Towards a Renewable Hydrogen Strategy for Mongolia

Executive summary

The global push for net zero could create economic opportunities for Mongolia as a producer of renewable hydrogen

As a signatory to the Paris Agreement on Climate, Mongolia has joined the international effort to reach net zero emissions by the year 2050. Achieving this ambitious goal will require a massive deployment of existing and new technologies across a wide array of industrial activities to reduce the carbon intensity of economic output. One such technology is hydrogen, and in particular renewable hydrogen produced using electrolysis powered by renewable energy sources. Renewable hydrogen has the particular advantage of being a viable alternative to fossil fuels in some of the hardest-to-abate industrial activities, such as metallurgy, cement, chemicals production, and mining. If forecasts from the International Energy Agency (IEA) are correct, then global hydrogen production will need to rise from 94 megatons (Mt) of hydrogen in 2021 to 500 Mt of hydrogen by 2050, of which 90% must come from renewable or low-carbon sources. Almost all of the capacity necessary to produce this renewable hydrogen is yet to be installed.

As the international market for renewable hydrogen matures and demand for the technology increases, there may arise significant opportunities for emerging economies such as Mongolia. Most international organisations and industrial stakeholders assume that for renewable hydrogen to be an economically competitive alternative to fossil fuels then it must be produced for less than USD 3 per kilogram. The drivers of that cost are varied, with some related to location (and by extension, distance to market), and others determined by inputs. The two most significant cost components are electrolysers and the levelised cost of renewable electricity. As the technology matures and is more widely deployed in the coming years, the cost of electrolysers is widely expected to come down, leaving the cost of renewable electricity as the major cost determinant. Given Mongolia’s exceptionally high renewable energy potential, it is here that the country may be able to distinguish itself as a competitive renewable hydrogen producer.

The potential for Mongolia to be a producer of renewable hydrogen has already attracted private sector interest. Drawn by the quality of Mongolia’s potential for combined solar and wind power generation, which is overwhelmingly located in the South Gobi region of the country, investors – both new to Mongolia and established – are at various stages of developing renewable hydrogen projects. Two sets of considerations are driving these first movers to explore the development of a frontier low-carbon technology in Mongolia. The first is the aforementioned quality of the renewable energy potential, the second is the relative proximity to a large potential export market, namely the steel industry in northern China. As discussed in this report, while the domestic market for renewable hydrogen remains at a very early stage of development, developers have already begun to secure off-take contracts with major industrial enterprises within Mongolia, with the decision making of these firms in large part driven by external pressure and encouragement to decarbonise their value chains, regardless the maturity of the low-carbon transition in the countries in which their operations are located.

A competitive renewable hydrogen industry in Mongolia could support diversification and decarbonisation

There are multiple rationales for Mongolia to explore the production and use of renewable hydrogen. If Mongolia is able to successfully develop its vast renewable energy potential, then it can feasibly produce renewable hydrogen at a sufficiently low cost to be a competitive exporter. Similarly, given the nascent stage of development of the many of the likely future applications of hydrogen – from fertilisers to synthetic fuels – there is an opportunity for Mongolia to position itself if new low-carbon value chains and thereby support the long-standing commitment to export diversification.

The implications for Mongolia producing low-cost renewable hydrogen might be greatest for the country’s mining sector, where both what is mined and how it is mined is changing. The government has well-established plans to develop the country’s industrial sector in general and its mining sector in particular, with ambitions to cement its position as a locum of investment. Developments in the mining sector are a bellwether of the challenges and opportunities that the global push for decarbonisation will present to Mongolia. On the one hand, with the decision at COP 28 in 2023 to transition away from fossil fuels, the future of Mongolia’s coal exports is uncertain. On the other, the push for electrification continues to raise the importance of the country’s important copper reserves, as well as its undeveloped reserves of critical rare minerals.

