This chapter examines Mongolia’s science, technology, and innovation (STI) framework and identifies ways to leverage it in support of renewable hydrogen development. There is much discussion around the role of green industrial policy in driving down the costs of technologies and rapidly scaling-up the production and use of renewable hydrogen at the global scale. At the same time, hydrogen innovation is primarily concentrated in a few high-income economies, with China being the notable exception. This means that establishing the conditions for effective technology transfer through international mechanisms will play a key role in an emerging economy such as Mongolia. Fostering demand for low-carbon technologies, for example through green public procurement, should also be a priority. Finally, Mongolia should consider how to mobilise existing public resources for innovation to support low-carbon technology and renewable hydrogen development, and address the misalignment of its STI framework with its climate objectives.
Towards a Renewable Hydrogen Strategy for Mongolia
Abstract
Innovation in hydrogen production technologies is needed to lower the costs of producing renewable hydrogen and enable the technology to support net-zero objectives by mid-century. Recent OECD analysis focusing on OECD hydrogen-producing countries identifies five innovation and industrial policy priorities to support the development of renewable hydrogen and accelerate its deployment (Cammeraat, Dechezlepretre and Lalanne, 2022[1]). First, given the low level of technological maturity in renewable hydrogen production and applications, governments can provide more directed research and development (R&D) support, rather than relying on horizontal, technology-neutral instruments such as R&D tax credits. Second, in countries where renewable hydrogen is to be powered by renewable energy from the national grid, it is imperative that there is an efficient supply of renewable energy, and that policy supports continued cost reductions in renewable energy production. Third, as with other low-carbon solutions, the competitiveness of green hydrogen will depend in large part on establishing clear carbon-price trajectories, unwinding fossil fuel subsidies, and providing subsidies for deployment. Fourth, as with many frontier technologies, investors will seek regulatory clarity around green hydrogen, with the role of internationally agreed standards and certification of particular importance as international hydrogen markets begin to mature. Fifth, governments may consider supporting blue hydrogen as an interim solution to facilitate a transition to green hydrogen, provided this is achieved through clearly time-bound short-term mechanisms.
While the lessons from this work have relevance to Mongolia’s own renewable hydrogen ambitions, the country faces a number of additional innovation and industrial policy challenges that are specific to an emerging economy context. These challenges include the more limited capacities – technological and financial – of emerging markets to be first movers in hydrogen innovation and deployment, even if they are endowed with promising natural resources (OECD, 2022[2]). Mongolia, furthermore, is not a (grey) hydrogen-producing country and has a small industrial sector which limits the current options for hydrogen applications in a domestic context. As discussed in complementary OECD work, one possible approach for emerging economies to overcome capacity constraints is to take a more targeted approach to renewable hydrogen development wherein emerging economies leverage particular stages of value chains where their national characteristics might create a comparative advantage in the production of renewable hydrogen and its use in industrial applications (Cordonnier and Saygin, 2023[3]). Technology transfer and policies stimulating domestic demand, in this respect, play a key role, and are prominent in national hydrogen strategies of countries seeking to establish themselves as renewable hydrogen producers.
This chapter focusses on innovation and industrial policies that Mongolia can consider in the framework of developing a national renewable hydrogen strategy. The chapter will also explore available solutions to Mongolia for promoting low-carbon technologies at large, including – but not limited to – renewable hydrogen. Section 2.2 begins with an overview of technology transfer in the context of low-carbon industrial development, wherein many of the observations are as true for hydrogen as they are for other low-carbon technologies. Section 2.3 discusses the role of demand-side policies for stimulating and guiding innovation capacities in Mongolia. These policies aim to help the government’s renewable hydrogen objectives, while also ensuring the development of capacities for innovation and adoption of other low-carbon technologies. Section 2.4 concludes with an assessment of the current science, technology, and innovation (STI) policy and regulatory framework in Mongolia, its conduciveness to renewable hydrogen development, and some observations on recent hydrogen-related innovation activities in the country.
The transition to a low-carbon economy requires systemic change, involving a range of different policy areas – from energy and industry to transport and finance – which taken together set the framework and incentives for the private sector to adopt less emission-intensive modes of production and organisation. Renewable hydrogen is likely to be one solution among many used by countries around the world as they decarbonise different areas of their economies, and there remains significant scope for emissions reductions through interventions at the lower end of the marginal abatement cost curve. Like other low-carbon technologies, the development and diffusion of renewable hydrogen require significant policy coordination and a strategic vision of the role it should play in a given economy. Notably, this includes focussing on green domestic innovation, and effectively coordinating both domestic and international innovation resources in the pursuit of hydrogen development. Coordinating these resources has emerged as a major component of national hydrogen strategies (Box 2.1). It is important that policymakers have the capacities and knowledge necessary to take a systemic view of the whole value chain now and how it might develop in the future. For example, the potential role of renewable hydrogen to substitute grey hydrogen as a feedstock for fertilisers, or completely novel applications such as the integration of renewable hydrogen into mining and mineral value chains to create low-carbon products – in a way that individual private actors might be unable to do. This is typically the vision that countries develop in their national sectoral strategies, including for renewable hydrogen development.
Policies that give direction to investment and innovation are likely to be important for the development of technological competencies in emerging hydrogen value chains. Such policies come from within STI policymaking as well as from other policy domains (trade, energy, investment, taxation, etc.). From an innovation policy perspective, there are a range of levers that policymakers can use to support priority technologies or research areas, particularly when these remain at an early and uncompetitive stage. Directed public R&D is one important lever, but so too are conditional R&D tax credits and other incentives that support market-led private innovation. Importantly, such interventions can be focussed either on a specific technology (hydrogen) or a purpose or goal (such as lowering emissions from a specific sector). In order to accelerate the deployment of low-carbon technologies such as renewable hydrogen, governments are also returning to more traditional industrial policy levers – itself an indication of the need for coordination between different policy domains in advancing a low-carbon industrial strategy. Such policies may be more focussed on unlocking the finance and investment necessary to scale up promising innovations; building and de-risking the enabling infrastructure; and stimulating demand through targeted demand-side and regulatory policy interventions.
1. Most national renewable hydrogen strategies include important innovation and R&D policies and initiatives, though approaches can vary significantly. R&D is a key component in the deployment of the low-carbon hydrogen technology. Specific, targeted R&D tools are needed in countries positioning themselves as major future renewable hydrogen exporters, because horizontal R&D policies will tend to benefit more mature technologies and thus are not the most effective for nascent, far from market technologies (Cammeraat, Dechezleprêtre and Lalanne, 2022[4]).
The Moroccan GreenH2A research platform aims to be a national and regional reference for R&D and innovation. The research mainly focuses on renewable hydrogen, green ammonia and synthetic fuels, within the broader scope of ‘’Power to X’’ Initiative. According to the strategy, the main objective of the centre is to promote the use of low-carbon molecules in the industrial sector as well as the production of fertilizers (Government of Morocco, 2021[5]).
