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STRATEGY ON SUSTAINABLE DEVELOPMENT OF ENERGY SECTOR AND REGULATORY FRAMEWORK

STRATEGY ON SUSTAINABLE DEVELOPMENT OF ENERGY SECTOR AND REGULATORY FRAMEWORK. “ ENERGY MONGOLIA -2013 ” INTERNATIONAL CONFERENCE. Ulaanbaatar, Mongolia May 24-26, 2013. Chairman Mr . Otgonbayar , Sainbuyan Energy Regulatory Commission /ERC/ of Mongolia. CONTENT.

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STRATEGY ON SUSTAINABLE DEVELOPMENT OF ENERGY SECTOR AND REGULATORY FRAMEWORK

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  1. STRATEGY ON SUSTAINABLE DEVELOPMENT OF ENERGY SECTOR AND REGULATORY FRAMEWORK • “ENERGY MONGOLIA-2013” • INTERNATIONAL CONFERENCE Ulaanbaatar, Mongolia May 24-26, 2013 • Chairman Mr. Otgonbayar, Sainbuyan • Energy Regulatory Commission /ERC/ of Mongolia

  2. CONTENT

  3. ENERGY REGULATORY COMMISSION /ERC/ The Energy Law adopted at the Parliament of Mongolia on February 02, 2001 is based on: the economic principles, market relations, sectorial and customers’ rights and duties, and the law legally set up Energy Regulatory Authority, the body responsible for economic regulations. The economic regulatory instrument: has implemented its functions to grant a license, monitor its implementation through fixing relevant term and requirements, revise and approve licensees’ tariffs, to set selling tariffs to consumers, develop consumer’s connection instructions and Business rule and to ensure their observance, within the framework of the legally provided power and rule. According to the amendment introduced to the Energy Law in December 2011, the Energy Regulatory Authority was reorganized as an Energy Regulatory Commission.

  4. LEGAL FRAMEWORK OF REGULATION LAWS MAINLY USED IN ENERGY REGULATION • CIVIL LAW • LAW ON LICENSING • LAW ON ENERGY • LAW ON RENEWABLE ENERGY • LAW ON CONSUMER RIGHT PROTECTION • COMPETITION LAW Эрчим хүчний салбар дахь зохицуулалтын орчин

  5. LEGAL FRAMEWORK OF REGULATION RULES AND REGULATIONS GOVERNMENT RESOLUTION OF MONGOLIA • ELECTRICITY CONSUMPTION RULE • HEAT CONSUMPTION RULE SECTORIAL MINISRTY ORDER • GRID RULE • CENTRALIZED HEAT SUPPLY RULE COMMISSION /ERC/ DECISION • BUSINESS RULE AMONG THE LICENSEES • BUSINESS RULE AMONG THE ENERGY SUPPLIER AND CONSUMER • ELECTRICITY SPOT MARKER RULE • ELECTRICITY COMPETITIVE MARKET RULE • PROCEDURE ON REVIEW OF TARIFF PROPOSAL

  6. I. LICENSING: PRINCIPLES FOR ISSUING LICENSE • A DECISION WHETHER TO ISSUE A LICENSE SHALL BE MADE WITHIN 60 DAYS FROM THE DATE OF RECEIPT OF THE APPLICATION FOR A LICENSE; • IN CASE THE APPLICATION AND ENCLOSED DOCUMENTS FAIL TO MEET THE REQUIREMENTS, THEY SHALL BE RETURNED TO THE APPLICANT WITHIN 10 DAYS FROM THE DATE OF RECEIPT; • THE DECISION TO ISSUE A LICENSE OR A JUSTIFICATION FOR REFUSAL SHALL BE PUBLISHED; • A LICENSE SHALL BE GRANTED TO A FINANCIALLY CAPABLE LEGAL ENTITY, WHICH POSSESSES EXPERIENCE OR IS ABLE TO OPERATE IN THE GIVEN FIELD; • IN CASE SEVERAL LEGAL ENTITIES SUBMIT APPLICATIONS FOR THE SAME TYPE OF LICENSE, THE LICENSE SHALL BE GRANTED ON THE BASIS OF COMPETITIVE TENDERING; • LICENSE ISSUING PROCESS SHALL BE OPEN, PRECISE AND NONE DISCRIMINATIVE MANNER.

