Mongolia Energy Situation

Energy Situation

The power system of Mongolia accounts for 3% of GDP and supplies 80% of the population with electricity. The system is considered to be a major branch of the economy and infrastructure sector of Mongolia and it strongly influences the social and economical viability of the country. Approximately 80% of the consumed electricity is generated in coal-fired power plants, 4% is produced by diesel generators and 3% by renewable energy sources (mainly hydropower). The remaining 13% is imported, mainly from the Russian Federation.

In 1989 the total electricity consumption amounted to 2,900 million kWh. In the period between 1990 and 1998 electricity consumption dropped tremendously owing to the transition to a market based economy whereby a major portion of the industrial companies was closed. Due to the lack of financial resources, the energy sector faces huge problems to maintain and repair the existing equipment which is in obsolete condition. The Mongolian government has taken actions for the rehabilitation of equipment and auxiliaries by using foreign loan and assistance. From 1998 to 2007 the average annual consumption increased by 3.7% and reached a level of 3,000 million kWh in 2007. On average, the industrial and construction sector accounts for 62% of the energy consumption. The housing and communal service sector consumes 24% and the transportation and communication sector 4%. The rest, 10%, is consumed by the remaining sectors of the Mongolian economy. The totally required capacity in Mongolia is 740 MW at present and will increase to 780 MW in 2010.

Energy systems

The power system of Mongolia consists of the three unconnected energy systems (Central, Western and Eastern Energy System), diesel generators and heat-only boilers in off-grid areas.

The Western system provides three province (Aimag) centres and its 22 district (Soum) centres with electricity imported from Russia. The peak load of the imported electricity reaches 8.0 MW. Currently, there is no own generation capacity. It is planned to build two smaller coal plants with a capacity of 24 and 40 MW respectively to reduce dependency on Russia

The Eastern Energy System is based on the 36 MW Choibalsan Power Plant. The plant supplies the Aimag and Soum centres of the Dornod and Sukhabaatar provinces with electrical power.

The Central Energy System consists of five heat and power cogeneration power plants of Russian design, for base load operation, interconnected by a 220 kV line with the Russian-Siberian grid, one transmission network and four distribution networks. The system supplies power to the cities of Ulaanbaatar, Darkhan, and Erdenet and to the centres of 13 Aimags and about 150 Soum centres. The total capacity of the central grid is 680 MW or 840 MW including the maximum potential supplies from Russia. The total load currently amounts to 740 MW and is expected to increase to 780 MW by next year.

Concerning the Western and Central systems, the Mongolian operators are not able to balance the demand and supply in the grid adequately. The missing balance load has to be compensated by additional supplies from Russia which comes at a high price.

Although there has been some improvement in recent years, the country's coal-power-heat supply system remains in poor condition, and is unable to meet the basic supply requirements of industrial and commercial enterprises and the urban population. Power system losses remain very high. In addition to exceptionally high losses and internal use in the CHP plants, losses and faultily metered or unmetered consumption in the electricity distribution system are in excess of 25%. Poor bill collection and revenue management practices cause further financial losses. Although the financial situation has improved substantially since mid-1996, it remains precarious, due to the high system losses, revenue collection difficulties and insufficient tariff levels (especially for heat) to cover the service cost. Financial information systems are insufficient and/or inappropriate, and skills and procedures need to be developed to undertake proper financial planning. Hardware, software and skills in Mongolia are inadequate for efficient operation of the main generation and transmission system, and interfaces with distribution systems.

Future Developments

The MoE (Ministry of Energy) is in the planning process of constructing two coal-fired power plants (24 MW and 40 MW), supplying the Western system. Chinese investors plan to construct a gigantic 4,800 MW coal power station in southern Mongolia during the next decade. It will be supplied with coal from Mongolia but the electricity generated is exclusively transmitted to China. It can be seen as a Chinese power station in Mongolian territory which will also not be connected to the central grid.

Problem Situation

The Mongolian annual State budget depends by a portion of 40% on the income generated by exploitation of resources, mainly copper. The economic boom in recent years, which also allowed implementing big infrastructure projects such as the massive 7,000 km grid extension programme, has declined rapidly. The annual budget deficit already accounted for 12% in 2008. Whereas in mid-2008, 35% of the whole population were considered to be below the poverty line, this value has increased to 42% by the end of 2008.

The electricity supply of off-grid Soums and settlements is based on diesel generators. Heat is provided through heat-only boilers. However, the high fuel costs and the low financial ability of the consumers hamper the generation of electricity. Therefore the Government of Mongolia intends to extend the national grid (220 kV and 110 kV transmission lines as well as 35 kV distribution lines) in order to connect off-grid Soums. The grid extension will be financed by the state budget and the development fund of Mongolia. At the moment around 330 Soums and about 200 settlements are connected to the grid, while twelve Soum centres are supplied through decentralised (renewable) energy sources. The original grid extension programme includes the construction of 7,000 km of power lines; to current date 2,300 km have been realised. In some areas transmission lines are already constructed but not taken in operation because no power plants are feeding in as yet.