The strategy of Namibia envisions the set-up of a research centre, the Namibia Green Hydrogen Research Institute (NGHRI). In addition to its focus on R&D, the centre also aims to be a meeting point for university and industry as well as for government consortia to conduct research for renewable hydrogen development. Lastly, the NGHRI has a capacity building mission and plans to offer formal degree programmes such as Masters and PhDs as well as re-skilling and re-training programmes (Government of Namibia, 2022[6]).
The Chilean government created a public fund up to USD 260 million for the setup of the Clean Technologies Institute. The “Istituto de Tecnologías Limpias’’ (ITL) is an innovation platform for clean energy and mining technologies (Government of Chile, 2021[7]). The funding was awarded to a consortium bringing together several Chilean Universities as well as local public companies such as Industrial Association of Antofagasta. The Institute will focus on sustainable mining issues and building a renewable hydrogen value chain (ASDIT, 2023[8]).
The Moroccan Cluster is the first renewable hydrogen cluster in Africa. The Cluster’s main goal is to organize the green hydrogen value chain at national level. Hence, its scope is not limited to advance on R&D but also to support public policy drafting in the realm of green derivatives, to contribute to the development of an industrial value chain and to foster job creation through training and re-skilling courses (Government of Morocco, 2021[5]).
In the OECD, a major focus of renewable hydrogen technology policy support aims to accelerate its commercialisation by reducing production costs. The goal is to make renewable hydrogen and its derivatives competitive with ‘grey’ hydrogen products. The key determinant of low hydrogen production scaling to levels envisaged in a number of Net Zero scenarios will be lowering the costs involved with its production and adoption. In part this is relative: the competitiveness of hydrogen use will depend in large part on the cost of alternative fuels, including those that are fossil fuel based. At present in Mongolia there has been only limited attention paid by the government to how to phase-out fossil fuels, and a more serious engagement with this issue is likely to be necessary as the government advances its renewable hydrogen ambitions. The reduction of more emissions-intensive alternatives will be achieved through regulation and a more systemic use of market-based instruments such as carbon pricing, as discussed below. Part of the solution involves making significant advances to lower the costs of electrolysers and the necessary feedstock of renewable energy (Figure 2.1), which are the two largest factors in reducing renewable hydrogen production costs. As discussed in Chapter 3, addressing the investment barriers to developing Mongolia’s vast renewable energy resources will be a key consideration for any future national hydrogen strategy. Much can already be done through the trade and fiscal policy frameworks to de-risk and lower the associated capital costs.
Source: (IRENA, 2020[9]) (OECD, 2022[2])
In emerging economies such as Mongolia, policy efforts to support low-carbon technology innovation and diffusion must address the reliance on core technology developments from other countries (IEA, 2023[10]). At present, hydrogen innovation (not just related to production, but also, for example, applications in industry and transport) is concentrated within large, technologically advanced firms and across a relatively small number of countries, all of which are high income with the exception of China. For example, as shown in a joint OECD-Joint Research Council of the European Commission report in 2021 of the top 2,000 firms by business research expenditure (BERD), accounting for some 87% of global BERD, the top world’s top R&D firms hold 70% of all patents in technologies related to climate change adaptation and mitigation, and 10% of trademarks in the same technologies (compared to 63% of all patents and 6% of trademarks); innovation relating to low-carbon technologies is more regionally and commercially concentrated than in general, and this has implications for the inclusivity of the low-carbon transition in emerging economies (Amoroso et al., 2021[11]). For hydrogen, technological developments are more concentrated. Some 72.1% of all IP5 patents for hydrogen technologies were filed by firms in the top 2,000 worldwide by BERD (Figure 2.2a). Although trademarks, which indicate research commercialisation rather than technological breakthroughs themselves, show less concentration, the share of hydrogen-related trademarks owned by these top firms is still high (27.8%). Notably, this percentage is much higher for hydrogen than for other low-carbon technologies (Figure 2.2b).1 As shown in Figure 2.2c , the regional revealed technological advantages for hydrogen technologies is much higher in Japan, Korea, and to a lesser extent the EU than the world average.
Share of patents (a) and trademarks (b) owned by the world’s top R&D investors in three technology focus areas (2016-18).
Note: For Figure 2.2a and Figure 2.2b, data reflect the concentration of patenting and trademarking in the selected technology areas among the world’s top 2,000 R&D investors, the innovation expenditure of which is equal to 87% of global business R&D expenditures by the private sector and 63% of patent filings across all technologies. For Fig Figure 2.2c, data reflect the revealed technology advantage (RTA) in the same set of technologies at the regional level.
Source : JRC-OECD, COR&DIP© data base v.3., 2021 based on (Amoroso et al., 2021[11])
Any strategy aimed at supporting the development of a renewable hydrogen industry in Mongolia will have to engage with the most effective way of facilitating international technology transfer. The ability of emerging economies to channel innovation taking place abroad, develop it and make it competitive will determine their capacity to become hydrogen producers and exporters. Technology transfer by large, multinational enterprises (MNEs) is an important means of enabling technology diffusion in emerging economies, including for environmental and climate related activities. Debates on the most effective ways of encouraging technology transfer have, in the OECD, often taken place in the context of trade policy discussions, where concerns have emerged around perceptions of ‘forcing’ technology transfer through local content requirements or other forms of approvals and permitting procedures (Andrenelli, Gourdon and Moisé, 2019[12]). This will also involve the establishing of a framework which enables local firms to benefit from the opportunities that low-carbon technologies present for the local industry. This partly means providing access to lower-cost electrolysers for production, but also ensuring access to innovations in industrial operations. These innovations will be important in enabling the use of hydrogen or its derivatives in Mongolia’s hard-to-abate sectors.
The barriers to technology transfer and innovation for achieving Mongolia’s low-carbon ambitions are generally accepted in the local science, technology, and innovation community. As part of the country’s contribution to the UNFCCC, the National Agency for Meteorology, Hydrology and Environmental Monitoring of Mongolia submitted a position paper on the barriers to the use of internal and external innovation capacities for environmental and climate goals. The paper set out a number of priority policy areas for action that are coherent with OECD analysis and stakeholder consultation. These include identifying sector-specific technology transfer needs, recognising barriers to technology development, transfer and diffusion, exploring ways of participation in bilateral and multilateral mechanisms for technology transfer, and improving the participation of the Mongolian private sector in domestic technology transfer needs (Dagvadorj, n.d.[13]). Similar observations were made during OECD stakeholder consultations in Ulaanbaatar, during which participants noted long-standing but rarely used arrangements within the 2020 Law on Intellectual Property (IPR) for commercialising intellectual property through academic spin-offs and private sector technology transfer. There was a common observation of a lack of awareness within the Mongolian industrial sector regarding the benefits of using low-carbon technologies. This concern was frequently raised both by actors in the STI system as well as in MNEs or their local affiliates. These entities noted the difficulty of integrating their low-carbon activities with the activities of SMEs in their local value chains.
