This chapter considers the investment policy framework for renewable hydrogen development in Mongolia. Experience from countries that have introduced national strategies for renewable hydrogen development underscores the importance of improving both the hydrogen-specific and general investment climates, as well as enhancing the supportive policy framework. As Mongolia considers its own national hydrogen strategy, the country has the opportunity to tackle some critical challenges to its investment attractiveness for clean energy and other low-carbon technologies. Key challenges include improving the attractiveness of the renewable energy sector relative to fossil fuel alternatives, laying the groundwork for the hard and soft infrastructure required to scale the industry, and stimulating demand for renewable hydrogen within Mongolian industry.
Towards a Renewable Hydrogen Strategy for Mongolia
Abstract
There are two ways of looking at investment attraction in the renewable hydrogen sector in Mongolia. The first approach is to limit government intervention to establishing a conducive framework for local project development, through the identification of potential regulatory and policy barriers and hurdles and addressing them. The second – more directional – approach is to target the large-scale development of a national hydrogen sector through the mobilisation of massive public resources to accompany sectoral development. This second strategy combines elements of investment and ‘green’ industrial policy. Most economies establishing national strategies for the development of renewable hydrogen production, regardless of whether they envisage renewable hydrogen imports or domestic production, adopt the interventionist approach. Governments typically adopt this approach because achieving cost competitiveness of low-carbon hydrogen production, i.e., to reach prices on par with “grey” hydrogen, requires reaching economies of scale rapidly. While the break-even point is high in this capital-intensive sector, most low-carbon projects have not reached the stage of final investment decisions (FID) yet (IEA, 2023[1]).
The general investment policy framework is of structural importance since it enables or restricts private investment in general and foreign direct investment (FDI) in particular. In the case of the latter, there is a well-established literature on the role of FDI in enabling emerging technologies to move up global value chains and gain new knowledge and technological capacities. Specific, targeted renewable hydrogen investment policies include instruments such as incentives and financial schemes designed to directly support sectoral development, as well as dedicated investment promotion and facilitation efforts. Given that Mongolia will likely need to mobilise external finance if it is to achieve a hydrogen industry at scale, the chapter places particular importance on FDI. The chapter considers investment promotion policies across three categories, from the broadest to the most specific: Policies promoting private investment development in general; policies targeting green and low-carbon investments; and policies directed specifically at renewable hydrogen.
Whether Mongolia takes a more directional approach to promoting investment in hydrogen will depend on whether the country wishes to establish itself as a “first mover” hydrogen producing economy. The implications, both in terms of time and financial resources, will vary for investment promotion in hydrogen development depending on whether authorities in Mongolia decide to position the country as an early producer of a frontier, nascent technology, or whether it should wait for the global market, technologies, and infrastructure to mature before taking a more directional approach to the development of a hydrogen industry in Mongolia. Should Mongolia wish to establish itself as a first mover, then, as discussed in this chapter, there will likely be a need for substantial and well-coordinated investment policies that directly overcome and address investment risks relating to hydrogen-specific technologies, infrastructure and market.
At the same time, there is also scope for Mongolia to pursue a less directional approach to hydrogen investment, one which focuses on reducing barriers to and improving framework conditions for investment in low-carbon technologies more broadly. Such an approach would involve three primary areas for policy intervention. The first would be to ensure that the basic conditions necessary for private sector hydrogen development pilots in Mongolia to succeed are in place. The second would be to integrate low-carbon and environmental sustainability objectives into the investment policy framework. This approach would benefit the development of a hydrogen industry in Mongolia without overly committing the government to one technology option. Here the rationale is similar to the industrial and innovation policy discussion set out in Chapter 2: If the economic and social benefits of ‘green’ investments are not fully internalised by investors in the public and private sector, largely due to the absence of fully priced environmental externalities, then fossil-fuel-based technologies will remain more economically competitive than their green alternatives. Well-designed and targeted investment policy interventions can therefore help to address this imbalance. By combing the approaches outlined in this chapter, Mongolia could create an investment toolkit for its hydrogen industry that is in line with the country’s economic situation and the government’s priorities.
The third and critically important consideration for investment in Mongolia’s hydrogen industry, whether the government takes a more directional approach to hydrogen or not, is the need for massive investment in renewable energy. A stable and low-cost supply of renewable electricity is necessary to competitively produce renewable hydrogen, and Mongolia’s renewable energy potential is the country’s key comparative advantage as a potential hydrogen producer. For hydrogen to be considered ‘green’ or ‘renewable’, the electricity used to power electrolysis must come from renewable sources. At present, electrolysers require 45-83 kilowatt hour (kWh) to produce 1 KG of H2, depending on the technology used (the more commonly used alkaline electrolysers have a range of 50-78 kWh/KG H2, whereas solid oxide electrolysers are more efficient with a range of 45-55 kWh/KG H2) (OECD, 2022[2]). Most renewable hydrogen studies assume that for renewable hydrogen to be competitive, projects will require a levelised cost of electricity (LCOE) of around 0.02 USD/kWh for wind and solar electricity generation. In reality, the global average RE generation costs are generally higher, with new utility-scale solar PV costing, on average, 0.048 USD/kWh and 0.033 USD/kWh for wind in 2021 (IRENA, 2022[3]). To achieve a utility-scale hydrogen industry in Mongolia, the country will need to significantly increase its renewable electricity generation capacity - just one of the pilot projects currently in Mongolia anticipates a need for an additional 600 megawatt (MW) of combined wind and solar power, more than double the 283 MW of renewable power currently installed in Mongolia as of 2024 – and ensure that the cost of renewable power generation is sufficiently low for competitiveness. Thus, the conditions for fostering investments in renewable energy in Mongolia will play a significant role in enabling a growing trajectory of renewable hydrogen production moving ahead, which is why a part of this chapter is devoted to exploring these conditions.
The chapter investigates the importance of investment policies for renewable hydrogen development in Mongolia and identifies measures and instruments that could be included in its national strategy. The chapter is structured as follows. Section 3.2 starts by looking at international experience in developing investment plans and policies for renewable hydrogen development in the framework of national hydrogen strategies. Section 3.3 then provides a view of Mongolia’s renewable energy sector potential as the key source for domestic production competitiveness. Section 3.4 focusses on the assessment of the investment policy framework in Mongolia and its alignment with renewable hydrogen development. Section 3.5 concludes with a discussion on the importance of soft and hard infrastructure as enabling conditions for attracting the investments needed for the long-term industry development.
Policy discussions about renewable hydrogen largely focus on the need to engage in massive efforts to scale-up production and achieve cost-competitiveness of this technology versus its “brown” or “grey” alternatives and enable the reaching of net-zero targets by mid-century. Against this backdrop and considering their anticipated domestic needs for renewable hydrogen and potential economic and future low-carbon benefits from this nascent technology, many countries have developed renewable hydrogen national strategies with a strong emphasis on investments, sometimes within broader hydrogen strategies that also consider other production pathways (e.g., fossil-fuel based with CCUS). These strategies typically aim for specific target volumes of production, products and derivatives, sectoral markets, and target production costs. The economic literature on low-carbon hydrogen indicates that production costs should reach as low as USD 1 to 3/kg for renewable hydrogen to become competitive against “grey” hydrogen, from USD 3/kg for best-in-class projects to more than USD 10/kg in less favourable locations and conditions (OECD/The World Bank, 2024[4]). Countries also often provide estimated investment sizes associated with their visions. The examples provided below in Table 3.1 show a range of estimated cumulated investments ranging between USD 77 Billion and USD 330 Billion, which includes primarily private investment.
Note: (*) Estimated cumulated investment opportunities for the private sector by 2050.
Source: Desk research.
Countries’ national hydrogen strategies can be categorised into three types: importers’ strategies, exporters’ strategies, or self-sufficient strategies. Germany, Japan, Korea, and the EU, for example, have developed strategies for importing renewable hydrogen, anticipating their needs for reaching their low-carbon targets. China is a typical example of a self-sufficient renewable hydrogen producer, having a large domestic market able to absorb a scaled production of renewable hydrogen across a wide range of sectoral applications. Other countries have developed exporters’ strategies, which, given Mongolia’s small domestic market size, is a more appropriate model for an ambitious strategy, as discussed in Chapter 1. Canada, Chile, Morocco, Namibia and Oman’s provide examples of exporters’ strategies. These countries offer a range of various experiences of interest as countries with ambitions for becoming competitive renewable hydrogen exporters, illustrating what the competition looks like for an economy with similar ambitions.
