This chapter introduces the rationale for developing a renewable hydrogen strategy in Mongolia. The country’s economic development has been driven mainly by the mining of coal and other minerals, activities with high environmental and social costs. The importance of mining and the significant role of coal in its power sector will likely make it difficult for the country to meet its emissions reduction commitments under the Paris Agreement. As Mongolia explores the potential of greener technologies and private sector renewable hydrogen projects emerge in the South Gobi Desert, the government has an opportunity to establish a national renewable hydrogen strategy. This strategy would support these early projects and lay the foundations for low-carbon technology development. By steering the production and adoption of renewable hydrogen, it could help decarbonisation Mongolia’s economy and facilitate its transition to a more sustainable and resilient development pathway.
Towards a Renewable Hydrogen Strategy for Mongolia
Abstract
Mongolia’s ability to deliver on its low-carbon commitments, and more broadly, on the transformation needed to put the country on a more resilient, and environmentally sustainable economic pathway, will require it to address two intertwined challenges. For the foreseeable future, Mongolia’s economic growth will be driven by the export of coal and other mineral products that the country has in abundance, which is a highly emission-intensive activity. Secondly, the country’s power system relies heavily on coal, and Mongolia is one of the most energy-intensive countries in the world. In spite of its commitments to the Paris Agreement on Climate Change (Paris Agreement) and associated Nationally Determined Contribution (NDC) targets, along with the adoption of plans and policies in recent years aimed at decarbonising the economy, the clean energy transition in Mongolia has not yet begun. This section looks in detail at these challenges to Mongolia’s decarbonisation.
1.1.1. Over the past 20 years Mongolia’s economic growth has been driven primarily by the export of minerals
Since exiting a deep recession in the early 1990s, Mongolia’s economic growth has been consistently robust, averaging 5.9% between 2000 and 2022 (IMF, 2023[1]). Between 1998 and 2018, the share of the population living in poverty dropped from 28.5% to 0.7% (USD 2.15 per day threshold) (World Bank, 2023[2]), and GDP per capita (PPP) has risen from 13.1% of the OECD average in 2000 to 28.3% in 2022; however, the rate of convergence has slowed in recent years (World Bank, 2023[3]). Since 2000, productivity across all sectors of the economy has also grown significantly, rising from USD 1,875 per worker in agriculture in 2000 to USD 5,705 per worker in 2019, from USD 9,395 to USD 14,156 per worker in industry, and USD 6,673 per worker (2010) to USD 9,516 per worker in services, with productivity growth in this latter category more muted than elsewhere (World Bank, 2023[3]).
This growth has been fuelled primarily by the extraction and export of a narrow range of mineral products that the country has in abundance – principally copper, gold and coal. Some 70.1% of Mongolia’s exports consist of unprocessed mineral products. One market – China – accounts for 73% of Mongolia’s exports, with Mongolian exports to that country growing 131% over 2011-2021 (OEC, 2023[4]). In 2021, 38% of Mongolian exports to China consisted of copper ore; coal’s share was 32.1% coal, followed by iron ore (12.4%), crude petroleum (3.58%) and zinc ore (2.23%) (OEC, 2023[4]). Mongolia has the 24th largest total proven reserves (2.5 billion tonnes) in the world, and it is the 14th largest coal producer in the world (892,455 Terajoule (TJ)of coal extracted in 2021, down from a peak of 1,123,854 TJ in 2019). At the national level, the economic and energy significance is clear. In 2022, Mongolia produced the equivalent of 61,257 kilowatt-hours (kWh) of coal per capita, second to only Australia (121,618 kWh). According to a 2020 IMF study on the economic implications of coal dependence for coal producers in the energy transition, coal production was equivalent to 30% of the country’s GDP. Of this production, the Fund estimated the net export of coal was equivalent to 22.5% of GDP. In both cases, Mongolia stands significantly ahead of the other surveyed countries (BP, 2022[5]) (IMF, 2022[6]).
Given the absence of a large domestic market, growth is hugely dependent on external demand, increasingly from China. The vast majority of Mongolia’s domestic industrial and manufactured output is exported, with exports of goods and services in 2022 equal to 69.7% of GDP. This percentage is significantly higher than the OECD average of 30.4% and exceeds that of other countries in the region with large extractive sectors, such as Kazakhstan, where the equivalent figure was 33.5% (World Bank, 2023[3]). The situation in Mongolia is similar to that in other transition economies in the Eurasia region, where the small size of the domestic market means that external trade plays a major role in domestic output.
This extreme concentration of export products and trade partners increases vulnerability to external shocks. When the COVID-19 pandemic prompted an international shutdown of economic activity, Mongolia was one of the worst-affected economies in Central Asia, with GDP contracting 4.6% in 2020, second only to Kyrgyzstan, which saw its economy shrink 8.4% (World Bank, 2023[3]). The main driver of the shock to Mongolia’s economy was the immediate passthrough effect of the decision by China to close its borders, which caused major disruptions to industrial output and trade (World Bank, 2023[7]). In 2020, slowdown in the mining sector was the largest single contributor to the country’s economic contraction, accounting for 31.3% of the drop in GDP (National Statistical Committee of Mongolia, 2022[8]).