The development of renewable hydrogen requires international co-operation, both in Mongolia and across the OECD. The development of low-carbon technologies is a global effort, requiring significant international co-operation in STI and investment. Within the OECD and G20, such co-operation is typified in large technology development and innovation projects such as the Important Projects of Common European Interest (IPCEIs) in the hydrogen sector and the International Partnership for Hydrogen and Fuel Cells in the Economy (IPHE) (European Commission, 2022; IPHE, 2022). In small, emerging economies such as Mongolia, international co-operation is particularly important. This is due to the anticipated reliance on external technological capacities, financial resources and technical assistance for the development and deployment of domestic low-carbon hydrogen production. Long-standing mechanisms such as the Korea-Israel Industrial R&D Foundation give an example of how countries with shared research priorities and complementary capacities can work bilaterally to accelerate international technology transfer (Israel Innovation Authority, 2024[14]). Given the importance of international innovation and technology co-operation for advanced and developing economies alike, there is a clear rationale for the government to explore how it can better involve its policymakers, technical advisors and the broader STI community in these international discussions.
It is a priority of the leading hydrogen innovator economies to embed their technologies into emerging value chains as part of their own low-carbon transition ambitions. An example of such mechanisms is Japan’s Joint Crediting Mechanism, the use of which is being explored by a number of early-stage hydrogen production projects in Mongolia. This mechanism involves a 30% grant (with a ceiling) to cover the purchase of equipment from Japanese technology providers where this enables local emissions reduction (Government of Japan, 2024[15]). More broadly, there is a rich discussion taking place at the global level on fostering co-operation for renewable hydrogen development at a massive scale and ensure that this technology benefits all countries’ climate and sustainable growth agendas. To contribute to long-term economic growth in recipient countries, efforts should not only establish renewable hydrogen production sites but also support the development of domestic capabilities to channel this low-carbon technology towards higher value-added products, taking into account local opportunities. In the framework of such co-operation, both the recipient government and its international partners should consider the development of local skills. There is a role here, too, for government, since the ability of Mongolia to benefit from international initiatives to diffuse low-carbon technologies and improve access to the most competitive and locally-suitable innovation will require the government to engage at different levels and from different policy areas at an official bilateral and multilateral level.
Mongolia’s existing domestic technology transfer channels can also support the country’s renewable hydrogen ambitions. While international co-operation is and will remain important to diffuse low-carbon technologies globally (Box 2.2), domestic channels of knowledge and technology transfer are also important, particularly since such channels can more accurately respond to the particular needs and capacities of local firms. Mongolia already has a number of technology transfer systems in place, notably through the Mongolian Academy of Sciences (the Academy). As discussed in consultations with the OECD in the preparation of this report, the Academy has programmes aimed at supporting academic spin-offs and fostering linkages between industry and academia. These initiatives are designed to facilitate the transfer of knowledge and technologies developed within the domestic public research system to industrial users. These platforms are, however, neither well-known nor well-used, but they nevertheless provide a strong base on which a technology-transfer component of a national hydrogen strategy could be developed. Building on these platforms that already exist, there are a number of things that the Mongolian STI authorities could consider in order to improve the transfer of knowledge and technology between the domestic STI system and the country’s industrial sector, particularly its smaller firms. By simply raising awareness of technology transfers that already exist the government could improve participation of firms in existing programmes and accelerate the diffusion of less expensive and more mature technologies which could already be utilised to reduce the emissions-intensity of industrial output. Other options could include integrating technology transfer explicitly into the mandate of publicly funded higher education and research institutions, fostering industry-research partnerships (for example, between large industrial firms and Mongolian research institutions to address local challenges such as efficient water resource management), or supporting the placement of postgraduate students and researchers in industry could be explored. This approach aims to identify opportunities for hydrogen or other low-carbon technology applications into industrial processes.
The Joint Crediting Mechanism (JCM), established by Japan, is designed to accelerate the dissemination of advanced decarbonisation technologies, products, systems, and infrastructure. Its primary aim is to utilise Japanese technology to achieve significant reductions or removals of greenhouse gas (GHG) emissions, while concurrently promoting sustainable development in partner countries. The emissions avoided through the JCM projects can be used to contribute towards Japan’s GHG reduction targets set out in its Nationally Determined Contribution (NDC). The JCM allows projects in participating countries to receive grants to partially cover the cost of investment into the relevant Japanese decarbonisation technology.
As of January 2024, partnerships with 29 countries demonstrate the JCM's role in promoting global alignment with the goals of the Paris Agreement and the United Nations Framework Convention on Climate Change (UNFCCC). Diverse stakeholders, including Ministry of the Environment of Japan (MOEJ), the Asian Development (ADB) trust fund, and the New Energy and Industrial Technology Development Organisation (NEDO), collectively enhance the JCM's capacity to accelerate the development and adoption of green solutions, like hydrogen-related technologies and infrastructure.
Since Mongolia joined as a partner country on January 8, 2013, nine projects have been developed, expecting to reduce GHG emissions by 75,502 tCO2/year. These projects have focused on renewable energy development and enhancing energy efficiency across various provinces and industries. As Mongolia aims to meet its emission reduction targets and accelerate the shift towards sustainable energy, the JCM has the potential to play a significant role in promoting low-carbon technology adoption, facilitating collaboration, knowledge exchange, and the deployment of innovative solutions, contributing to progress towards a more sustainable future. At least one on-going renewable hydrogen project in Mongolia has utilised the JCM
Source: (Government of Japan, 2024[16])
Domestic innovation in low-carbon technologies and the adoption of low-carbon solutions in domestic industry will depend largely on the signals conveyed by government policies and regulations regarding its commitment to a low-carbon transition. One of the most immediate levers available to governments is to make the cost of emissions higher by using carbon pricing policies and phasing out fossil fuel subsidies. In doing so, the Mongolian authorities can begin to change the relative costs and benefits for competing technologies, while also unlocking new resources to finance climate-related R&D (Cervantes et al., 2023[17]). Such policies force actors to internalise pollution externalities and encourage innovation in and the adoption of more environmentally friendly technologies. Experience from the European Union suggests that the impact of emissions trading schemes on low-carbon innovation can be significant and rapid (Calel and Dechezleprêtre, 2016).
Demand-side interventions are important for renewable hydrogen projects at different levels of development. For firms that might be able to innovate in new uses of renewable hydrogen in existing or new industrial applications, demand-side policies can signal the economic rationale for redirecting R&D activities from existing activities to low-carbon ones, even if the market for the output remains undeveloped. Similarly, for firms that might be able to deploy low-carbon technologies at scale, demand-side policies can support investment decisions in higher-risk but more sustainable technology options, thereby accelerating their use and leading to cost reductions through learning and economies of scale in production. Whether administered through science and innovation ministries or those overseeing industrial development, these policies ultimately have the same purpose: to overcome the market failures that prevent firms from innovating and investing in low-carbon solutions. The implementation of such policies can thereby expedite the green transition and mitigate the substantial off-take risk that continues to weigh on financing costs of renewable hydrogen projects (World Bank, 2023[18]).