The magnitude of investments needed to scale-up the sector is driving important policy discussions about mobilising financing for de-risking investments undertaken by the private sector and the role that international financial institutions should play in providing such financing in emerging economies. Recognising the limited ability of many developing economies to provide the public financial support needed to de-risk the development at scale of the sector, international partners are mobilised for directing financing at clean hydrogen development in economies endowed with natural assets and favourable conditions for domestic production at scale. The World Bank, in a report developed with the OECD, proposes a global initiative for supporting mid- to large size “lighthouse” projects (100 MW to 1GW) with a total volume of 10 gigawatts (GW) or more. The aim is to demonstrate the viability of renewable hydrogen projects across emerging economies. The report details further aspects of this initiative (Box 3.1) (OECD/The World Bank, 2024[4]). Other multilateral development such as the European Bank for Reconstruction and Development (EBRD)can provide financing in well-designed renewable hydrogen projects as part of their green investment portfolio. Understanding the requirements and criteria for accessing financing solutions offered by International Financial Institutions (IFIs) and Multilateral Development Banks (MDBs) directed at renewable hydrogen development should be a priority for emerging economies aiming to become major producing countries.
Develop a guideline or checklist of factors across the supply chain that need to be considered when developing a clean hydrogen project;
promote tools for prioritizing and assessing projects, drawing initially from the pipeline of existing projects;
identify and remove bottlenecks;
enhance project quality to improve bankability;
promote joint mechanisms (funds and donors such as MDBs) to allocate financial support to the projects;
follow the principles of the World Bank Group’s International Finance Corporation (IFC or similar environmental, social, and governance guidelines) to define a set of actions to guarantee sustainable, socioeconomically equitable, and beneficial project development.
Source: (OECD/The World Bank, 2024[4])
Exporters’ national renewable investment strategies rely on domestic assets and competitive advantages for renewable hydrogen production and exports. National investment strategies of “first-movers” rely on identified national comparative advantages. For example, Chile relies on its low levelized cost of electricity produced from renewable sources to become one of the most competitive hydrogen exporters. Morocco and its partners highlight the country’s potential for solar and wind energy development, as well as its proximity to EU markets and access via maritime routes. Namibia has some of the world’s highest potential for solar and wind generation (NewClimate Institute, 2023[5]). Available infrastructure for hydrogen transportation, such as pipelines and ports, that can be retrofitted or upgraded, is also a key advantage. Australia’s and Chile’s port infrastructures provide these countries with good access to many markets via maritime routes, with regions as far as the EU considering them as potential renewable hydrogen suppliers. Finally, national investment strategies often plan to leverage the demand in domestic industries. For example, Chile plans to use renewable hydrogen in its large mining sector, while Morocco aims to use green ammonia in its fertilisers sector in substitution of imported grey ammonia. These domestic applications for renewable hydrogen produced locally are often meant to support the first stages of national hydrogen strategies. These applications require much less transportation infrastructure than exports and enable the creation of national pilot projects to demonstrate viability.
Emerging economies positioning themselves as first-movers in the renewable hydrogen space often have already large-scale investment projects under development with the involvement of international partners. Several emerging countries developing renewable hydrogen exporting strategies have strong backing from international private investors and foreign governments for developing large-scale projects and key infrastructure. Namibia, for example, has signed several Memorandums of Understanding (MoUs) with the European Commission, Belgium, Germany, and Japan. The government has signed on the commissioning of a giga-scale renewable project, Hyphen Namibia, representing USD 10 Billion of CAPEX and a full annual production capacity of 350 KT / year (NewClimate Institute, 2023[5]). The project is supported by two foreign private investors including a large German energy industrial. Other notable examples, closer to Mongolia, are the Svevind project in Kazakhstan (which released its national hydrogen strategy in May 2024), and ACWA Power’s hydrogen project in Uzbekistan (which does not have a national hydrogen strategy at the time of the writing of this report).
The main comparative advantage of Mongolia as a producer country of renewable hydrogen is its renewable energy generation potential, the overwhelming majority of which has yet to be developed. The country is estimated to have 2.13 TW of wind power capacity with an electricity production capacity of 2,600 terawatt hours (TWh). This is equivalent to around 25% of total Chinese electricity consumption in 2022, and substantially above Mongolia’s 7.27 TWh of electricity consumption in 2022 (IRENA, 2016[6]) (IEA, 2023[7]). Of the total potential, around 400GW are considered to be feasibly exploitable, with these located in the south and southeast of the country (World Bank, 2020[8]). The actual production capacity is, however, likely to be much greater. The most authoritative international study of Mongolia’s wind resources remains the 2001 assessment conducted by the US National Renewable Energy Laboratory (NREL).1 Whilst the NREL findings in terms of capacities and their location in Mongolia remain accurate, wind turbine generation capacity has significantly increased since the report's publication over twenty years ago. At that time, the average wind turbine was mounted at a height of 40 metres and had a capacity of 500 kW. In contrast, as of 2023, the typical height is around 100 metres and generation capacity of 3-4 MW (IRENA, 2023[9]).
The most productive wind areas are concentrated in the South Gobi region of Mongolia (Figure 3.1). Wind resources are most significant in the Omnogovi Aimag, Mongolia’s largest region, with a generation capacity is around 300,000 MW (IRENA, 2016[6]). The neighbouring regions of Bajankhongor, Dundgovi and Dornogovi Aimag – where the country’s largest wind farm, Saishand, is located, with 55 MW of installed capacity – also have high levels of wind generation capacity. This concentration indicates some of the country’s most potentially productive wind power areas are concentrated in the south of Mongolia, relatively proximate to major industrial sites and Ulaanbaatar. The south and southeast of the country are also home to the regions with the highest wind capacity factors (CF), where CF ranges between 17.5-31.6%. Some thirteen aimags have more than 20,000 MW of wind potential, while nine have more than 50,000 MW of wind potential (IRENA, 2016[6]). Whilst there may be limited commercial rationale for large scale wind installations in all of Mongolia’s aimags, the quality of wind resources throughout much of the country suggests that there is significant scope for using wind for off-grid power generation in remote areas that are otherwise difficult and costly to connect to the national grid.
Mongolia’s wind resources are concentrated in the south and east of the country
As of 2023, Mongolia had 155 MW of installed wind power capacity. The current installed wind capacity accounts for10% of Mongolia’s total installed power capacity and produced 564 gigawatt hour (GWh) in 2021 according to IRENA (although the IEA reports a lower level of 480GWh in 2021, falling to 420GWh in 2022). This output represents 70.4% of renewable electricity produced in 2021 and or 7% of total generation (IEA, 2023[7]) (IRENA, 2022[11]) (Ministry of Energy of Mongolia, 2022[12]). The current level of installed wind capacity is low, and while an additional 104 MW of wind power has been installed since the introduction of the government’s 2015 State Policy Paper on the Energy Sector, there has been almost no new installed capacity since 2018 (New Climate Institute, 2020[13]). The government does have plans for the installation of an additional 252 MW of wind energy before 2030 (Government of Mongolia, 2023[14]).
Mongolia’s solar energy capacities are also significant and are concentrated in the south and east of the country. Mongolia averages between 270-300 days of sun per year, with an estimated 2,250-3,300 hours of daylight. The country benefits from a high level of regular solar irradiance, with a daily solar energy capacity in the range of 3.4-5.4 kWh/m2 over an area of 23,461 square kilometres. Taken together, Mongolia has a hypothetical solar electricity generation capacity of 4,774 TWh per year, and an estimated exploitable solar capacity of 700GW. As with wind, the most productive solar regions are in the south and east of the country. The South Gobi region has particularly significant solar power generation potential, with the NREL calculating that Mongolia had an average solar electricity generation potential of 1,092 TWh over an area of 5,542 square kilometres (Figure 3.2).
Mongolia’s PV power is concentrated in the southern aimags of the country
Despite Mongolia’s significant solar resources, actual levels of installed solar power capacity remain low. Mongolia currently has 90 MW of installed PV power generation capacity, with an additional 35 MW capacity planned by the Ministry of Energy (Ministry of Energy of Mongolia, 2022[12]). There are also a number of projects in the west of the country to improve the efficiency and reduce transmission loss of existing installations. Despite the limited contribution to grid decarbonisation and renewable energy expansion, solar power has nevertheless played a transformative role in providing reliable electricity to rural communities.. Since 2002 and with the assistance of the World Bank, Mongolia implemented a massive rollout of over 100,000 small-scale solar power units with an annual generation capacity of 5,000 kW. This initiative has provided electricity to about half of Mongolia’s population, or some 70% of the country’s nomadic population (IRENA, 2016[6]).
