TT power plant to follow global best practices

The planned thermal power plant based on Tavan Tolgoi coal is to be built with both Government and private investment. The Head of the Tavan Tolgoi Electrical Plant Proposal Department, Dr of Economics M. Enkhsaikhan, describes how things are progressing.


How is the progress?
The government announced its decision to build a power plant at Tavan Tolgoi in March of this year.  The project is important for the whole country, but is especially vital for the economic growth of the South Gobi region. An enormous amount of investment is needed, and our gest challenge has been to raise funds on the international market. 

International best practices will be followed in everything to do with the project and global standards will be scrupulously observed. These include principles of transparency, profitability, competitiveness, honesty, and avoidance of any conflict of interests.  We also set great storeon prioritizing our time. Our web site www.ttpp.mn gives all details about this mega project which has captured public attention, and will be of immense benefit to both national and regional development.

The tens of millions of dollars that Oyu Tolgoi pays to China for the energy it uses would stay here in Mongolia once we start generating. The coal is all our own and a new coking technology will be used.

We have accomplished a lot over the past seven months.  We are working together with the large international consultancies selected for the project. Japan’s Sumitomo Mitsui Banking Corporation (SMBC) advises us on finance, on technical matters it is Worley Parsons, and the American company Shearman and Sterling is our legal advisor.  A mega project will always have many independent spheres of management, but at some point they converge and work as a unit. Successful implementation is possible only whenthe government, the local people, the investors, the banking and financial institutions, the insurance companies, and even the public operate as one team.  Lack of unity of purpose and internal conflicts badly affect performance.  We never forget this cardinal principle as we formulate criteria for choosing the investors and prepare detailed preliminary building and construction plans.  

How successful have you been in seriously interesting investors,both foreign and domestic?
We need to raise almost one billion dollars, 30% of this in direct investment and the rest in loans from international financial institutions such as banks. This was never going to be easy. Globally, only one in three proposals is able to raise the funds required. We face fierce competition. Following the oil price rise in the 1970s, many countries decided to build coal-based power plants. All these are being phased out, and have to be extensively upgraded or totally replaced. That’s why we are in the middle of so much competition.

Concerns about global warming also play a role. Producing an environmentally acceptable plan for a thermal electricity plant makes it more difficult to raise funds. We approached 25 foreign investors, all of them with global presence and reputation, in July and ten of them responded over the next month. Thus there is investment interest.  
   
We chose four from among these ten -- the Korean-French consortium Posco Energy& GDF Suez Energy Asia, the Korean Daewoo Engineering & Construction, Japan’s Marubeni, and Kansai Electric Power.  They have been given technical assignments, and a final decision on both sides will depend on the result of these studies.   

So it will be several months before we select our strategic investor. Then a mutually acceptable shareholding contract has to be drawn up with appropriate legal provisions. All this means construction can start in April or May of next year.

People get impatient when construction does not begin.  They do not understand that so many details of so many kinds must be painstakingly resolved before we start digging. If this is not done, we may very well get stuck after a while. So many things have to be taken care of and so much paperwork is called for. Investors need to be satisfied with the technical reports, the feasibility studies, the environmental and social impact assessment, the trade contracts, coal and water supply contracts, the land use contract, the shareholding agreement, and the stability agreement, and so on.We are now at work on all this.

What risks and complications do you anticipate during implementation?
The risks are high when building a power plant.  There could be 30 risks of ten different types.  Any of these could seriously affect progress, and could even mean cancellation of the project.  Our job is to minimise the risk factor. 

At present, I am working on three risk scenarios to submit to the government.  One of these is identifying the buyer of the electricity generated. We plan to have Oyu Tolgoi as the major buyer, but this may not be acceptable to international banks at the moment.  They will allude to the unresolved issues between Oyu Tolgoi and the Mongolian government and say OT cannot be a reliable customer until the underground mine is developed. In that way, an amicable settlement of differences over the second stage of OT operations is vitally connected to the future of the power plant. 

Foreign investors have said guarantees from Oyu Tolgoi LLC are not enough at this stage, unless these are endorsed by Rio Tinto. But we cannot talk about this to Rio Tinto when negotiations are on. We are hoping that investors will change their mind as Oyu Tolgoi reaches a new level of profitability with its second phase of operations.  Until then, OT LLC cannot be counted as a reliable long-term buyer of the power produced. Investors will say there is no commercial future for the power plant if OT LLC goes bankrupt or stops buying power.

