Government inaction threatens the renewable energy sector

By James Watkins

After the passing of the much-praised Renewable Energy Law in 2007, Mongolia looked poised to undergo a renewable energy revolution. The country’s natural environment makes it a perfect candidate for large-scale projects in both wind and solar power, potentially attracting hundreds of millions of dollars of foreign investment, creating thousands of local jobs, reducing reliance on imported energy, and dramatically reducing environmental pollution, the scourge of Ulaanbaatar.
However, according to industry sources, the government is failing to fulfill its contractual obligations in terms of paying for the renewable electricity that is produced at the new 120 million USD Salkhit wind farm, which opened in June 2013. This action not only threatens the future of Salkhit wind farm but it will also deter other private investors from making any further ventures into the Mongolian renewable energy sector.

Under the terms of the Power Purchase Agreement (PPA) between government energy agencies and Clean Energy LLC, a company set up by Newcom in 2004 to set up and manage Salkhit wind farm, all electricity produced at the farm would be paid for at a guaranteed price of 0.095 USD/kWh, regardless of whether it is actually used by the national grid to power Mongolian homes and businesses. Neal Detert, CFO/COO of Clean Energy LLC, explains that “we have priority dispatch, and the agreement that we have is a take-or-pay contract, so in theory they have to purchase everything, regardless of whether they take it or not.” However, that “has not been happening to this point.”
In reality, the National Dispatching Center has significantly limited the amount of electricity it is purchasing from clean energy by a factor of seven of 10 percent. Detert stresses that “this seriously impacts the financial viability of the company. Whether or not we will survive the next year is in question.”
In addition to Salkhit wind farm, three other projects of similar size are in planning stages, in Choir, Sainshand, and Tsogttsetsii. Two of the three hold construction licenses, in addition to power purchase agreements (PPA) similar to that held by Clean Energy LLC. However, the government’s failure to fulfill their commitments made in Clean Energy’s PPA is clearly making other companies hesitant. The wind farm planned for Sainshand received approval, financial backing and signed PPAs four months ago, but no further action has been taken since whilst the outlook remains uncertain. This is costing the country investment, jobs, and a much-needed clean energy supply, both now and in the future.
Salkhit wind farm, about 70 km away from Ulaanbaatar, is made up of 31 wind turbines, which together create a total generation capacity of 50MW, about five percent of Mongolia’s total electricity demand, enough to power roughly 100,000 homes. Crucially, this electricity is produced with zero emissions of harmful gasses (post-construction). As a result, wind energy can not only help ensure energy security in the context of rapidly rising demand, but it does so using a freely available resource that will never run out—the wind—and avoiding pollution that would otherwise be produced, contributing to global climate change as well as to localized issues of air pollution.
With over 85 percent of Mongolia’s electricity otherwise coming from coal-fired power plants, Clean Energy estimate that their wind farm alone will save 1.6 million tons of fresh water and 12,250 tons of coal per year, avoiding the emissions of 1,780 tons of carbon dioxide. In addition to these environmental benefits, a booming renewable energy sector is economically desirable too, potentially bringing in millions of dollars in private foreign investment, and creating employment in rural areas—during construction, the Salkhit wind farm was employing over 3,500 people, directly or indirectly.
Mongolia is an ideal location for renewable energy production. The Salkhit project is achieving wind capacity rates several percentage points higher than average farms around the world, and that is even after a season of lower wind yield than expected. In addition, the environment is even more beneficial for wind generation in the Gobi Desert, which has a potential capacity for 2,000 gigawatts of electricity generation (by means of comparison, total installed capacity of the whole Mongolian power sector is roughly one gigawatt). With huge potential for solar power too—the Gobi Desert experiences almost 4,500 daylight hours per year—renewable energy is a sector that could transform Mongolia, economically and environmentally.
Currently, low nighttime demand for electricity in Mongolia means that the electricity produced at Salkhit cannot be used without switching off other power stations, which can be costly and inefficient. This is one of the cited reasons for the curtailment of purchasing electricity by the National Dispatching Center.
Dulamsuren Dorjpurev, the Deputy Minister of Energy, has in the past hinted that Mongolia could become a regional hub for renewable energy generation by exporting electricity created at wind or solar farms to Russia or China. If favorable export tariffs can be negotiated with trade partners, this could be a doubly positive outcome—not only would Mongolia expand a new export industry, but this could also alleviate the pressure over the existing PPAs that the government is failing to uphold, as it would provide a guaranteed demand for all renewable energy produced, removing the need to curtail purchases.
While Mongolian energy generation capacity is currently under 1,000 MW, the Ministry of Energy forecast that peak demand will rise to over 2300 MW by 2020. Substantial investment in generation capacity is clearly needed, as well as in modernizing the distribution and transmission infrastructure around the country. With the government announcing a target for 20-25 percent of energy generation to be from renewable sources by 2025, renewable energy will be hugely important in this revolution that must occur in the energy sector in the coming decades.
With public funds unable to fully cover an investment of this scale (in the billions of dollars), private investment will have to form the backbone of the Mongolian energy sector over the coming decades. And, as Detert points out, “in order for [the government] to get private investment, they have to respect contract law, the rule of law.”
This is true not only in this sector, but across the economy. Arguably the most fundamental requirement of creating a sound, reliable economic environment in which foreign investors feel comfortable doing business is respect for contract law. Without it, the future of Clean Energy LLC’s Salkhit wind farm remains uncertain, and the potential for attracting substantial foreign investment in other renewable energy projects is diminishing.

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Posted by on Jun 4 2014. Filed under Opinion. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

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