Despite facing significant water scarcity issues, Mongolia has substantial hydropower potential, with these primarily concentrated in the north of the country. Annual precipitation is generally low, diminishing digressively from the mountainous north and northeast of the country close to the border with Russia towards the steppe and desert regions of the south and west. Precipitation is also highly seasonal, with there being almost no rain in winter months when much of the country’s waterways and lakes are frozen. A detailed discussion of Mongolia’s water resources and their suitability for sustainable, low-carbon hydrogen development is discussed in Chapter 2.
Hydropower accounts for the largest share of planned additional renewable electricity capacity. Of the 360 MW non-fossil fuel additions to the country’s energy system planned by the Mongolian Ministry of Energy, 315 MW is allocated to the Eglin Gol (EG) River Hydropower Plant (Ministry of Energy of Mongolia, 2022[12]). The EG plant, whose construction began in 2016 with USD 1 billion loan from China, will be Mongolia’s first major hydropower installation, The project, however, has attracted controversy due to its potential impact on biodiversity and the environment, particularly on Lake Baikal in Russia, into which Mongolia’s northern rivers drain (IRENA, 2016[6]). Ongoing discussions between Russia and Mongolia, intermediated by UNESCO, have been centred around the project’s potential transboundary impact.. The UNESCO World Heritage Centre has requested additional information on the transboundary Strategic Environmental Assessment for the EG project, as well as for the Regional Environmental Assessments for the Shuren and Orkhon hydropower projects. As of summer 2024, the Mongolian authorities have not yet provided this information (UNESCO, 2023[16]).
Utilising Mongolia’s potential hydropower resources is complicated by two geographical constraints. Unlike Mongolia’s wind and solar resources, there is a geospatial mismatch between the location of the country’s potential hydropower generation in the north and the demand for the electricity that could be produced, with Ulaanbaatar and the main centres of industrial demand in the centre and south of the country. The limited interconnectedness between Mongolia’s five grid systems and a high level of transmission lost renders delivering power from the north to these locations expensive and inefficient under current infrastructure conditions. In addition, the development of hydroelectric power plants in the country’s northern regions is complicated by potential objections from Russia, which has expressed concern over the impact of such projects on Lake Baikal, as outlined above (IRENA, 2016[6]).
Plans for overcoming the challenges of renewable electricity development in Mongolia will help provide a conducive environment for investments in renewable hydrogen. Although pilot projects in Mongolia currently envisage off-grid renewable electricity production for powering electrolysers, the prospect of selling renewable electricity production in excess can contribute to improved business models therefore encouraging investments even in the short term. In the longer-term, should Mongolia envisage the development of renewable hydrogen at scale, the volumes of electricity needed will require access to a decarbonised grid.. The section below considers the investment policy framework for investing in renewable energy production, which will directly impact future prospects for renewable hydrogen investment.
3.4.1. Investment attraction and incentives for renewable hydrogen development
As in other countries of Central Asia, Mongolia has a relatively open statutory framework for investment. The OECD FDI Regulatory Restrictiveness Index, which measures the statutory restrictiveness of different economic sectors for foreign investment, shows that Mongolia’s economy has a similar level of FDI regulatory restrictiveness as the OECD average (Box 3.3) (Fig. 3.3). This is reflective of a relatively broad openness to foreign investment and the investment-friendly policies of the government, as noted in other international assessments (U.S. Department of State, 2023[17]). The challenge for Mongolia is that this de jure openness to foreign investment does not equate to a de facto openness. Non-statutory barriers that are adjacent to the legal framework for investment continue to weigh on the investment attractiveness, including that of clean energy and low-carbon opportunities, in the country. As in other Central Asia countries, the implementation of regulations in a way that ensures consistency, transparency and reliability remains a concern. Anecdotal evidence from the mining sector, a prominent FDI recipient and an engine of national growth, hints that foreign investors are facing potential legal challenges when developing significant projects in the country.
Note: 1 = most restrictive, 0 = least restrictive.
Source: (OECD, 2023[18])
While there are no explicit regulations or preferences for low-carbon technology projects that can support the decarbonisation of hard-to-abate industries, the government has begun to put together a legal framework that gives certain preferences and incentives to renewable energy projects. The 2013 Law on Investment plays a crucial role in this aspect, providing certain tax-free incentives for investment in innovative projects, as outlined in Article 12 of the law, though the scope of such projects is not defined; As of 2024, the Law on Investment was being revised by the Government of Mongolia and remained open to public comment (Government of Mongolia, 2023[19]). These incentives encompass a broad range of direct and indirect support measures on a number of key areas of licensing and permitting, such as long land tenure agreements (up to 60 years) with the possibility of further extensions (up to an additional 40 years), fiscal incentives for innovative export-oriented projects, support with visa and work permit requirements, and assistance with access to free economic zones and technology parks (Government of Mongolia, 2013[20]). As noted on the information portal of the newly-created Mongolian Investment Promotion Agency (IPA), the Law on Investment also establishes that investment projects that support the development of renewable energy and innovation capacities can also apply for stabilisation certificates, whereby certain taxes (CIT, customs duties, VAT, minerals royalties) can be held at fixed rates over a legally determined period of time (5-18 years) depending on the size of the investment (PwC, 2023[21]).
Mongolian legislation also allows for a number of preferential customs arrangements for the importation of goods for innovation and renewable energy infrastructure. As enshrined in Article 1 of the Exemption from Customs and Value Added Tax Law, imported equipment necessary for the development of innovative products will not be subjected to custom and value-added tax. At present, these exemptions do not extend to capital goods necessary for renewable hydrogen production. For instance, the import of Solar PV panels is exempt from a 5.5% customs tax. The government also exempts certain goods from customs and VAT, specifically targeting renewable energy research and production equipment, its accessories, spare parts, and equipment necessary for the production of innovative products. (Government of Mongolia, 2012[22]) (Government of Mongolia, 2008[23]). The Law on Energy Saving introduces fiscal incentives for constructing energy-efficient buildings and for manufacturing or importing energy-efficient machines and materials. Meanwhile, the Law on Corporate Income Tax, particularly under Article 22.5.3, offers tax relief for activities that efficiently use natural resources and reduce environmental pollution and waste. This includes the sale of environmentally friendly techniques and equipment, thus promoting greener industrial practices (Government of Mongolia, 2015[24]).
The OECD FDI Regulatory Restrictiveness Index covers 22 sectors, including agriculture, mining, electricity, manufacturing and main services (transport, construction, distribution, communications, real estate, financial and professional services). Restrictions are evaluated on a 0 (open) to 1 (closed) scale. The overall restrictiveness index is a weighted average of individual sectoral scores.
For each sector, the scoring is based on the following elements:
the level of foreign equity ownership permitted;
the screening and approval procedures applied to inward foreign direct investment;
restrictions on key foreign personnel; and
other restrictions such as on land ownership, corporate organisation (e.g., branching).
The measures taken into account by the index are limited to statutory regulatory restrictions on FDI, typically listed in countries’ lists of reservations under Foreign Trade Agreements (FTAs) or, for OECD countries, under the list of exceptions to national treatment. The FDI Index does not assess actual enforcement and implementation procedures. The discriminatory nature of measures, i.e., when they apply to foreign investors only, is the central criterion for scoring a measure. State ownership and state monopolies, to the extent they are not discriminatory towards foreigners, are not scored. Preferential treatment for special-economic zones and export-oriented investors or for investment from a treaty-covered country is also not factored into the FDI Index score.
In 2023, the government established a new Investment Promotion Agency (IPA). The agency, which operates under aegis of the Ministry of Economic Development, has a user-friendly website that lists sectors into which the government is actively seeking foreign investment. These include metal and mining, logistics, renewable energy, and agriculture. The site provides a clear overview of regulations relevant to each sector. It is difficult to attest to the effectiveness of the IPA due to the limited time it has been operational. However, considering the government’s renewable hydrogen ambitions and the importance of attracting FDI. Furthermore, the IPA may be able to play an active role in soliciting potential hydrogen investors and providing information to those active or exploring opportunities in the country regarding the regulations, incentives and procurement opportunities available for renewable hydrogen – and other low-carbon – opportunities in Mongolia. There may be additional opportunities to strengthen the IPA’s activities and the government’s broader investment attraction ambitions through a closer alignment with similar activities undertaken by development partners, such as the UNDP’s “Mongolia SDG Investor Map” (UNDP, 2023[26]).
