The global focus on sustainability has accelerated - and there has been talk of tailwinds behind the clean energy sector now that Joe Biden has taken the reins in the US. Countries such as Australia are now facing pressure from Washington’s Climate Envoy John Kerry and from the EU to do more as international media herald the ‘end of coal’.
Closer to Mongolia, a recent report from the Asian Development Bank found that northeast Asian countries relied on fossil fuels for 70 percent of electricity generation in 2018. Of those countries, the three largest – China, Japan and South Korea – have all pledged to reach net zero emissions by 2050 or 2060.
In 2020, according to the Bank, those three countries consumed 8815.7 terawatt-hours (TWh) of electricity, which means roughly 6000-6200 TWh will need to be converted to renewable sources in the next 30-40 years. That’s about 40 percent more electricity than the US uses in a year – right next door to Mongolia’s huge renewable resources.
Surely now is the time for Mongolia’s renewable energy sector to boom?
In theory, yes. But in practice, a renewable boom won’t happen unless corporate boardrooms decide that projects are likely to be profitable.
As the situation stands, renewable energy projects are disadvantaged from the start by the Mongolian government’s huge subsidies for coal-fired electricity.
Although there are obstacles to profitability further down the road – namely whether exports to China, South Korea and Japan are diplomatically feasible – this is the first roadblock.
In an interview, E. Orchlon, the head of Clean Energy Asia, said that the subsidy scheme prevents renewable energy projects from matching the extraordinarily low price point of Mongolia’s coal-fired power plants.
“The depreciation costs [of those plants] have already been recouped,” Orchlon said. “In other words, electricity is generated at a rate that includes only human wages and repair costs. Second, huge subsidies are given to this sector. Thermal coal is even subsidized from mines to power plants. [So] the main reason for not being able to build large-scale new power plants is the lack of money in the system.”
That lack of money is preventing much-needed capital from reaching renewables.
In a boardroom, the net present value of a project needs to be positive for a proposal to survive the decision-making process. If cash inflows are guaranteed through watertight future energy contracts at decent price points and cash outflows for investors are reduced, then Mongolia’s renewable sector may take off.
Conversely, if Mongolia continues to subsidise coal-fired electricity to $0.04 per kilowatt hour (amongst the lowest prices in the world) for all users, then foreign investors won’t see a positive net present value in Mongolian renewables.
That means an increase in electricity rates for end users is necessary to improve the system, which obviously isn’t going to be popular.
So now a money problem has become a political problem – but there are reasons to press on.
One line of resistance to a rates hike is that the government needs to keep Mongolia’s electricity prices affordable for poorer households. UB is the coldest capital in the world with an average annual temperature of -1.3C, and the average monthly salary for a UB resident is around US $490. The government wrote off utility costs (electricity and heating) for households to mitigate the impact of COVID-19 until this July.
But research shows that utility subsidies don’t have much impact on the disposable income of lower income households compared to other social programs. That means the government could better help poorer households by redirecting the money spent on subsidies to other social safety nets whilst also improving the net present value outlook for renewable energy investors.
Second, a rate hike for the purpose of boosting the renewable energy sector may actually reduce wholesale prices in the long term.
A study in Australia (another coal-dependent grid) found that renewable energy projects reduced wholesale prices by a greater amount than the cost of subsidising those same projects.
Finally, a rate hike doesn’t actually need to impact households. According to Ministry of Energy figures from 2018, households only account for 18 percent of Mongolia’s total energy consumption, whilst industry and construction accounted for 47 percent. An increase in rates for industry with targeted discounts for households could be a more efficient way of achieving the same outcome without attracting the ire of voters.
In sum, it will be difficult for Mongolia to tap into its vast renewable resources and improve its electricity grid without spending political capital on increasing the price of electricity.
But if the framework and benefits of an increase (as outlined above) are well communicated to the public, then perhaps the end of coal really is a possibility. And Mongolia can capture the accelerating opportunities created by a net-zero carbon world.
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