But we do have other buyers. There are mines like Tavan Tolgoi and Tsagaansuvarga and rural consumers...
Our plant has the capacity to generate 450 MW,of which 300 MW will be used by Oyu Tolgoi. Other mines such as Tavan Tolgoi and Tsagaansuvarga will be consuming between 60 MW and 80 MW, and this will not be seen as contributing to the power plant’s viability by international financiers, who might very well ask for further government guarantees, something that is not for us to provide. Domestic consumers in rural areas will take no more than 8 MW-10 MW.

Another major risk lay in building the transmission line from Tavan Tolgoi to Oyu Tolgoi, but I believe we have eliminated the risk. The line would stretch along 150 km.It is true that there is already a line between the two points but it cannot carry the load that will finally pass through it. The other problem is that as this line is government property, it will be responsible for its proper maintenance and repairs in the event of a breakdown. This is something our government cannot guarantee and so no prospective investor will consider it. 

We considered all this and then decided to build a line to Oyu Tolgoi exclusively for the transmission of the output from the plant, with adequate load-bearing capacity. 

The last of the three risks I talked about relates to a stability agreement.  The new investment law allows us to sign a stability agreement with large investors.It will take us some time to get a draft agreement ready but even then it’s possible that we would be the first to make a stability agreement under the new law.  

There is still no consensus in Mongolia on what the extent of the government’s shareholding in a project should be. What is being considered in this present case?
The government has decided that up to $50 million from Chinggis bonds sales can be used for this project.  However, the country has no experience of financing such a mega project so we have had to adopt a new financial mechanism, which is called mezzanine financing. This basically permits the government to finance a project all by itself to save time, and then, if it so wishes,claim shares in the company instead of taking the money back. So this mezzanine method is not quite a loan but it’s not quite shareholding either. 

My personal opinion is that, once the project gets started, we should pay back the investment from the Chinggis bond sales, thus treating it as a straightforward loan.The Government will also need cash to redeem the Chinggis bonds.

It is clear that the power plant project is not like others, for instance the Oyu Tolgoi project, and we should not be in a rush over this. The power plant will not earn money by digging underground resources. Our profit will come from producing energy from coal, a process that can always harm the environment.The chemical byproducts are easily combustible and dangerous for the environment.

Once this plant shows the way how to produce coal-based energy without environmental damage, other such plants will come up in Mongolia and eventually our country can become an exporter of energy.  

A large national company is to help implement the project.  Do we have one with the necessary experience, work force, and skills?
There is none that has ever worked on such a large scale project. The company with the most experience is MCS because they built an 18-MW power plant.  Its experience would be very useful, because they developed a system to provide water for the plant with water.  We are riding on the experience of MCS as we find our way on a new path.

How many new jobs will be created when the new power plant opens?
The plant, when operational, will provide around 200 jobs. But the construction period will offer opportunities to many more locals, and suppliers of goods and services will also be needed.  

What about the technology the plant will use?
During generation we shall be using circulating fluidised boiler technology to burn the coal in the furnace.This technology allows us to burn any kind of coal and, indeed, even plastic trash.  It is a step above the currently used powder coal or PC system, as far as environmental safety is concerned.
The main disadvantage of the PC technology is that you have to use coal of a certain quality and grind it for the furnace.  Complications can arise with a change in the quality of the coal, causing the furnace to malfunction or to become unstable. 

The CFB technology that we will use for the furnace pressure is of the mid-high pressure (subcritical) technology category. Most countries seek to use supercritical and even ultra-supercritical pressure technology in furnaces.  Around 70% of power plants in Japan and Korea have made the switch to supercritical technology.  Even in Kazakhstan, 60% or so of their plants are now using this technology. 

Major countries such as the United States, Russia, Australia, Canada and China have many power plants and therefore, the number of plants using supercritical technology may not be very high.  The main difference is in the use of higher temperature and pressure to get higher productivity. The global average is that only 39 percent of the fuel used turns into electricity and the remaining 61 per cent is wasted. The plant itself needs 3% of this 39%and network loss is about another 3%. So only 33 percent is saleable, and we hope to improve on this. 

Power plants using the regular PC technology have a productivity rate of 34.3 percent.  The CFB (circulating fluidized bed) technology we shall use yields 34.8 percent, while the productivity of the supercritical technology is 38.5 percent.

The higher the production, the greater is the possibility of selling at a lower cost.  That way supercritical or ultra-supercritical technology is more efficient.  For several reasons, it is not possible for us to use either here.