The mining sector is and will remain important to the country’s economic development under current conditions. Mining output has picked up since China re-opened its borders in 2022, with the sector’s output accounting for 25.8% value added that year, a far larger share than in other SIPA project countries in Central Asia, such as Kazakhstan (15.6%) and Uzbekistan (4.3%) (Figure 1.1). Between 2011 and 2022, mining accounted for 72.8% of all foreign direct investment inflows to Mongolia (FDI) (National Statistics Office of Mongolia, 2023[9]). The contribution of the mining sector to Mongolia’s economy is expected to grow in the coming years as underground extraction begins at the country’s vast Oyu Tolgoi (OT) copper and gold mine, with production forecast to double between 2023 and 2025 (World Bank, 2023[10]). Trade partners' interest in accessing minerals within Mongolia's subsoil, including critical minerals like copper and rare earths, as well as other minerals like uranium, could spur additional mining expansion. In 2011, Mongolia’s minerals wealth was estimated between USD 1 and 3 trillion (Brian S. Fisher, 2011[11]). National plans to develop the sector are discussed in Chapter 3 of this report.
Note: Economic activities according to ISIC classifications. ‘Other’ contains the following categories: Public administration and defence; compulsory social security; Education; Construction; Human health and social work activities; Information and communication; Electricity, gas, steam and air conditioning supply; Professional, scientific and technical activities; Accommodation and food service activities; Administrative and support service activities; Water supply; sewerage, waste management and remediation activities; Other service activities; Arts, entertainment and recreation; Activities of households as employers; undifferentiated goods- and services-producing activities of households for own use
Source: National Statistical Agencies of Mongolia, Uzbekistan, and Kazakhstan. (OECD, 2021[12])
Although the industrial sector does not have as large a direct GHG footprint as the power sector (Figure 1.2a and Box 1.1), it is a major source of GHG emissions and other forms of pollution (IEA, 2022[13]). Industry accounts for 6% of Mongolia’s total GHG emissions and the majority originates in the mining sector, with 95% of industrial emissions attributable to mining activities (Figure 1.2); this is significantly lower than the OECD average of 10.5% but higher than in Kazakhstan (3.1%) and similar to Uzbekistan (6.1%) (UNFCCC data put this at a slightly lower level, at around 3% of total emissions for Mongolia, but the trends are broadly consistent) (Gutschow et al., 2022[14]). As output from the sector has grown over the past 20 years, direct emissions have risen precipitously. The mining sector in Mongolia is also characterised by a high degree of carbon intensity, in large part due to the extremely high share of fossil fuels used to power mining operations. Mining in Mongolia produces USD 0.15 of value added (VA) per kilogram (KG) of CO2 emitted, compared an OECD average of USD 0.36 per KG of CO2 (Fig 1.c). When examining the relationship between mining growth and electricity demand, the impact of mining on Mongolia’s emissions profile becomes notably pronounced. The country is currently constructing additional coal-fired generation to satisfy rising electricity demand from mining activities in the south of the country.
A similar story is true of the industrial sector’s energy intensity more generally, with mining in Mongolia producing USD 2.2 of VA per megajoule (MJ) of energy consumed compared to an OECD average of USD 6.35 per MJ of energy (.Figure 1.1d). The difference with major mining economies such as Australia and Canada is even starker, where the equivalent figures are USD 0.52 VA per KG of CO2/USD 6.01 per MJ and USD 1.52 VA per KG of CO2/USD 27.3 per MJ. The sector is therefore not only very energy intensive, but also inefficient. There is likely considerable room for improvement in enhancing the energy efficiency of Mongolian economic performance. Upgrading industrial technologies and processes could yield significant improvements, especially at the lower end of the marginal abatement cost curve
Note: In Figure 1.2c, the chart depicts the amount of value added in the mining sector per KG of CO2. In Figure 1.2d, the chart depicts the amount of value added in the mining sector per MJ of energy consumed.
Source: Figure 1.2a and b based on (Gutschow et al., 2022[14]); Figure 1.2c and d based on (IEA, 2023[15]).
Like a number of other areas of heavy industry, emissions from mining activities are considered to be “hard-to-abate”. Such characterisations generally reflect the limited scope for emissions reductions through electrification, efficiency improvements, and readily available and commercially viable technological solutions. This is true in Mongolia as it is in other countries, but the significant gap between Mongolia and other mining economies in terms of the efficiency of energy use and carbon emissions relative to output highlights both the scope that the country has to improve the sustainability of mining activities as well as the ways in which other carbon intense activities – principally in the energy sector – have a pass-through effect on other sectors of the economy. The government’s intention to significantly expand the scope of mining activities as part of its broader industrialisation and economic development strategy will have an impact on the emissions footprint of industry in Mongolia (Government of Mongolia, 2020[16]) (Government of Mongolia, 2023[17]). There is, therefore, a rationale to integrate sustainable and low-carbon technologies and approaches into industrial planning now – for example, supporting the embedding of low-carbon technology options into the development of Mongolia’s nascent steel industry, exemplified by ongoing discussions in Mongolia to develop the Darkhan steel plant – which could help with the longer-term competitiveness of Mongolia’s industry in a less carbon intensive international context.