According to the objectives of the Mongolian government the share of power produced by renewable energy sources should reach 20% in 2020; the current governmental programme, however, aims at 3 to 4%. Full coverage of the country by grid extension is doubtful from a technical as well as economic perspective due to high investment costs and high electrical losses to cover long distances and little demand on the countryside. Renewable energy could contribute to a reliable and cost-efficient electrification of remote rural areas.

According to the Energy Authority the extended grid will reach the Western regions including Zavkhan and Altai Aimag in 2011. Even when the grid reaches the Soum centres, which will be already provided with electricity through isolated renewable energy plants, these will be kept in operation in order to decrease power deficit and to increase the quality and stability of the service supplied.

Institutional set up and actors in the energy sector

All Mongolian power plants are state-owned, equally divided among the Ministry of Energy, the Ministry of Finance and the State Property Committee by one third each. Several operating companies are in charge of operating and managing the power plants and the transport and distribution grids. Most operating companies are state-owned and others are based on public-private partnerships.

Energy Authority

The Energy Authority (EA) has been established in March 2009 in order to achieve an efficient operation and management of power plants and installations and to secure proper maintenance. The EA is not only responsible for the operation of all power plants in Mongolia, but also supervises all operating companies. Due to its short existence, the EA is still seeking for its role and position. The director of the EA emphasized that it is not the EA’s intention to fully control electricity sector in Mongolia, which means that there will be room for existing and new private companies to operate at least the distribution systems.

Energy Regulatory Authority

The Energy Regulatory Authority (ERA) executes its duties and responsibilities to regulate energy generation, transmission, distribution, supply and dispatching. It approves prices and tariffs, awards licenses to operators, and monitors compliance with terms and requirements of licenses. Furthermore, it is supposed to protect equally the rights of both consumers and licensees according to the relevant laws, regulations and codes of the ERA enacted by the Energy Law. USAid supports the ERA in the transition process towards a structure in conformity with market tariffs. The ERA also influences the tariffs of isolated plants and grids. On the basis of an ERA methodology, the licensee determines the tariffs, which has to be approved by the Aimag Government first and by the ERA thereafter.

Altai Uliastai Energy Supply

The Altai Uliastai Energy Supply (AUES) was found a few months ago due to the construction of the 11 MW Taishir Hydro Power Plant nearby the city of Altai. AUES is owned by the Ministry of Energy, the Ministry of Finance and the State Property Committee one third each. The composition of the Supervisory Board is already determined and the board will consist of the technical director of the Energy Authority, a director of the bureau of the Aimag government and a representative of the State Property Committee. At the time of the mission the composition of the Executive Board was still unknown. The executive director was already appointed and he had employed a director and the chief engineer.

AUES will be responsible for power generation in the region and for the operation of the grid. Electricity will be delivered to Altai through a 47 km long 35 kV transmission line and to Uliastai (135 km, 110 kV) and from there to 19 Soums. Backed by a strong political will at present, discussions about the future responsibilities of AUES are ongoing. It seems likely, however, that they will also be responsible for the operation of the regional distribution grid, including the hydro power plants of Bogdyn, Tosontsengel, Tsetsen-Uul, Zavkhanmandal and several diesel installations. Despite its potential future importance, it has to be stated that AUES is currently an organisation which mainly exists on paper and is not yet in a position to take its envisaged role.

Uliastai Energy Company

The Uliastai Energy Company (UEC) was established in October 2004 to operate the 2 MW Bogdyn HPP, the 6.2 MW diesel power plant and the distribution grid in Uliastai. The Bogdyn HPP has been rehabilitated with financial support of KfW from 2005 until 2008. The maximum annual generation, which was 1.5 million kWh before the rehabilitation, could be increased to 9 million kWh. The power plant can usually operate between May and October. Due to the current water deficiency, Bogdyn runs with a reduced capacity of 750 kW and electricity can only be provided for six to eight hours a day. Taishir HPP cannot run at the moment for the same reason. Only if these two plants run on a regular basis, a 24h supply can be guaranteed once the regional grid is in operation. In winter, supplies will be restricted whereby in particular the ger (yurt) districts will only receive power for two hours in the morning and six to seven hours in the evening.

The UEC is owned by the Aimag government but the operating company has been privatised (supported by the GTZ RE-project) which was a new and innovative model in the Mongolian energy sector. After a tendering process, 51% of the operating company is in the hands of the private company “Mongol-Erden” and 49% is owned by the Aimag government. Although no final decision has yet been taken, it can be expected that the UEC will be owned by AUES in the long term. The EA and the State Property Commission will send a delegation to Uliastai by July 2009 to clarify the outstanding property issues. According to the director, it is likely that UEC will continue to exist and remain responsible for the operation of the Bogdyn HPP. The UEC will also keep operating the Uliastai diesel power plant until the Taishir HPP will be in operation.

