DEVELOPMENT TREND OF MONGOLIAN ENERGY SECTOR AND MEDIUM TERM PLANNING NATIONAL DEVELOPMENT AND INNOVATION COMITTEE Regulatory agency of the Government of Mongolia DEVELOPMENT TREND OF MONGOLIAN ENERGY SECTOR AND MEDIUM TERM PLANNING /MONGOLIAN ENERGY-2012/ Vice chairman: Zorig.L

CONTENTS 1 2 3 4 5 6 8 7 CURRENT SITUATION OF MACROECONOMY MID -TERM MACROECONOMIC TREND, INFRASTRUCTURE- ENERGY SECTOR 4 NEW TRENDS ON THE WORLD ENERGY SECTOR DEVELOPMENT OF MONGOLIAN ENERGY SECTOR AND IT’S TREND 5 6 8 NEW OPPORTUNITY-RENEWABLE ENERGY MID-TERM PRIORITY GUIDLINE- ENERGY SECTOR 7 CONCLUSIONS AND COMMENTS

MONGOLIAN ECONOMY FOR PAST 5 YEARS After the world economic crisis in 2008-2009, Mongolian economy has revived in a quite short term and reached a positive result. Between 2006-2010, our economy has been increased approximately by 6.6 percent annually. During the last 5 years main objective of macro economy was focusing its target to supporting and promoting economic growth, initiate large project within infrastructure and industry sectors, increase investment and utilize mineral resources, to keep inflation rate in a one digit number and maintain budget expenditure within the 33 percent of the GDP, balance foreign debt in a rational level, reduce the deficit of the BOP and increase foreign exchange reserve. In the future, our goals are to add value for copper, iron and crude oil, to establish base of heavy industry to develop coke and coal to liquid plants . Economic structure will be altered and since the year of 2013, along with the increases of the mining sector share in GDP , share on agriculture and service sector are projected to be decrease comparatively.

2. MID-TERM MACROECONOMIC TRENDS, INFRASTRUCTURE-ENERGY SECTOR

MAIN INDICATORS OF ECONOMIC GROWTH   2006 2007 2008 2009 2010 2011* GDP /billion MNT.y-o-y/ 4,027.6 4,956.6 6,555.6 6,590.6 8,414.5 10,829.7 Real economic growth 8.6 10.2 8.9 -1.3 6.4 17.3 Growth of mineral sector 5.3 1.1 -1.6 5.8 3.6 8.7 Growth of non mineral sector 9.4 12.6 11.3 -2.7 7.0 19.1 GDP per Capita, USD 1324.2 1,619.5 2,108.3 1,688.1 2,264.4 3,073 GNP per Capita, USD 1307.7 1,582.2 2,043.3 1,616.0 2,016.6 2,811.3 ДНБ-нд гол хувь нэмэр оруулсан салбарууд нь үйлчилгээ, хөдөө аж ахуй, тээвэр, аж үйлдвэр (ашигт малтмал, үйлдвэрлэл, барилгыг оруулсан) байв. 2006-2010 онд ХАА-н салбарын ДНБ-д эзлэх хувь 18%-16% болж, аж үйлдвэрийн салбарын ДНБ-д эзлэх хувь 41%-36% (дэлхийн эдийн засгийн хямралаас болж ашигт малтмалын үнэ буурснаас) болж тус тус буурсан бол үйлчилгээний салбарын ДНБ-д эзлэх хувь 41%-48% болж өсчээ. Source :NDIC, NSO *-Projected estimation

