This chapter presents the Recommendations of the OECD report ‘Towards a renewable hydrogen strategy in Mongolia’. The extractive-fuelled growth of Mongolia poses challenges for the long-term sustainability ambitions of the government and raises the importance of policy support for technology and investment decisions that can align industrial growth with low carbon outcomes. Renewable hydrogen has emerged as one potential technology option for the long-term sustainability of Mongolia’s industrial sector. The domestic production of renewable hydrogen could also contribute to a range of other government ambitions, such as export diversification and industrial development. Yet, under current conditions, attracting the investment necessary to develop a renewable hydrogen industry is challenging. The recommendations of this report explore how the government can support the emergence of a renewable hydrogen industry in Mongolia, and which can contribute to the broader long-term sustainability and socio-economic development objectives of the authorities.
Towards a Renewable Hydrogen Strategy for Mongolia
Abstract
The recommendations of this report are designed to support policymakers in Mongolia with the development of a renewable hydrogen strategy. The aim of the recommendations is to align decision-making on hydrogen-related development and its supportive industry with the sustainable, low carbon growth of the Mongolian economy. The recommendations draw on the analysis presented in this report, OECD experience in the areas covered by the report, and the extensive consultations that the OECD Sustainable Infrastructure Programme in Asia (SIPA) held with public and private stakeholders in Mongolia in 2023-24. The recommendations and analysis that underpin them were discussed and validated with the Ministry of Economy and Development of Mongolia at a workshop in Ulaanbaatar in April 2024 which also brought together representatives of the Ministry of Energy and of the private sector including the Mongolian Hydrogen Council.
Hydrogen pilot projects in Mongolia for renewable hydrogen development demonstrate that there is private sector interest. Any strategy should therefore look to empower the private sector to responsibly and sustainably explore opportunities for renewable hydrogen development, to leverage experience from early-stage projects to further the government’s sustainable economic development agenda, while not closing the financial, policy and innovation space to alternative technologies that could support a low carbon transition in Mongolia. This opportunity to engage in a public-private industrial policy dialogue on renewable hydrogen is important to Mongolia’s future sustainable economic growth, regardless of whether it leads to great commercial success. Even in the absence of such success - which is never guaranteed when it comes to innovation - it can and should be seen as a chance at getting the (policy) process right, as Dani Rodrik puts it (Rodrik, 2004[1]), and build institutional knowledge and capabilities that will serve for the needed transformation of Mongolia’s growth model. It will also enable stakeholders to learn about the potential use of renewable hydrogen technology whether Mongolia produces it or imports it in the future.
The nature of any low carbon transformation is systemic, and as such the recommendations generally draw on the entire report rather than specific thematic chapters (Figure 5.1). While there are exceptions to this, notably in the recommendations on water, it means that the findings of several chapters of the report may be present in a given set of recommendations, even when these relate to targeted and well-defined policy actions. Other recommendations, particularly those concerning strategic planning and steering, are deliberately transversal. Taken together, the recommendations may act as a roadmap for the government as it moves forward with the development of a renewable hydrogen strategy.
The recommendations are grouped into three thematic categories. The first set of recommendations (Recommendation 1 and 2) concern the process of developing and implementing a strategy for renewable hydrogen development in Mongolia. The second set of recommendations (Recommendations 3-5) look at how to improve the framework conditions for industrial decarbonisation in Mongolia, including creating demand for low carbon technologies such as hydrogen, and improving the competitiveness of Mongolia as a destination for foreign direct investment in low carbon industrial activities. The third set of recommendations (6-8) look at how to ensure the development of infrastructure – both hard and soft – that can ensure a sustainable use of the country’s natural resources in the pursuit both of a renewable hydrogen strategy and the country’s sustainable economic development more broadly.
A key consideration for the government of Mongolia in designing and implementing a national strategy for the development of renewable hydrogen will be sequencing. Many of the national strategies that have informed the analysis of this report reflect the ambitions of governments to establish their countries as first movers in the production and use of renewable hydrogen. While this may be the approach that the government of Mongolia chooses to take, the recommendations have nevertheless been structured in such a way as to be adaptable to different timelines and ambitions. In practice, this means that certain recommendations will be of greater relevance to the Mongolian authorities in the short term should they decide to establish the country as a first mover in the production of renewable hydrogen. At the same time, a larger share of the recommendations will be relevant to policymakers even if they adopt a less directional and more cautious approach to hydrogen development; indeed, they will be of relevance to policymakers even if they do not develop a renewable hydrogen strategy at all. This is because while all of the recommendations included in the report will be necessary for a renewable hydrogen industry to develop in Mongolia, their implementation will support the development of other low carbon technologies, capacities, and infrastructure necessary for the decarbonisation of Mongolia’s economic growth.