Demand-side policy measures to stimulate innovation in (and the adoption of) renewable hydrogen technologies can be both technology-specific and neutral. Both sets have advantages and disadvantages, and it is notable that countries such as Germany with well-established technology-neutral approaches to innovation policy have, in the context of the green transition, increasingly utilised more ‘directional’ policies (Arnold et al., 2023[19]) (OECD, 2022[20]). More directional approaches to stimulating hydrogen development can take numerous forms. These include government quotas and mandates for the adoption of renewable hydrogen in industrial applications, such as Japan’s commitment to having 800,000 fuel cell electric vehicles on the road by 2030, or the EU’s target for 42% of hydrogen used in industrial processes to come from renewable fuels of non-biological origin by 2030 (France Strategie, 2018[21]) (European Council, 2023[22])). Additionally, end-use subsidies through, for example, the form of tax credits for the use of renewable hydrogen in hard-to-abate sectors; and public subsidies to cover the capital and operational expenditure of industrial projects for the purchase and operation of renewable hydrogen technology and infrastructure, are also effective mechanisms. Taken together or in isolation, these types of policies can send a clear signal to industrial enterprises and research institutions that there is a developing market for their renewable hydrogen innovation investments, but the extent to which they are actionable by a government will invariably depend on public sector financing constraints and priorities. As discussed in Box 2.3, given the relatively constrained fiscal space available to Mongolian authorities compared to advanced OECD economies, any demand-side policy toolkit should strike a balance. This balance involves conveying the strategic interest of the Mongolian authorities in hydrogen (e.g., by supporting pilot projects, regulating for the use of renewable hydrogen in existing industrial applications) with clear, issue-specific instruments that direct innovation towards outcomes (e.g., lowering emissions from mining) without being overly prescriptive of technology choice.
Demand-side policies can play an important role in de-risking investments into renewable hydrogen innovation and related infrastructure. The challenge for governments, particularly in more fiscally constrained emerging economies, is to strike a balance between sending a clear signal to the private sector that low-carbon technologies are an integral part of economic development policy whilst allowing the private sector to remain free to choose – even if the government has a strategic preference for one technology option over an other – between the options that are most competitive and viable to them. This requires designing a policy toolkit that combines elements of ‘directionality’ in de-risking instruments (e.g., where they apply to one or a set of technologies) with other levers that are technology neutral (e.g., where they do not specify a technology but rather an outcome, such as lower emissions from a given industry).
Experience from the OECD and IEA demonstrates that demand-side policies aimed at de-risking investment both in specific technologies and their supporting infrastructure are emerging as key components of country strategies for renewable hydrogen development. A non-exhaustive overview of these policies is below.
Carbon Contracts for Difference (CCfD): Governments can spur hydrogen demand by offering CCfD, covering the cost difference between CO2 abatement and a reference price. For example, the UK’s CCfD scheme for offshore wind farms has driven investment and innovation, reducing costs over time. Mongolia could replicate this model, guaranteeing stable prices to attract significant investment and enhance hydrogen's competitiveness with fossil fuels.
Public Procurement: Governments can drive renewable hydrogen demand by prioritizing low-emission materials in public procurement. This has proven effective in sectors like construction and transportation, as seen in the US Federal Buy Clean initiative. Mongolia can adopt similar sustainable practices to boost demand for renewable hydrogen in material production processes.
Quotas and Mandates: Governments can stimulate market growth by establishing quotas for low-emission hydrogen consumption. Romania's mandate for industrial users to meet 50% of their hydrogen demand with low-emission sources by 2030 has spurred investment in renewable hydrogen infrastructure. Mongolia could adopt similar policies to drive innovation and decarbonization efforts.
End-Use and CAPEX/OPEX Subsidies: Government subsidies can expand the renewable hydrogen market. For example, the USD 1/kg H2 tax credit in several US states has boosted end-user purchasing power. Mongolia could introduce similar subsidies promoting the adoption of renewable hydrogen technologies. Establishing grant programs through its Innovation Fund could further support market development in industries like mining and manufacturing.
Carbon Taxes: Applying carbon taxes on CO2 emissions in specific sectors, as seen in Chile and Portugal, can incentivize emission reduction and promote the adoption of renewable hydrogen technologies. Mongolia can emulate Chile's approach by implementing a carbon tax on industries exceeding specified thermal power thresholds, thereby encouraging the transition to cleaner energy sources like renewable hydrogen.
Emissions Trading Systems (ETS): Implementing ETS can effectively regulate CO2 emissions and promote the adoption of renewable hydrogen technologies. Following the examples of over 30 ETS worldwide, including those in China, the European Union, and sub-national entities like California and Québec, Mongolia can establish a similar system to allocate emissions allowances and encourage emission reduction efforts across sectors. By including hydrogen production in the ETS, Mongolia can further incentivize the adoption of renewable hydrogen technologies throughout its economy.
Source: Adapted from (IEA, 2023[23])
It is important that such support does not overly determine the availability of other viable technologies and solutions for decarbonisation. The balance between ‘directionality’ and ‘technological neutrality’ is at the heart of many ongoing debates around innovation and industrial policy in the context of decarbonisation, where the emphasis is placed on the broader need to compress the innovation cycle for low-carbon technologies and to redirect investment to help scale up promising solutions (OECD, 2023). Technology-neutral policies are also varied, but they often share a rationale of addressing an outcome rather than a particular technology. For example, the use of Carbon Contracts for Difference (CCfD)sees governments covering the difference between the CO2 abatement cost and an average wholesale price to support the de-risking of renewable energy projects. In jurisdictions such as the UK, CCfD schemes are now being applied to hydrogen projects (IEA, 2019[24]). Conversely, effective carbon pricing, whether through emissions trading or other regulatory mechanisms such as emissions standards, can help to lower the competitiveness of fossil-fuel energy sources or carbon-intensive technologies without prescribing a particular technological solution. Additionally, governments can add conditionalities to public procurement to make the purchase of goods and services contingent on specific climate or environmental criteria (IEA, 2023[23]).
There is significant scope for Mongolia to develop demand-side policy signals for low-carbon technology development, for example through green public procurement. Many of the levers used to establish framework conditions for low-carbon investment and market creation in other countries – effective carbon pricing, green quotas, carbon credits – do not yet exist in Mongolia. Using green public procurement as a lever to stimulate demand for low-carbon technologies could work well in Mongolia. The government retains a major stake in many of the most carbon-intensive and environmentally polluting industries, notably in the mining sector, where the government has both a right to a 50% equity stake in strategic mineral deposits and directly controls some of the country’s biggest mine operations. A corollary of this public presence is that there is significant scope for the government to directly influence the investment decisions of some of the country’s major industrial and infrastructure investors towards more environmentally sustainable and low-carbon outcomes. However, there is currently no clear regulatory or policy push to do so, creating a misalignment between SOE incentives and government climate objectives (De Kleine Feige, 2021[25]). Beyond the existing framework for environmental licensing and permitting, Mongolia could, for example, introduce explicit conditionalities for the use of environmentally sustainable or low-carbon options in public procurement. Several renewable hydrogen developers interviewed for this report are eyeing the mining sector as a client for their pilot projects. Linking renewable hydrogen and mining makes sense on several accounts, as argued in Chapter 1 and other parts of this report: there is a strong rationale for providing public support to establish such linkages as part of a national renewable hydrogen strategy.