Mongolia’s recent efforts in developing a national long-term low-emission development strategy (LT-LEDS), if successful, can accelerate investment in clean energy and low-carbon technologies. The adoption of robust LT-LEDS with credible associated commitments has the power of sending out signals and incentives encouraging stakeholders to invest in low-carbon projects supporting the economic transformation necessary to achieve Paris Agreement targets. LT-LEDS and their implementation roadmaps typically contain sectoral contributions to the overall economies’ decarbonisation, ideally with clear quantitative targets and identified supporting measures. If credible, i.e., backed with strong public commitments, such as financial and non-financial incentives, carbon pricing instruments and other public investment in areas critical to the transition, these strategies can play a catalytic role in the development of project pipelines supporting sectoral decarbonisation targets (OECD/The World Bank/UN Environment, 2018[27]). Mongolia has started to work with international partners to develop a LT-LEDS, and while this work is at a very early stage, its potential for attracting sustainable investment in the country is great, under the condition that the plan is credible, and that the government commits to its realisation.
Similarly, the development of a credible national renewable hydrogen strategy can contribute to attracting investment in the sector. By developing a cross-cutting vision for the sector growth and committing to pursuing policies in support of projects development, including in key areas such as contributing to securing demand at the nascent stage, a national strategy – the very topic of this report - can make a difference and encourage investors. If the process is well-established and if the strategy contains well-conducted economic analyses, it can also help investors develop business plans. Given that renewable hydrogen is a nascent technology, the development of credible plans, economic analyses and forecasts relies on a process that is consultative and well-documented. This is why, when developing national strategies, countries typically establish steering platforms bringing together representatives of various sectors who can inform a sound and credible strategy and oversee its implementation (Box 3.2).
The fast adoption and deployment at scale of an innovative low-carbon technology such as renewable hydrogen requires a high degree of commitment and co-ordination across stakeholders. Many countries have established institutional bodies with the mandate to oversee the development and implementation of national hydrogen strategies. These bodies bring together a wide array of stakeholders, from ministers and government officials to representatives of industry and academia. Some countries have also decided to set up ad hoc bodies to manage specific aspects of the strategy implementation.
Morocco has established a National Hydrogen Commission for its national hydrogen strategy implementation. The “Commission Nationale de l’Hydrogène” was created in 2019. Chaired by the Minister of Energy, Mines and Environment, the Commission is composed of representatives from four different Ministries, industrial organisations such as the Confédération Générale des Entreprises du Maroc, research centers and state-owned enterprises.
Chile set up an Interministerial Council of Hydrogen (Consejo Interministerial de Hidrogeno Verde) which brings together multiple ministries as well as regional governors. The mandate of the Council is to review and assess progress made by the bodies and stakeholders in charge of the strategy implementation, including the Steering Committee (Comité Estratégico), established in July 2023 The Committee has as its main objective the drafting of the Green Hydrogen Action Plan 2023-2030 to facilitate the development of this nascent industry (Government of Chile, 2023[48])
Canada has established a Steering Committee to oversee the overall implementation of its hydrogen strategy, as well as working groups dedicated to specific topics. The mandate of the Steering Committee is to implement and track the progress made. It is co-chaired by the Minister of Natural Resources and by the CEO of the Canada Hydrogen and Fuel Cell Association. In addition, 16 working groups work on the strategy’s implementation, in specific areas such as Codes and Standards, Export, Mining, and Training.
Oman’s approach is strongly oriented towards public-private co-operation. Established in 2021 by the Minister of Energy and Minerals (MEM), the Hy-Fly Alliance gathers 13 public and private organisations (IEA, 2023[30]). The purpose of the Alliance is to facilitate the production and use of renewable hydrogen through investments, technologies, policies, and expertise across the whole hydrogen supply chain (Times of Oman, 2021[49])
Namibia’s Green Hydrogen Council was established in 2021 by the President of the Namibian Republic. Its eight members include five Ministers, the Central Bank governor, the economic advisor to the President and the CEO of Namibia’s investment promotion agency (GH2 Namibia). In 2023 the Implementation Authority Office was established by the Ministry of Mines and Energy with the mandate to identify the key hydrogen projects to be developed and oversee the auction of state-owned land to ensure the government’s participation in project development. (Government of Namibia, 2022[16]).
3.4.2. Investments in Mongolia’s electricity sector and implications for renewable hydrogen
Mongolia’s power network is split into five areas: the Western, Altai-Uliastai, Central Energy System (CES), Eastern and Southern power systems. The interconnectedness between these different areas is limited due to the significant distances between them and the low transmission capacities of power lines, which in turn limits the ability of the country to integrate its different regions into one system. The CES, which serves Ulaanbaatar and nearby settlements, is by far the largest, accounting for 80% of the country’s power supply in 2022, with the base load primarily provided by seven Combined Heat and Power (CHP) plants (World Bank, 2022[28]); other systems have significantly lower capacities, with the Eastern Energy System catering for only 100 MW of electricity demand. A transboundary interconnection between the Russian power grid and the CES, Western, and Eastern power systems of Mongolia allow for power imports, the importance of which has grown in recent years as generation capacity in the country has struggled to keep pace with rising demand. Power sector transmission projects to improve the high voltage linkages between the south and the east to the main source of demand in Ulaanbaatar and mining sites are currently being supported by development partners such as the World Bank and the EBRD, with the latter working on a high voltage transmission connection between the renewable-rich region of the South Gobi and Ulaanbaatar, anticipating the potential role renewables could play in meeting increasing electricity demand from that region while keeping a stable baseload from the CES CHPs.
Demand for electricity is growing rapidly, primarily driven by the industrial and residential sectors. Between 2010 and 2021, electricity demand from the industrial sector grew 129%, or from 7,538 terajoules (TJ) to 17,246TJ. This makes the industrial sector by far the largest single electricity consumer in terms of absolute value and in additional demand. If the industrial electricity demand increases at the same rate between 2020-2030, then this would represent 30,712TJ by the end of the decade. This figure is 6,172TJ more than total electricity demand in Mongolia in 2020 (Figure 3.4). A significant part of industrial electricity demand comes from the mining sector, with industrial enterprises adopting a range of strategies to adapt to a lack of confidence in the Central power system to meet their needs. For example, the Oyu Tolgoi copper mine in the Southern Gobi region is powered by a power plant in northern China, while in consultations with the OECD, firms such as RioTinto (the Oyu Tolgoi operator) and the large Mongolian industrial firm MAK outlined their strategies to build their own co-located renewable energy infrastructure in order to ensure security of electricity supply. Another motivation for firm-level investment in co-located renewable energy infrastructure is to have certainty over the carbon intensity of their electricity consumption, something which, at present, the national grid operators are not able to provide.
Source: OECD calculations based on (IEA, 2022[29])
In the face of rising electricity demand and limited domestic capacity, Mongolia has increasingly depended on expensive electricity imports. In 2020, Mongolia imported 1,705.6 GWh of electricity, or 19.3% of total domestic electricity consumption, of which all was imported from Russia – the only country with which Mongolia has a cross-border interconnection. Imported electricity creates significant costs for Mongolia, with the average import tariff in 2022 at 0.0928 USD/kWh, significantly higher than the export tariff of 0.0140 USD/kWh in the same year and almost double the domestic residential and industrial tariffs of 0.045/0.52 USD/kWh (IMF data). The inability of the grid to provide stable power has prompted some large industrial firms to begin investing in their own co-located renewable infrastructure.
The need for electricity imports stems from the inflexibility of Mongolia’s power system, where electricity output generally follows heating demand, thereby causing electricity deficits at certain times of the year. The inflexibility of this system limits the ability of the grid to absorb even modest levels of electricity from variable renewable energy (VRE) sources (Nilsson et al., 2021[30]). Addressing the inflexibility challenges in the power system would allow Mongolia to integrate a substantially higher level of electricity generation from renewable sources, negating the need for additional coal-fired CHP expansions while eliminating its dependence on electricity imports to cover its power deficit. Sequencing policy decisions around hydrogen production, renewable generation development, and power system modernisation can all benefit the government’s energy security objectives. Should the trend of industry co-locating their own energy infrastructure continue and be encouraged by the government – at present there is no clear policy support for these initiatives – it could decrease the strain on the central grid baseload and enable a larger share of renewable energy integration into the national power mix.