Fostering the development of activities at higher stages in mining value chains will also have an impact on the domestic emissions intensity of the mining industry. At present, Mongolia exports the vast majority of its minerals in unprocessed form. For example, of the USD 2.9 billion copper exported from China in 2021 – an 80.5% increase over the previous five years – all of it was in the form of ores or concentrates, with processing taking place primarily in China (OEC, 2023[4]). This means that the true emissions footprint of the industry is not captured domestically as the most emissions-intensive activities are off-shored (as is currently the case with smelting activities for copper). It is the government’s intention to expand mining activities and to develop higher value-adding activities in the value chain within Mongolia as part of its diversification and development agenda (cf. Point 1 of Objective 4.2 of the Vision 2050 document on increasing the level of mineral processing in Mongolia) (Government of Mongolia, 2020[16]). The needs for critical minerals to support a global sustainable and low-carbon transition, in this regard, may represent a sizeable opportunity for Mongolia. Locating higher value-adding mining activities on its territory would, however, also introduce the carbon and other GHG emissions associated with these activities within the country. The adoption of decarbonisation solutions for Mongolia’s mining industry should go hand in hand with plans for diversifying the sector and moving up mineral value chains in the coming decades.
In 2020, Mongolia’s total greenhouse gas (GHG) emissions were equal to 43,081.62 gigagrams of CO2-equivalent (Gg CO2-e), when excluding emissions from Land Use, Land Use Change and Forestry (LULUCF). This represents an 82.17% increase in GHG emissions since 1990; net GHG emissions (i.e., total emissions minus removal of emissions) were equal to 12,909.10 Gg CO2-e in 2020, which is equal to a 340.02% increase from the 1990 level (Figure 1.3).
Note: For Panel A, the category Land Use, Land Use Change and Forestry (LULUCF) is excluded, the values being -30,172.52 GgCO2e in 2020 or a 3.95% change since 1990.
Source: (UNFCCC, 2023[18])
The agriculture and energy sectors are by far the biggest contributors to Mongolia’s GHG emissions. In 2020, emissions from the agriculture sector accounted for 51.97% of total emissions, while the energy sector accounted for 44.78% of total emissions. Emissions from industrial processes were equivalent to 2.66% of total emissions, though this does not account for indirect emissions in industry through energy consumption; of industrial emissions, the mining and minerals sector accounts for 50.11% emissions, and total emissions from this sector continue to rise sharply.
Carbon dioxide (CO2) is the most important GHG in Mongolia, and represented 42.4% of total GHG emissions in 2020, followed by methane (33.82%) and nitrous oxide (22.46%). In 2020, Mongolia emitted 18,256.66 Gg CO2, a 52.59% increase from 1990. Of these emissions, 96.84% are accounted for by the combustion of fossil fuels for energy.
Source: (UNFCCC, 2023[18])
1.1.2. Mongolia’s coal-powered energy system is a barrier to low-carbon, sustainable development
Mongolia has one of the most emissions-intensive economies in the world. Measured in terms of CO2 intensity of GDP (KG of CO2 per USD 1 PPP of output) or the energy productivity of GDP (GDP per unit of total energy supply), Mongolia significantly lags the OECD average (Figure 1.3a). In short, Mongolia requires more energy and emits more carbon to produce the same output as comparable OECD and non-OECD countries, with 1 tonne of oil equivalent (TOE) of energy in 2020 necessary to produce USD 6 102 output, compared to OECD average of USD 10 898 (Figure 1.3b) (OECD, 2023[19]).
Note: TES = Total Energy Supply
Source : (OECD, 2023[20])
The persistently high levels of CO2 emissions and energy intensity of production is due to in large part to the dominance of fossil fuels in the country’s energy supply. The power and heat sector accounts for 65% of Mongolia’s CO2 emissions, with 85% of electricity generation being coal-fired (IEA, 2023[21]). There is a modest positive trend in most emissions intensity and growth indicators, including the CO2 intensity per unit of total energy supply (a key factor in the decarbonisation of the domestic energy sector), which indicates that Mongolia is gradually increasing the energy efficiency of the industrial base and energy sector. The CO2 intensity of energy supply nevertheless remains significantly higher than the OECD average, and further convergence of Mongolia with the OECD trend will require significant investment and reform in the country’s energy sector.
In addition to environmental costs, there is a significant public health cost to the emissions-intensive nature of Mongolia’s economy. The predominance of coal in Mongolia’s energy supply is not only a major barrier to the country realising its own GHG reduction targets, but it is a major source of pollution and causes significant environmental and social externalities. In 2019, the OECD estimates that some 51% of Mongolia’s population were exposed to dangerously high levels of particulate matter through air pollution compared to an OECD average of 0.45% (OECD, 2023[19]). The cost of Mongolia’s pollution, in both public health and public finance terms, is significant. The OECD estimated that the welfare cost of premature deaths due to particulate matter in Mongolia was equal to 7.7% GDP in 2021, equivalent to 696 premature deaths per million of the population (OECD, 2023[22]).
1.1.3. Despite commitments in its Nationally Defined Contribution, Mongolia’s energy transition has yet to begin
If not properly anticipated, the global transition to net zero can create challenges for Mongolia, particularly through the need to address the economic and social importance of coal. The Net Zero by 2050 scenario set out by the IEA envisages a precipitous decrease in coal demand over the coming decades, with demand for unabated coal use to fall by 98% by 2050 (IEA, 2021[23]). As global demand for coal falls, there will likely be an impact on coal-producing regions in terms of economic output and employment, as well as on public authorities through decreased tax revenues and export earnings on coal production; mining is found throughout the country, but many of the most economically important mines, including Tavan Tolgoi (coal) and Oyu Tolgoi (coal and copper) are located in Ömnögovi Aimag (region), which covers a vast part of the South Gobi. Ensuring that a pivot away from hydrocarbons such as coal does not have a harmful impact on social inclusion and welfare, particularly but not exclusively on extractive-based emerging economies, underpins significant academic and policy attention being paid to the need to secure a ‘just’ transition (OECD, 2022[24]) (IEA, 2023[25]).