  7. BY DECEMBER 2012, THEENERGY REGULATORY COMMISSION GRANTED MORE THAN 10 TYPE OF 172 LICENSES IN TOTAL TO 87 ENTERPRISES AND ORGANIZATIONS.

  8. LICENSE ON CONSTRUCTION OF ENERGY FACILITIES FOLLOWING ARE SOME OF CONSIDERABLY THE BIGGEST THERMAL POWER PLANT PROJECTS ACQUIRED A LICENSE ON CONSTRUCTION OF ENERGY FACILITIES, BEING SUPPORTED BY THE SCIENCE AND TECHNOLOGY COUNCIL UNDER THE SECTORIAL MINISTRY: • 600 MW THERMAL POWER PLANT RELIED UPON THE CHANDGANA TAL COAL FIELD IN THE TERRITORY OF MURUN SOUM, KHENTII AIMAG, • OYU TOLGOI 450 MW POWER PLANT IN KHANBOGD SOUM, UNMNUGOBI AIMAG, • 600 MW THERMAL POWER PLANT RELIED UPON THE BUURELJUUT COAL FIELD IN THE TERRITORY OF BAYAN SOUM, TUV AIMAG, • 600 MW THERMAL POWER PLANT RELIED UPON THE TSAIDAM NUUR COAL FIELD IN THE TERRITORY OF BAYAN SOUM, TUV AIMAG, AND • 600 MW THERMAL POWER PLANT RELIED UPON THE ERDENETSOGT COAL FIELD IN THE TERRITORY OF ALTANSHIREE SOUM, DORNOGOBI AIMAG. IN TOTAL: 2850 MW

  9. LICENSE ON CONSTRUCTION OF ENERGY FACILITIES WIND FARMS: • 50 MW WIND FARM IN SERGELEN SOUM, TUV AIMAG, • 250 MW WIND FARM IN KHANBOGD SOUM, UMNUGOBI AIMAG, • 52 MW WIND FARM IN SAINSHAND SOUM, DORNOGOBI AIMAG, • 100 MW WIND FARM IN DALANJARGALAN SOUM, DORNOGOBI AIMAG, AND • 50.4 MW WIND FARM IN SUMBER SOUM, GOBISUMBER AIMAG IN TOTAL: 502.4 MW

  10. LICENSE ON CONSTRUCTION OF ENERGY FACILITIES • ALTHOUGH THE LICENSES ON CONSTRUCTION OF ENERGY FACILITIES WITH 3351.6 MW CAPACITY WERE ALREADY GRANTED TO ENTERPRISES, PRESENTLY, THERE IS NO LICENSEE THAT HAS FINALLY SETTLED AN INVESTMENT ISSUE AND COMMENCED A PROJECT CONSTRUCTION PHASE IF NOT TO MENTION A “CLEAN ENERGY” LLC 50 MW WIND PARK THAT IS BEING ERECTED IN SERGELEN SOUM, TUV AIMAG.

  11. IN GENERAL, THE POLICY AND LINE TO BE PURSUED IN GRANTING A LICENSE ON CONSTRUCTION OF ENERGY FACILITIES ARE FORMULATED AS FOLLOWS: • TO BE BASED ON ENERGY SUPPLY-CONSUMPTION BALANCE, • TO SUPPORT ADVANCED ENVIRONMENTALLY FAVORABLE AND ECONOMICALLY EFFICIENT TECHNOLOGIES, • A NEW ENERGY SOURCE TO BE CONNECTED TO THE CENTRALIZED SYSTEM SHOULD BE DESIGNED TO OPERATE IN THE SYSTEM’S STATIC AND DYNAMIC STABILIZATION REGIMES, GENERATE A MINIMAL VALUE OF GRAPHIC DECLINATION AND REDUCE A CONSUMPTION OF IMPORTED ENERGY, • TO TAKE INTO ACCOUNT A POTENTIAL IMPACT THAT MIGHT BE IMPOSED BY NEWLY COMMISSIONED ENERGY SOURCES ON THE TECHNICAL SPECIFICATIONS OF THE CURRENTLY OPERATING PRODUCERS AS WELL AS ON THE CONSUMER’S TARIFFS, • TO SUPPORT OR APPRECIATE A PRIVATE SECTOR INVESTMENT, • TO BE CAPABLE TO FINANCE AS MINIMUM AS 30 PER CENT OF TOTAL PROJECT INVESTMENT FROM OWN SOURCES, AND • TO IDENTIFY EITHER A PRACTICABLE CURCUMSTANCE FOR ENERGY EXPORT HAS BEEN PROVIDED OR NOT.