Electricity generation in Mongolia continues to be primarily coal powered. Given that renewable hydrogen requires electricity from renewable sources, the ability to draw on the national grid for renewable hydrogen generation in Mongolia is highly limited. In 2021, 84% of electricity generation came from coal (6269 GWh), with wind accounting for only 7.8% (580 GWh) and solar PV 2.2% (165 GWh). The predominance of coal in Mongolia’s electricity generation mix means that, as power generation has grown to keep up with rising industrial demand there has been a precipitous rise in the carbon footprint of the energy sector. Emissions from burning coal for electricity (and heat) generation rose from 6.6 Mt of CO2 in 2000 to 14.5 Mt of CO2 in 2021 (Figure 3.5). Should electricity demand continue to increase at the same rate as in recent years and this increased demand be met by primarily coal-fired power plants, then it will be difficult Mongolia to meet its commitments to decarbonising the power sector. Additionally, this will have broader implications for the Scope 2 emissions (those related to industrial purchases of power and heat) for the expanding industrial sector (Box 3.1).
Note: Panel B displays combined heat and electricity CO2 emissions in Mongolia, reflecting the fact that all coal-fired power generation in Mongolia comes from Combined Heat and Power Plants (CHPs)
Source: OECD calculations based on (IEA, 2022[29])
Despite commitments to increase the share of renewable energy in the country’s electricity generation, the majority of additional capacity is set to be coal-fired. The government has set clear targets for increasing the share of renewable energy in the country’s electricity generation. The 2015 State Policy on Energy (SPE) set a goal of increasing renewable electricity capacity from 7.62% in 2014 to 20% by 2023, and then to 30% by 2030 as a share of total electricity generation capacity (IEA, 2023[7]). As part of the government’s Mid-Term Development Plan of 2018 and in its Nationally Determined Contribution of 2019, Mongolia also set a goal of expanding hydropower capacity by 0.9 GW capacity from a level close to zero, as well as increasing renewable capacity by 0.6 GW from other sources (Government of Mongolia, 2019[31]) (Government of Mongolia, 2015[32]). In 2020, the government again increased its commitment under its Updated Nationally Determined Contribution targets to reduce GHG emissions from the energy sector by 49.4% by 2030 compared to its 2015 baseline. The government’s state targets for renewable energy development nevertheless take place in a context where the bulk of anticipated electricity generation expansion will come from coal (Figure 3.5a) (Government of Mongolia, 2015[32]). The Ministry of Energy does anticipate the addition of 585 MW of renewable power by 2030, but these additions are dwarfed by the additional 2,090 MW of coal-fired power – including the 450 MW Tavantolgoi CHP – that is due to come online over the same period. If the capacity additions proceed as currently foreseen by the Ministry of Energy, the share of coal-fired CHP power in total power generation capacity will be greater in 2030 than it was in 2023 (89% vs. 83%) (Fig.3.3b).
(a) MW, (b) as a percentage of total installed capacity
Source: OECD calculations based on information from the Ministry of Energy of Mongolia
Mongolia has the eighth largest pipeline of new coal power capacity in the world (Global Energy Monitor, 2021[33]). That such a significant proportion of additional power in Mongolia is due to come from coal rather than renewables puts the direction of development of the country’s power sector at odds with the government’s stated decarbonisation objectives, as well as with trends in global financing of energy infrastructure. For example, there is a significant gap between pre-construction projects (6,630 MW) and projects already under construction (200 MW) in Mongolia, which in part may reflect the increasing difficulties facing countries in attracting the investment and financing necessary for CHP development. In interviews with the OECD during the preparation of this report, stakeholders regularly cited the challenges the Mongolian government has faced in tendering CHP expansion projects. Due to the limited financial capacities of Mongolian State-Owned Enterprises (SOEs) to invest in energy infrastructure, Mongolia has been highly dependent on a limited number of bilateral (namely Japan and South Korea) and international financial partners to support new energy projects or the expansion of existing installations. However, most of these countries or institutions have either ceased financing new coal power or are in the process of ceasing such investments (Edianto, Trencher and Matsubae, 2022[34]). At the same time, developments such as the agreement of participants to the OECD Arrangement on Officially Supported Export Credits to end support for unabated coal-fired power plants is an indication that Mongolia’s coal-driven power sector expansion will be increasingly difficult to finance in the years ahead (OECD, 2021[35]).
The lack of a clear plan to phase out unabated coal-fired power generation is a major barrier to developing Mongolia’s renewable energy sector and incurs significant costs. The challenges in transitioning away from coal are far from unique to Mongolia. Supporting emerging economies – particularly those with large extractive sectors – in designing strategies and toolkits for such a transition has been the subject of work at the OECD (OECD, 2022[36]). Coal phase-out is often as much a political economy challenge as it is an economic or environmental one, with a multitude of complex policy issues interacting with one another: SOE governance issues in coal mining and power generation companies, the importance of taxes levied on production and trade of coal for government revenues, the role of low-cost electricity in maintaining a social contract between the state, its citizens and business, etc. Given the importance of coal for domestic power but also for export revenues, it is perhaps unsurprising that the IEA assessed Mongolia to be one of the six countries in the world where coal phase-out is likely to be the most challenging (IEA, 2022[37]). While there are undoubtedly costs involved in supporting the transition away from coal use, particularly in a country with abundant and cheap coal resources, it is important to note that there are equally costly implications – financial, social and environmental – in not doing so. Whether through the direct subsidy of coal use (e.g., the major coal-producing SOE Baganuur JSC providing state-owned power plants with coal below market prices, or charging below cost prices to electricity end-users) or indirect subsidies (e.g., soft budgetary constraints for SOEs in coal production and use), the business as usual situation in Mongolia directs relatively scarce public – and at times private resources – towards the continued use of coal. These resources could otherwise be used to accelerate the deployment of low-carbon alternatives (EITI, 2021[38]).
Investments are also necessary in Mongolia’s grid infrastructure to allow for larger shares of variable renewable energy. The CHPs that provide the majority of Mongolia’s power and heating are highly inflexible in their electricity output. This is primarily due to their operational focus on meeting heat demand rather than electricity demand. Taken together with the country’s large size and the limited interconnectedness – internally and internationally – of its transmission grid, Mongolia faces significant challenges in integrating VRE sources, despite their considerable potential in the country. Despite only having 283 MW of installed renewable capacity in 2022, or 18.41% of the total installed capacity, Mongolia may already have reached the limit of what can be integrated into its power system under current conditions. A report by the National Dispatch Centre concluded that only up to 250 MW of VRE could be reliably integrated into the grid (World Bank, 2022[28]). In 2022, the actual total power supplied from renewable sources was equal to 10.24% of the total supply, or 0.64 TWh compared to 6.27TWh from fossil-fuel sources. Work supported by the EBRD is underway to improve grid transmission infrastructure between the renewable-rich South Gobi region and Ulaanbaatar. This connection would allow additional power demand in Ulaanbaatar to be provided by renewable energy generation in the south but would not necessarily displace coal-fired power in the capital.
Policymakers, regulators, firms, and international organisations regularly differentiate between the origin of emissions by referring to the ‘scope’. Understanding this categorisation is key for measuring, inventorising, and addressing GHG emissions, as it is for navigating international and national regulations around GHG emissions. For example, in the EU Carbon Border Adjustment Mechanism (CBAM), the implementation rollout is explicitly linked to different scopes of emissions. The scopes of emissions are numbered, and broadly relate to upstream emissions, direct emissions at the activity being measured, and downstream indirect emissions:
Scope 1: This category covers direct GHG emissions that occur from sources that are owned or controlled by an entity (for example, emissions from the use of coal in a steel furnace, or from the vehicles used on an industrial plant). In ‘hard-to-abate’ sectors, it is often scope 1 emissions that are the most difficult and expensive to address.
Scope 2: This category covers GHG emissions from the generation of electricity purchased and consumed by the entity. Scope 2 emissions occur at the facility where the electricity is generated, not at the end-user.
Scope 3: These emissions are those that result as a consequence of the activities of an entity, but which occur from sources not owned or controlled by the entity. An example would be the emissions that occur through the production or extraction of materials used as inputs by the entity. Scope 3 emissions are particularly important for firms that are exploring how to improve the sustainability of their value chains.
