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Mongolia: Energy windfalls

Coal production continues to rise in Mongolia amid the ongoing development of large mining projects aimed at increasing regional demand, yet the energy sector has also began exploring greener alternatives.

In late February, construction started on the country’s first wind farm. Located 64 km southeast of Ulaanbaatar, the USD 100 million Salkhit Project is expected to deliver 168.5m KWh of electricity. Salkhit will be a joint project between Mongolian investment firm Newcom Group and US-based General Electric.

While expected to contribute about 5% of national demand, Salkhit will not come close to tapping the country’s full wind energy potential. The 1.56m-sq-km country has the potential to generate 2.6 terawatts of renewable energy per year – about one-quarter of global electricity demand – according to data from the National Renewable Energy Laboratory in the US and the National Renewable Energy Centre of Mongolia.

As the country’s potential as a green-energy centre for Asia rises, it is already becoming a regional leader in fossil fuel supply. The Mongolian Coal Association has predicted that coal export volumes will reach 50m tonnes by 2015 and 100 million tonnes by 2025.

Energy-hungry China will be a prime customer, with coal imports from Mongolia expected to reach 30 million tonnes by 2015, almost double the 163 million imported in 2010. Local media has reported that while a tonne of coking coal from Australia costs China around USD 185 per tonne, it only costs USD 62 when imported from Mongolia.

The growth in exports will accelerate exponentially as the vast Tavan Tolgoi coking coal mine – the largest in the world, with an estimated 6.4 billion tonnes of untapped reserves – comes online in 2014, with output of around 20 million tonnes of coal expected annually. Russia, Japan and South Korea are other potential destinations for the country’s coal, with Vancouver-based, thermal-coal producer Prophecy Coal exporting the first-ever shipment of Mongolian coal to Russia from its Ulaan Ovoo mine in July 2011.

However, industry officials say that without the necessary infrastructure, Mongolia could lag behind rivals in supplying energy to the region. When speaking with local media in March, G. Battsengel, the CEO of Energy Resources, a Mongolian mining company, said, “We need to improve our infrastructure if we are to be competitors in the coal market. The first coal shipment to Japan has been sold for USD 280 per tonne. The transportation cost was USD 170 per tonne. Our transport costs make it difficult … Coal is a product with a massive physical size; its profits are heavily dependent on its transportation costs.”

As Mongolia is landlocked, railways will be key to the country reaching its energy export potential, with rivals such as the US, Canada and Russia enjoying easy access to shipping.

However, Purevbaatar Luvsandavag, the vice-chairman of the Mongolia Railway Authority, told Reuters in February that the Government had not raised the USD 50 million required to fund feasibility studies for plans to build a railway network connecting Tavan Tolgoi to the rail networks of Russia, which would give it further access to markets in Japan and South Korea.

While the country mulls how to best deliver its coal to foreign markets, the national growth being generated by the mining projects is expected to fuel a surge in domestic demand. While there are seven main coal-fired power plants with a total installed capacity of 856 MW, according to the Asian Development Bank, due to ageing equipment, the actual available power capacity is significantly lower, and the country is currently importing power from Russia at a rate of $0.08 per KWh.

Demand, however, is expected to hit 1600 KW by 2015, with supply only expected to be 800 KW, according to the Energy International Corporation. Prophecy Coal Corporation has advised the government to consider building a new thermal coal power plant that could also export electricity to China. In November 2011, Prophecy Coal received a license to build a 600-MW power plant at its Chandgana Tal thermal, while the government confirmed that an oil refinery will be built and is expected to be completed by 2015. Once completed, the refinery will produce 120 tonnes of fuel for approximately 30 years.

While these initiatives will rely on fossil fuels, the potentially precipitous rise in demand has also led to other green innovations, with engineers proposing that ultra-thick slabs of ice be created around the capital to reduce heat, and, in turn, energy costs. The project will attempt to artificially build “naleds”, a Russian term for super-thick sheets of ice that naturally form when water flows atop a frozen river or lake. As the process is repeated, the ice continues to gain mass and size, resembling a small glacier.

As potentially vast revenues start to roll in from energy exports, the Mongolian government will need to ensure that such green alternatives to traditional sources of energy are seriously considered and funded, as it must ensure that future generations do not pay the environmental and financial cost of today’s massive surge in mining.

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