In 2020, the government updated its Nationally Determined Contribution (NDC) targets to reduce GHG emissions from the energy sector by 49.4% by 2030 compared to its 2015 baseline. Mongolia’s NDC commitments take place against a backdrop of numerous domestic policy commitments to increase the share of renewables in the country’s energy system. The country’s key energy-related policy is the 2015 State Policy on Energy (SPE), which 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[21]). Prior to the recent NDC update, the government also set a goal of expanding hydropower capacity by 0.9GW capacity from a level close to zero, as well as increasing renewable capacity by 0.6GW from other sources (Government of Mongolia, 2019[26]) (Government of Mongolia, 2015[27]).
Despite these commitments, the majority of planned additional capacity is due to come from coal. The abundance of cheap and easily accessible coal has perpetuated a highly carbon intensive, polluting, and inflexible power and heating system, the emissions from which grow linearly with electricity demand. As industry continues to grow and with increasing residential electricity demand in the context of internal migration to Ulaanbaatar, demand on Mongolia’s power system is rising every year. The vast majority of power expansion in Mongolia is envisaged to come from additional coal-fired plants. At present, the Ministry of Energy of Mongolia has plans to expand existing coal-fired plant capacity by 810 megawatts (MW), as well as creating an additional 750MW of new coal-fired capacity. Total installed coal capacity is anticipated to almost double in the second half of the 2020s, as a number of expansion projects at coal-fired CHPs and new CHPs – including the 450MW Tavantolgoi CHP – come online (Ministry of Energy of Mongolia, 2022[28]).
Moreover, grid and power system inflexibility are major challenges to the integration of renewable energy penetration and deployment of clean electricity. The power generation capacities of Mongolia’s CHPs are generally inflexible and linked to demand for heat rather than electricity (Nilsson et al., 2021[29]). One consequence of power system and grid inflexibility is the difficulty of integrating electricity produced from variable renewable energy (VRE) sources, such as wind and solar, which acts an implicit barrier to electrification and its potential as a vector of decarbonisation. The limited flexibility of the grid is one of the major challenges to integrating even modest shares of VRE. These challenges are exacerbated by a lack of interconnectedness between Mongolia’s power grid, which is both a reflection of geography and underinvestment (Nilsson et al., 2021[29]).
The position of the Mongolian authorities on the role of coal in the socio-economic future of the country is at odds with national emissions reduction commitments and will pose a fundamental challenge to the development of low-carbon industries such as renewable hydrogen. As discussed in Chapter 3, Mongolia retains a substantial pipeline of planned coal capacity additions, while the roll out of new renewable power generation capacity remains very slow. Trends in international climate negotiations, such as the decision taken at COP 28 to phase-down unabated coal power and phase-out fossil fuel subsidies, the agreement reached at the OECD Arrangement on Officially Supported Export Credits to cease providing support for unabated coal-fired power plants, as well as decisions by multilateral finance organisations such as the World Bank and the ADB to phase-out the financing of new coal-fired power generation all indicate that there is a need for Mongolia to begin planning for a post-coal future (UNFCCC, 2023[30]) (OECD, 2021[31]) (ADB, 2024[32]) (World Bank, 2023[33]). While revenues from coal exports may fall over the coming decades, the global low-carbon transition will create opportunities for Mongolia. Many of these opportunities will lie precisely in the new, more complex and at times higher value-adding industrial activities that the government wishes to develop. This includes mining metals such as copper and other rare earth minerals critical to the global transition, as well as in new low-carbon technologies such as hydrogen. As discussed throughout this report, what is important for the government to retain is that the development of these activities will likely depend on a clear signal to phase-out coal and to stimulate investment in low-carbon areas.
The acceleration of national efforts towards a net zero global economy by 2050 has given additional impetus to Mongolia’s long-standing environmental and social rationales for decarbonisation. Around the world, countries are designing and implementing policy programmes to support the decarbonisation of economic production, with the Paris Agreement– to which Mongolia is a signatory – setting a goal of limiting global temperature increase to 1.5C above pre-industrial levels by the end of the century. The challenge for all countries pursuing this goal is the inherent complexity in coordinating the low-carbon transition. Governments are increasingly expected to take an interventionist and steering role to facilitate systemic change domestically – often expressed through a renewed interest in industrial policy – and adapting to it internationally (Criscuolo et al., 2022[34]). The low-carbon transition is shaping existing markets and creating new ones which adds additional commercial and economic rationale for governments to act quickly in order to ensure competitiveness and wellbeing for future generations. To achieve its decarbonisation objectives, the Government of Mongolia is working with international partners, including the OECD, to develop a long-term vision for low-carbon economic development.
Renewable hydrogen will play a critical role in achieving net zero both globally, and across economies (Figure 1.4ab). While there are numerous approaches for renewable hydrogen production, one of the most promising is ‘green’ or renewable hydrogen, which is produced using electrolysis powered by renewable energy sources, and at scale it can contribute to global net zero targets in four important ways (Box 1.2). First, hydrogen is a promising alternative to fossil fuels in the energy sector – where its use is expected to grow markedly by 2050 – and industrial processes that require high temperatures (Figure 1.4c); the only by product of hydrogen combustion is water, and it could therefore contribute to improving the sustainability of hard-to-abate sectors where the technical viability of electrification is limited. Second, hydrogen is a necessary input for the development of fuel-cell based vehicles, which are likely to play a critical role in reducing emissions in logistics, the built environment, and in sectors such as mining. Third, hydrogen is a feedstock for a number of chemical industries, and therefore renewable hydrogen could significantly support the decarbonisation of many carbon-intensive products such as fertilisers whilst also enabling the emergence of new synthetic fuels. Lastly, as a storer of energy, hydrogen can help integrate energy produced from intermittent renewable electricity sources (Cammeraat, Dechezlepretre and Lalanne, 2022[35])(IEA, 2022b).
