Technical Assistance Consultant’s Report Project Number: 50088-001 December 2018 Mongolia: Upscaling Renewable Energy Sector Project (Financed by the Strategic Climate Fund) Prepared by Integration Environment & Energy Gmbh, Germany in association with German ProfEC, Germany and Mon-Energy Consult LLC, Mongolia Ulaanbaatar, Mongolia For the Ministry of Energy This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. (For project preparatory technical assistance: All the views expressed herein may not be incorporated into the proposed project’s design. TA-9224 MON SCALING UP RENEWABLE ENERGY (PHASE II) Final Report Executive Summary Prepared for Asian Development Bank by INTEGRATION environment & energy GmbH in association with Mon-Energy & Profec December 2018 TA-9224 MON: Scaling Up Renewable Energy in Mongolia – Phase II Final Report ABBREVIATIONS ADB – Asian Development Bank AuES – Altai-Uliastai Energy System CES – Central Energy System CHP – Combined Heat & Power CIF – Climate Investment Fund CO2 – Carbon Dioxide EA – Executing Agency EARF – Environmental Assessment Review Framework EES – Eastern Energy System EIA – Environmental Impact assessment EIRR – Economic Internal Rate of Return ERC – Electricity Regulatory Commission FIRR – Financial Internal Rate of Return FiT – Feed-In-Tariff FSR – Feasibility Study GCF – Green Climate Fund GDP – Gross Domestic Product GSHP – Ground Source Heat Pump HOB – Heat Only Boiler IEE – Initial Environmental Examination JFJCM – Japan Fund for Joint Crediting Mechanism MDB – Multi-lateral Development Bank MoE – Ministry of Energy MoF – Ministry of Finance NPTG – National Power Transmission Grid Company NOx – Nitrogen Oxides PM – Particulate Matter SOx – Sulphur Dioxides SREP – Scaling Up Renewable Energy SOJSC – State-Owned Joint Stock Company TA – Technical Assistance TOR – Terms of Reference UB – Ulaanbaatar WACC – Weighted Average Cost of Capital WES – Western Energy System NOTE In this report, “$” refers to US dollars. i TA-9224 MON: Scaling Up Renewable Energy in Mongolia – Phase II Final Report CONTENTS II. INTRODUCTION 4 A. SCOPE OF PROJECT 4 B. FINANCIAL / ECONOMIC SUMMARY 5 C. OUTPUT-BASED RESULTS FRAMEWORK 7 III. MACRO-ECONOMIC INDICATORS 8 A. HOUSEHOLDS & ELECTRICITY CONSUMPTION 8 B. REGIONAL GROSS DOMESTIC PRODUCT (GDP) 9 C. ELECTRICITY STATISTICS 10 IV. ELECTRICITY DEMAND FORECASTS WES & AUES 12 D. WES DEMAND FORECAST 12 E. AuES DEMAND FORECAST 17 F. DEMAND PROFILE FOR WES & AuES 22 G. IMPACT OF STORAGE BATTERIES 22 V. ON-GRID RENEWABLE ENERGY IN WES & AUES 23 H. SOLAR PV 23 I. WIND 29 J. STORAGE BATTERIES 36 VI. ELECTRICITY SYSTEM INTEGRATION (ON-GRID) 41 K. INTRODUCTION 41 L. INTERMITTENCY 41 M. WESTERN ENERGY SYSTEM EXPANSION 44 N. WES TRANSMISSION GRID STABILIZATION 48 O. ALTAI ULIASTAI ENERGY SYSTEM EXPANSION 53 P. AuES TRANSMISSION GRID STABILIZATION 57 VII. ALTAI SOUM (OFF-GRID HYBRID RE) 61 Q. BACKGROUND 61 R. CONDITION OF EXISTING ELECTRICITY SUPPLY SYSTEM 61 D. LEVELIZED COST OF ENERGY 72 E. WIND FARM SITING 73 VIII. GROUND SOURCE HEAT PUMPS 74 S. BACKGROUND 74 T. GSHP STUDY 74 U. GSHP TECHNOLOGIES 75 V. INVESTMENT 77 IX. FINANCE / ECONOMICS 80 W. INTRODUCTION 80 X. HISTORICAL FINANCIAL PERFORMANCE AND CORPORATE PROJECTIONS FOR IMPLEMENTING AGENCIES 80 Y. FINANCIAL MANAGEMENT ASSESSMENT AND RELATED RISKS 83 Z. FINANCIAL ANALYSIS OF THE PROJECT 83 AA. ECONOMIC ANALYSES OF THE PROJECT 86 ii TA-9224 MON: Scaling Up Renewable Energy in Mongolia – Phase II Final Report X. SOCIAL SAFEGUARDS 91 BB. POVERTY & SOCIAL ANALYSES 91 CC. LAND ACQUISITION AND RESETTLEMENT 93 XI. ENVIRONMENT 94 APPENDICES Appendix A: Solar PV Detailed Technical Report Appendix B: Wind Detailed Technical Report Appendix C: Storage Batteries Detailed Technical Report Appendix D: On-Grid System Integration Appendix E: Altai Soum Off-Grid Hybrid RE Technical Report Appendix F: Ground Source Heat Pumps Detailed Technical Report Appendix G: Finance / Economics Report Appendix H: Poverty & Social Analysis Report Appendix I: Initial Environmental Examination (IEE) Report Appendix J: EARF Report Appendix K: CVRA Report iii TA-9224 MON: Scaling Up Renewable Energy in Mongolia – Phase II Final Report II. INTRODUCTION A. SCOPE OF PROJECT 1. The Project aims to develop the renewable based distributed energy system in a remote and less developed region of western Mongolia, that is the first-of-its-kind renewable energy application in Mongolia, and entails perceived risks on the system performance, cost of energy and its impact upon end-user affordability, and grid stability. 2. The Project will help develop 41.5 MW of distributed renewable energy systems in the Western and Altai-Uliastai regions, in a time and geographic slicing manner. The project supports the development, demonstration and gradual roll out of the distributed renewable energy system in the targeted load centres in batches (the first stage 2018-2021 and the second stage 2021-2023). 