G.Iderkhangai finds out from P.Tovuudorj, head of Strategic Policy and Planning Department at the Ministry of Energy, about major projects and reform in the legal environment of the sector.
Several major energy projects have been very successful in fulfilling consumer demands. Can you elaborate on the excitement?
In the past few years, the Government has been paying a lot of attention to improving performance in energy generation, supply and delivery. Only four of Mongolia’s 329 soums are yet to be connected to the central power network.
Currently we are working on connecting Khatanbulag and Mandakh soums of Dornogovi aimag and Altai and Bugat soums of Gobi-Altai aimag to the network and on providing power to 11 soums near the border.
Due to the population increase in Ulaanbaatar city, it is necessary to expand and renovate power lines and networks. The city’s infrastructure, power and heating pipelines in particular, were planned for a population of 500,000-600,000 people, but this has crossed 1 million and 200,000, with new houses and apartments coming up all the time.
Work on the 100,000 Homes project was guided mainly by Government Decree No.118, with funds coming from the Development Bank. The Ministry of Construction and City Development and the Ministry of Energy, together with the Ulaanbaatar City Authority, have so far implemented projects and programmes worth more than MNT400 billion.
Most of the 110-kWt sub-power plants of Ulaanbaatar were overloaded and overworked, so we upgraded their capacity and expanded the power supply networks. New 110-kWt-capacity sub-power plants were built in Bayangol Am, Yarmag Bridge and 14th District.
We also added 5 km to the F1,200-mm heating pipeline.
There is much more to be done in expansion and renovation of the power system. And we still haven’t got a new power plant. Major projects such as Thermal Power Plant #5 and the Tavan Tolgoi Power Plant require investment of more than $1 billion.
Since the State could not spare such a amount, and since loans and aid proposals did not materialise, the Ministry of Energy decided to keep building large-capacity power plants in abeyance, preferring to expand and upgrade the existing power plants. This will allow us to work on new, projects in phases. That is the policy we are following right now. A 50-MWt facility was added to Thermal Power Plant #3 last June.
The very end of the year saw Power Plant #4 upgraded to produce an additional 123MWt.
If the Amgalan Thermal Power Plant is built and commissioned this year, with Chinggis Bond financing, 50,000 homes in Ulaanbaatar will be connected to a reliable source of heating.
Mongolia imports energy from Russia during the peak season of winter. Oyu Tolgoi, too, is getting power from China. Thus the need for a large power plant remains very much there. We plan to first take up Power Plant #5 and then begin work on the Tavan Tolgoi, Egiin Gol and Baganuur power plants. But first we must have the money.
But a consortium was selected to work on the PP#5 as a Public Private Partnership project...
PP#5 has a complex and long history. I’m saying complex because it will have two innovative features. It will be the first power plant in Mongolia built by an independet power producer (IPP) and also the first one as a PPP.
The plan is for the IPP to borrow 70 per cent of the $1-billion investment from banks and other financial organizations, on presentation of the agreement with the Government. The prospective lenders will assess if the project is viable and if that agreement can be used as a guarantee of repayment. All this requires a lot of time.
Power plants built by an IPP became popular in 1990 throughout the developed world. There the investment can be quickly and comfortably recouped as electricity rates are high.
But the situation is different in our country where electricity rates are set lower than the actual cost of production. Besides, our political and economic instability will not encourage a foreign investor to risk $1 billion. The Government has to ensure an attractive investment environment first. Many things would also have to be considered, including the country’s interest, the energy sector’s interest, reliability of supply etc. A right balance has to be struck.
As for PP#5, the Concession Agreement is already signed but several subsidiary agreements are not yet ready.
GDF Suez of France holds the concession. With such a reputable IPP, raising funds may be easier. Those in our energy sector will also get a chance to learn much from such an internationally famous company.
What are these follow-up agreements?
The most important one is the Power Purchase Agreement (PPA). A Heat Purchase Agreement, Coal Supply Agreement, Water Supply Agreement and Land Usage Agreement are to follow.
The problem is that our present laws do not fit into present conditions and cannot offer any help in preparing guidelines and safety catches etc. for building a large power plant by a non-state entity. According to our laws PPAs are made with the National Power Transmission Grid (NPTG) alone, which is State-owned. The consortium takes this to mean that the NPTG represents the Government in the PPA.
That would mean that whenever a problem arises in PP#5, we have to call in NPTG. The Energy Regulation Committee reviews electricity tariffs once a year, which can be made twice in any special situation.
With an IPP, a base tariff will have a term of 25 years but it will be changed according to currency rate fluctuations and consumer price index movements. First we have to fix and agree on the base tariff.
There is no scope to refer to the Law on Energy, so we are taking the help of provisions in other laws.
Are you planning to submit them to the State Great Khural during the Spring Session?
Yes, we are.
Things got delayed when the site for PP#5 was changed. Since the new location is in a river valley, we have to build water removal pipes. So we are conducting soil, geophysical and other related studies. We shall be including the expenses of these additional activities in the base bid price at the tender to select the consortium. This is planned for January.
After this, we have to find a funding source and then prepare the Financial Closure. This will require time. Setting up IPP plants do take a long time to arrange. It took more than 10 years to finalise the details of the 1800-MWt power plant Thailand’s Wanpu Corporation is building in Laos. Negotiation on every item takes long hours. There are many factors that influence a decision on such mega projects and not the least detail can be left to chance. Investors will agree only when everything is in their favour.
PP#5 is the first mega project for us and our present experience will help us a lot when working on the next ones. That is why we are taking it very seriously and making sure there is no mistake. Some mistakes were unfortunately made when announcing the tender selection and we are rectifying them. This is another reason for the delay.
What are the problems facing the Tavan Tolgoi Power Plant Project?