The mining and transport sectors may be areas where the government could define a limited set of demand-side interventions to stimulate innovation in and uptake of renewable hydrogen. In conversations with project developers and financial institutions for the preparation of this report, it is clear that a lack of domestic off-take opportunities within Mongolia is a major impediment to de-risking renewable hydrogen projects in the country. While the domestic market in Mongolia for hydrogen is presently small (to the extent that it is used at all in industrial processes, it is generally used as a coolant in thermal power plants, such as in Ulaanbaatar’s 663MW Thermal Power Plant 4), the mining and transport sectors are areas where renewable hydrogen could feasibly be used (Table 2.1); encouraging the use of the technology in these areas would have the twin benefit of stimulating demand for hydrogen production in Mongolia whilst also contributing to their decarbonisation in line with the country’s NDC. It is notable that the first private sector pilot project to secure an off-take agreement in Mongolia did so within the mining sector, and that it is in the transport sector – specifically in urban mobility – that the Ministry of Energy is focussing its initial efforts to develop domestic renewable hydrogen usage. Given the large SOE footprint in both these sectors, the government could also explore how to use such firms to conduct limited pilot projects while the broader framework conditions for private sector adoption of low-carbon technologies matures.
Note: Adapted from (IEA, 2019[26]) and (IEA, 2023[27]). The TRL scale is as follows: (1) Initial idea: basic principles have been defined; (2) Application formulated: concept and application of solution have been formulated; (3) Concept needs validation: solution needs to be prototyped and applied; (4) Early prototype: prototype proven in test conditions; (5) Large prototype: components proven in conditions to be deployed; (6) Full prototype at scale: prototype proven at scale in conditions to be deployed; (7) Pre-commercial demonstration: solution working in expected conditions; (8) First-of-a-kind commercial: commercial demonstration, full-scale deployment in final form; (9) Commercial operation in relevant environment: solution is commercially available, needs evolutionary improvement to stay competitive; (10) Integration at scale: solution is commercial but needs further integration efforts; (11) Proof of stability: predictable growth.
Source: (IEA, 2023[27])
Renewable hydrogen has the potential to decarbonise both mine operations and later stages of mineral value chains. As discussed in a 2021 paper by the NewClimate Institute, the mining sector is one potential avenue to stimulate demand for renewable hydrogen in Mongolia, notably through the potential to use fuel cell trucks for mine operations and long-haul transport (Nilsson et al., 2021[28]). Certain existing mine operations remain difficult to decarbonise through electrification (e.g., large vehicles used within the mine, though there are nevertheless efforts to decarbonise these through direct electrification) and they are therefore in need of alternative technology options – of which hydrogen is emerging as one option – to support their decarbonisation. It is notable, however, that the competitiveness of the technology options set out in the NewClimate Institute assume a high-level carbon pricing (USD 100/tCO2), which as discussed in this report does not yet exist in Mongolia. This highlights the need of the government to see the broader framework conditions for the decarbonisation of industry as an integral rather than separate component of any national strategy to develop renewable hydrogen production and usage in Mongolia
There are also opportunities to embed hydrogen-related technologies into future government plans to develop industrial activities in later stages of mineral extraction and processing. At present Mongolia extracts a large quantity of copper (a quantity that will expand following the opening of the underground mine operations at Oyu Tolgoi), but all of the smelting (i.e., the energy intensive but higher value-adding process) takes place in China. It is a priority of the Mongolian government to increase the share of minerals processing within Mongolia, which will necessitate the construction of new infrastructure. For example, the German copper smelter Aurubis is set to become the first to use hydrogen as a substitution for fossil fuels following a EUR 40 million investment to convert its anode furnaces for use hydrogen. While the immediate economics of the Aurubis hydrogen project are influenced by the relatively high level of carbon pricing in the EU – and its future trajectory – it nevertheless is illustrative of a number of considerations for Mongolian policymakers. The first, is that the decision reflects a growing awareness among the minerals sector of the need to decarbonise their entire value chains, and of the importance of doing so both for climatic and competitiveness rationales. The second is that while the ultimate aim of the project is to use only low-carbon hydrogen, the initial phase of the project allows for a flexible input of either gas or hydrogen. The advantage of emerging economies in general is that much of their infrastructures is yet to be built. This which means that options allowing for fuel and energy input flexibility are easier to put in place, although they often mean higher investments.
The development of policies that facilitate a market for low-carbon technologies and fuels would help to foster low-carbon innovation and industries in Mongolia. One theme that runs through much of the OECD’s recent work on attracting investment to low-carbon technologies and innovation is the importance of demand-side policies that can de-risk and create incentives for investment in low-carbon projects (Saygin and Lee, 2023[29]) (OECD, 2022[2]) (Cervantes et al., 2023[17]). Such policies can take numerous forms, from reforms to energy feed-in tariffs – as was successfully done by Germany to lower the cost of solar and wind energy – thereby lowering the cost of production inputs to the direct use of public procurement to give preference to low-carbon solutions. Policymakers can also support the development of mechanisms such as previously mentioned CCfDs or providing direct offtake from early-stage projects. It is notable that in Mongolia some of the most ardent proponents of these measures are industrial firms that are seeking a clear framework and policy certainty to invest in solutions for decarbonisation. However, the government has not meaningfully defined and adopted the types of demand-side policies and regulatory reforms that would give incumbent and future investors certainty. The experience of the introduction of Feed-in Tariffs and later disputes and concerns over their affordability and flexibility perhaps highlight the need for the government to ensure that any publicly-backed demand-side intervention is financially sustainable and that there is a vision for the competitiveness of low-carbon technology investments that is not dependent on long-term subsidy. The introduction and linkage of revenue-raising mechanisms, such as a modest carbon price floor, could be used to support government interventions aimed at stimulating the use of low-carbon technologies such as hydrogen in industry and other sectors.
Managing the interaction of the various policy areas necessary to redirect public and private sector investment towards low-carbon outcomes may require new institutional approaches and capacities. Recent work by the OECD has demonstrated, for example, that the success of innovation and industrial policies in the context of the low-carbon transition depends on new forms of cross-sectoral policy coordination; such coordination has always been positive for policymaking, but in achieving decarbonisation it is increasingly essential (Arnold et al., 2023[19]). In practice, this is due to the need to carefully balance a range of policy instruments across – though not exclusively – fiscal policy, investment preferences, environmental regulation, industrial incentives, skills and education, and infrastructure investment. In Mongolia, and in the context of the country’s hydrogen ambitions, this will require raising the knowledge of public servants and decision-makers on the technological, infrastructure and economic implications of hydrogen development and varying scales, and improving the coordination across the various areas of policy-making – from heavy industry and energy to fiscal policy and STI – that are necessary to bring together in order to give the country’s nascent hydrogen industry the best chance of success This is a challenge for emerging economies such as Mongolia as well as in the advanced economies of the OECD, and in practice it may mean changing or expanding the scope of sector-specific policy committees or agencies to better allow for the integration of experience from adjacent policy areas in policymaking and implementation.