THE DEVELOPMENT LEVEL OF INFRASTRUCTURE   Basic infrastructure Road Railway Port Air transport Electricity World average 4,30 4,00 3,20 4,70 4,50 G-7 5,71 5,61 5,39 5,44 5,69 6,46 Central Asia 3,98 3,16 3,50 2,96 3,96 3,64 East Asia 5,74 5,60 5,80 5,52 6,30 South East Asia 4,48 4,44 3,24 4,54 5,04 4,63 South Asia 3,05 3,10 2,85 3,55 2,00 Mongolia 2,30 1,70 2,50 3,30 3,00 Sourse: World Economic Forum, World competitiveness report. ДНБ-нд гол хувь нэмэр оруулсан салбарууд нь үйлчилгээ, хөдөө аж ахуй, тээвэр, аж үйлдвэр (ашигт малтмал, үйлдвэрлэл, барилгыг оруулсан) байв. 2006-2010 онд ХАА-н салбарын ДНБ-д эзлэх хувь 18%-16% болж, аж үйлдвэрийн салбарын ДНБ-д эзлэх хувь 41%-36% (дэлхийн эдийн засгийн хямралаас болж ашигт малтмалын үнэ буурснаас) болж тус тус буурсан бол үйлчилгээний салбарын ДНБ-д эзлэх хувь 41%-48% болж өсчээ.

GDP, Budget expenditure Foreign exchange reserve 5. MID TERM TREND OF MACRO ECONOMY GDP, Budget expenditure GDP per capita, USD Economic structure Inflation Budget balance Foreign trade balance Foreign exchange reserve BOP

Resource of Foreign exchange GDP PER CAPITA /USD/ Amount of GDP, Budget expenditure GDP per capita, USD Economic structure Inflation Budget balance Foreign trade balance Resource of Foreign exchange Payment balance

Resource of Foreign exchange ECONOMIC STRUCTURE Amount of GDP, Budget expenditure GDP per capita, USD Economic structure Inflation Budget balance Foreign trade balance Resource of Foreign exchange Payment balance

Resource of Foreign exchange INFLATION Amount of GDP, Budget expenditure GDP per capita, USD Economic structure Inflation Budget balance Foreign trade balance Resource of Foreign exchange Payment balance

Resource of Foreign exchange BUDGET BALANCE Amount of GDP, Budget expenditure GDP per capita, USD Economic structure Inflation Budget balance Foreign trade balance Resource of Foreign exchange Payment balance

Resource of Foreign exchange FOREIGN TRADE BALANCE Amount of GDP, Budget expenditure GDP per capita, USD Economic structure Inflation Budget balance Foreign trade balance Resource of Foreign exchange Payment balance

Resource of Foreign exchange FOREIGN EXCHANGE RESERVE Amount of GDP, Budget expenditure GDP per capita, USD Economic structure Inflation Budget balance Foreign trade balance Resource of Foreign exchange Payment balance

Resource of Foreign exchange BALANCE OF PAYMENT Amount of GDP, Budget expenditure GDP per capita, USD Economic structure Inflation Budget balance Foreign trade balance Resource of Foreign exchange Payment balance

3. NEW TRENDS ON THE WORLD ENERGY SECTOR

WORLD ECONOMY IN 2030 By 2030, the world economic growth would remain high. During this time, world average GDP growth would be around 4.6 percent and the amount of GDP would be around 380 trillion USD in 2050 comparing to 72 trillion USD in 2010. Asia and African countries were projected to become one of the most rapid growing regions in the world in terms of population and GDP per capita. By 2020, China will have overtaken the USA and considered as the world first biggest economy, whereas India will overtake China by 2050. Institutional framework, politics and energy market stability would become key factors for sustainable growth.

South East Asia would be the hot spot of the world economic growth South East Asia would be the hot spot of the world economic growth. /as a percentage of World GNP/ 2005 year 2030 year North Eastern Asia : P.R. China (including Taiwan, Hong-Kong), Japan South Korea North Korea Mongolia North America: 30% North America: 33% North Eastern Asia: 19% North Eastern Asia: 19% European Union: 31% European Union : 19% South Asia: 5% Others: 31% Others: 16% North Eastern Asia 2005 2030 National Revenue /GNI, trillion.USD/ 7.565 28.400 Population /Billion/ 1.524 1.542 Revenue per capita /million USD/ 4.963 18.417

World commercial energy use Driven by sustainable growth on population, real income and by the impact of other factors, energy consumption is projecting to grow significantly in the near future World commercial energy use /billion toe-2030/

The safety of energy supply would become backbone for the world geopolitical policy on politic, economy and transport Non OECD energy consumption is 68 percent higher by 2030, averaging 2.6 percent p.a. growth from 2010, and accounts for 93 percent of global energy growth. The fuel mix changes relatively slowly, due to long asset lifetimes, but gas and non-fossil fuels gain share at the expense of coal and oil. The fastest growing fuels are renewables which are expected to grow at 8.2 percent however, it still have any chance to replace the traditional energy consumption. Coal has been central of the recent rapid economic growth of developing countries such as China and India. China’s coal consumption is likely to raise to 53 percent by globally in 2030, thus it can conclude that the price of coal is still optimistic in the future.

