By early October 2012, two of the 31 turbines had been completed. According to the environmental-impact assessment report, the project will last for 20 years, and could be expanded to a capacity of 100-150 MW.

While the potential of the Mongolian renewables sector is largely due to its ready supply of wind, analysis has noted that procuring the technology to harness it could also come easy. This is largely because China is currently the world’s largest maker of wind-energy equipment. However, Salkhit will not use Chinese-made products, but instead turbines from US-based GE. Newcom and GE have a relationship that dates back to a September 2010 memorandum of understanding to explore ways to work together on energy and in other fields, including mining, water, aviation, railroads, lighting and health care.

Newcom initially owned a 75% stake in Clean Energy, with the EBRD at 25%. Dutch bank FMO and GE are also participants. In March 2012 the EBRD announced that it would provide a $47m loan to the company, as well as increasing its equity stake by $4.4m. Additional loans from the Netherlands Development Finance Company bring the debt load to $85m. International law firm Norton Rose advised the lenders on the deal. “The project is likely to act as a template for further private sector interest in the country’s renewable sector,’’ Jeffrey Barratt, a partner at Norton Rose, said in a press release announcing the agreement.

BUILDING A REPUTATION: Indeed, although Mongolia is a country with huge economic potential, interest from foreign investors would increase further if the government had a track record as a reliable partner to private investment and as a regulator.

As of now there are no examples to point to in the sector. Success for Salkhit and Newcom’s conventional power plant, which is being built as a PPP, would help establish that track record, which is especially important as investors of all stripes have been watching the state’s negotiations with Rio Tinto, the mining multinational developing the Oyu Tolgoi copper-and-gold mine. The government has on several occasions attempted to renegotiate the investment agreement signed in 2009 with Rio Tinto, raising concerns for investors about contract sanctity and political risk.

A new foreign-investment law passed in May 2012 has also discouraged foreign investors by shrinking the opportunities available to them, or mandating the that local partners own majority stakes in ventures in the financial, mining and media sectors. As a domestic company, however, Newcom is expected to face fewer bureaucratic obstacles. Once Salkhit is running smoothly, Newcom aims to build 1 GW of new wind capacity spread across six separate facilities, which it hopes will be functioning by 2020.

EXPORT POTENTIAL: For the short and medium terms, Mongolia’s focus will continue to remain on meeting its own electricity needs. But, over a longer time horizon, the country’s renewables potential is great enough that, in combination with its conventional reserves of coal and perhaps petroleum, it could become an electricity exporter to energy-poor but heavily populated countries nearby, such as China, South Korea and Japan.

Newcom and Japan’s SoftBank in March 2012 created a Mongolian joint venture called Clean Energy Asia to further explore renewables opportunities, including wind farms. Softbank officials told media they believe that the cooperation could lead to an Asian international electricity grid. Potentially connecting Mongolia, Japan, South Korea, Taiwan, Hong Kong and China, it could establish a regional electricity market.