TOUGH CHALLENGES AHEAD FOR COAL MINES AND POWER PLANTS

A. Khaliun  

Thirty-four years after Mongolia transitioned to a market economy, the energy sector remains the only one yet to fully integrate into the market. It has long been a subject of public criticism that the sector operates at a loss and relies on government subsidies. However, the recent bold decision to raise energy prices to reflect real costs is being  hailed as a 'historic' move.

The government has outlined a series of energy reforms in its four-year action plan The first step is to adjust energy prices to reflect their real cost, with the next phase aiming to 'liberalize' prices in line with market principles. Additionally, the government is working to boost the production of renewable energy, with the long-term goal of becoming an energy-exporting country. Despite concerns about voter backlash, the government has successfully implemented the first step by raising prices.

The Energy Regulatory Commission has announced that it will align consumer electricity tariffs with actual costs, with effect from November 15, 2024. Heat tariffs will follow suit on May 16, 2025.  

The average electricity tariff, previously 216 MNT per kWh, will rise to 280 MNT beginning November 15. This marks the first change in household electricity and healing tariffs in five years, since 2019.

The average monthly electricity consumption for households nationwide is 220 kWh. With this change, the monthly electricity bill will increase by 15,887 MNT, rising from 36,220 MNT to 52,107 MNT. The nightly electricity discount for households in ger districts will remain in effect. Meanwhile, the electricity tariff for businesses and organizations will increase by an average of 30%. 

WHAT LED TO THE TARIFF INCREASE?

Behind the broader energy sector are the power plants that ensure a reliable supply of electricity and heat to households and businesses as well as the mines that provide the plants with coal. 

TPP-3, which supplies 31% of Ulaanbaatar's heat, 14% of the Central Power System's electricity, and 47% of its steam, was built in 1968. This plant produces thermal energy at a cost of 24,683 MNT per Gcal but sells it to consumers for only 7,215 MNT. This results in a loss of 17,467 MNT per Gcal. Operating under these conditions the plant is projected to incur a loss of 14.6 billion MNT in 2024.

Due to its ongoing losses, the plant has been unable to undergo a full renovation and has instead survived by repairing and replacing only the most damaged equipment. As a result, 20% of the plant's total equipment is outdated and beyond its useful life. Given that it is no longer feasible to continue operating the plant in this manner while meeting the growing energy demand, a proposal to adjust energy prices to reflect the cost of production has been submitted to policymakers. This time, a solution has been reached.

N. CHIMEDDORJ: THE STEAM TURBINE HAS REACHED THE END OF ITS SERVICE LIFE AND HAS DEVELOPED CRACKS

The engineers at the plant explained the operating conditions of TPP- 3, which supplies 30% of the capital city's heat, in an effort to help people understand the real situation. The plant currently produces 148 MW of energy with 10 boilers and 8 turbines. The boilers were renovated between 2005 and 2009, while the turbines have been in operation for 45 to 47 years without any renovation. One of the steam turbines has reached the end of its service life and has developed cracks. 

The cracks are expanding, posing a risk of explosion. If this occurs, it could shut down the entire power plant, freeze the city, and plunge it into darkness. Even steel pipes that have been in service for many years, and have been repaired countless times, can no longer be repaired effectively.

As a result, the operation of one 20 MW turbine, which had worn out in this manner, was halted in March 2024, based on the conclusion of a professional inspector. A 20 MW capacity is enough to supply one provincial center and half of another. This means that Ulaanbaatar's heat supply has decreased by this amount.

Upgrading and purchasing a new turbine on the market would cost around 30 billion MNT. However, since the plant's major renovation and investments would amount to 20 billion MNT, the plant does not have the financial capacity to purchase a new turbine, explained N. Chimeddorj, Chief Engineer of TPP-3. 

The old power plant has equipment dating back to the 1960s and offers poor working conditions for its 1,100 employees, along with low wages. Around 150-170 employees leave each year, with many young workers joining only to leave shortly afterwards.

Finding skilled specialists on the labor market who can adjust the station's furnaces to various parameters and manage the heat supply to apartments by regulating output at the power plant is not easy. As a result, the plant is currently short of 29 specialized technicians. 

Another major issue facing the plant is the ash pond. Although a new ash pond was built in 2001, it is now 60% full. Without the pond, the plant would have no place to dispose of its ash. Without a place to dispose of ash, the furnaces cannot operate, and the plant would shut down. If the new ash storage facility is not operational by 2027 the plant's operations will start to fail. 

