Agreement with OT a big boost to TT power plant project

11th of 2, 2019

G. Iderkhangai 

By signing on the very last day of 2018 an agreement on Oyu Tolgoi sourcing power from inside the country, Ts. Davaasuren, Minister of Energy, G.Batsukh, Chairman of the Board of Directors at Oyu Tolgoi, and Armando Torres, the company’s CEO, took the actual implementation of the long-discussed Tavan Tolgoi power plant mega project one big step forward. The plant will generate power for not just Oyu Tolgoi but also for southern Mongolia as a whole. The government gave the go-ahead to the agreement on 26 December, and the two parties lost no time in formalizing it. 

The plant will have the capacity to produce 300 mw and is to be connected to the Oyu Tolgoi substation through 220-kw double-circuit cables. The capacity can be further raised. Construction is to start within the first quarter of 2020 and should be completed by June 2023. All financing matters will be regulated under the Investment Agreement of Tavan Tolgoi Power Plant LLC.  The financing agreement, the feasibility study and the environmental assessment work are planned to be completed in 2019.

Mongolia has not built such a large power plant in the last 30 years. Under the terms of the Oyu Tolgoi Investment Agreement, the funding would possibly be raised from a third-party loan. Oyu Tolgoi will own at least 51 percent of the project and will operate the plant. Representatives from Oyu Tolgoi have said that the funding details would be finalized by 1 March. 

Oyu Tolgoi is studying ways of drawing electricity from other sources in Mongolia until the TT plant is operational and is also exploring the possibilities of using renewable energy. The company will continue to receive power from Inner Mongolia’s Energy Corporation until these arrangements are made. Its current annual consumption is 152 mw but once the underground mine operations start, this will go up to 290 mw. 

In a media interaction, Armando Torres termed the signing of the agreement “another memorable event for Oyu Tolgoi”. The initial feasibility study put the construction cost at between $1 billion and $1.5 billion but at that time the plant was to come up at Oyu Tolgoi and the cost will have to be re-estimated now that it would be built at Tavan Tolgoi deposit. However, “both sides will try their best to ensure that the costs are kept at the minimum level”, Torres said and added that he expected construction to begin in March 2020.

He saw the agreement as having a three-way impact: drawing the road map for the Tavan Tolgoi power plant, providing a long-term solution to the power needs of the southern region, and ensuring stable and safe operation in the underground mine. All this means more economic benefit to Mongolia. The work immediately ahead covers project financing, finalising technical designs and preparing extensive documentation.  

Giving his views, the head of the Energy Regulatory Commission, A.Tleikhan, told media that the Tavan Tolgoi plant would be followed by one at Baganuur, based on coal from the local mine. With Oyu Tolgoi set to consume 300 mw of electricity in a few years, meeting its needs from a domestic source would lead to a big jump in revenue for Mongolia and will also lower OT’s electricity bills. Tleikhan indicated that the plant’s initial capacity would be 300 mw, but this could be increased to 450 mw.

“A landmark agreement”

Minister of Energy Ts.Davaasuren answered questions from the media after the agreement was signed. 

How important is the agreement?
It is a landmark in the history of our energy sector. We have shown how parties can work to mutual benefit with some effort. Oyu Tolgoi is now the largest consumer of energy in the country and a large amount of our foreign exchange reserves is being spent on its import of power. This will end when the Tavan Tolgoi plant starts generation in 2023. The agreement also meets a requirement of the OT Investment Agreement that says the company must meet its power needs from domestic sources.

When will Oyu Tolgoi begin drawing power from domestic sources?
A certain amount would be made available to it from April. Both parties to the agreement want the new plant to begin operations early and we hope to expedite completion of the environmental assessment and water survey. Much new work has to be done as the plant’s proposed location has been changed from Oyu Tolgoi to Tavan Tolgoi. 

What about shareholders" returns?
The priority now is to keep the project cost low, so we agreed to keep the issue of shareholders’ returns for later. The investors in the project will be responsible for the financing and the Government will fulfil its obligations under the agreement.

Will Oyu Tolgoi own 51 percent of the project?
This is a matter for the investors to decide among themselves. As for the Government, it will do what the agreement asks it to, such as extension of licences. 

Oyu Tolgoi now imports over 100 mw of electricity from China every year, at a cost of between $160 million and $170 million. What percentage of our total national consumption is this? 
Some 20 percent. Starting from 2019, the company will take a certain amount of electricity from domestic sources. From 2023 when the company starts purchasing 100 percent of its electricity needs domestically, around $200 million per year will be retained in the country. The construction of the plant also means Rio Tinto is fulfilling its obligations under the Investment Agreement. 

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