Mongolia has an opportunity to ensure that mining remains an economically important activity in the context of the green transition. Nevertheless, without significant a significant policy push to embed low-carbon technologies such as hydrogen in infrastructure investment decisions in the mining sector, there is a risk that Mongolia’s industrial development will be incompatible with the government’s broader sustainability ambitions. The mining sector, a significant driver of rising demand for power in Mongolia’s overwhelmingly coal-fired electricity generation system, can be a driver of decarbonisation elsewhere in the long-term only if it begins to address its sustainability domestically. Given the global push to decarbonise entire mining value chains, if Mongolia moves into higher value-adding activities such as smelting, then the need for alternatives to coal for power will only grow. Renewable hydrogen is one technology that could play an important role in this process.

Towards a renewable hydrogen strategy for Mongolia: Building on private sector interest, aligning with Mongolia’s low-carbon objectives

Recognising both the opportunities and challenges that the development of a renewable hydrogen industry presents, the Government of Mongolia has taken some initial stages towards formulating a hydrogen strategy. As discussed throughout this report, should Mongolia move forward with developing a renewable hydrogen industry, there will likely be a clear need for government leadership. The Ministry of Economy and Development was the first institution to explore the possibility of a national strategy for hydrogen development, responding in part to the private sector interest that has been consistently articulated through the Mongolian Hydrogen Council. Other government institutions, the Ministry of Energy and the Industrialisation Policy Committee among them, have since began to explore the development of hydrogen production in Mongolia, as well as its use in existing and new industrial applications.

A priority for policymakers will be balancing the ambition to develop a national hydrogen industry with ensuring that policy support does not crowd out investment and innovation in other low-carbon areas. While Mongolia has natural resources that could be leveraged to become an important producer of renewable hydrogen, the development of that market remains uncertain, and domestically a number of the hypothetical off-takers in the mining sector are pursuing other technologies in parallel for their decarbonisation. The challenge is therefore to simultaneously improve the effectiveness of innovation and industrial policy support for renewable hydrogen in a way that does not detract from private sector initiatives in other low-carbon technology domains. To this end, ‘technologically neutral’ innovation and industrial policies are likely to play an important role in any policy toolkit for the development of renewable hydrogen capacities in Mongolia, as well as “no regret” policies to improve the broader enabling environment for decarbonisation in the country, such as the development of Mongolia’s vast renewable energy resources for power sector decarbonisation. There is also a balance to be struck between committing resources that may improve Mongolia’s competitiveness as a first mover in global renewable hydrogen market (e.g., providing significant fiscal incentives to project developers) with taking a more cautious approach and committing public resources for hydrogen development as the global market matures and technology costs decrease.

Any low-carbon economic transition presents systemic challenges, and one of the greatest obstacles for governments is the difficulty in aligning the interests of the manifold economic actors and policy domains whose buy-in and input are necessary for success. Given the early stage of Mongolia’s low-carbon transition, the emergence of private sector interest to develop renewable hydrogen production in the country, despite the many challenges this implies, may come at a propitious moment. Mongolia’s renewable hydrogen ambitions can act as a locum for the broader process of industrial decarbonisation that is necessary to ensure the long-term sustainability and competitiveness of the economy. Should Mongolia be successful in developing this nascent industry, then the decisions taken over the coming years on infrastructure, technology and capacities will shape the extent to which the domestic industrial sector benefits from its development, as well as the environmental sustainability of this development. However, should Mongolia’s hydrogen ambitions be jettisoned, circumscribed or postponed, then the actions outlined in this report, based on the analysis presented throughout, will nevertheless support the government’s broader low-carbon transition objectives, since they will accelerate the rollout of the knowledge, skills, technologies and incentives necessary to set Mongolia’s growing industrial sector on a more sustainable pathway.