The construction of such a waste facility would take at least two years. A technical design for the new ash facility has been developed, with an estimated cost of 40.7 billion MNT. The plant's management has been raising this issue for the past two years, but the cost of building the ash pond has not been included in the state budget. They argue that increasing energy tariffs will help address some of the challenges.

Chief Engineer N. Chimeddorj emphasized that to ensure the normal and reliable operations of the plant, it is essential to modernize the equipment, train and keep qualified personnel, provide thermal energy at their own cost, and increase salaries.

Will the price increase starting November 1st provide the financial means to address the pressing issues?

In the 40 years since TPP-4 was established in 1984, no new energy sources have been built in Ulaanbaatar. During the socialist era, TPP-3 and TPP-4 were constructed under the slogan "Developing the Fuel and Energy Sector First." Thanks to this focus on energy development, Mongolia has been able to support the city's expansion up to the present. However, today, those reserves are depleted. The plant engineers explained that it is no longer possible to supply energy to newly constructed buildings.

BAGANUUR MINE OPERATES AT A LOSS OF 635,000 MNT PER CARLOAD OF COAL, OR 132 MILLION MNT PER DAY

As power plants operate at a loss, the mines that supply them with coal are also facing severe challenges. Last month, the management of the Baganuur and Shivee-Ovoo mines, which provide coal to the power plants, the situation and explained highlighted the need for an increase in energy prices.

The Baganuur and Shivee-Ovoo companies play a crucial role in supporting Mongolia's energy sector by supplying coal at a loss. However, the government offers no taxor social security benefits and continues to collect taxes and fees as it would from more profitable mines.

For example, the Baganuur mine extracts coal at a cost of 55,700 MNT per ton but sells it to power plants for 43,000 MNT, incurring a loss of 12,700 MNT per ton. The mine's daily plan involves loading 223 railcars of coal, each incurring a loss of 635,000 MNT. 

This means they are operating at a loss of 132 million MNT per day, approximately 4 billion MNT per month, and 23.6 billion MNT every six months. 

This is a clear example of the energy sector being trapped in a debt cycle, with mines unable to raise coal prices because the power plants are operating at a loss. 

As of October 29, 2024, "Baganuur" JSC has receivables totaling 10 billion MNT from power plants, along with a debt of 260 million MNT The government sets coal prices for the mines. which are operating at a loss. Despite this, the Tax Authority imposes fines and applies late payment penalties. The General Tax Authority has imposed a total fine of 10.8 billion MNT to date. 

"Despite operating at a loss, "Baganuur JSC is solely responsible for covering 99.4% of the water bills for state organizations industrial" and service purposes in the capital city, said D. Tuvshinjargal, Executive Director of "Baganuur" JSC. 

He stated that Baganuur JSC supplies thermal coal to the central regional energy network, as well as to 112 soums and settlements across Mongolia. The mine plays a strategically important role in the country's energy sector, providing 100% of the coal needed by TPP-2, TPP-3, Darkhan, Erdenet, Amgalan, and Nalaikh TPPs, as well as aimag centers, military units, Sharkhad Hospital, the International Children's 'Nairamdal’ Center, and ‘Chinggis Khaan' Airport. Additionally, it supplies 50% of the coal required by TPP-4. 

The mine, which has been supplying energy to the central region of the country for 46 years, now produces 5 million tons of coal - double the 2.7 million tons it extracted in 2003 - while using the same workforce and capacity as it did back then. The mine's depth has increased and today, coal is being extracted from a depth of 137 meters. This process requires extensive stripping, drilling blasting, and water filtration, according to D. Tuvshinjargal, the mine director.

As the energy sector's workload continues to grow, the demand for coal will definitely rise. For example, Mongolia had 189 hospitals in 1978, but today that number has increased to 599. The question remains: who will ensure the proper operation of these facilities?

"Baganuur" JSC, which supplies electricity and heat to hospitals relies on outdated and obsolete equipment, continually repairing and maintaining it to keep operations running. For instance, a walking excavator that was originally designed for a 21-year lifespan is now in its 39th year of operation. It's a harsh reality that miners are forced to work in increasingly difficult conditions where labor safety standards have deteriorated and the risk of accidents remains high. However, thanks to the skill and dedication of our miners,we continue to avoid major accidents. 

70% of the mine's workforce is under the age of 45, with 330 employees under the age of 30. However, due to unsafe working conditions and low wages, retaining staff has become increasingly difficult. By the beginning of 2024, 100 workers had already left the Baganuur mine. It has become evident that the mine is now more of a transit point, where workers are trained before moving on to other opportunities. 