2.4.1. The policy and regulatory framework for innovation in Mongolia
Government ambitions for innovation in Mongolia are set out a number of strategic documents, with some of these having explicit low-carbon development objectives. There are two recent strategic documents that are of particular relevance for framing public policy interventions to support the low-carbon transition in Mongolia. The first of these is the ‘Vision 2050 Long-Term Development Policy of Mongolia’, which contains a set of explicit objectives for developing the country’s STI system, ensuring that STI contributes to the sustainable economic development of Mongolia. These objectives are split over three stages, with the first (2021-2030) focussing on: creating an enabling environment between public research and science and the private sector, ensuring a mixed source of financing for this relationship; expanding STI infrastructure; reforming incentives for researchers and scientists; and increasing their participation in international research collaboration. The second stage (2031-2040) aims to increase funding and resources for research in a number of frontier technologies – e.g., artificial intelligence and technologies to support advanced manufacturing – and to integrate international standards in these areas into the national quality infrastructure framework.
These ambitious commitments were further developed in the government’s ‘New Recovery Policy 2021’ (NRP). This document was drafted to steer the socio-economic development in the wake of the global COVID-19 pandemic (Government of Mongolia, 2023[30]). As part of the NRP, the government integrated a commitment to developing technological and innovation capacities into its industrial revival pillar, linking these efforts to the high-level government ambition of creating more value in the country’s agricultural sector. Nevertheless, throughout the sub-indicators and actions of other priority areas in the industrial components of the NRP there are a number of references to the importance of science- and knowledge-based approaches. Notably, the document explicitly references the development of pilot renewable hydrogen projects in the South Gobi region as part of the government’s ambitions to improve the resilience and reduce the carbon-intensity of the energy system. This latter point is important in so far as it highlights the polyvalence and complementary rationales for hydrogen development in Mongolia; as a means of industrial decarbonisation and as a potential way to integrate more renewable energy into other applications (such as, for example, providing dispatchable power from VRE sources in electric vehicle charging infrastructure). There has also been a partial institutionalisation of the NRP through the New Recovery Policy Accelerator, whose mandate is to provide policy support to projects that can advance the objectives of the NRP; at present it has no low-carbon projects, but OECD consultations with stakeholders in Ulaanbaatar suggested that the institution may play a role in supporting pilot and demonstration projects in renewable hydrogen production.
These recent developments build on a general increase in attention paid by Mongolian policymakers to the contribution of science, technology, and innovation (STI) to socio-economic outcomes. The government has received technical assistance from the Asian Development Bank (ADB) to improve the policy and regulatory framework for STI and its contribution to economic development. Concretely, the NRP follows from the development of the Action Program of the Government of Mongolia for 2016-2020, in which the government set out its vision for improving the legal and policy frameworks for innovation, innovation financing, research and data infrastructure. This vision was reiterated in the subsequent ‘Priority Areas for Innovation (2020-2025)’ policy programme, where the government emphasised its ambition for innovation- and knowledge-based growth.
The government has articulated a linkage between the need to develop renewable energy capacities and investment and innovation policies. For example, in the aforementioned ‘Priority Areas for Innovation (2020-2025)’ policy programme, the government sets out the need to attract investment and develop innovation capacities in order to support both the production of renewable energy as well as the diffusion of energy efficiency technologies to minimise heat loss from. Importantly, the same document also emphasises renewable energy storage to increase reliability in the energy system, with the development of battery storage solutions – pilot projects for which are under development with the ADB – viewed by many stakeholders interviewed for this report as a crucial step in improving the integration of VREs into the Mongolian energy system (Government of Mongolia, n.d.[31]).
There is a fairly well-developed legal framework for science and innovation activities in Mongolia, with the government undertaking legal reforms to improve the framework for intellectual property development and transfer. Significant pieces of legislation include the 2006 Law on Science and Technology and the 2012 Law on Innovation, which is in the process of being amended. The Law on Science and Technology entails 6 different chapters covering a variety of issues from funding for science and technology activities to provisions ruling the social security of the researcher. It also establishes the mandate of the Science and Technology Council of the Ministry over the sector. According to the law the Council is in charge of identifying scientific and technological priorities, implementing measures to strengthen scientific and industrial alliances and cooperating with universities and research institutes, among others.
A major development has been the adoption of the 2020 Law on Intellectual Property (IPR), which superseded an earlier 2006 law. As noted by the ADB in 2017, Mongolia has faced significant challenges with IPR-based knowledge and technology transfer, notably around the methodology for IPR valuation and a lack of quality assurance in the granting of IPR. As discussed below, given the significant role that publicly-funded research plays in the Mongolian innovation system, these shortcomings have created challenges around IPR ownership, posing issues for the commercialisation of research through arrangements such as academic spin-offs and joint ventures. The 2020 IPR law may therefore prove to be an important part of the regulatory framework for low-carbon technology development in Mongolia, since it seeks to address a number of shortcomings in the previous IPR framework and thereby the conditions for technology transfer (Government of Mongolia, 2020[32]).
The institutional arrangement for the innovation system is relatively fragmented. The Ministry of Education and Science (MES) is responsible for the overall design and implementation of STI policy in the country, and directly supervises the majority of the 59 public research institutions and the 21 research-based universities. Of Mongolia’s public and private research institutions, around one third (20) are supervised by other line ministries. Additionally,10 are under the supervision of the Mongolian Academy of Sciences, which is affiliated with the MES. While such complex institutional arrangements are not uncommon in innovation systems, they can hinder the formulation of policies aimed at directing research and innovation resources toward complex, systemic challenges. This is particularly evident in Mongolia, where limited R&D resources are spread across a wide range of uncoordinated institutions, leading to a misalignment of these resources with local industrial needs and government policy objectives.
2.4.2. The Mongolian research base and its alignment with industrial needs
Mongolia’s innovation system is small in relative and absolute terms, which limits the extent that the development and deployment of low-carbon technologies in the country can draw on domestic resources. Mongolia’s research base – meaning the strength and competencies of the institutions and their personnel dedicated to research in the public and private sectors – is an integral part of any innovation system. This base can provide expertise, capabilities, can raise awareness, and can partner with firms in innovation activities; this can be crucial for SMEs which lack internal R&D capacities. In the context of industrial decarbonisation, where industrial firms will increasingly require new forms of expertise and cross-disciplinary collaboration (e.g., traditional production equipment in cement manufacturing with new low-carbon fuels or carbon capture facilities), the strength of this base and the ease with which industrial SMEs can make use of it is likely to grow in importance. As noted in the Vision 2050 document, the government has an ambition to strengthen the linkages between the private sector and public research, but at present it is not clear if there are any explicit policies – e.g., support for co-financed research between public and private actors, academic placements in industry, SOE contracting of R&D from domestic research institutions – that have been implemented to this end.