Historically there has a strong correlation between income and electricity demand. But it was projected that there have a major changes in world energy production structure and the ratio of global electricity growth to GDP growth should fall to 0.7 in 2010-2030 from 0.9 in 1990-2010. However the policy supports the continued rapid growth of non-fossil power generation-especially renewables, which attain a global share of 10 percent by 2030. Due to increasing demand of energy consumption, favorable location on geological and transportation will determine the world energy market policy and sustainability of the world energy supply.

The interrelations of GDP growth and energy consumption are projecting to decrease Electricity and income since 1990 /GDP per capita 2009 PPP, thousand / World power generation

Strategic reserve of energy, diversification for utilizing resources are becoming the key factors for country’s economic development and political stability

From above, we may conclude: Development gravity has been changing towards to the South Eastern Asia, South America and the Middle East. This trend is bringing development opportunity for Mongolia. Issues on supplying the increasing demand of raw material for energy is determining further political, economic policy of the countries and competition to get energy resources are intensifying more than ever. As a biggest market of energy, Chinese interest of cooperating with Mongolia in this regard is projected to be increase dramatically. Thus, mutually beneficial cooperation with China in energy sector will create opportunity to penetrate North East Asian energy market. Russia’s policy on gas, oil, coal and its intention to become monopoly at international energy market throughout to those products, the instability of the Middle East would cause the uncertainty on energy supply . From this perspective, we may draw as for Mongolia, it is essential to make a solution on comprising strategic reserve for energy, and to improve the energy distribution system.

4. DEVELOPMENT OF MONGOLIAN ENERGY SECTOR AND IT’S TREND

DEVELOPMENT OF MONGOLIAN ENERGY SECTOR 2006-2011: Goal of the energy sector of Mongolia during the last five year was to create an independent and guaranteed energy supply system in order to provide security in energy of the country, eliminate the dependency of the energy imports, improve the effectiveness of the energy production, decrease the loss, ensure the reliability of the regional electricity supply in order to attract the private sector participation in the energy sector, start the reform of the new sources by utilizing the resources of the renewable energy, and advance the energy sector as an effective and independent sector with reliable financial capacity. 2012-2016: As a new development phase for Mongolian energy sector, main policies on energy sector over the next 5 years would be defined as to build high capacity power plants and high voltage transmission lines for connecting regions, basis for export oriented power industry would be established, environmentally friendly renewable resource would be utilized and energy sector would be shifted into the market scheme and become financially independent.

MONGOLIAN ENERGY SECTOR-TODAY Energy production and distribution are growing constantly /million.kW/hour/ Even though the import is growing, the share on production is becoming comparatively small. /million kW/hour/

MONGOLIAN ENERGY SECTOR-TODAY Energy consumption has been growing rapidly during the past years. /MB/ Subsidy from state budget remains high. /million MNT/

THE DEVELOPMENT TREND OF MONGOLIAN ENERGY SECTOR Briefly illustrate mid and long term development policy on Mongolian energy sector as following: To create independent, safe, reliable and integrated energy system, To improve domestic generation of the energy resource and supply structure, to make up strategic reserve on energy, To enhance regional status through to become energy exporting country, To become large supplier of brown coal, coking coal, uranium and other final products Through to developing non-traditional energy source, coal gasification and liquidation technology to create reliable supply on petroleum products, To increase the usage of gas by step, develop supply chain of gas production and distribution, To increase oil exploration and exploitation, develop domestic oil processing plants by regions, To formulate state policy on coal sector and to reach the quality of coal and price with the international standard.