Source: (IEA, 2021[23]), Figure 1.4b OECD analysis based on stated scenarios.
Global production of hydrogen is anticipated to expand significantly in the coming decades as the fuel and its derivatives play an increasing role in achieving Net Zero targets. Projections for the share of renewable hydrogen in global energy demand by 2050 vary between 12 and 22%, equivalent to 340-420 exajoules (EJ) of energy (Figure 1.4 b). Not all of this hydrogen will be ‘green’, with a notable amount likely to be produced using natural gas and carbon capture and storage (CCUS) technologies. Nevertheless, the increase in hydrogen production required for these scenarios is vast. In 2021, global hydrogen production was equal to 94 megatons (Mt), with over 90% of this being produced using unabated fossil fuels. By 2050, the International Energy Agency (IEA) anticipates that global production will need to reach 500 Mt to meet global demand, with over 90% this coming from low-carbon sources (IEA, 2022c).
Demand for renewable hydrogen will grow in a range of sectors over the coming decades as it is expected to become cost competitive with fossil fuel equivalents due to technology advancements and regulatory push (Figure 1.5). Deep decarbonisation implies that a number of hard-to-abate sectors will need to find novel and innovative ways of integrating low-carbon fuels into their operations. By 2050, industrial demand for hydrogen could reach 62.9Mt, almost double the level of industrial hydrogen consumption in 2020 (IEA, 2023[36]). As the cost of renewable hydrogen comes down, its use in a number of novel applications, such as fuel-cell vehicles, shipping and heavy industry is projected to rise from zero in 2020 to 93.2Mt, 57.3Mt, and 28.3Mt respectively by 2050 (Figure 1.5). The challenge in the shorter-term is that the degree of risk involved in technology switching and the concomitant implication for infrastructure means that potential drivers of demand, such as those in hard-to-abate industries, face high initial costs and limited incentives to adopt low-carbon alternatives.
Note: The share of low-carbon hydrogen in total demand is projected to increase from 11% in 2020, to 70% in 2030, 91% in 2040, and 99% in 2050.
Source: (IEA, 2021[23])
Hydrogen is one of the few technologies that can both support the decarbonisation of Mongolia’s industrial and energy sectors. Renewable hydrogen has the advantage of being able to support the decarbonisation of Mongolia’s emissions-intensive mining sector whilst also contributing to the decarbonisation of the country’s fossil fuel intensive power system. In the mining sector, which is likely to serve as the initial source of renewable hydrogen demand within the country, hydrogen can be used in heavy-duty mine vehicles for which electrification is not viable (Nilsson et al., 2021[29]). In the power sector, hydrogen can be an alternative for dispatchable green energy, with hydrogen that is produced from VRE sources offering low-carbon grid balancing solutions and enabling Mongolia in the short- and medium-term to navigate some of the grid inflexibilities that pose technical barriers to wider integration of VREs into the national grid. Other potential applications in the country include the production of synfuels and their use in public transport systems. Nevertheless, it should be noted that the development of a hydrogen industry is not a necessary condition for RES expansion and any new RES capacity for hydrogen production should offer additionality to the grid if it is to be connected.
As the global renewable hydrogen market matures and expands there may be trade opportunities for emerging economies such as Mongolia. While innovation and technology development linked to renewable hydrogen production remains concentrated in a small number of countries (primarily Japan, the United States, Germany and Korea), many emerging economies – including Mongolia – are endowed with the renewable energy resources and land necessary to produce hydrogen at scale (Cammeraat et al., 2022). The IEA calculates that global demand for renewable hydrogen will rise from 1 Mt in 2022 to 420 Mt in 2050, with 327 Mt of this total produced from electrolysis and renewable energy and a further 89 Mt produced from fossil fuels using CCUS technologies (IEA, 2023[36]). The most significant cost factors in the overall levelised cost of production of hydrogen (LCOH) are electricity and electrolysers, and as the cost of the former is likely to come down in the coming years, the cost of renewable electricity is likely to be the key determinant of LCOH over the medium- and long-term. In this regard, Mongolia could have a notable comparative advantage in renewable hydrogen production should it succeed in addressing the barriers to scaling investment in its renewable energy sector.
The commercial rationale for emerging economies such as Mongolia’s in exploring renewable hydrogen are largely three-fold. First, if Mongolia succeeds in producing renewable hydrogen at low cost, then it can feasibly position itself as a supplier to emerging economies where there is likely to be a marked increase for renewable hydrogen as a fuel for hard-to-abate industry. In China, for example, half of the country’s leading steel producers have begun to invest in hydrogen as an effort to decarbonise production, and others are likely to follow suit as China moves to secure the competitiveness of its steel industry – much of which is located in northern China, close to Mongolia – in a global low-carbon context (Hseuh, 2023[37]) (Zhou et al., 2022[38]). Second, as noted in Figure 1.4a., a significant proportion of renewable hydrogen will be used in non-industrial applications, such as fertilisers and synthetic fuels. Renewable hydrogen producers therefore have an opportunity to position themselves in nascent but high growth value chains whose importance will grow in low-carbon global economy. Third, access to renewable hydrogen can contribute to the future international competitiveness of Mongolia’s tradeable industrial output (particularly its mining and nascent metallurgical sector), which may be severely damaged should industrial growth continue to be powered by emissions-intensive fossil-fuels.