3. The successful completion of the project will see the establishment of an institutional platform that encourages private sector investment in distributed renewable energy to sustainably expand clean and affordable electricity supply in remote and less developed regions of Mongolia, and to decarbonize the energy sector in the country. • Component A. Distributed renewable energy system development. The component will be implemented with two batches to develop a total of 41.0 MW of renewable energy throughout the project implementation period from 2018 to 2023. The first batch (2018-2021) will develop a total of 25.5 MW of distributed renewable energy systems in Umnugovi, Uvs province, Altai, Govi Altai province, Uliastai, Zavkhan province, and Altai-Soum, Govi-Altai province. The second batch (2021-2023) will see construction of another 16.0 MW of distributed renewable energy capacity in Telmen, Zavkhan province, and Moron, Khovsgol province. • Component B. Shallow ground heat pump demonstration. The component will also install around 100 kW of unit heat capacity of shallow ground heat pump in the public buildings in selected five townships of the targeted region to supply air pollutant free space heating which would cover 10,000 square meter of floor area in total. Decentralized coal based individual heating system is common in the targeted regions and is a major source of air pollution. The component demonstrates the performance of shallow-ground heat pump systems and develops experience in design, installation, operation and maintenance of a shallow ground heat pump system for future scaling- up. 4. Mongolia is currently highly debt distressed mainly due to sluggish mineral export and slowed-down economic growth and is now under the three years of the Extended Financing Facility under the International Monetary Fund. To forge ahead and scale up renewable energy in remote and less developed regions of Mongolia, while the government has now to downsize both borrowing and expenditure, means that matching grant funding is critical for the success of the programme. 4 TA-9224 MON: Scaling Up Renewable Energy in Mongolia – Phase II Final Report B. FINANCIAL / ECONOMIC SUMMARY 5. The base costs of the sub-Projects are summarised in the following table: Table II-1: Base Cost Table Component Sub-component MUSD TOTAL 49.03 Component 1: First Batch Distributed Renewable Energy System Umnugovi 10 MW Wind 13.71 Govi Altai 10 MW PV 9.71 Uliastai 5 MW PV + Battery 7.95 Altai Soum Hybrid 0.92 Second Batch Muren 10 MW PV 9.38 Salkhit Khutul 5 MW Wind 6.36 Component 2: Shallow Ground Heat Pump Demonstration Shallow Ground Heat Pumps 1.00 Source: ADB Consultant 6. Financial cost-benefit analysis of the sub-projects and the whole project was carried out both without grant financing and with grant financing. Summary of the project financial analysis results is given in the following tables. Table II-2: Summary of Financial Cost-Benefit Analysis by sub-Project, no Grants FNPV WACC (%) FIRR (%) FBCR (million MNT) Umnugovi 10 MW Wind 2.91 % 9.93 % 42 490 2.13 Govi Altai 10 MW PV 2.81 % 7.67 % 18 973 1.68 Uliastai 5 MW PV + Batt 3.03 % 6.42 % 10 456 1.45 Altai Soum Hybrid (PV & Wind) 2.01 % 1.31 % -227 0.91 Muren 10 MW PV 2.01 % -3.27 % -14 401 0.46 Salkhit Khutul 6 MW Wind 2.01 % 12.15 % 28 633 2.63 SGHP 3.49 % 4.13 % 128 1.05 Whole Project 2.59 % 7.10 % 88 491 1.64 Source: ADB Consultant Table II-3: Summary of Financial Cost-Benefit Analysis by sub-Project, with Grants FNPV WACC (%) FIRR (%) FBCR (million MNT) Umnugovi 10 MW Wind 2.91 % 20.27 % 62 666 4.56 Govi Altai 10 MW PV 2.81 % 14.25 % 30 592 2.88 Uliastai 5 MW PV + Batt 3.03 % 17.80 % 24 418 3.65 Altai Soum Hybrid (PV & Wind) (*) 2.01 % 1.31 % -227 0.91 Muren 10 MW PV (*) 2.01 % -3.27 % -14 401 0.46 Salkhit Khutul 6 MW Wind (*) 2.01 % 12.15 % 28 633 2.63 5 TA-9224 MON: Scaling Up Renewable Energy in Mongolia – Phase II Final Report FNPV WACC (%) FIRR (%) FBCR (million MNT) SGHP 3.49 % 53.26 % 2 428 5.92 Whole Project 2.59 % 12.10 % 136 684 2.51 Source: ADB Consultant (*) No grants are assumed for these sub-projects 7. As it can be seen in the above tables, under the given assumptions, even without grants most of the sub-projects will have positive FNPV and FIRR higher than their WACC. Among the sub- components, only the Muren PV and the Altai Soum Hybrid have negative profitability. It is worth to notice that none of these two sub-projects is supposed to receive grant financing, thus they would continue to be infeasible even after the injection of the grants to the project. However, the overall profitability of the project is quite good even despite the poor performance of the Muren PV and the Altai Soum Hybrid sub-projects.