19January2018



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Investors Keen to Support Mongolia’s Renewable Energy Goals

The pace of Mongolian wind investment announcements is quickening. The country’s leaders are working to meet increasing demand for electricity, reduce heavy reliance on coal and improve energy security. It’s no surprise, therefore, that renewable energy solutions have become the focus of such new investments.

The Sainshand wind farm in Mongolia, the third privately financed wind farm in the country, is receiving a US$120 million project financing package from a group of international investors and financiers.

Located 460km south-east of Ulaanbaatar, in the desert, the project is sponsored by ENGIE, a French private energy company; Ferrostaal, a German project developer; the Danish Climate Investment Fund (DCIF); and Mongolian entrepreneur Radnaabazar Davaanyam. Long-term financing comes from two international organizations: the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD).

These lenders have agreed to provide a total project financing of US$78.5 million, which comprises EIB funding of US$47 million, of which the first tranche will be guaranteed by Denmark’s Export Credit Agency (EKF), with NORD/LB acting as agent. EBRD is funding US$31.5 million.

Sainshand will make a significant contribution to reducing Mongolia’s carbon emissions and meeting the country’s increased power demands. Once the new investment funds are put to use, this project will significantly enlarge Mongolia’s renewable energy capacity while also help the government achieve its goal of renewable energy for 20 percent of all power by 2020, and 30 percent by 2030.

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Mongolia has abundant solar and wind power resources along with some hydropower opportunities, and the government set targets to increase the share of generation capacity of renewable energy sources to 20 percent by 2020 and to 30 percent by 2030, up from the current 3 percent, and has established feed-in tariffs (FiT) for wind, solar and hydropower. As a result of the generous FiTs, a substantial number of licenses with power purchase agreements (PPAs) have been granted to developers of solar power (with a total capacity of 200 MW) and wind power (with a total capacity of 450 MW).

There is a possibility that the government will be changing the FiT — but they have not yet done so. The Renewable Energy Law of Mongolia was adopted in January 2007 and Article 11 on Renewable Energy Tariffs and Prices sets guidelines for FITs applied to renewable energy generators. Tariffs for renewable energy generated by wind can be set within the range of US$0.10-0.15 per kWh of electricity. The price of electricity generated by wind was set at US$0.08-0.095 per kWh.

According to the law, the national government’s Energy Regulatory Authority sets the tariffs and the prices for the energy generated and supplied by renewable energy sources, which are connected to the transmission network. FITs were guaranteed to investors for a limited period of 10 years from the date of the law. (According to the law, any price difference of electricity generated by renewable energy sources, connected to a transmission network, will be absorbed into the selling prices of other generators connected to the transmission network.)

Unfortunately, those arrangements were made without proper consideration of the ability of the power grid to absorb that much variable power and without regard to the ability and willingness of electricity consumers to accept the necessary tariff increases. For this reason, the licensed developers have run into difficulties in establishing their operations, leaving most licenses in limbo. This is partly due to government bureaucracy, and partly due to government agency reluctance to push as hard as the elected politicians have verbalized their enthusiasm.

Mongolia’s government is now considering how to more effectively and efficiently incentivize renewable energy investment. Recent reports of auctioned solar PV plants that produce power at prices as low as 5 to 6 US cents/kWh in countries with solar potential similar to Mongolia’s have given rise to doubts about the existing FiT model.

Mongolia’s government has thus decided to explore alternative models, and in particular, to understand the cost implications of solar PV plants that are competitively procured. The country’s Western Energy System has been chosen as the testbed for the first public solar investment — due to its unsustainable dependency on power imports (70 percent of supply), its urgent need for generation expansion and low likelihood to attract private investment due to its remoteness and low overall load. The Scaling-up Renewable Energy Program (SREP) Investment Plan for Mongolia, which was recently approved, includes US$12.4 million for a 10-MW solar PV power plant in the Western Region.

The renewable energy-focused deals are piling up: The World Bank’s newest renewable energy project in Mongolia, approved in June, totals US$55.4 million, of which US$42 million is from World Bank, a Strategic Climate Fund grant totaling US$12.4 million, and US$1 million from Mongolia’s budget.

Asian Development Bank is working with the government to prepare for the other renewable energy plants as identified in SREP (a 10-MW solar PV plant, a 5-MW wind farm and a 1-MW hydroelectric plant). EBRD is financing a second 50-MW wind farm in Tsetsii. Germany’s Kreditanstalt fur Wiederaufbau is considering a loan to upgrade Mongolia’s transmission network. Deutsche Gesellschaft fur Internationale Zusammenarbeit is providing technical assistance to two key state-owned distribution companies.

What about the quality of deals announced over the next years? One good sign of things to come is the statement made about Sainshand by EIB’s Jonathan Taylor: “EIB is committed to supporting climate-related investment across Asia and is pleased to support development of wind power in Mongolia... Sainshand will use world-class technology and demonstrate that wind power can be successfully harnessed in remote regions facing a harsh climate.”

Lead image credit: CC0 Creative Commons[1] | Pixabay

References

  1. ^CC0 Creative Commons (pixabay.com)

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