The ability of renewable hydrogen to play a critical role in domestic decarbonisation will likely depend on the government’s future low-carbon development strategy. Whilst the country does not yet have a net zero target, it has defined a number of clear objectives for its low-carbon transition: the country aimed to have 20% of installed energy capacity from renewable sources by 2023 and 30% by 2030 (Government of Mongolia, 2019[39]). Though the country did not succeed in achieving the first of these milestones, there remains time to meet its 2030 target. The government also set out a 27.2% GHG reduction compared to the business-as-usual (BAU) scenario in its NDC. Nevertheless, the maturity of the country’s low-carbon policy framework development remains low, with Mongolia yet to develop strategies for coal phase-out, industrial decarbonisation plans, a mechanism for carbon pricing, nor an overarching strategic roadmap to coordinate the systemic nature of the decarbonisation challenge. The ongoing work of the Ministry of Economy and Development to establish a Long-Term Vision 2050 as a foundation for a future fully-fledged long-term low- emission development strategy (LT-LEDS) can be seen as a step towards the articulation low-carbon technology adoption and development contributions to an economy-wide decarbonisation scenario. This work towards a LT-LEDS is supported by international partners including the 2050 Pathway Platform, the EBRD, the ADB, IDDRI, the OECD and the UNDP.
If developed, Mongolia’s vast renewable energy capacities could allow renewable hydrogen to play a role in the country’s broader low-carbon development pathway. Mongolia has an estimated 2.6 terawatts (TW) of renewables capacity, with a hypothetical combined electricity output from the country’s wind and solar resources potentially reaching 15,000 terawatt-hours (TWh) per year – double the China’s total electricity consumption in 2020 (IRENA, 2016[40]) (IEA, 2022[13]). Despite the country’s vast renewable energy potential, the actual level of renewable energy supply remains very limited. As of 2020, the share of renewables in total energy supply (TES) was only 2%, though this did represent a 9.6% year-on-year increase and a 40.4% increase over the preceding five years (IRENA, 2022[41]). Shares of electricity generation from renewable sources are concomitantly low, at 10% of total generation. Data from international organisations is generally in line with the government’s own statistics, with the Mongolian authorities calculating in 2020 that the country had 649.4GWh of installed renewable electricity capacity (wind 70.4%; solar 16.8%; hydro 12.8%), equal to 9.1% of total installed capacity, with the remaining 90.9% or 4,493.6GWh accounted for by coal-fired CHP plants (Ministry of Energy of Mongolia, 2022[42]).
Mongolia can pursue new, green industrial jobs and innovation if the country succeeds in developing its renewable energy potential. Not only can the development of the country’s renewable energy resources help decarbonise the power and industrial sectors, but it can also enable the country to diversify its economy in new green industries where the access to abundant, cheap renewable energy is a key input. Similarly, it can increase the attractiveness of energy-intensive existing industries looking to secure similarly abundant, cheap and sustainable energy. It is in this context that the Government of Mongolia is pursuing low-carbon fuels such as renewable hydrogen, with a number of private sector-led initiatives in Mongolia indicating that investors and entrepreneurs recognise Mongolia as a potential location for a renewable hydrogen industry.
Private investors are already developing projects to produce renewable hydrogen in Mongolia. Reflecting the opportunities for renewable hydrogen production identified in recent reports by organisations such as the New Climate Institute, a number of private investors are already developing renewable hydrogen projects in Mongolia (Nilsson et al., 2021[29]). This report draws on several case studies of these early-stage projects, outlined in Annex A, to present a number of policy-relevant lessons throughout. What emerges in the case studies is that, despite the significant obstacles to getting low-carbon projects off the ground in Mongolia, there is significant interest from both established private sector actors in Mongolia and firms which are new to the country.
Policymakers are also beginning to explore the potential for hydrogen to contribute to a number of policy objectives of the Mongolian government. The establishment of the Mongolian Hydrogen Council in 2022 was the clearest example yet of public-private interest in the development of a renewable hydrogen industry in Mongolia, which is a body that brings together a number of senior public and private sector representatives to discuss opportunities for hydrogen development in Mongolia. Yet, interest also comes from elsewhere. For example, one of the case studies included in this report features a project created under the aegis of the recently established Industrialisation Policy Committee of Mongolia, highlighting the fact that the technology is regarded as an opportunity for new value creation in Mongolia as much as it is for its decarbonisation. Coordinating interested policymakers and line ministries and enabling them to leverage the potential of early-stage, enthusiastic pilot projects will be key for the country to demonstrate the viability of hydrogen as a vector of local decarbonisation and industrial development.
Many international organisations, national administrations and private sector actors use ‘colour’ classifications to denote the differing production methods for hydrogen. These colours are used to approximate the carbon intensity and sustainability of different approaches to hydrogen production, and an overview of these ‘classifications’ is as follows:
Renewable hydrogen is hydrogen produced using electrolysers powered by renewable energy sources. As with all forms of hydrogen it can be burned as a fuel and used as a feedstock in other products; in the case of the former it is carbon neutral as the only by product is water, in the case of the latter it can contribute to low-carbon or zero carbon products and hydrogen derivatives.
