Delivery of a key new 450-MW combined heat and power plant known as CHP5 continues to face implementation uncertainties, with competing projects likely causing a delay in the final investment decision in the near term. Foreign participants who spoke to OBG remain interested in offering technology and expertise. However, progress appears to be stalling as a result of an internal debate over project viability.
All parties recognise that the energy infrastructure is inadequate and more power generation capacity needs to be installed to avoid a crunch in supply further down the road. In the Central Energy System (CES), which serves the capital and most of the population, the generation units are outdated and overly polluting: CHP2 was built in 1961, CHP3 in 1968, CHP4 in 1983, Darkhan in 1965 and Erdenet in 1987. CHP4 is estimated to be about 40% efficient and CHP3 38%.
A jump in demand is seen as mining projects come on-line and as general economic activity follows. According to a May 2013 report by Prophecy Coal, which also has a power plant in planning, Mongolia will be 100 MW short in 2013, 228 in 2014, 425 in 2015 and 525 in 2016. The CES and the Western Energy System are connected to the Russian grid via 220-kV and 110-kV lines, respectively, but that electricity is expensive and cannot make up for long-term shortfalls.
In February 2012 the State Property Committee (SPC) issued a request for proposals for CHP5 and received bids from two consortia: Samsung C&T and Korea Southern Power Co; and France’s GDF Suez, Korea’s POSCO Energy, Japan’s Sojitz Corp and Mongolia’s Newcom (with a planned 30:30:30:10 split). The Asian Development Bank came on board as an advisor to the government in June 2011, and in July that year the SPC informed the GDF group that it was the preferred bidder.
Meanwhile, in June 2012, elections were held, and a coalition government was formed in August. After that, tendering was moved from the SPC to the Ministry of Economic Development, a new ministry. A joint working group was also formed between the Ministry of Economic Development and the Ministry of Energy.
In October, the proposed location of CHP5 was moved from the CHP3 site to an area in the east part of Ulaanbaatar. It was changed again in December to another location. Strictly speaking, this could have put the deal in jeopardy, as coal-fired plants can usually get international and multilateral support only if they are used to replace an existing coal plant. However indications are, according to a source close to the deal, that the re-positioning of CHP5 would not scare away the committed participants.
In February 2013 the joint working group asked both bidders to submit their best and final offers. Press reports indicated that the GDF consortium was still favoured, and in March the working group issued a report saying much the same. However, Prime Minister Norovyn Altankhuyag made public comments that month that suggested the deal may not happen at all. He said that a new CHP was not the way to go; he preferred a mine-mouth solution.
Chandgana Power is a planned 4x150-MW project next to the 1bn-plus-tonne Chandgana mines. It is being developed by Prophecy Coal, the Canadian company that owns the mines. The group has already received permission to build the power plant and has submitted its power purchase agreement application to the government. Another project, a 4800-MW plant at the Shivee-Ovoo mine that will sell power to China and supply the domestic grid, has been in discussion since 2008.
In presentations to the government, the GDF consortium has argued that the CHP project makes the most sense for the country. It is not only more efficient (at 60%) and clean, with emissions at or under standards set by the World Bank, but it also offers a number of clear advantages over a mine-mouth project. A power plant at a mine site requires laying high-voltage, direct-current transmission lines, which are expensive and will result in the loss of energy over distance. It would also, the GDF consortium argues, lack the advantage of being able to produce both electricity and heat for Ulaanbaatar. If the government chooses a mine-mouth solution, a heat-only boiler will have to be constructed in the city to provide the heat that CHP5 would provide directly.
In early April, the joint working group suggested that the two consortia work together, but this is not possible due to the strict requirements of some of the lenders, including the Japan Bank for International Cooperation and the European Bank for Reconstruction and Development. They cannot be involved unless the project was won in a competitive and transparent bidding process. Foreign observers with a strategic interest in CHP5 project recognise that the new government faces a difficult balancing act of scrutinising the rationale and details of projects that were initiated under the old government. At the same time, it faces a credibility test abroad, with Mongolia struggling recently to attract FDI into key sectors such as energy and mining. Apart from weighing on investors’ confidence, further delays in delivery of key power projects will likely result in power shortages that the government is trying to avoid.