Overview: Energy regulatory framework for Mongolia


Overview

  • According to the Ministry of Energy, the current installed power capacity in Mongolia is approximately 1100MW, with an available capacity of approximately 900MW. Mongolia has about 8 coal-fired combined heat and power plants, 600 small diesel generators, 13 hydroelectric plants and multiple wind and solar systems. Approximately 85% of the total electricity generated domestically results from coal-fired CHPs, 7% from diesel systems, 5% from wind parks, 2% from hydroelectric and the remaining 1% is supplied by small renewable energy sources.
  • Mongolia imports about 20% of its annual electricity demand mainly from Russia and to a lesser extent, from China. In the recent years, Mongolia’s energy demand has been continually increasing by 7-10% per year as the economy grows.
  • In 2002, the power sector was unbundled resulting into 18 independent companies which are still wholly owned by the State. Simultaneously, ERC launched the single-buyer model where the National Electricity Transmission Grid purchases all the energy output of energy producers (five State owned CHPs and one privately owned wind power plant which are all located in the central region) and then sells to distribution companies.
  • The Mongolian Parliament aims to reform the energy sector and transition to a market economy. Recently, the Parliament announced the partial privatization of State owned power plants.

Energy Legislation

Mongolian energy legislation comprises of the State policies for energy and nuclear energy, and specific statutes for conventional energy, renewable energy and nuclear energy sectors.

  • On 19 June 2015, the Parliament approved the State Energy Policy which replaces the National Program for Renewable Energy of 2005 and the National Program for Integrated Energy System of 2007. The Government is expected to approve a medium term program for the implementation the State Energy Policy within 2015 and to evaluate the implementation of the State Energy Policy biennially and report to the Parliament.
  • On 25 June 2009, the Parliament approved the State Policy for Radioactive Minerals and Nuclear Energy.
  • The current Energy Law was adopted in 2001 and has been amended several times since its adoption. The Energy Law is the principal legislation for the energy sector and regulates matters relating to energy generation, transmission, distribution, dispatching and supply, energy consumption and licenses for energy related activities.
  • The Renewable Energy Law was introduced in 2007 and it regulates the generation and supply of renewable energy.
  • The Nuclear Energy Law was adopted in 2009 and sets forth the rules for the exploration and mining of radioactive minerals, construction and use of nuclear reactors, safety of nuclear substances and radioactive minerals, and licensed activities.

In addition, there are various regulations, procedures, codes and rules approved by the Government, the Ministry of Energy and the Energy Regulatory Commission. Key regulations are the Grid Code, the Business Relations Code and the Central Heat Supply Code which all license holders must comply with.

State Energy Policy

The energy policy of Mongolia sets forth a vision to become a country with reliable and secure energy supply by assessing the current situation and challenges of the energy sector and identifying the actionable strategic goals and objectives. Mongolia aims to fulfill the following strategic goals:

  • ensure the security and reliable supply of energy;
  • develop mutually beneficial relationship in respect of energy with the regional countries;
  • develop and improve the human resources capacity in the energy sector;
  • transition the energy sector to a private sector based, regulated and competitive market;
  • introduce innovation and advanced technology in the energy sector as well as energy efficiency and saving policy; and
  • increase renewable energy generation and reduce adverse environmental impacts of conventional energy sources and greenhouse gas.

The State Energy Policy is expected to be implemented in two phases.

Phase 1 will be implemented from 2015 until 2023. In this first phase, the State targets to double the current total installed power capacity, to increase the installed renewable energy capacity to 20% of the total installed capacity, to increase the power reserve to 10% of the installed capacity, to establish a realistic tariff and rate structure and to create a robust environment for the major growth of renewable energy. Multiple concrete actions to be taken during this period. For example, CHP5, Tavantolgoi Power Plant and Baganuur Power Plant are expected to be completed, State owned power generation, distribution and supply companies (with the exception of transmission) are planned to be privatized in phases and energy tariff is to be indexed and the energy market is to become financially independent.

Phase 2 will be implemented during the period of 2024 and 2030. In the second phase, Mongolia sets a goal to increase its installed renewable energy capacity to 30% and the power reserve 20% of the total installed capacity, and to export energy to its neighboring countries.

The State Energy Policy encourages public private partnership and domestic and foreign investment in the energy sector.