Despite government commitments to raise levels of innovation expenditure, levels of R&D expenditure in Mongolia remain also low and have fallen in relative terms over time. While there is limited data available on firm-level R&D expenditure in Mongolia or disaggregated data on R&D by area of activity, there does exist high-level gross R&D expenditure (GERD) data, which is collected under SDG 9.5.1. In the most recent year for which data are available, GERD in Mongolia was equal to 0.1% GDP, similar to levels in Kazakhstan and Uzbekistan (0.12 and 0.13% GDP respectively), but far below the OECD average of 2.57% GDP (Figure 2.3). Perhaps of greater concern is that since over the past two decades GERD in Mongolia as a share of GDP has fallen (from 0.19% GDP in 2000). The general trend across the OECD has been for intramural expenditure on R&D to have increased as a share of GDP.
OECD members and SIPA Central Asia countries (Kazakhstan, Mongolia and Uzbekistan)
Note: OECD countries for which 2022 data are not available have been excluded.
The contribution of Mongolian innovation to economic and low-carbon development is likely held back by a limited supply of research capacity. The share of fulltime researchers (an indicator of the magnitude if not the quality of the research capacities in a given economy) in Mongolia is low in international comparison, below Kazakhstan and Uzbekistan (626 and 525 fulltime researchers per million population compared to 332 per million in Mongolia), with all three significantly below the OECD average of 4079 researchers per million population; a similar gap exists between Mongolia and other large mining economies, such as Canada and Australia (4594 and 5076 per million population respectively) (World Bank, 2023[34]). In absolute terms, Mongolia had 2515 fulltime research personnel across the public and private sector in 2015, a decline from 3102 in 1995. Data on the allocation of research staff within Mongolian industries, as well as on industry-science linkages (academic-industry placements, joint PhD supervision in key industries, etc.) are not available.
2.4.3. Operational environment for low-carbon technology projects
The operational environment for firms involved in renewable hydrogen projects – i.e., the regulatory, licensing and permitting requirements governing such projects– is governed by a range of laws and regulations, each addressing different aspects of project development. The Land Law (1994, last amended in 2002), as the primary legislation governing land tenure and licensing, plays a crucial role since most land in Mongolia is state-owned and land rights are essential for hydrogen project development (Government of Mongolia, 1994[35]). Experience from other emerging economies with ambitions to become major hydrogen producers has shown that simplifying access to land is one of the major interventions governments may take to support the de-risking of hydrogen projects (IEA, 2023[36]). At present, there is no specific regime for hydrogen projects in the legislation. Thus, such projects would be governed by general land allocation rules and procedures. Upon obtaining land permits, fees must be paid as outlined in the Land Fees Law (Goverment of Mongolia, 1994[37]). Additionally, the Minerals Law and the Petroleum Law grant mineral license holders and parties certain powers to obtain land surface rights; in the cast of permitting for renewable energy projects. However, there may be some potential inconsistencies between the Minerals Law and the Renewable Energy Law, which requires that land permits must have been already obtained by the applicants before applying for the needed licences and permission (Government of Mongolia, 2006[38]) (Government of Mongolia, 2014[39]).
The Renewable Energy Law categorises renewable energy plants into two types: those connected to the transmission grid and stand-alone facilities. This classification affects the types of licenses and agreements developers must secure. Grid-connected facilities are required to enter a Power Purchase Agreement (PPA) with the National Dispatch Centre, while stand-alone facilities only need a PPA if they supply energy to customers; this has implications for potential large-scale hydrogen production projects which might wish to secure a grid connection to sell surplus electricity. All energy projects are bound to sell electricity at rates set by the Energy Regulatory Commission, as discussed in Chapter 3, though there are certain exceptions for electricity exports without grid connection. However, there are regulatory gaps, particularly concerning the transfer of transmission lines and substations built by project proponents to the State, which, by law, should own all such infrastructure. All grid-connected transmission lines and substations should be owned by the state, there is currently no specific regulations on how project proponents will or shall transfer the transmission lines they built using their own funds to the state and whether the state is required to pay compensation for the transferred assets (Government of Mongolia, 2015[40]).
While project developers are relatively comfortable with the existing regulatory framework, the nature of supporting frontier technologies such as renewable hydrogen may require a degree of experimentation and agility. If Mongolia wishes to position itself as a first mover in renewable hydrogen production, the government must find a balance between establishing a robust regulatory framework for the safe production and use of renewable hydrogen and maintaining a degree of regulatory agility, based on real risks and up-to-date evidence, to support innovation. In practice, this means ensuring that the policymakers and institutions in Mongolia that are responsible for the development of the regulatory framework for low-carbon technologies have the capacities and mandate to adapt their regulatory approach as projects develop and new evidence becomes available (OECD, 2023[41]).
The OECD Recommendation on Agile Regulatory Governance to Harness Innovation may be instructive for Mongolian policymakers. The Recommendation contains insights that could inform reforms in Mongolia to improve the suitability of the regulatory frameworks for the type of innovation and technology adoption necessary for success in the low-carbon transition. This is particularly relevant when innovation occurs at the intersection of technologies or industries previously regulated separately or under different assumptions (for example, the use of hydrogen in pre-existing industrial applications as opposed to its use in applications where the rationale is emissions reduction) (OECD, 2021[42]). As noted in the Recommendation, there is a recognition across the OECD of the need to adjust regulatory management tools to ensure that regulation is fit for future purposes. This includes adopting more iterative and flexible regulatory assessment cycles and improving co-operation between different sectoral regulatory agencies. The underlying rationale, which centres on accelerating innovation in green and digital technologies, is as relevant to Mongolia and non-member OECD economies as it is to advanced OECD economies.
The development and oversight of the regulations and licenses governing hydrogen, as for other chemicals and fuels, is overseen by the National Energy Centre (NEC) of Mongolia, under the Ministry of Energy. The NEC has significant experience with fuel-related regulation and inspection but will likely require capacity-building to ensure that it can support the development of a wider use and production of renewable hydrogen in the country. Projects involving hydrogen, classified in Mongolian legislation as a hazardous chemical, falls under the Toxic and Hazardous Chemical Law, necessitate a special license for its production, storage, trade, and use (Government of Mongolia, 2006[43]). As across the OECD, Mongolia will likely need to update these provisions to allow for the production and use of hydrogen as a fuel and in new industrial processes in a way that promotes a rational use of natural resources, sets clear limits on pollution, and mitigates adverse environmental impacts more broadly.
Environmental regulatory considerations are also important for any potential hydrogen project. Environmental Impact Assessments (EIAs) are mandatory for projects involving toxic and hazardous chemicals (as hydrogen is currently designated), as well as for solar and wind farms. At present, there is no legal requirement to conduct a strategic environmental assessment (SEAs), that is, an assessment of the potential broader, systemic impact of a project beyond the immediate project site. Given the interconnections between land, water, and energy use that go beyond the immediate project site for hydrogen production (e.g., impact on downstream river basin if drawing water from Kherlen river), or the unclear impact of hydrogen production at scale on groundwater reserves, it may be advisable for the government to apply a SEA framework at the policy or strategy level. As discussed in Chapter 4, given the social sensitivities in Mongolia around industrial water use, this may also politically de-risk any large investment project in Mongolia’s hydrogen sector.