The financial situation of the current public-private company UEC is far healthier than that of the old, fully state-owned operating company. It succeeded in reducing debts but also raising salaries. It decided to make their staff responsible for the operational management to a larger extent which resulted in a decreased number of unplanned standstills. Due to lower operational costs and an increased generation of the Bogdyn HPP, UEC increased its profitability. Some of the profits have been reinvested in the company and the remaining portion was divided among the owners.

Subsidies and tariffs

The ERA is responsible for the tariff setting in the Mongolian energy sector. According to the Mongolian Energy Law tariffs should be cost-covering. In practice, however, the tariffs are kept lower for political reasons and cost-covering tariffs would not be approved by the authorities if suggested by a licensee. This is also the reason why the private sector has not been interested in investing in the energy sector so far. Fuel for diesel generators is imported from the Russian Federation. High diesel prices necessitate the government to subsidise end users tariffs. Subsidy depends on the market price but does not fully follow price increases. Subsidy schemes are also in place for private owned companies. In case of power production through diesel generators, 90% of generation costs are determined by diesel and lube oil.

The tariffs UEC applies (December 2008) are 90 MNT/kWh for companies and government administration, and 50 MNT for private households. The production costs however, are currently at 409 MNT/kWh. Companies and government administration pay for all the consumed electricity, while only 70% of the households do. It is expected that this percentage will go up after the rehabilitation of the Uliastai distribution grid. In order to sustain those prices which are not cost-covering at the moment, UEC receives diesel subsidies from the central government. As Bogdyn and at later stage Taishir hydropower stations will be able to provide enough power, the subsidies for diesel will be phased out. UEC receives 66 MNT per kWh produced by the Bogdyn Hydro Power Plant which would also be the feed-in tariff for MHP into the Mongolian national grid. It is not expected that tariffs will be adapted when Taishir Power Plant will be brought into operation. Whether the feed-in tariff of 66 MNT/kWh is cost covering or not, depends on the specific circumstances of the plant but most importantly its capacity. Concerning the GTZ/EnDev plants which are relatively small this has quite some implications. For the private operated plant in Tosontsengel (375 kW) this tariff is cost covering and even beneficial. For the Tsetsen-Uul (150 kW) plant this tariff might be sufficient, but for Zavkhanmandal (115 kW) this seems very unlikely. This means that in future it is very unlikely that a private operator will invest in particular into new MHP plants due to those tariffs. It may take a lot of time until the current feed-in tariffs are revised again and change the profitability of plants to a level which would give investors more incentives.

Considering the enormous transmission distances in Mongolia, the new plants will be very useful for the national grid in terms of net-stabilisation and transmission losses will be greatly reduced. These are benefits, however, which will belong to the state utility and not to a private operator.

Electricity prices currently

Central grid:

MTN 68 per kWh (commercial and private)

Feed-in tariff for MHP: MTN 66 per kWh

Uliastai Energy Company:

Private Households: MTN 50 per kWh

Commercial: MTN 90 per kWh

Ownership and operation

At the time of the mission discussions on how to organise the operation of the (new) power plants were still ongoing. The current owner, the Aimag government, is not in a position to fulfil this task satisfactorily. In September the operator for both plants will be chosen. To current knowledge it is most likely that the property (plant and transmission lines) will belong to the newly found umbrella company AUES. By late June a large delegation from the MoE and from the State Property Committee met the Aimag governor and UEC in Uliastai to discuss all relevant issues on ownership of power plants and responsibilities for proper operation and maintenance. During the mission, partners gave various views and recommendations on how to establish the most efficient and effective structure of the operating company, varying from a fully state owned to a 100% private company. For some people it was a foregone conclusion that the newly established company AUES will become responsible for the operation and management. Others like the UEC recommended that the AUES structure should be based on a public-private partnership because this would motivate management and staff to minimize operational costs.

The increased ownership of the state in operation is a trend in the whole Mongolian energy sector which does not match the advice of GTZ to establish private based management to operate the plants. The example which has been set with support of GTZ is the semi-privatisation of UEC. Unfortunately, this example does not seem to be replicated in other areas. The Tosontsengel MHP plant was supposed to be organised like UEC. This semi-privatised structure, however, was never carried out. There is a certain risk that the UEC will be integrated into the AUES and the objective of running on a cost-covering basis becoming less important. However, the operating company Mongol-Erden (owning 51% UEC operations) has a contract for about 10 years and the EA will be careful about throwing out a company that is established and provides a satisfactory energy service for its catchment area, in particular as AUES is still in a provisional state. Although there is a renewed trend to re-nationalise the energy sector, the EA might be willing to accept private operators for distribution of electricity but not for generation and transmission.