3.4.3. Improving the attractiveness of Mongolia’s clean energy and renewable hydrogen sector
In consultations conducted for this report, two key sets of issues emerged regarding the attractiveness of Mongolia’s renewable energy sector. The first of these relates to market regulation, namely electricity tariffs. The second of these relates to investor confidence and public governance, which may have an impact on the willingness of foreign investors to enter into contracts with the Mongolian government or SOEs in the energy and power transmission sectors. The investment attractiveness of the country’s renewable energy sector has implications for the country’s low-carbon transition. Many factors influencing investment decisions to support this transition – including renewable hydrogen – are similar to those in the renewable energy sector. These factors encompass: entering into power purchasing agreements and other off-take contracts with the government or publicly owned entities, regulatory stability, and the broader regulatory framework for low-carbon investments. Such factors signal to investors that the government is serious about transitioning the economy to a less carbon-intensive footing.
As in other countries of Central Asia, Mongolia has a relatively open statutory framework for investment in the energy and electricity sector. As indicated in the OECD FDI Regulatory Restrictiveness Index, which measures the statutory restrictiveness of different economic sectors for foreign investment, Mongolia’s electricity sector is generally less restrictive for FDI than the OECD average (Fig. 4.5). This is reflective of a relatively broad openness to foreign investment and the investment-friendly policies of the government, as noted in other international assessments (U.S. Department of State, 2023[17]). The challenge for Mongolia is that this de jure openness to foreign investment does not equate to a de facto openness. Non-statutory barriers, which operate alongside the legal framework for investment continue to weigh on the investment attractiveness of low-carbon opportunities, whether in energy or elsewhere, in the country.
Note: Red = OECD average, orange = Mongolia
Source: (OECD, 2022[41])
Despite the statutory openness of power and energy sectors, Mongolia has struggled to attract FDI into renewable energy projects. In 2023, 74% of FDI stock in Mongolia was in the mining sector, with only 0.3% accounted for by activities related to the power sector (National Statistics Office of Mongolia, 2024[42]). While there are no official FDI statistics available specifically for renewable energy, Mongolia has succeeded in attracting 200 MW of private sector led renewable energy projects to the country (ADB, 2023[43]). The bulk of this investment took place following the introduction of feed-in tariffs in 2007, and much of it was co-financed by international donors, including the EBRD and World Bank. All of this investment has been in the Central Energy System, with the majority attributed to one project, the Sainshand Wind Farm in Dornogovi aimag. Since that project fully came online in 2019 there has been almost no additional external investment in the sector. Financing constraints for Mongolian SOEs in the power generation and transmission sectors mean that it is difficult for them to undertake the capacity expansion and network modernisation investments. These updates are necessary to meet rising demand and policy commitments to energy sector decarbonisation detailed elsewhere in this chapter. The corollary of this is that, in the absence of reforms to electricity tariffs and a clear policy commitment to developing renewable energy and less carbon-intensive industrial production, attracting external finance – both from IFIs and the private sector – necessary for these investments may prove difficult.
Whereas financing for renewable energy projects is sensitive to local framework conditions, the same is not necessarily true for export-oriented extractive sector investment projects. Investment projects in the extractive sectors are often implemented by large, well-resourced multinational companies, many of which can negotiate directly with the government to overcome policy and regulatory barriers. Unlike Small and Medium Enterprises (SMEs), which are very sensitive to local framework conditions in the business environment, larger firms in extractive sectors can often self-finance, provide infrastructure, and ensure security. This ability enables them to operate in poor-quality institutional and legal environments. The implication is that success in the attraction of FDI into extractive sectors might hide underlying issues in the business climate that might limit success in attracting FDI into other sectors of the economy. Similarly, while statutory openness may be a necessary condition for FDI in non-extractive sectors, it may not be sufficient (OECD, 2021[44]). In the case of renewable energy, and indeed renewable hydrogen, issues that relate to investor confidence in the broader business climate and governance are particularly important. This is because such projects often require some kind of commercial agreement with the government or state-owned entity, at least in the early stages of project development, to make it to a final investment decision (World Bank, 2023[45]).
Regulated electricity prices are too low to attract the investment necessary to develop renewable energy projects to supply the national grid without additional policy intervention. Electricity prices in Mongolia are very low, with average residential tariffs and industrial tariffs of 0.045 and 0.52 USD/kWh. There is a balance to be struck between ensuring equitable access to electricity for the population and ensuring that tariffs are economically viable for investment in renewable energy. At present, the low cost of electricity is a function of abundant and cheap coal, a subsidised and primarily state-owned mining, generation, and distribution sector. There are ongoing discussions at the Energy Regulatory Commission and relevant line ministries, with input from the EBRD and other development partners, on a possible reform of the country’s electricity tariff system, as well as on the introduction of competitive auctions for new renewable energy project developments.
The government has made limited use of financial de-risking instruments to improve the attractiveness of renewable energy projects for foreign investors. The main tool used by Mongolian energy regulators has been the feed-in tariff (FiT). Introduced in 2007, the Renewable Energy Law sets out the FiT ranges for different renewable technologies depending on whether they are on-grid or off-grid installations. These FiTs are paid in Mongolian Tugrik, contracts are signed with the NDC, and the PPA agreement lasts for ten years. The on-grid FiT bands are USD 0.08-0.095/kWh for wind and USD 0.15-0.18kWh for solar PV (IEA, 2023[7]). As part of ongoing discussions to reform the FiT and the regulated energy price the government is considering the introduction of competitive auctions for new renewable projects. In the absence of new revenue generation for the energy sector through pricing reform there is limited scope for the government to increase the incentives available to advance its renewable energy development ambitions.
The impact of these incentives on FDI in the renewable sector has been limited. Following initial success in attracting investment to develop the country’s first large-scale wind farm, FDI into the renewable sector has been very low. One reason for this may be the structure and duration of Mongolia’s FiTs, and importantly the regulatory rate to which these projects would revert following the expiry of the initial PPA. For example, authors of a 2023 study on Mongolia’s renewable potential calculated that, once exposed to the regulated electricity price set by the Energy Regulatory Commission (ERC), utility-scale wind farms in Mongolia were economically unprofitable (Harrucksteiner et al., 2023[46]); the assessment considered a ten-year on grid feed-in tariff of 95 USD/ megawatt hour (MWh) for wind farms and 150.18 USD/MWh for solar PV, which then would be reduced to USD 37.4 USD/MWh under the ERC regulated rate, but does not consider the possibility for a separate PPA. It is important to note that the main factor affecting the economic viability of RE projects may not be the initial FiT, but the very low regulatory rate to which renewable projects would revert. Raising this regulatory rate for electricity is subject to an ongoing reform process in the country.
Another policy used to raise the attractiveness of investment in renewables is to lower the competitiveness of polluting equivalents through carbon pricing and other forms of regulation. Mongolia has yet to develop a carbon tax and is at a very early stage in developing a regulatory framework that disincentivises the use of coal. This is an issue for the expansion of renewable power generation in Mongolia for hydrogen production. For one, it severely limits the ability of the national grid to play any role in a domestic hydrogen economy, since the power it provides is overwhelmingly fossil fuel powered. Even if hydrogen projects were able to access renewable power at the margins of supply, this would not be consistent with the international regulatory trends that demand additional infrastructure for hydrogen production. Further, the cost of renewable electricity is in large part a function of the relative costs of alternatives; as coal-fired power becomes more expensive, there emerges a greater rationale to invest in and lower the cost of clean alternatives.
The government has highlighted renewable energy as a priority sector for investment attraction. In 2023 the government established a new Investment and Trade Agency (ITA) under the Ministry of Economic Development. Mirroring the investment objectives set out in the New Recovery Policy and Vision 2050, the ITA prominently features the renewable energy sector as one of the priority areas for FDI in the country. The site sets out clear information on regulation, licensing, and the applicable feed-in tariffs. While the ITA website does not yet discuss hydrogen, it may be advisable for the government to use this platform as well as its trade missions to promote the country as a potential location for renewable hydrogen production. The same logic is true for promoting clearer opportunities around power-intensive industrial production and the scope for co-located renewable electricity generation.