CHALLENGES Accessibility of the infrastructure, especially energy supply is becoming the main concerning issues. Energy sector is the only sector which didn’t transferred into the market scheme. Thus competitiveness with other sectors is poor and state participation remains high. Due to the lack energy supply of unanticipated growth for electricity demand which followed by mining sector development and urbanization, there have a increasing risk on the dependent of electricity import. Principally, regional cooperation over energy sector will have significant positive impact on future development, however, Mongolian energy sector is not ready for this change. Due to insufficient and unfavorable investment environment in Mongolian energy sector, foreign investment intention to the sector remains lower.

CHALLENGES Harsh weather and climate change, desertification, sensitive ecosystem, poor natural rehabilitation and high air pollution are demanding technological renovations in energy sector of Mongolia needs to be implemented. Due to absence of legal environment on promoting energy efficiency and saving, energy losses is high and no intention to improve energy efficiency. Due to absence of domestic oil refinery and increasing demand on petroleum products remain high dependency on imported products.

5.NEW OPPORTUNITY- RENEWABLE ENERGY

Mongolia has a potential resources to become one of the biggest renewable energy producer Approx 1,100 GW capacity for wind power. It could produce 2.6 TW renewable energy. Mongolian renewable energy could produce 25 percent of the world energy consumption.

Renewable energy has been becoming the base for sustainable growth and economic development 100 thousand households are using wind and solar energy to producing electricity. Newcom group has been constructing 50 MW “Salkhit wind farm” near Tuv province with “GE” technology. Potential projects such as “Selenge” hydropower station, “Sainshand” wind park with 52 MW. From this, we may conclude; By 2013, renewable energy would account 10 percent of the installed energy capacity. By 2020, 20 percent of the energy supply will come from renewable source.

Mongolia has an opportunity to green energy producer and exporter Asian “Super-grid,” project with connecting Mongolia-Korea-Japan. Project that will export renewable energy to China, Korea and Japan. Possibility: JREF- a pilot project that transmit 1GW of electricity from Busan in South Korea to Kyushu in Japan by using cable which over 250 km under the sea is now at the stage of experimental period. Advantage: Low transmission loss. Possibility in Mongolia: Has signed MOU with Mongolia. Newcom company is now cooperating with Softbank and KEPCO.

Capacity of wind and solar energy are constantly increasing, technology innovation is improving significantly. Companies are developing and utilizing solar and wind technology widely. Support from social group getting even wider. For example: “Apple ” project Project cost: 1 billion USD 20 MW Solar station. 5 MW Biochemical station. Annual production with 82 million kW/hour. Taking action to carry out power audit for saving energy consumption.

Construction was designed as a wind for cooler. Saving 10,400 kW/ hour power from cooling system using water tank. /transmitting peak loading time/ Construction was designed as a wind for cooler. Restaurant has installed solar power system and solved its heating problem. Parks and street lights are changed as LED. Case study for developing country /Kenya/: Total renewable energy capacity of 2000 MW and 800 MW for wind, 500 MW for solar, and reaming are bio, thermal, waste. 3 geothermal power stations, producing 200 MW power for 0.04 cent. Government has founded 137 million USD investment. 300 MW wind power station is under construction.

6.MEDIUM TERM PRIORITY GUIDELINES

MEDIUM TERM PRIORITIY GUIDLIENS Priority 1 Priority 2 Priority 3 Priority 4 Priority 5 To develop human capacity, create safe and favorable environment for living and working. To improve the governance, develop economy by region. To develop responsible mining, establish a basis for heavy industry. To improve competitiveness of manufacturing industry, Develop intensive agriculture To develop infrastructure for promoting economic growth.