Main regulatory body

The Energy Regulatory Commission of Mongolia (“ERC”) is the main regulatory body in the energy sector. ERC consists of five regulators who are appointed by the Government. ERC has the authority to issue, suspend and terminate licenses, approve energy tariff, resolve certain types of disputes between license holders and disputes between consumers and license holders.

Licenses and duties of license holders

According to Article 12.1 of the Energy Law, there are twelve (12) types of energy licenses:

  • electricity generation;
  • heat generation;
  • electricity transmission;
  • hear transmission;
  • dispatch regulation;
  • electricity distribution;
  • heat distribution;
  • regulated supply of energy (i.e., at regulated tariff);
  • un-regulated supply of energy (i.e., at contract price);
  • electricity import and export;
  • construction of energy building; and
  • gas supply.

Processing time for license application is sixty (60) business days. Licenses for energy generation and transmission are issued for 5-25 years while a license for construction of energy building is issued for up to 5 years and the validity period for all other licenses is up to 10 years.

License holders have the following obligations, among others:

  • not to transfer its license;
  • abide by the applicable legislation, safety and operations rules, terms and conditions of the license, and the decisions of the license issuing authority;
  • submit its annual audited financial statement to ERC;
  • comply with the Grid Code, the Central Heat Supply Code and the Gas Supply Code;
  • prepare and implement an environment protection and rehabilitation plan on an annual basis;
  • inform ERC and obtain approval in the event of a reorganization, or a refurbishment, renewal, transfer or pledge of its building, network, equipment or other properties which may affect the activities of the license holder.

Power purchase agreement (“PPA”)

The National Dispatch Center has the authority to enter into a PPA with an independent power producer upon obtaining approval of the Ministry of Energy. ERC must endorse the starting price of energy sold by an independent power producer and supplied to the main or unified grid under a PPA. PPAs must be in the form approved by ERC and be registered with ERC. We expect that ERC will approve a form of PPA in the near future.

Energy tariff

ERC sets tariff for energy generation, transmission and distribution respectively based on the following key principles, among others:

  • the actual production or operation costs;
  • coordinate the price with inflation;
  • income of the license holder is at the level where it has financial capacity; and
  • least-cost rule while taking account of the reliability of energy generation, transmission and distribution.

ERC reviews and approves tariff proposed by holders of energy generation, transmission and distribution licenses in accordance with the ERC tariff guideline.

Renewable energy tariff and feed-in tariff scheme

ERC sets the renewable energy tariff taking account of the investment payback period within the range specified in the Renewable Energy Law. The table below sets forth the tariff levels.

Energy source

Generation that is connected and supply to the transmission grid

Independent generation

Tariff (USD per kilowatt hour)

Wind

0.08-0.095

0.10-0.15

Hydro

0.045-0.06

0.045-0.10

Solar

0.15-0.18

0.2-0.3

With respect to the generation that is connected and supply to the transmission grid, such generator may be able to benefit from the feed-in tariff scheme. Currently, the feed-in tariff is MNT4 (approx. USD0.002) per kWh in the Central and Southern regions and MNT8.30 (approx. USD0.004) per kWh in the Western and Altai-Uliastai regions.

Dispute resolution

ERC has the authority to resolve disputes relating to matters within its authority between (i) license holders, and (ii) consumers and license holders. ERC determines whether a dispute is within its jurisdiction. If a disputing party does not accept the decision of ERC, it may appeal to a Mongolian court of competent jurisdiction.

Mongolia ratified the Energy Charter and the Energy Charter Protocol on Energy Efficiency and Related Environmental Aspects in 1999.

Privatization

On 03 July 2015, the Parliament authorized and directed the Government to privatize several State owned energy companies, among others, through prescribed methods. Accordingly, on 17 August 2015, the Government approved a list of State owned entities for privatization.

The Government plans to partially privatize five CHPs (namely, CHP2, CHP3, CHP4, Darkhan CHP and Erdenet CHP) within the last quarter of 2015 and two coal mines (namely, Shivee Ovoo and Baganuur) within 2016 by issuing new shares for sale at the Mongolian Stock Exchange. The State will still keep 70% of the total issued shares of the aforesaid CHPs and 49% of the total issued shares of the two coal mines.

For further information, please contact Ms Byambasuren Narantuya and Ms Zoljargal Dashnyam.