As I see it, those working on that project want to make sure they do not repeat the mistakes we made because of inexperience. We are now getting technical and legal advice from a few different international companies for the TT unit.
The TT unit sent invitations to 20 companies and 10 of them submitted their offers. The four companies shortlisted were Japan’s Marubeni, Kansai Electric, Daewoo, and a French-Korean consortium of GDF Suez & Posco Energy. The final selection from among the four should be made in February, 2015 and then the project will move forward.
The main buyer of TTPP output will be Oyu Tolgoi LLC and it will issue the guarantee for TTPP. The company currently pays over $100 million a year to China for imported energy.
Having a ready buyer for TTPP energy helps investors and banks alike to have faith in the project. This is an advantage.
Oyu Tolgoi LLC will establish PPA on TTPP. But for PP#5, an organization representing the Government of Mongolia will make the PPA. Legally, the NPTG is supposed to make the PPA by itself. PPA will determine the involvement of Energy Regulation Committee and responsibilities of the Ministry of Energy.
So the major power plants will all be entirely foreign invested projects, without any investment from the Government of Mongolia. What will be the role of the Government in these then?
The Government released the necessary funds from Chinggis Bond and set the Tavan Tolgoi PP project rolling. I think the Government will issue a guarantee for the necessary negotiations in due time.
We should not forget the other important projects. Preparations for the Egiin Gol Hydroelectric Power Plant are going well but the day load and the night load are very different and the fluctuation is too high for a coal-based power plant to adjust.
We badly need a large hydroelectric station. But this cannot be an IPP. The IPP builder’s primary concern is profit but we see electricity for the people differently.
A hydroelectric power project in Mongolia will not interest the private sector. They will be difficult to work in times of drought and will be inefficient during the winter months, when demand actually will be at the peak.
So this Egiin Gol station should be State-owned. All studies have been made and the Feasibility Report is approved. Now the main work is to find the money. Building this power plant will solve many issues in Mongolia.
We are also working on preparing the Feasibility Report for Shuren Hydroelectric Station as part of the Infrastructure Support Project of the World Bank. Its possible impact on the Baikal Lake eco system was a worry but I believe the World Bank has given the green light. So the project is moving forward.
Experts say that if we build large power plants in the East and in the West regions, that will end all power problems for the country. Is this true?
It is. Power consumption is more in the East where the major mining companies are. Household consumption is more in the West where the paying capacity is low and generation and transmission costs are high.
The Government issued a decree in 2013 to build 100-MWt power plant in the eastern region. However, there has been little progress so far.
In the western part, 80 percent of the power comes from Russia and the rest is supplied by the Durgun Hydroelectric Station. We could set up 60-MWt power stations in this area.
I would like to mention here that safety is a major concern in any power plant. At least 20 per cent of the energy needs to be in reserve. If we build a 600MWt-700 MWt power station in Nyalga-Choir area that is included in the Government’s programme, then energy supply at PP#5, Tavan Tolgoi Power plant and Egiin Gol Hydroelectric station will improve a lot.
Tender selection has been announced for the power plant at Nyalga-Choir area. What company has been selected?
The Ministry of Economic Development announced the tender and China’s 22nd Nuclear Energy Plant’s offer has been accepted. The work is going on for this project.
What are you doing to make the transmission system more efficient?
All power plants should be linked to a central system, so that in an emergency, they can help one another. The transmission lines need to be reworked for this but it will cost money. Even if the work is given as a concession, ownership has to be with the State because of national security reasons.
It will not be correct to build transmission lines with BOT type concession. We may offer the BT type but as of today, it is difficult to find a taker on BT terms.
The Energy Sector is going to have a State Policy for the first time. When will the draft policy be ready?
After Parliament had passed Laws on Energy and Renewable Energy and Related Programmes, the Ministry of Energy combined these two and formulated a draft “State Policy in Energy Sector” and held several discussions within the sector.
A package of laws on energy was submitted to the Government, but we are preparing to re-submit the draft to the new Government with some fresh suggestions. Maybe the package will be discussed during the Spring Session.
The State Policy is connected to the Law of Mongolia on Development Policy and Planning, which is set for 20 years and there are mid-term national programmes of 4-8 years as well.
Right now, we are still working on formulating the State policy documents and receiving suggestions from those in the sector.
The only company that is getting power from abroad is Oyu Tolgoi. The company has an agreement to import power until the TTPP is commissioned in 2017. Can the Ministry review the price paid for the electricity?
Oyu Tolgoi LLC is importing energy from China for about $100 million a year. According to the Investment Agreement made with the Government, Oyu Tolgoi is supposed to be provided energy from its own plant or from a third source in the country within four years of the processing plant starting to operate.
For now, the power tariff is regulated by an agreement made between Oyu Tolgoi LLC, Energy Company of Inner Mongolia and National Power Transmission Grid, a State-owned company of Mongolia. This agreement will end in April, 2017.
Only the National Power Transmission Grid can act as a legal exporter or importer of energy. Unfortunately, China and Oyu Tolgoi made the agreements even before the Mongolian Government could step in. Since Oyu Tolgoi and the Inner Mongolian Energy Company are dealing with each other directly, the Ministry of Energy does not intend to interfere, but in April, 2017, when the three-sided agreement becomes two-sided, then we can control the tariff.
Increasing the price of power causes hardship to domestic and business consumers alike. The present troubles of the mining companies are creating more problems for them. What do you think of this?
As I said before, legally, the Ministry of Energy is not supposed to get involved in regulating the power and electricity tariff. And with the amendment to the law, the Energy Regulation Committee will be an independent organization. And of course, an independent organization should try to find the right balance among the needs and demands of the producer, consumers, transmitters and distributors. The Ministry just wants the rates to be realistic and to not put too much pressure on anybody.