  12. II. ENERGY GENERATION AND CONSUMPTION, ECONOMIC DEVELOPMENT ZONE

  13. ECONOMIC DEVELOPMENT ZONE OF MONGOLIA

  14. III. ENERGY RESOURCE OF MONGOLIA: COAL RESOURCE: • OF 150 BILLION TONS OF TOTAL COAL RESOURCE OF MONGOLIA, BY NOW, OVER 20 BILLION TONS HAVE BEEN IDENTIFIED THROUGH RELEVANT PRELIMINARY AND DETAILED EXPLORATIONS AND PROSPECTING. • CURRENTLY, THERE HAVE BEEN DISCOVERED OVER 200 COAL FIELDS, AND OUT OF THESE, NEARLY 40 COAL FIELDS ARE BEING NOW EXTRACTED. SOME OF INTENSIVELY EXTRACTED COAL FIELDS ARE: • IN THE WESTERN REGION: NUURST KHOTGOR, KHAR TARVAGATAIAND KHUSHUUT, • IN THE KHANGAI REGION: BULGAN AIMAG’S SAIKHAN-OVOO, BAYANKHONGOR AIMAG’S JINST AND KHUVSGUL AIMAG’S MOGOIN GOL, • IN THE CENTRAL REGION: TAVAN TOLGOI, BAGANUUR, SHIVEE ОVОО, TEVSHIINGOBI, ALAGTOLGOI ANDKHANGAI, AND • IN THE EASTERN REGION: ADUUNCHULUUNAND TALBULAG. AS A RESULT OF CONDUCTING A PETROLEUM EXPLORATION WITHIN WHOLE THE TERRITORY OF MONGOLIA, THERE WERE DISCOVERED NOT SO ABUNDANT PETROLEUM RESOURCES IN THE EASTERN AND GOBI REGIONS. HOWEVER, NO FLAMMABLE GAS RESOURCE HAS BEEN CURRENTLY REVEALED.

  15. RENEWABLE ENERGY RESOURCE: • ACCORDING TO THE RELEVANT STUDY, THE HYDROPOWER CAPACITY RESOURCE OF MONGOLIA IS ESTIMATED AS 6417.7 MW, AND THERE IS A POSSIBILITY TO PRODUCE 56.2 kW.h ENERGY PER YEAR. • FOR MOST OF THE COUNTRY’S TERRITORY, 270-300 DAYS ARE SUNNY PER YEAR, WHILE THE AVERAGE DURATION OF SOLAR ILLUMINATION; ANNUAL MEAN SOLAR ENERGY, AND THE DAILY SOLAR INTENSITY ARE IDENTIFIED RESPECTIVELY AS 2250-3300 HOURS; 1400 kW.h/m2, AND 4.3-4.7kW.h/m2. • THE WIND POWER CAPACITY RESOURCE OF MONGOLIA IS ESTIMATED AS 836.8 BILLION kW.h AND AN ANNUAL DURATION OF ITS POTENTIAL EXPLOITATION IS 3500-4600 HOURS.

  16. IV. TARIFF AND PRICING: THE PRICES AND TARIFFS FOR RENEWABLE ENERGY ARE FIXED AS FOLLOWS IN THE “RENEWABLE ENERGY LAW”: IN CASE OF BEING CONNECTED TO THE TRANSMISSION GRID: • 1 kW.h ENERGY PRODUCED AND SUPPLIED BY WIND POWER SOURCE:0.08-0.095$ • 1 kW.hENERGY PRODUCED AND SUPPLIED BY HYDROPOWER PLANT WITH UP TO 500 kWCAPACITY: 0.045-0.06$ • 1 kW.hENERGY PRODUCED AND SUPPLIED BY SOLAR POWER SOURCE: 0.15-0.18$ IN CASE OF INDEPENDENT OR SEPARATE SOURCES: • 1 kW.hENERGY PRODUCED AND SUPPLIED BY WIND POWER SOURCE:0.10-0.15$ • 1 kW.hENERGY PRODUCED AND SUPPLIED BY HYDROPOWER PLANT WITH UP TO 500 kWCAPACITY: 0.08-0.10$ • 1 kW.hENERGY PRODUCED AND SUPPLIED BY HYDROPOWER PLANT WITH 500-2000kWCAPACITY: 0.05-0.06$ • 1 kW.hENERGY PRODUCED AND SUPPLIED BY HYDROPOWER PLANT WITH 2001-5000kWCAPACITY: 0.045-0.05$, AND • 1 kW.hENERGY PRODUCED AND SUPPLIED BY SOLAR POWER SOURCE: 0.2-0.3$.