An unresolved state-investor dispute in Mongolia may limit the ability of the government to attract investment into higher-risk projects. Following the introduction of FiTs for renewable energy producers in Mongolia in 2007, Mongolia succeeded in attracting a number of renewable projects, with these supported with a combination of private and development finance. In consultations with investors in the Mongolian energy sector and potential investors in a low-carbon hydrogen industry, stakeholders frequently evoked an unresolved dispute between one of these early renewable projects and the Mongolian National Dispatch Centre (NDC) as a major barrier to developing the country’s renewable sector and entering into higher risk industrial development projects such as low-carbon hydrogen. The dispute centres on establishing government liabilities to pay for curtailed electricity production from a wind farm in the South Gobi region. The Fit requires the NDC to pay a significantly higher rate for wind power generated than the equivalent from the country’s CHPs, even when the grid is not able to integrate the renewable power. The dispute is indicative of a number of challenges facing the government if it is to attract FDI for other renewable projects and low-carbon hydrogen development: investor confidence in the government as an off-taker is relatively low and this is affecting investor appetite for further renewable projects in Mongolia, FiTs for low-carbon energy or fuels must be coherent with public financial capacities such that investors can be confident in the government’s ability to uphold contractual obligations. Moreover, underinvestment in adjacent sectors – in this case power transmission – place a de facto limit on the scope and ambition of low-carbon investment projects in the country.
One of the key factors that affect FDI entering low-carbon projects in emerging markets is the risk-related higher costs of capital. It is important to note the main factor affecting capital costs in emerging economies are generally country-specific risks. Mitigating these risks often involves focusing on enabling conditions, such as sovereign guarantees or specialised insurance targeting policy and political uncertainties. Factors such as financial market maturity, policy stability, and the regulatory landscape also affect capital costs. In short, the cost of capital for hydrogen projects is affected by many of the same factors that affect the investment climate in the country more broadly, and as such improving the attractiveness of Mongolia for low-carbon industrial investments must be viewed through the same prism of issues that affect the investment climate in general, rather than as a separate category (Saygin and Lee, 2023[47]).
There are policy levers that governments can use to lower capital costs for low-carbon projects. For example, specialised tax treatment can improve early-stage project cashflows, helping to de-risk the investments of first movers. In a number of jurisdictions, governments are pursuing additional de-risking policies to support investors by lowering capital costs. This includes providing regulatory clarity for hydrogen developers, implementing FiTs (primarily for the renewable energy infrastructure built for hydrogen production), and establishing auctions (Table 3.2). Many of these policies are also relevant to the mobilisation of innovation resources for low-carbon development as outlined in Chapter 2. An important consideration for Mongolia is that the fiscal capacities available to policymakers to provide capital grants to early-stage projects are very limited. Therefore, policymakers may need to use a more creative blend of investment and fiscal incentives to achieve a de-risking effect. Mongolia is likely to require the mobilisation of finance from IFIs and MDBs to fulfil the role that public sector finance might play elsewhere. Consequently, it is essential ensure that hydrogen projects under consideration for public support in Mongolia are coherent with the financing criteria of these institutions.
Governments with hydrogen strategies have undertaken direct financing mechanisms to support the development of hydrogen development and deployment. Grants, subsidies, and funds are examples of devising measures implemented by government to de-risk investment and reduce market uncertainty. While public financial support for project development may be necessary, policymakers should pay further attention to market creation and complement their actions with demand-side policies (IEA, 2023[1]).
The SDG Namibia One Fund was launched at COP27 in 2022. This blended finance platform aims at facilitating the deployment of green hydrogen market in Namibia. The fund was established in June 2023 through a partnership between the government-owned Environmental Investment Fund of Namibia and two Dutch organisations Climate Fund Managers and Invest international. The fund, whose objective is to mobilise a total of USD 1 billion, has already secured an initial funding of USD 40 million, under the form of a grant provided by Invest International. (Climate Fund Managers, 2022[48]) (Environmental Investment Fund, 2023[49]).
The Chilean government through its development agency Corfo has awarded USD 50 million of public subsidies to six renewable hydrogen projects. (Green Hydrogen Organisation, n.d.[50]). Furthermore, in summer 2023 the government launched a USD 1,000 million Fund for the Development of Green Hydrogen. The aim of the fund is to catalyze private investment for production and demand projects (Government of Chile, 2023[51]).
Canada has implemented the Clean Fuels Fund (CFF). The federal government in Budget 2021 has allocated CAD 1.5 billion to de-risk capital investment for clean fuel production facilities, including hydrogen (Government of Canada, n.d.[52]). In 2022 60 projects were selected to receive federal funding under the CFF which will amount to CAD 800 million (Government of Canada, 2022[53]).
In its national hydrogen strategy, Morocco envisages the use of export credit guarantees as a de-risking instrument. Morocco has highlighted in its green hydrogen strategy the importance that de-risking mechanisms play in rendering the investment environment more appealing to foreign investors. In particular, the strategy mentions direct support in the form of public private partnership and preferential tax treatment, as well as export credit guarantees as a potential option to attract investment (Government of Morocco, 2021[54]).
3.5.1. Hard infrastructure: developing the supporting infrastructure for transporting and storing renewable hydrogen
Export markets are likely to be key to supporting a domestic hydrogen industry at scale in Mongolia, and this will require additional infrastructure considerations. While it is important for projects to secure domestic off-take agreements, all the private-sector led renewable hydrogen projects in Mongolia envisage eventually producing hydrogen for export. It is evident that Mongolia’s potential as a competitive hydrogen producer relies on its natural assets. However, the ability to be a competitive exporter of hydrogen will also depend on transportation costs.
For Mongolia, given its landlocked geography and distance to seaports, the destination of hydrogen exports will likely be China. Many of the projects consulted for this report anticipate rising demand for low-carbon hydrogen in China from both existing applications (such as fuel cell vehicles) and from novel applications in industry, notably as a substitute for coal – Mongolia’s most important export commodity – in northern China’s steel industry. Notably, China is currently undertaking significant hydrogen-related infrastructure work at all stages of the value chain. For production, there is the example of a large-scale UNIDO-backed renewable hydrogen demonstration project in the city of Baotou, which aims to be producing 390,000 tonnes of green ammonia annually by 2025 (UNIDO, 2023[55]). Within Chinese industry there are indications of where future demand may come from, particularly in the steel sector, The completion of China’s first hydrogen-powered shaft furnace at the Zhanjiang Steelworks, one of the country’s major iron and steel producers, serves as a significant example (Sinosteel, 2022[56]). For transmission, China has included the construction of a 400km gas pipeline as part of the next “Implementation Plan for the Construction of a National Oil and Gas Network” (People's Republic of China, 2023[57]).
There are generally three main ways to export hydrogen: ship, truck, and pipeline. Each mode of hydrogen transmission has its own advantages and disadvantages and can be more or less competitive depending on the distance being covered. Given the distance between the likely production sites in Mongolia and the nearest major market in Northern China (~400km), the most competitive option for Mongolia’s exports would most probably be via pipeline, either as a compressed gas, liquified or transformed into another energy carrier such as ammonia. Countries with established gas transmission infrastructure are well-positioned here since the retrofitting of gas pipelines for hydrogen transmission can be achieved at low-cost (below 0.1 USD/kg H2 for distances up to 500km compared to USD 0.1-1/kg H2 for new pipelines). In comparison, transmission by ship and truck is much more expensive, at USD 1-2/kg H2 for distances up to 500km by truck and upwards of USD 2/kg H2 by ship, though this generally only used for distances above 5000km (Hydrogen Council/McKinsey & Company, 2021[58]). In Mongolia, unlike in other countries with ambitions to be early hydrogen producers such as Oman, there is no transboundary gas infrastructure that could be retrofitted. There are ongoing discussions to construct a pipeline from Russia to China that would cross Mongolia, but the rationale for this pipeline is to deliver natural gas to China (Downs, Losz and Mitrova, 2024[59]).
While pipeline construction costs vary depending on a range of local factors, the investment needs will nevertheless be substantial. At present, no transmission or storage infrastructure exists in Mongolia suitable for the export of locally produced hydrogen or its derivatives, and a clear understanding of what the future infrastructure needs, their associated costs, and how this affects the competitiveness of Mongolia as a hydrogen exporter will all need to be carefully considered if the country moves forward with a national hydrogen strategy. A survey of hydrogen infrastructure literature suggests that the cost of new pipelines ranges between USD 1.93 million to USD 3.95 million per kilometre.2 Taking the location of a future utility-scale hydrogen production facility to be located at one of the pilot project sites in the South Gobi, and assuming that in order for the hydrogen produced there to be exported there would be a need for a pipeline from the production facility to Baotou, the first major hub in China, then approximately 310km of new pipeline would need to be constructed. Without considering the storage requirements or any additional infrastructure for transforming hydrogen into alternative carriers, this would imply an investment need of between USD 598.3 million and USD 1.224 billion.