Recommendation 1: Establish a steering platform and implementation bodies for Mongolia’s renewable hydrogen strategy
Overview
Successfully navigating the low carbon transition requires aligning policy areas that in the past have often been disparate and unconnected; this is true of the implementation of a hydrogen strategy as it is of any low carbon technology development and adoption that involves the interaction of domains such as energy, industry, finance, education, and science. At present, there are conversations ongoing in different areas of government and industry concerning the development of a hydrogen industry in Mongolia. For example, the Standing Committee on Industrialisation Policy, the Ministry of Energy, the Ministry of Mining and Heavy Industry, the Ministry of Economic Development, as well the private sector-led Mongolian Hydrogen Council, are all pursuing important work to scope and explore the possibilities of a future hydrogen industry in Mongolia but are largely doing so independently of one another.
The successful implementation of the Concept and any eventual strategy will depend on the ability to align and steer various public and private stakeholders, as well as on the ability of those charged with its steering being provided with relevant, timely and evidence-based inputs concerning the evolution of different technology and policy issues that relate to the strategy. Given the importance of different line ministries in directing public investment and policy support, coordination will be critical to avoid duplication and wastefulness. The interest of the private sector in developing hydrogen projects in Mongolia is a positive indication that entrepreneurs, innovators, and investors see Mongolia as a high-potential location for hydrogen project development. There is therefore an opportunity for policymakers to integrate projects’ experiences, challenges, and successes into the steering and implementation of the government’s hydrogen strategy, ensuring bottom-up, private sector experience can focus government intervention to areas where it is needed most.
R1.1: Establish a cross-government, public-private Steering Committee for the low carbon transition in Mongolia
The Steering Committee would be in charge of the development of the Vision set out at Recommendation 2 and could be fed by a number of issue-specific working groups (e.g., a hydrogen working group, a technology-neutral working group for decarbonisation, a coal phase-out working group). The Steering Committee should not create an additional layer of bureaucracy but rather streamline existing platforms. It is notable that there are a number of different line ministries in Mongolia as well as cross-ministerial committees that are separately pursuing low carbon activities, including on hydrogen; ensuring an aligned approach to renewable hydrogen development will be key to avoiding duplication, giving clarity to project developers and investors, and allowing relevant line ministries and other public agencies to focus their interventions and support on the areas where their input is of greatest value and necessity. The Steering Committee could build upon the participants and experience of the various working group meetings organised by the OECD and UNDP in preparation of this report.
R1.2: Conduct public and private sector awareness raising exercise on government ambitions for decarbonisation and the role of low carbon fuels such as renewable hydrogen
There is a highly unequal level of awareness of the economic imperative for decarbonisation in Mongolia. While certain large firms, both domestic and international, have an advanced and long-term vision on the importance of investments to support decarbonisation, other firms have significantly lower awareness. The ability of a hydrogen industry to contribute to a just transition will depend on creating opportunities for firms – in particular SMEs – in existing and future industrial value chains linked to the use of low carbon technologies and fuels such as hydrogen. A similar dynamic is clear in the public sector, including in line ministries whose input will be necessary for any strategy to be successful and whose broader responsibilities will be significantly affected by the low carbon transition. There is therefore a pressing need to raise awareness at a technical and policy level across the public and private sector on the rationale of public policy support for low carbon technology, as well as the commercial opportunities and challenges relating to the government’s ambitions for low carbon economic development.
R1.3: Raise awareness of the opportunities and challenges of hydrogen development at the level of regional government
There is a specific need to raise the awareness of renewable hydrogen projects and government policy objectives in this area at the level of regional administrations. Renewable hydrogen development projects have the potential to significantly contribute to regional development priorities, including infrastructure development and job creation; this is particularly important in regions that may over the longer term be affected through job loss or displacement owing to a future coal phase-out, or at least a coal economy decline. At the same time, the use of water resources and land – for example in the development of renewable energy infrastructure for electrolysis – may have significant localised impacts on communities. There is a clear rationale for increasing the involvement of regional governments in the consultation, design and implementation of renewable hydrogen projects to ensure that such projects contribute to local development needs and are socially and politically viable at the local level. This process also runs in the other direction, since many of Mongolia’s regional governments have deep expertise and experience in managing large industrial projects; in this sense, there is much that can be derived from the experience of regional government to inform national decision-making on low carbon industry development, including for renewable hydrogen.
R1.4: Establish a public-private working group to map infrastructure needs for low carbon industry development
There is a significant level of uncertainty surrounding the infrastructure needs for hydrogen exports from Mongolia, with much dependent on the location of production and domestic users, the proximity to the Chinese border, clustering of production and related energy infrastructure, and infrastructure developments in China. Similarly, there is uncertainty surrounding the low carbon industry infrastructure needs more generally, both in terms of new infrastructure, retrofitting of existing infrastructure, planning, permitting and location of industry development and its associated infrastructure, etc. While different working groups are envisaged under R1.1, the cross-sectoral implications for infrastructure development and the associated financing needs justify a particular focus on these questions. The lessons derived from the working group could significantly improve the quality and availability of information available to both the private and public sector in the planning of industry investment projects.