Strategy 5.1. To provide strategically beneficial mining and industrial complexes by reliable fuel and energy sources, establish integrated energy system Strategy 1: Development policy for energy sector is to be improved and a condition for reliable and sustained energy supply for customers responding effectively to the growing regional energy needs is created.   Strategy 2: Implementing policy on reduction of import dependant provide security of energy system, create opportunity to supply constantly the growing regional energy consumption. Strategy 3: In connection to improving efficiency of the sector, developing export oriented energy production, sustaining its financial situation, fostering the public and the private partnerships and promoting economically sound management, energy cost will be freed and the energy sector will shift to the market economy relations. Strategy 4: Reliable energy resources are domestically supplied to mining sites and other industrial complexes with a strategic significance. Strategy 5: In the structure of energy production, use of energy from renewable resources is to be increased and, thus the balanced approach towards production and distribution is created.

Strategy 5.2. To provide strategically beneficial mining and industrial complexes by reliable fuel and energy sources, establish integrated energy system Strategy 1: Development policy for energy sector is to be improved and a condition for reliable and sustained energy supply for customers responding effectively to the growing regional energy needs is created. In scope of developing state policy to support energy efficiency use, “Law on Energy saving” will be drafted and approved by the Parliament to foster environment that saves energy. To set up “ Energy research institute” for support a policy decisions through to making a decision and analysis scientifically feasible, carry out policy planning and detailed design as well.  

Strategy 5.2. To provide strategically beneficial mining and industrial complexes by reliable fuel and energy sources, establish integrated energy system Strategy 2: Implementing policy on reduction of import dependant provide security of energy system, create opportunity to supply constantly the growing regional energy consumption. Start to construct high capacity power plant and strategically significant power resources which possibly influences Mongolian energy security. To build Baganuur-Ondurkhaan-Choibalsan’s 220 kW transmission line, 110 kW transmission line for Telmen-Moron and Eastern Altai-Uliastai and Central energy systems are connected with the high voltage transmission lines. To construct 60 MB power plant based on Mogoin river to maintain reliable energy supply for Altai-Uliastai energy system. In order to supply energy to the Western region, 36 MB power plant is built based on Khushuut mining.  

Strategy 5.2. To provide strategically beneficial mining and industrial complexes by reliable fuel and energy sources, establish integrated energy system In the scope of solving issues facing energy supply in aimag centers, integrated heating system of aimag centers and towns is established at the aimag centers. Recognizing growing energy needs of the Ulaanbaatar city, fifth power plant is to be built with 450 MB capacity and “Big Ring” energy distribution system is created and heating system with about 100 MB is established in the west and east part of the City to reduce inefficiency in energy transfer and distribution.  

Strategy 5.2. To provide strategically beneficial mining and industrial complexes by reliable fuel and energy sources, establish integrated energy system Strategy 3: In connection to improving efficiency of the sector, developing export oriented energy production, sustaining its financial situation, fostering the public and the private partnerships and promoting economically sound management, energy cost will be freed and the energy sector will shift to the market economy relations. Amendments will be made in the “Energy law” to widen the public and private partnerships and from 2013, monthly energy consumption of a household that is within 150 kilowatt per hour will cost 79.80 tugrug per kilowatt and those used 151 kilowatt per hour or more will pay 115 tugrug per kilowatt hour used. Through to promoting PPP and Private sector investment, expand the private sector’s involvement in energy industry, to comprise funding for implementation of the large projects in energy sector. In scope of developing state policy to support energy efficiency use, “Law on Energy saving” will be drafted and approved by the Parliament to foster environment that saves energy. Basing on capacities of Choir-Nyalga brown coal site and other mines, opportunity of building high power energy plant is to be explored which would promote export oriented domestic energy production.

Possibilities of establishing 330 MB hydro power station of Eg river. Strategy 5.2. To provide strategically beneficial mining and industrial complexes by reliable fuel and energy sources, establish integrated energy system Strategy 4: Reliable energy resources are domestically supplied to mining sites and other industrial complexes with a strategic significance Responding to growing needs of energy in South Gobi, power plants based on Tavan tolgoi and Oyutolgoi mine would be built and transmission line with 220 kilowatt to transfer energy is created connecting Ulaanbaatar- Mandalgobi- Tavan tolgoi- Oyu tolgoi and another 220 kilowatt transmission line to transfer energy is established and connected to the central system wiring Choir and Tsagaan-suvarga with two lines. Possibility of building 600 MB power plants based on thermal coal basin at the Central region of Mongolia. Strategy 5: In the structure of energy production, use of energy from renewable resources is to be increased and, thus the balanced approach towards production and distribution is created. 60 MB wind park is built in Tuv province, 52 MB wind park is installed in Sainshand. Possibilities of establishing 330 MB hydro power station of Eg river.