Blue hydrogen is renewable hydrogen produced from natural gas but using carbon capture to limit emissions. Critics of blue hydrogen argue that investments in the technology may slow the transition to carbon neutrality as it could compete with the commercialisation of renewable hydrogen. Nevertheless, it has been proposed as a short-term option to support the decarbonisation of existing grey hydrogen production and facilitating the emergence of a more mature hydrogen market.
Grey hydrogen is hydrogen produced using energy from natural gas using steam reforming, without mitigation technologies.
Purple hydrogen is hydrogen produced using nuclear energy.
Brown or black hydrogen is hydrogen produced from coal.
At present, over 90% of global hydrogen production is powered by fossil fuels. This is in part a reflection of the maturity of the technology used in fossil fuel-based production, a corollary of which being the low level of technological maturity and concomitantly high cost of ‘green’ hydrogen production. Most national strategies for the development of renewable hydrogen aim to lower the cost of production and consumption of renewable hydrogen versus its fossil fuel-produced equivalents, in doing so facilitating the emergence of renewable hydrogen markets and improving its commercial viability as a low-carbon fuel and feedstock.
There has been criticism on the use of ‘colours’ to denote hydrogen production methods. It has been argued that the use of colours to refer to different production routes, as well as unqualified terms such as ‘sustainable’, ‘low-carbon’ or ‘clean’ can obscure different levels of associated emissions. In addition, a lack of standardisation across the terminology risks creating impracticalities for contracting and investment decisions. Nevertheless, while recognising that there presently lacks an international agreement on the use of differing terminologies for hydrogen production methods, this report uses ‘renewable hydrogen’ to denote hydrogen produced using electrolysis from renewable energy sources and ‘low-carbon’ to denote hydrogen produced using different combinations of renewable technologies and carbon mitigation technologies.
Source: Adapted from (Cammeraat et al., 2022; International Energy Agency, 2023a, 2023b, 2021; OECD, 2022)
The literature on policies to accelerate investment in clean hydrogen (and, in particular, private investment) highlights the high level of risk of the sector. On the one hand, clean hydrogen projects require substantial capital investment for the production (electrolysers and, in most projects, renewable energy production equipment), and for the transportation and storage infrastructure. On the other hand, the sector is nascent and facing high uncertainties in a great number of areas that interact with one another (systemic risk): location and availability of supply and demand, availability of infrastructure, selling prices, regulations, etc. This is why, in countries with strong interest for renewable hydrogen consumption or production, policymakers are looking at all available options for providing some level of certainty and decreasing the perception of risk. Over the past few years, many governments have been issuing national renewable hydrogen strategies with this intent. For example, the European Union, Japan and the Republic of Korea have been setting import targets, which combined reach nearly 16 Mt by 2030 (OECD and the World Bank, Forthcoming[43]), thus providing a visibility on the future clean hydrogen market for exporters.
Even though all governments face similar challenges with regards to the level of risk, emerging economies encounter a set of additional, specific barriers to the development of renewable hydrogen and low-carbon technologies in general. The challenges of how to achieve the type of systemic transformation necessary for achieving net zero are shared by advanced and emerging economies alike: policymakers across the OECD, just as in Mongolia, grapple with how to overcome the market failures that prevent investment and innovation being directed to areas that will lower global emissions and create new, more sustainable economic growth. Nevertheless, the starting point is not necessarily the same, and the hurdles in achieving low-carbon growth for emerging and developing economies can be higher than in more advanced equivalents.
Public finance: The governments of many emerging and developing economies often face considerably more challenging public finance constraints than those in the OECD. The cost of government borrowing can be higher, making it more onerous to finance the type of large-scale public-backed infrastructure and technology programmes that characterise the approach of many more developed economies to the low-carbon transition. Recent work by the IEA suggests, in the current high interest rate context, that for project developers in an emerging markets an increase in the weighted average cost of capital (WACC) from 6% to 15% would result in a 70% increase in the LCOH of hydrogen produced from solar (IEA, 2023[44]). This means the governments of emerging economies are often required to do more with less, or to turn to international financial institutions such as the IMF or World Bank to bridge the gap and de-risk necessary infrastructure investments. In a context of constrained public finance, success with technology and infrastructure choices can matter significantly more than in a developed economy. Unlike developed economies, where both the public and private sector may be more capable of pursuing multiple strategies and avenues then choosing the most promising option at a later point, emerging economies may not enjoy this luxury. Therefore, decisions to deviate from a technologically open approach to low-carbon development to one that is more directional must be carefully weighted with the potential risks.
Political economy of extractive industries in development contexts: In many extractive-based emerging economies, direct or indirect rents from the very extractive sectors that are liable for significant disruption in the context of the low-carbon transition are essential for government revenues. How the revenues from extractive industries are used whilst those industries are still internationally competitive can have a significant impact on the inclusivity of the low-carbon transition. In some countries, such as Norway and other oil-rich economies in the MENA region, governments are actively using revenues from the oil and gas sector to support low-carbon industrial development and innovation, paving the way for diversified and sustainable growth in a post-fossil fuel context. The challenge of redirecting extractive sector revenues and policy support towards low-carbon development is as much one of finance as it is of political economy.