Miners from the socialist era, both older and middle-aged, approached their work with the mindset that they were "guarding the hearth of our country." In contrast, today's younger workforce focuses more on practical concerns, asking, "What is my employment contract, salary and working environment?" The mine director notes that young workers are increasingly vocal about their willingness to leave the job at any time. 

The power plants, along with the coal mines that supply them, are facing a tough challenge in preparing for the upcoming winter. Typically preparations for coal mining and stripping should have been completed by now, but financial constraints have prevented these essential tasks from being carried out. 

In November 2024, the Baganuur mine is set to extract 510,000 tons of coal to supply the power plants. However, once this coal is used, there will be no remaining reserves. 

In December, another 512,000 tons will be extracted and supplied, leaving no reserves again. The question remains: how will we survive the coming winter under such challenging circumstances? 

The most challenging period will come in the first quarter of 2025. In previous years, the mine had typically accumulated 480,000 to 500,000 tons of coal reserves by year-end, but this year, only 85,000 tons have been set aside. The power plants approve their annual plans and place orders with the mine in advance. However, the additional coal orders each year, driven by rising energy consumption, present a serious challenge for the mine

SHIVEE-OVOO MINE'S LOSSES EXPECTED TO REACH 15 BILLION MNT BY YEAR-END

Ts. Enkhtuvshin, Executive Director of "Shivee-Ovoo" JSC, presented an update on the current status of the mine. As of October 29, the mine has outstanding receivables totaling 11 billion MNT from the power plants.

He explained that "Shivee-Ovoo" JSC located in Gobi-Sumber aimag, as established in 1990. The company is 90% state-owned, with the remaining 10% held by other shareholders. It was the first mine constructed by Mongolian engineers during the country's transition to a market economy In 2007, the mine was declared a strategic deposit by government decision. 

The mine has received orders to supply 2.4 million tons of coal to power plants in the central region in preparation for the 2023-2024 winter. Additionally, it has received extra orders for 310,000 tons of coal.

The mine is working to supply approximately 2.7 million tons of coal in 2025. While the power plants maintain an emergency reserve for 20 days, the mine is also expected to keep a similar reserve. However, due to technical and economic constraints, it is not feasible to prepare these reserves. Both the mine and the power plants are facing the same dire conditions, with coal being loaded directly from the mines into railcars and delivered to consumers without sufficient stockpiles.

Forty percent of the mine's total equipment has surpassed its operational lifespan. The mine currently carries a debt of 183.6 billion MNT, with receivables amounting to 11.1 billion MNT. The initial investment, totaling 82.2 billion MNT, was made between 1998 and 2010. Subsequent upgrades to the mine's equipment were financed through loans, which have significantly contributed to the large debt reflected on the mine's balance sheet.

The mine incurred losses of 18.9 billion MNT in 2022 and 11 billion MNT in 2023. In 2024, losses are expected to reach 15 billion MNT.

The Energy Regulatory Commission has made a temporary decision to set the coal price at cost until November 2024. Based on this decision, the company is projected to make a profit of 16 million MNT for the first time, according to its 2025 business plan.

The real cost of producing one ton of coal at the Shivee-Ovoo mine is 53,000 MNT. However, until September 2024, coal was sold for only 38,990 MNT per ton, resulting in a loss of 14,000 MNT per ton. This loss is a significant factor contributing to the mine's debt.

However, with the approval of a temporary regulation to sell coal at 53,190 MNT per ton starting in September 2024, sales are now aligned with the actual cost. Making this temporary price a permanent fixed rate would improve the mine's financial situation, create opportunities for equipment upgrades and bring miners' salaries closer to the industry average.

"The Shivee-Ovoo mine currently employs 487 miners, but 476 have left their jobs over the past five years. Of those, nearly 65% were specialized engineers and technicians. A skilled workforce is the mine's most valuable asset, so it is crucial to offer salaries that are competitive with industry standards," he said. 

The global standard price for thermal coal is $40 per ton, while the temporary price set by our country's regulatory body is just $15. Despite facing significant losses and mounting debt, the managers of the Baganuur and Shivee-Ovoo mines, both of which have the critical mission of continuing operations, have openly shared the true conditions of these two mines. 

If the coal extracted from the mine is sold at its actual cost, losses will be reduced. In a historic move, the Energy Regulatory Commission has approved an increase in electricity and heat tariffs for the first time since 2019 - an anticipated decision for the industry. The Commission stated that these revised prices and tariffs will ensure the financial and economic independence of the energy sector, creating the opportunity for operations to align with market principles.