MONGOLIAN INTEGRATED ENERGY SYSTEM Fuel and energy sector investment – 3658,5 billion MNT New capacity: 5 stations with 1900 МВ 317 km 110 kW transmission line 1227 km 220 kW transmission line

7.CONCLUSIONS AND COMMENTS

CONCLUSIONS AND COMMNETS Goal of energy sector of Mongolia during the last 5 years was to increase energy supply domestically, create stable, independent energy system, whereas upcoming 5 years or medium term development policy and strategy is conducted to build high capacity power plants, transmission lines in order to assure growing energy consumption and to create inter regional energy system, also it will be the new phase for energy sector to transfer into the market scheme . Due to purposed plan for implementing large projects within the next few years and private sector investment predicted to be growing dramatically, therefore raising necessitates to create favorable policies and regulations in favor of improving the implementation mechanism of PPP, attracting sustainable private sector investment are required. As a main supporting factor of economic development, basic infrastructure such as power, transport should be financed by state due to a significant positive impact on early commencement and economic performance of proposed new mining, and industrial parks. Зам тээврийн салбарт нийт 9594.2 тэрбум Түлш, эрчим хүчний салбарт нийт 3658.5 тэрбум Эрдэс баялаг, хүнд үйлдвэрийн салбарт 15,09 их наяд Мэдээлэл, шуудан, харилцаа холбооны технологийн салбарт 777.2 тэрбум Хот байгуулалт, барилгын салбарт нийт 1523.0 тэрбум  Хүнс, хөдөө аж ахуй хөнгөн үйлдвэрийн салбарт – 466,1 тэрбум төгрөг Эрүүл мэндийн салбарт 195,0 тэрбум Боловсрол, соёл, шинжлэх ухааны салбарт 812,17 тэрбум Байгал орчин, аялал жуулчлалын салбарт 2085,4 тэрбум төгрөг

CONCLUSIONS AND COMMNETS It is possible to take actions for controlling the price and quality of energy products through to modifying the structure of supply and distribution chain of energy products, improving the monitoring would on the one hand, to maintain sustainable economic growth and the other hand, it could prevent a shocks that caused by commodity price fluctuation. However, budget investment of energy sector has been increasing dramatically during the last several years, due to lack of research on investment return, incompletion of the project and dead expenses become a critical issues. Thus, in a wider extent, it is necessary to take more attention onto development policy and planning. Comprehensive state policy on primary energy products such as petroleum, coal is needs to be implemented shortly and we see that foremost goal of Mongolian energy sector is to address energy dependency and to become “Self sufficient”. Зам тээврийн салбарт нийт 9594.2 тэрбум Түлш, эрчим хүчний салбарт нийт 3658.5 тэрбум Эрдэс баялаг, хүнд үйлдвэрийн салбарт 15,09 их наяд Мэдээлэл, шуудан, харилцаа холбооны технологийн салбарт 777.2 тэрбум Хот байгуулалт, барилгын салбарт нийт 1523.0 тэрбум  Хүнс, хөдөө аж ахуй хөнгөн үйлдвэрийн салбарт – 466,1 тэрбум төгрөг Эрүүл мэндийн салбарт 195,0 тэрбум Боловсрол, соёл, шинжлэх ухааны салбарт 812,17 тэрбум Байгал орчин, аялал жуулчлалын салбарт 2085,4 тэрбум төгрөг

National Development and Innovation Committee   Government building 2, United Nations Street 5/1, Chingeltei district, Ulaanbaatar 15160, MONGOLIA. Tel: +976-11-265912 Fax: +976-11-327914 Web site: www.ndic.gov.mn, E-mail: info@ndic.gov.mn