The cheapest way to deliver hydrogen to the end-user is to cluster production and transmission infrastructure with demand. While it is true that in the short- and medium-term there is very limited domestic demand for renewable hydrogen or its derivatives in Mongolia, the very high investment costs related to hydrogen storage and its transmission infrastructure creates a clear economic rationale. This justification guides the development of the country’s hydrogen industry in such a way that combines the most competitive production and delivery costs for both external and eventual domestic users. This is the logic that underpins the significant attention paid by policymakers in OECD economies, which emphasises the importance of co-locating hydrogen infrastructure – along with other supportive infrastructure for industrial decarbonisation – within existing or planned infrastructure clusters. While the development of industrial clusters will likely be driven by the market, there is nevertheless much that the government can do to encourage that development in a way which supports both its hydrogen export and domestic decarbonisation objectives. Interventions can range from simply providing the private sector and project developers with better information and data on hydrogen production and consumption opportunities (Box 3.6), to considering infrastructure sharing and co-location benefits in decisions around permitting and licensing. What is clear is that the more the government can steer the development of hydrogen production in Mongolia with a clustering of demand, the more Mongolia will be able to improve the economics of hydrogen use and the development of its supportive infrastructure.
The Australian government put in place a geo-mapping tool to support its national hydrogen strategy. The tool, developed by Geoscience Australia offers extensive data useful to hydrogen project localisation and feasibility assessment.
Australia’s Hydrogen Opportunities Tool consolidates and provides free access to geoscience data and tools for mapping and understanding hydrogen potential in Australia. Bringing together 7,000 datasets, it allows to visualise many factors affecting project viability including natural resources and geographic factors (e.g., land type, surface and groundwater), infrastructure (existing and prospect) including renewable energy production sites and transport, and other information such as administrative boundaries, and land status. It also allows to visualise hydrogen projects under development, under construction or operating in Australia. It allows to build scenarios, providing data about potential for production with or without infrastructure constraints, potential for CCUS development, presence of carbon storage sites, etc.
The tool also enables users to run hydrogen project feasibility assessments through its Hydrogen Economic Fairways Tool (HEFT).
In addition, this tool acts as an information portal for hydrogen project developers. It contains links to a variety of information about the hydrogen economy including the national strategy, market studies, and issues paper.
3.5.2. Soft infrastructure: standards and certifications for renewable hydrogen projects
Ensuring conformity with standards and certification in emerging hydrogen value chains will be crucial for an export-oriented renewable hydrogen production strategy. If Mongolia seeks to position itself within international emerging low-carbon production value chains, either as an exporter of green hydrogen or its derivatives, then it will also need to ensure that domestic policymakers and private sector actors are aligned with the international quality infrastructure requirements underpinning regional and global low-carbon hydrogen markets. In a number of recent OECD and IEA publications on supporting low-carbon hydrogen development a recurring recommendation is for policymakers to engage in international consultations on the development of these standards and certifications, the landscape of which remains fragmented but which will likely consolidate in the coming years around a common set of rules and standards (Table 1.1) (Cammeraat et al., 2022; International Energy Agency, 2023b).
The source of energy for hydrogen production plays an important role in aligning products with international standards and certifications. While the standards and certifications that will govern the international trade in renewable hydrogen are still being developed, it is already clear that a reliable, certifiably green source of energy to power electrolysis will be central to any hydrogen project’s compliance with the rules that will govern international hydrogen trade. Ensuring that the Mongolian authorities can give foreign investors – particularly those interested in using local value chains in a potential export-oriented production strategy – certainty that their projects will be compliant with international standards. This assurance will be crucial to the government’s ambitions to develop a utility-scale hydrogen industry. While pilot-stage projects may be less concerned with international standards and certifications, there is a need for the government to ensure that it is abreast of external regulatory developments and that it uses this knowledge to guide its policy interventions to support pilot projects and domestic innovation. If the government is to decide to commit to the long-term scaling-up of renewable hydrogen production in the country, putting in place this soft infrastructure will become particularly crucial.
Importing markets will contribute to standardising low-carbon hydrogen production regulations. The EU will likely play a significant role in shaping the development of international standards for hydrogen due to its importance as an early market for the low-carbon technology and its derivatives. Major European economies such as Germany and the Netherlands have plans to import a substantial amount of their renewable hydrogen demand as they seek to advance their domestic decarbonisation agendas. In June 2023, the European Commission introduced two Delegated Acts to officially define renewable hydrogen and related fuels, designating them as renewable fuels of non-biological origin (RFNBOs). Within this framework, the EU distinguishes between renewable hydrogen produced via electrolysis from renewable energy sources and low-carbon hydrogen, which relies on fossil fuels with carbon capture and storage (Table 3.3).
Note: Adapted from IEA World Energy Outlook 2022
Source: (IEA, 2022c)
The first EU Delegated Act demonstrates the importance of additionality requirements. The additionality requirement means that renewable power used for hydrogen electrolysis will only be classed as ‘renewable’ if the power does not detract from the decarbonisation (electrification) of other economic activities (European Commission, 2024[61]). In short, it means that for hydrogen imported into the EU to be considered ‘green’, then the renewable power used to produce it should either come from newly installed renewable energy infrastructure to meet power demand from electrolysis or surplus renewable power from the grid. This is a point of critical importance for emerging economies that are still in an early stage of power sector decarbonisation. The limited integration of renewable power into national power grids makes it difficult to certify that the power used for electrolysis is green. Additionally, even if it is green, it might not qualify as such in EU legislation due to failing the additionality requirement.
Learning from international experience and standards is crucial for new market entrants, allowing them to avoid duplicating efforts and align with global best practices. Adopting internationally recognised certification schemes, particularly for countries aspiring to export green hydrogen or its derivatives, is one approach; these messages have been increasingly highlighted by the OECD and IEA (IEA, 2023[1]). In countries such as Mongolia, where projects are expected to rely heavily on external technology developments, policymakers may explore an “outside-in” approach to regulatory development. This involves external regulatory developments and trends guiding the development of the domestic regulatory framework for renewable hydrogen and other synthetic fuels (see, for example, the ongoing development around Namibia’s Synthetic Fuels Act and its inclusion in the country’s hydrogen action plan to 2025) (European Commission, 2023[62]; Government of Namibia, 2022[63]) (OECD, 2023[64]) (World Bank, 2023[65]).
The production, storage, transport, and use of hydrogen beyond its traditional uses in Mongolia will likely require a significant revision and update of industrial safety standards. Industrial regulations and inspections for hydrogen in Mongolia are overseen by the National Energy Centre (NEC), which sits under the Ministry of Energy. While the NEC has extensive experience with the use of hydrogen in its limited industrial applications in Mongolia (primarily as a coolant for CHPs), the novelty of its use in new industrial applications, along with innovations in renewable hydrogen production and related advancements in storage and transmission, implies that the standards and regulations governing hydrogen's use will likely require updates. In this regard Mongolia faces a challenge similar to many other countries. Significant work exists at the OECD on updating licensing, permitting, inspections and enforcement for hydrogen production and usage. Given ; these new applications of hydrogen are not foreseen in existing legislation, they are often by default unaccounted for or subject to requirements that are not linked to specific risks of its new applications. An extensive overview of the OECD regulatory landscape for hydrogen can be found in the 2023 OECD publication Risk-based Regulatory Design for the Safe Use of Hydrogen (OECD, 2023[64]).
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← 1. The US National Renewable Energy Laboratory 2001 Wind Energy Resource Atlas of Mongolia provides an extensive overview of Mongolia’s wind resources, their location, and their technical characteristics. It remains the reference point of work on the wind energy sector by organisations including IRENA and Mongolia’s Ministry of Energy.
← 2. The distance (in kilometres) was estimated using the coordinates of Sainshand Wind Farm and Barun Industrial Zone Damao Baotou. The cost per kilometre was approximated using comparable projects and findings published by the Hydrogen Council and McKinsey & Company (Hydrogen Council/McKinsey & Company, 2021[58]).