Energy Security and Mongolia’s Achilles’ Heel

Ulaanbaatar, Mongolia's capital, endures harsh winters worsened by chronic power shortages and energy rationing, highlighting the city's urgent need for modernized energy infrastructure.

The aging Thermal Power Plant No. 3 (TPP-3), a coal-fired facility responsible for 32% of Ulaanbaatar's heat and 16% of the central region's electricity, struggles with frequent failures, jeopardizing the city's energy security during critical months.

Mongolia is considering to partner with Russia to modernize this plant—at a staggering cost of €1.3 billion—has sparked debates over cost-effectiveness, geopolitical dependencies, and long-term energy strategies.

The Russian energy company Inter RAO is expected to lead the plant’s reconstruction, tripling its generating capacity to enhance the reliability of the city’s power supply.

The project, estimated at €1.3 billion, was discussed by Mongolia’s parliament. However, the initial cost estimate of USD 4.4 million per megawatt sparked comparisons to the expense of building a new facility, raising questions about its cost-effectiveness.

Beyond cost-effectiveness, a critical question is whether Mongolia has viable alternatives, given the limited availability of coal technology from other countries—a limitation that increases Mongolia's dependence on Russia, both financially and geopolitically.

Thousands of coal-fired power stations are being decommissioned worldwide as the global energy sector transitions to renewables. This constraint weakens Mongolia's bargaining position, potentially driving up costs with Russia.

A key challenge highlighted during parliamentary discussions was the difficulty of securing international financing for coal-fired power plants. Since the Paris Agreement in 2015, many nations and organizations have ceased funding new coal projects. China’s 2021 decision to halt overseas coal financing further restricted Mongolia’s options. Consequently, Mongolia turned to Russia, a country still investing in coal technology, particularly since TPP-3 was originally built with Russian expertise.

Technically, reliance on Russian expertise narrows Mongolia’s options. Outdated equipment and designs from Russia may preclude the adoption of alternative technologies or international collaborations that could offer better value or innovation. This dependence could limit Mongolia's ability to pursue energy independence and complicate its foreign policy, potentially reducing leverage in other bilateral negotiations.

During parliamentary debates, skepticism toward Russia was palpable, reflecting broader concerns about Mongolia’s growing dependence on its northern neighbor.

This unease mirrored recent hesitation to finalize a free trade agreement with the Russia-led Eurasian Economic Union, further highlighting the geopolitical complexities of deepening ties with Russia.

Energy Minister Chojilsuren sought to address public concerns, emphasizing that the initial cost estimates were preliminary and negotiable. He clarified that the initiative to modernize TPP-3 stemmed from a 2019 request by then-Prime Minister and current President Khurelsukh to Russia for support.

The minister also noted that Mongolia would halt the project and forgo the Russian loan if the final cost proved unreasonably high. The proposed loan terms—a 2% interest rate over 20 years with a five-year grace period—appear favorable, but the financial prudence of the project remains under scrutiny.

While the focus has shifted to a phased design stage costing USD 20 million, concerns about the project’s expense persist.

Addressing Ulaanbaatar’s power shortages requires a diversified approach, including investments in renewable energy and open, competitive bidding processes for infrastructure projects. Transitioning ger districts to gas heating, though limited so far, could also provide short-term relief. Over-reliance on Russia to modernize an aging facility risks overlooking more innovative and sustainable solutions.

Mongolia’s energy needs are growing rapidly due to urbanization in Ulaanbaatar’s ger districts and new infrastructure projects, such as cable cars and potentially a metro system. Securing a reliable domestic energy source is crucial, and the agreement with Russia for TPP-3’s expansion is a first step in addressing this demand. However, the stakes of this modernization effort extend far beyond resolving immediate energy shortages.

Ultimately, TPP-3’s upgrade is not merely a technical undertaking but a strategic decision with significant economic and geopolitical ramifications. It could further deepen Mongolia’s dependence on Russia while shaping the nation’s broader energy and foreign policy.

As Mongolia aspires to become a net energy exporter, ensuring the TPP-3 project’s success while balancing cost, geopolitics, and sustainability will be critical to shaping the nation’s energy future.