The draft amendments to the renewable energy law of Mongolia are submitted to the parliament
The Renewable Energy Law of Mongolia was first enacted in 2007 with an aim to promote green and sustainable energy development in the country and it was amended in 2015, mainly to introduce feed-in tariff support for investments made in the renewable energy sector. Further, in June 2015, the Parliament of Mongolia approved the State Policies on Energy which declares the state ambition to increase the share of renewable energy in the total installed energy capacity of Mongolia to 20% in 2020 and 30% in 2030. In the course of past decade following the establishment of specific legal framework for renewable energy, a handful of pioneer projects in Mongolian renewable energy sector was successfully implemented and a great number of project developers were licensed to construct and develop renewable energy projects.
In recent years however, a growing concern among the policy makers and authorities in the energy sector has been noticed as to whether the current legal framework for renewable energy needs to be revisited in connection with the rapid development and changes occurred in the global renewable energy market over the last 10 years. Furthermore, the authorities in the energy sector had expressed their opinion that certain amendments to the Renewable Energy Law are desired in order to ensure the stability of the grid system and keep the feed-in tariff the energy consumers pay at an affordable level. To this end, 6 Members of the Parliament led by Mr. Damba-Ochir Dorjdamba proposed the Draft Law on Amendments to the Renewable Energy Law of Mongolia to the Parliament of Mongolia for discussion and approval (the “Proposed Amendments”) on 30 October 2018.
We highlight below the major points of the Proposed Amendments and briefly present our thoughts on their potential implications:
- REDUCED TARIFF
The currently effective Renewable Energy Law sets out the range of tariff for renewable energy within which Energy Regulatory Commission (“ERC”) can approve the specific tariff rate for a given renewable project, mainly considering the investment return period of the project. At present, the Renewable Energy Law sets the range of tariff at USD 0.08-0.95 per kWh for wind energy and USD 0.15-0.18 per kWh for solar energy. The Proposed Amendments, however, suggested to abandon the current approach of providing with a tariff range and to only legislate the cap for renewable energy tariffs instead.
In this regard, the tariffs for wind and solar energy are capped up to USD 0.12 and USD 0.08, respectively, under the Proposed Amendments.
According to the initiators of the Proposed Amendments, their proposal to cap the tariff relates to the fact that the cost of renewable energy technologies has been significantly reduced since the Renewable Energy Law was first adopted back in 2007. Therefore, it is viewed that the price for renewable energy has now become able to compete with energy generated through traditional sources (i.e. coal fired etc.).
- INTRODUCTION OF RENEWABLE ENERGY AUCTION
Another main feature of the Proposed Amendments is the introduction of renewable energy auction. It is defined in the Proposed Amendments as a selection procedure for a project to construct renewable energy facility to be connected to the energy transmission network, on the basis of technical conditions and tariff proposal to supply energy to the grid. According to the Proposed Amendments, the Ministry of Energy will be in charge of formulating and adopting the relevant implementing regulations on the renewable energy auction procedure as well as organizing the auctions.
In view of the Proposed Amendments, it looks that the regular procedure for granting renewable energy licenses in the Renewable Energy Law (which refers to the Energy Law) remains unchanged. In the absence of amendments to the licensing procedure under the Renewable Energy Law, it can be said that the renewable energy auction is just an additional way of obtaining a license to construct and develop a renewable energy facility. In other words, the project developers would still be able to apply for license to construct energy facility for their own-initiated
projects without necessarily participating and winning in the energy auction procedure. Consequently, it gives rise to a question that in respect of which renewable facilities the auction procedure is to be implemented and whether this new procedure would impact in any way the regular licensing procedure. However, it appears that the Proposed Amendments fail to clarify these issues, and left them open to be clarified under the regulation to be adopted by the Ministry of Energy on the auction procedure.
From a critical point of view, leaving these questions subject to a regulatory act to be adopted later may not be the best approach when introducing such a significant policy changing instrument for the future development of renewable energy in Mongolia.
- PERFORMANCE GUARANTEE
The Proposed Amendments also introduced a concept of ‘project development guarantee’. It is defined as a monetary fund deposited at a bank or a bank guarantee delivered to the buyer of energy which ensures full performance of the obligations of the project developer under a contract to construct renewable energy facility. The definition refers to a contract to construct renewable energy facility which does not currently exist in the present practice of the energy sector. In the current practice, only power purchase agreement is made between the project company and the buyer of energy, and no other contract is entered into, especially concerning the obligation to construct a renewable energy facility. However, the Proposed Amendments also provide for an amendment to Article 10.2 of the Renewable Energy Law to include the project development guarantee to the main topics of terms of a power purchase agreement.
In view of this amendment to Article 10.2 of the Renewable Energy Law, coupled with the definition that such performance guarantee is to be provided to the seller of energy rather than ERC, we interpret this guarantee to be issued in respect of the power purchase agreements, not of a contract to construct an energy facility.
- TRANSMISSION COMPANY WILL NO LONGER BE RESPONSIBLE FOR SUBSTATION EXPANSION
Under Article 8.1.2 of the Renewable Energy Law, the power transmission license holder is responsible for connecting energy generated by a renewable energy facility to the distribution board of the transmission network and bearing the involved costs necessary for expansion of the transmission facilities. The initiators of the Proposed Amendments addressed that in practice, the transmission license holder, National Power Transmission Grid State Owned Stock Company (NPTG), is not financially able to fulfill the aforesaid statutory obligation. Thus, they proposed to remove Article 8.1.2 of the Renewable Energy Law in its entirety and release the transmission license holder from the above legal requirement. Accordingly, if the Proposed Amendments are approved, NPTG – the transmission license holder, will no longer be legally responsible for the expansion necessary for connection of the power plant to the transmission line.
- A DISCREPANCY BETWEEN THE ENERGY LAW AND THE RENEWABLE ENERGY LAW TO BE RESOLVED
Since the Energy Law was amended in 2015, a discrepancy between the Energy Law and the Renewable Energy Law as to the purchaser of energy under power purchase agreement has emerged and lasted. To be more specific, under the 2015 amendments to the Energy Law, National Dispatching Center State Owned LLC (NDC) was authorized to enter into power purchase agreements on the basis of a specific authorization from the Ministry of Energy in respect of each agreement. However, under the Renewable Energy Law, the authority to enter into power purchase agreements remained with the transmission license holder – NPTG. Although in practice, the two state owned entities, NDC and NPTG, have smoothly cooperated and followed the Energy Law neglecting the conflicting provision of the Renewable Energy Law, the contradiction between the two laws in energy sector has not been efficiently resolved to date. The Proposed Amendments intend to resolve the issue by replacing NPTG with NDC in terms of the authorized entity to sign the power purchase agreements in the renewable energy sector.
As the Proposed Amendments have not been adopted yet and are still subject to final revisions, it is of course too early to comment on their implications.
Nevertheless, if and when the Proposed Amendments are approved, they may have great implications on the renewable energy projects and/or investments that still need to obtain license to construct energy facility or tariff approval. The main implications would be as follows:
- there will no longer be statutorily guaranteed lowest rate of tariff for renewable energy;
- the tariff for renewables will be capped to USD 0.08 for wind energy and USD 0.12 for solar energy per kWh;
- renewable energy auction procedure will be introduced and its application will be determined under a regulation to be approved by the Minister of Energy. This raises uncertainty as to which projects will be subjected to such an auction procedure. Furthermore, the introduction of renewable energy auction procedure may give rise to auction related disputes; and
- NPTG as the transmission license holder will become no longer responsible for the financing of substation expansion or other electrical facility implying a shift of such responsibility from NPTG to the project developer.