Four areas for action and strategic coordination to ensure a renewable hydrogen industry works for Mongolia

Attracting investment to develop a renewable hydrogen industry

A renewable hydrogen industry at scale in Mongolia will require a massive mobilisation of external investment in technology and infrastructure, while FDI has historically been predominantly concentrated in the mining sector. There is a need for the government to make a case for why Mongolia, and why now. A clear example of this is in renewable energy infrastructure, both for production and transmission. In the case of the former, just one of the projects being explored in Mongolia envisages the installation of 600 megawatts (MW) of renewable power, more than double the renewable capacity currently installed in the country. Yet, investment into the country’s renewable energy infrastructure, for all its obvious potential, has not been forthcoming; partly this is a question of incentives, partly it is one of risk. Investors perceive risks in the country, particularly in the types of investor-state co-operation that is emerging as crucial to getting early hydrogen projects off the ground, such as off-take and hydrogen purchasing agreements. There is therefore a clear need to raise investor confidence. There is also a need to raise the profile of Mongolia as a potential location for renewable hydrogen production and ensuring that the country’s investment climate more broadly does not dampen investors’ appetite to pick Mongolia over the number of other emerging economies where similar projects are being developed.

Aligning innovation and technology adoption with low carbon outcomes

While there is scope for hydrogen to play a major role in the decarbonisation of Mongolian industry, the preparedness of Mongolian industry to use low-carbon technologies remains very low. At the same time, the market signals that constitute a major part of the policy framework for creating domestic demand for the development and deployment of such technologies – effective carbon pricing, conditional public procurement, directed public research and development (R&D) support, quotas – have yet to be established. Where innovation has taken place in low-carbon technologies, it has generally happened within large multinational mining companies which face external pressure to decarbonise and increase the sustainability of their value chains, with these companies benefiting from their own well-developed international networks of R&D. In other instances, hydrogen-related innovation is taking place, both in the private sector and in state-owned enterprises (SOEs) but is linked to government ambitions to add greater value to the country’s significant coal extraction industry; such initiatives are technologically advanced and a testament to the significant innovation capacities in Mongolia’s leading industries, but the output of their innovation expenditure risks being misaligned with the emerging standards and expectations of global markets for renewable hydrogen and its derivatives.

Ensuring that water use for a renewable hydrogen industry is sustainable

In addition to renewable electricity, the other critical input necessary for renewable hydrogen production is water, and water of a sufficiently high purity. Mongolia is a country facing water scarcity: not necessarily at the country level, but at the regional level, and this has significant implications for the development of a renewable hydrogen production industry at scale. There is a significant geospatial mismatch between the location of country’s freshwater resources, which are primarily in the north, and where the most propitious renewable electricity generation potential is found, which is in the south of the country. In the South Gobi, where all renewable hydrogen pilot projects are currently located, and where the water-intensive mining sector is also concentrated, the only source of water are saline aquifers, the reserves and replenishability of which remain uncertain. Where other emerging economies can explore the possibility of seawater desalination for hydrogen production, Mongolia evidently cannot. The development of the country’s renewable electricity potential in the south will be crucial to meeting the government’s broader low-carbon objectives, but the extent to which they can be utilised for hydrogen production will depend on whether projects can identify sustainable sources of water, developing the necessary infrastructure to utilise these sources, and ensuring that this use is environmentally, economically and socially sustainable.

Building a national vision and strategy for hydrogen development will require to establish a platform that brings together stakeholders from across the economy

As in most countries envisaging the production and use of renewable (or sometimes more broadly low-carbon) hydrogen, developing a national vision and strategy for such development will require putting in place proper steering and coordination mechanisms. Mongolia can build on the public-private working group that the OECD and UNDP have established and consulted for this work, which brings together several ministries, private sector representatives including the Mongolian Hydrogen Council, national experts and academics, and international partners. Working groups can be established to drive the agenda in specific areas such as innovation and technology transfer, water and hydrogen, infrastructure, and standards and regulations. The establishing of such a platform for a national industrial policy dialogue about renewable hydrogen is important in many respects: it enables to bring together knowledge and information that is disseminated across stakeholders, it helps identify critical problems and identify solutions, including and importantly those implying policy and regulations. It also enables to increase institutional knowledge about a new green technology, its implications, and its interaction with the broader policy framework for economic growth and decarbonisation in Mongolia.