Fate of TT power plant hinges on RIO TINTO decision

16th of 4, 2018

B. Tugsbilegt

How Oyu Tolgoi LLC decides to source the electricity to meet the needs of its mine will also decide the fate of the Tavan Tolgoi power plant, a proposed mega project that would meet the power needs of both industrial and domestic users across a large swathe of the country. As the Mongolian Government and Oyu Tolgoi seek to reach an agreement on the matter, the two partners in the company charged with taking the Tavan Tolgoi power plant (TTPP) project forward – Japan’s Marubeni (66%) and MCS Energy (34%) -- must be wondering what would be left for them to do. 

The Government terminated the Southern Region Power Sector Cooperation Agreement on 15 February, as it felt that the absence in it of a time frame to complete the power plant was a major reason why nothing had moved. Under the investment agreement on Oyu Tolgoi, sometime after the start of operation, the company would have to use power generated in Mongolia. As the Mongolian national grid is unable to provide the amount of power Oyu Tolgoi needs, the company has been buying electricity from China, but the Government has now called for a stop to it, with Minister of Energy Ts.Davaasuren telling Oyu Tolgoi that it must start buying its energy domestically within four years from now, hoping that, in the absence of an alternative, it would have to buy from the plant proposed to be built at Tavan Tolgoi.

That guarantee of sale of a major part of its generation would mean work on the power plant could then begin in real earnest. However, things did not quite work out that way, with Rio Tinto publicly mulling building a captive plant for the Oyu Tolgoi mine. That is not the best solution for either party. Building its own plant would mean a significant capital cost, around $1 billion, for Rio Tinto, adding to its debt burden as it develops the underground mine. For the Government the problem is that the OT plant will not provide power to any other consumer, and the Tavan Tolgoi plant will thus have to be built at a cost of $1 billion, but with OT lost as a customer, the 450MW it generates will be much in excess of demand. Both the company and the Government understand the urgent need to reconcile their differences and they are working together to find a win-win solution.

Nobody is willing to say anything on record, but there is reason to believe that the representatives of Oyu Tolgoi are likely to agree to buy from the Tavan Tolgoi plant, if the price is right. Once this is agreed upon, TTPP can finally be taken off the drawing board, and a clear timeline set for the different phases of construction. Building such an ambitious plant would take four years at least, and the cost is huge, so a guarantee of Rio Tinto for the power plant project is essential.

With the Government taking the stand that if Rio Tinto does not abide by the investment agreement and buy power generated in Mongolia, the agreement would stand annulled, the company has two options: buy from the Tavan Tolgoi plant, or set up one on its own. Rio just cannot risk negotiating a new investment agreement, and building its own plant also would not come easy. Its shareholders would not be happy with its cost, and with OECD members deciding to discourage use of coal, attracting investment might become harder, as time passes. The Government will also not be happy if Rio Tinto, as majority shareholder, does decide to build its own power plant. The increase in the OT development costs would mean more delay in Mongolia receiving dividends as a shareholder.

There will be another price to pay – a loss of reputation. Rio Tinto joined the Paris Agreement in 2015 and is known for its commitment to reducing carbon emission. It claims to have invested over AUD100 million in the past 15 years on developing carbon capture and storage technology. It cannot now be seen to build a coal-based plant for its own use.

The guarantee from Rio Tinto would make the TTPP much more viable and would boost investors’ faith in its profitability. Hopes are high that an agreement would be reached on the terms of this guarantee, particularly as energy was one of the three important issues the Rio Tinto Chief Executive, Jean Sebastien Jacques, and Prime Minister U. Khurelsukh, at their meeting earlier this year, agreed to resolve without delay. The project director of TTPP, D.Batbilet, has said they are ready to start construction work in July once the Rio Tinto guarantee is received. 

The TTPP Investment Agreement was concluded in June, 2016. It mentions Oyu Tolgoi as the main purchaser, and includes several incentives for it when a sale and purchase agreement is signed. So, if everything goes according to plan and if, as seems likely, a guarantee is received from the mining giant for the power plant project, Mongolia will finally have a new mega power generating facility ready and working by 2022.

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