Investment mobilisation: In the absence of sufficiently developed local capital markets, emerging and developing economies often place a great deal of importance on attracting foreign direct investment (FDI), which creates opportunities to spur industrialisation, induce technology transfer, and create high-quality and productive jobs. Yet, emerging and developing economies already face challenges in attracting high quality investment. Issues in the broader business climate, challenges around regulatory implementation, governance and transparency issues are among the many factors that raise the risk associated with many emerging economies over more advanced equivalents. In the period of low interest rates that characterised the years following the global financial crisis, the higher risk associated with emerging markets made them more attractive options for some investors looking for a higher rate of return. Now, in a global financial context that is much changed and where interest rates on even high-grade government debt produce significant yields, there is a risk that the difficulty faced by emerging economies in attracting foreign direct investment will be redoubled. In the context of financing infrastructure, industry, and technology for the low-carbon transition, where the investment needs across many sectors of the economy are substantial, there is an implicitly higher level of risk and uncertainty from the outset, further compounding the difficulties facing emerging and developing economies.
Innovation and technology capacities: Firms in emerging and developing economies may face issues of technological and innovation agency in the low-carbon transition. In the World Intellectual Property Organisation’s ranking of the most innovative economies according to the Global Innovation Index, the 35 most innovative countries in the world are all high-income, with the notable exception of China (World Intellectual Property Organization, 2023[45]). Green innovation follows a similar pattern: high-income countries have better innovation environments for a low-carbon future than their low-income peers, with wealth a significant determinant of the ability of a country to define its own low-carbon future (MIT Technology Review, 2023[46]). This means that where firms may be required or incentivised to adopt new low-carbon technologies, fuels, and processes, in many cases the innovation that drives these changes will originate elsewhere. Governments of emerging and developing economies therefore face a challenge in ensuring that their firms and workers are not just shaped by external developments but can have agency in the innovation and direction of such technologies and in so doing increase their opportunities for benefiting from the global low-carbon transition.
Competitiveness: In the short- to medium-term, the low-carbon transition may negatively impact the competitiveness of emerging and developing economies to an extent that is more severe than in more developed countries. Firms in emerging economies already face significant competitiveness challenges: limited investment capacities at the firm-level can make it hard to be innovative, the high cost or limited access to finance can create onerous burdens on firms, and, particularly in the context of Eurasia, competition issues around state ownership and the governance of state-owned enterprises can complicate firm activities and limit their opportunities. All these factors risk being aggravated in a context where firms are asked to switch to fuels and technologies that in the short-term are more costly, or where firms have only recently invested in capital intensive assets with a long lifespan that risk being stranded.
In Mongolia, the economic challenges faced by other emerging economies are exacerbated by geography and market structure. Mongolia is a vast, landlocked country. As such, its economy already faces a severe internal and external connectivity penalty: it is harder, longer, and more expensive for a Mongolian firm to deliver its products to the market. Any policy that risks a further detrimental impact on the competitiveness of Mongolia’s private sector in the short-term, even if in the long-term it may be essential to their competitiveness, will have to be carefully designed to minimise its disruptiveness. At the same time, the predominance of the mining industry in Mongolia’s economy may also indirectly curtail the competitiveness of the country’s private sector. For example, through the so-called ‘Dutch Disease’, whereby the competitiveness of tradeable non-extractive sectors in extractive-based economies are negatively affected through exchange rate appreciation, structural barriers to diversification are created.
A national strategy can help address the challenges and make the most of new opportunities in developing a renewable hydrogen industry. National renewable hydrogen strategies can help accelerate the development of a renewable hydrogen industry as well as ensuring that it plays the desired role in achieving other government policy objectives, such as in industry development and decarbonisation. Strategies can help send signals to investors that the government is willing to support in establishing a framework that enables hydrogen projects to succeed and can align the necessary government and private sector stakeholders necessary to overcome policy, regulatory, technological, and social barriers. This may be particularly true when such technology-specific strategies are formulated in parallel with strategies for the broader, systemic transition necessary for low-carbon and sustainable economic growth.
Mongolia’s rationale for supporting the domestic production of renewable hydrogen captures the dual sustainability and industrial rationale of many governments. In its ‘New Recovery Policy’, a ten-year economic development plan issued by the Government of Mongolia in late 2019, the government highlighted the development of renewable hydrogen production in Mongolia as a strategic objective, notably in the South Gobi region. This marked the first time the government had identified renewable hydrogen production as an area of national interest, building on broader commitments to the development of renewable energy production and environmental sustainability set out in its Vision 2050 and NDC. As mentioned previously, the vast renewables potential of Mongolia has also contributed to attracting a number of pilot renewable hydrogen projects to Mongolia.
The development of a renewable hydrogen strategy can help envision a way for Mongolia to take advantage of current opportunities for moving forward the national agenda towards a lower-carbon and sustainable economic growth. National stakeholders find that Mongolia has a number of assets which could make it a suitable candidate for renewable hydrogen production, and possibly exports. Firstly, the country is well endowed with at least one of the major inputs for the production of renewable hydrogen – renewable energy generation potential– and faces relatively few competing land use claims. Secondly, while the Mongolian market for renewable hydrogen may be relatively small, the country is proximate to a number of markets where demand for renewable hydrogen is likely to grow significantly in the coming years, notably China but also Japan and South Korea. Harnessing the potential for hydrogen production at competitive cost thus appears technically feasible, but this will require a significant degree of policy intervention and coordination to overcome challenges, as explored in this report. Building on a public-private dialogue with investors pursuing low-carbon innovation in Mongolia, developing a national renewable hydrogen strategy is a good opportunity to define the potential of the country, identify avenues for the implementation of a sound and realistic plan for realising this potential, and defining the policies that can underpin implementation.
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