  17. PRINCIPLES FOR DETERMINING TARIFF IS IDENTIFIED IN LAW ON ENERGY AS FOLLOWS: • TO SET THE TARIFF BASED ON ACTIVITY REAL COSTS AND EXPENSES; • TO ENSURE APPROPRIATE DEGREE OF REVENUE IN WHICH REQUIRED COSTS AND INVESTMENT RETURN OF LICENSED ACTIVITY SHOULD BE CALCULATED; • TO PROVIDE PRICE SUSTAINABILITY; • THE LICENSEES REVENUE THAT COULD ENSURE ITS FINANCIAL STABILITY;

  18. CENTRAL ENERGY SYSTEM ELECTRICITY PRIME COST PER UNIT /Performance by 2012/

  19. Cost structure of Central Region Licensees’ (performance by 2012) 13.4% 23.2% 31.9% 18.1% 17.0% 24.1% 37.7% 46.3% 44.0% 44.2% Fuel cost Salary Depreciation Others Average selling price88.21MNT/kW.h

  20. Fuel cost Salary Depreciation Others Central Region Licensees' heat cost structure (performance by 2012) Central region average selling price 12,295.5 MNT/Gkal

  21. IN GENERAL, THE ENERGY REGULATORY COMMISSION FORMULATES ITS POLICY AND LINE TO BE PURSUED FURTHER ON PRICE AND TARIFF AS FOLLOWS: • TO CREATE A PRICE AND TARIFF SYSTEM BASED ON THE FUNDAMENTAL MARKET ECONOMY PRINCIPLES, AT THE PRODUCTION-SUPPLY LEVEL, • TO FIX TARIFFS THAT COULD ENSURE FINANCIAL STABILITY OF LICENSEES, RELYING ON REAL COSTS AND EXPENSES, • TO CONSIDER SOCIAL FACTORS WHILE FIXING PRICE AND TARIFF. If concretely, it involves issues concerned with protection of consumers interests, considering a tariff of low-income social groups and support of efficient energy consumption, • TO INTRODUCE A CAPACITY AND ENERGY TARIFF BY COMPUTING ENERGY COST AND EXPENSE WITH THE CONSIDERATION OF A LOAD IMPOSED BY CONSUMERS ON ENERGY SUPPLY SYSTEM, • TO DEVELOP AND ADHERE A TARIFF METHODOLOGY THAT COULD ENSURE PRICE STABILITY IN ORDER TO AVOID OF FREQUENT CHANGES IN ENERGY CONSUMER’S TARIFF AND PRICE, • TO DEVELOP A METHODOLOGY FOR ALLOTING THE FUEL AND FIXED COSTS OF THERMAL POWER PLANTS AMONG ELECTRICITY AND HEATING IN ORDER TO COMPUTE PRIME COST OBJECTIVELY STARTING FROM THE PRODUCTION PROCESS.

  22. EVERYONE CLEARLY UNDERSTANDS THAT FOR THE PROMOTION AND DEVELOPMENT OF OTHER NATIONAL ECONOMIC SECTORS, IT IS SPECIFICALLY IMPORTANT TO OPERATE BY FIXING ENERGY PRICE AND TARIFF CORRECTLY, AND ENSURING A PRICE STABILITY. IN THIS SENSE, THE ENERGY REGULATORY COMMISSION HAS A SPECIFIC FUNCTION TO MAINTAIN FOLLOWING TWO INTERESTS IN A PROPER BALANCED WAY. THESE ARE: TO SET COST-BASED TARIFF OF ENERGY LICENSEES ON THE ONE HAND, AND TO TAKE IN CONSIDERATION THE IMPACT OF RELEVANT SOCIAL FACTORS WHILE FIXING CONSUMER’S PRICE AND TARIFF ON THE OTHER HAND.

  23. THANK YOU FOR YOUR ATTENTION ENERGY REGULATORY COMMISSION OF MONGOLIA Address: 14201, Ikhsurguuliingudamj 2a, Sukhbaatar district, Ulaanbaatar Tel: 976-11- 320126 Fax: 976-11- 319335 E-mail: info@erc.mn Web:www.erc.mn

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