2.4.4. Recent developments in Mongolian innovation relevant to the development of low-carbon technology capacities
Although Mongolia faces challenges such as a fragmented institutional environment, limited R&D investment and a lack of policy signals and guidance for low-carbon technology innovation, there are nevertheless a number of STI developments of relevance to renewable hydrogen development in the country. In terms of publicly financed research, Mongolia has a long-established hydrogen and other low-carbon technology initiatives at the Academy of Sciences, where there are ongoing projects on fuel-cell technologies and circular economy solutions for electric vehicle batteries. This work is conducted by faculty and postgraduate research students across a number of technology-specific laboratories within an institution with spinoff and transfer networks; participants in this work have been involved in efforts under the Hydrogen Council of Mongolia to establish a coherent and unified approach to hydrogen development int the country. The hydrogen-related work was initiated at the government’s request in 2010, but there has been no significant change to the scope of this request since then. The Academy has provided ad hoc advice to the government on hydrogen policy issues. However, there has been very little commercialisation of the hydrogen work undertaken at the Academy, and engagement with industry on their hydrogen-related projects is limited.
International firms and large, tradeable industrial firms are undertaking research and innovation to support the decarbonisation of their value chains. A number of observations emerged from industrial stakeholder consultations that are relevant to Mongolian policymakers considering how best to support the emergence of a renewable hydrogen industry in the country. Large mining enterprises, both domestic and foreign-owned, are undertaking significant R&D and infrastructure investments to ensure that their production is sustainable and aligns with evolving international emission intensity regulations. Hydrogen is one of the technologies being explored by such firms – one of the pilot hydrogen projects has concluded a Memorandum of Understanding (MoU) with one such firm to demonstrate viability (Box 2.4) – but it is not the only one. Crucially, firms in the mining sector, which present a viable use-case for renewable hydrogen under certain market conditions, are also actively exploring electrification of their heavy vehicles and processing operations. This is true both of firms with Mongolian and foreign ownership and is indicative of the risks involved with overly prescriptive innovation and technology policies, in that the private sector may choose an alternative approach to managing their decarbonisation. Furthermore, industrial firms have emphasised the need for stronger policy signals from the government on effective carbon pricing and grid decarbonisation. Such signals would enable them to rationalise the large investments necessary to adopt low-carbon technology and fuel options such as renewable hydrogen. Despite an absence of clear policy signals for decarbonisation within Mongolia, certain firms – foreign and domestic – are nevertheless redirecting investment to low-carbon options in anticipation of the impact of external regulatory developments on the competitiveness of their production.
SunSteppe Renewable Energy (‘SRE’), a joint venture between Petro Matad Limited and partners, is developing the first hydrogen demonstration project in the South Gobi region of Umnugobi aimag, Mongolia. The project aims to achieve financial close by late 2024, with construction scheduled to begin in spring 2025, and commissioning proposed for Q1 2026. Strategically located near key coal and copper mining operations, the project will provide green hydrogen to serve Oyu Tolgoi, one of the world’s largest copper and gold deposits, and associated camps.
A Memorandum of Understanding has been established with Oyu Tolgoi and the Japanese Overseas Environmental Cooperation Centre (‘OECC’) to develop the project and supply green hydrogen for heating facilities at the mine. This partnership with OECC has already secured some Japanese Government grant funding, with additional grant applications expected in the future. This funding could cover up to 40% of the capital expenditure required for the project, significantly enhancing its financial viability.
The financial structure of this project, comprising both debt and equity instruments, is in the final stages of being finalised. Equity funding is led by Wolfson Energy in partnership with Petro Matad, with potential third-party participation under consideration. Discussions with potential lenders for debt financing are ongoing, alongside exploration of financing avenues linked to technology providers. This collaboration highlights the commitment of both public and private sectors to promoting renewable energy in Mongolia.
Source: Sunsteppe/Petro Matad Limited case study (Annex A)
A significant driver of hydrogen related research in Mongolia has come through the Industrialisation Policy Committee, which was established in early 2023 to support the government with its industrialisation and diversification objectives. The clearest evidence of the impact institutional development on hydrogen innovation in Mongolia has been the direction of work undertaken by a working group on hydrogen development that was set up under this committee. The vice chair of the working group is a senior industrial figure in the country and CEO of one of Mongolia’s largest industrial and mining firms, MAK LLC (MAK). At the initiative of the working party, MAK is currently undertaking one of the largest hydrogen-related projects in Mongolia (Annex A). The MAK project is illustrative of a number of considerations for policymakers in Mongolia interested in supporting hydrogen development. The first is that, while concentrated in a small number of firms, industrial firms in the private sector possesses significant innovation capacities. The second concerns the challenges of demand-creation and market maturity, with the firm using its own internal purchasing power to create a small market for the output of its R&D. The third is that mixed signals on coal phase-out may lead to innovation activities whose output is divergent with international best practices and standards for low-carbon technologies (See Table 3.1 in Chapter 3).
‘Blue’ hydrogen production in early stages of renewable hydrogen development is a possible way of creating a market for domestic hydrogen, but only under strict conditions. For example, if the MAK project proves to be economically and technologically viable, then it could be an important, albeit time-bound and intermediate, step in Mongolia’s low-carbon transition. In fact, OECD work has discussed the use of CCUS and fossil-fuel produced hydrogen as a possible approach for a gradual building of hydrogen capacities in emerging markets. Nevertheless, policy support for blue hydrogen projects risks mixed signals regarding the government’s commitment to coal phase-out and creating an investment environment that privileges low-carbon technological development over brown alternatives (OECD, 2022[2]). As noted in consultations with the OECD, firms may question the rationale to develop renewable hydrogen projects if the small current demand for hydrogen could be met with blue projects. There are therefore risks involved in pursuing blue hydrogen as an intermediary step, which policymakers should take into consideration when providing public support. This also applies to the competitiveness of hydrogen projects in Mongolia on external markets. For example, depending on the standards that become the benchmark for international hydrogen trade, there is a risk that investment in blue hydrogen projects results in stranded assets, such as additional coal-related infrastructure. Similarly, if policy decisions are taken to continue coal exploitation under an assumption that coal assets can be used for hydrogen production, this too might lead to a misallocation of finance that could have been used for the development of other low-carbon infrastructure and technologies. Fundamentally, policymakers and industrial firms in Mongolia must balance the need to support local industrial development leveraging existing assets and capacities with the need to align production with standards and certifications that will ensure that Mongolian production remains viable and competitive in external markets.
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← 1. IP5 patent families are patents filed in at least two offices worldwide, including one of the five largest IP offices: the European Patent Office (EPO), the Japan Patent Office (JPO), the Korean Intellectual Property Office (KIPO), the United States Patent and Trademark Office (USPTO), and the China National Intellectual Property Administration (CNIPA).