Recommendation 2: Define a shared vision for a renewable hydrogen industry in Mongolia
Overview
The Government of Mongolia is considering the development of a renewable hydrogen industry and is exploring how best to support the development of such an industry in line with its broader socio-economic, industrial and sustainability objectives. Drawing on the experience of other economies that are exploring or in the early stages of implementing national strategies for renewable hydrogen development, Mongolia should approach the development of a national strategy in a clearly sequenced manner. The first stage of this approach should be establishing a socially and politically acceptable vision for what a renewable hydrogen industry could and should provide for Mongolia and its citizens, and how such an industry could contribute to the sustainable development of the country, including a just transition away from fossil fuel production and use. This stage should include a clear and evidence-based analysis of key early-stage risk factors associated with renewable hydrogen development – off-taker risk and finance risk – that can affect the viability and affordability of hydrogen projects, particularly in emerging markets. The findings of these exercises could then inform the development of a national strategy for renewable hydrogen development.
R2.1: Develop a shared ‘Vision’ for a renewable hydrogen industry in Mongolia
The Vision would act as an initial stage towards the development of a hydrogen strategy in Mongolia and would set out a vision of what a renewable hydrogen industry in Mongolia could contribute to the country’s socio-economic, environmental and climate policy objectives. The Vision could also outline the key responsibilities and needs of the public and private sector in the design and implementation of a renewable hydrogen industry. The Vision would clearly detail the risks and opportunities involved in directing public support towards the establishment of such an industry. Concretely, the Vision could:
Set clear targets for how hydrogen should contribute to decarbonisation in Mongolia, together with targets from other renewable technologies.
Mapping of resources and data collection to identify best locations for renewable hydrogen production.
Set out how the development of a renewable hydrogen industry could contribute to social and regional inclusion, for example through job creation, industrial investment, or upgrades to energy and power infrastructure.
Clearly establish the environmental and resource implications of a hydrogen industry in Mongolia at different magnitudes of scale.
Identify the potential domestic demand for renewable hydrogen including for supporting its early-stage development. In particular, this should be linked with the identification of industrial products where additional value and differentiation could be created by embedding low carbon fuels. Experience from other potential export-oriented hydrogen producers indicates that a number of countries are looking to embed renewable hydrogen directly into other industrial value chains, rather than exporting the hydrogen itself. In Mongolia, given the planned expansion of copper mining, there may be scope to couple the development of a renewable hydrogen production industry with the development of a new, forward-thinking, strategically important and highly differentiated product such as low- or zero-carbon copper.
Align and be coherent with government objectives for decarbonisation – which are being developed in a Long-Term Vision exercise supported by international partners - and its commitments under Mongolia’s Nationally Determined Contribution.
Establish a clear role for the local science, technology, and innovation system in the development of a renewable hydrogen industry.
Set clear short-term technology-neutral targets and long-term technology-specific targets, with a roadmap for how these will be achieved.
Recommendation 3: Improve Mongolia’s attractiveness as a foreign direct investment destination for renewable hydrogen development
Overview
The success of Mongolia’s renewable hydrogen ambitions will in large part depend on the ability of the country to attract investment from external sources, especially in a context where other emerging economies are also competing to attract FDI into their own nascent hydrogen sectors. A key role for the government should therefore be promoting Mongolia as an attractive destination for low carbon investment, using both financial and non-financial policy interventions to de-risk such investments where appropriate, addressing issues in the broader business environment that may undermine investor confidence, and utilising the existing policy and regulatory framework for investment to create clear economic signals that the government is committed to a low carbon industrial future.
R3.1: Integrate a low carbon investment mission into the Mongolian Investment and Trade Agency
The government could consider integrating a low carbon investment attraction mission into the mandate of its pre-existing investment promotion agency (the ‘Investment and Trade Agency of Mongolia’ under the Ministry of Economy and Development) and use trade representatives in diplomatic delegations to increase the awareness of Mongolia’s renewable hydrogen development ambitions. Building on the projects identified in this report, the Agency could also consider defining a suggestive pipeline of projects for foreign investors and facilitating dialogues between the projects and potential investors.
R3.2: Identify and address business climate issues that may negatively affect investor confidence in Mongolia as a destination for renewable hydrogen development
There are a number of issues in the broader business climate that may negatively affect investor confidence in Mongolia, some of which have been discussed in this report, such as the ongoing perceived dispute surrounding power purchasing agreements in the renewable energy sector. Given the high risk involved with renewable hydrogen projects, such unresolved issues may lower investor confidence in the reliability and stability of Mongolia’s otherwise open and liberal legal and regulatory framework for investment. Ensuring that the government is able to solve issues and disputes swiftly and transparently in the business climate will be critical to increasing investor confidence not only in the nascent hydrogen industry but the broader energy and infrastructure necessary for Mongolia’s low carbon transition. Fundamentally, the importance of attracting foreign investment for low carbon investment projects should redouble the need to improve the broader investment climate.
R3.3: Consider import duty and tax relief for enabling technologies for low carbon and sustainable industries
There are a number of horizontal legal provisions already in force in Mongolia that might support investments to support a low carbon industrial transformation and low carbon innovation more broadly, notably Art. 12.1.4 of the 2013 Law on Investment (conditions for non-taxable investments for the production of export-oriented innovative products to finance innovation) and the 2012 Law on Exemption from Customs and VAT (customs and VAT relief for the import of equipment for innovative products). Mongolia could consider applying a clearer low carbon taxonomy to such provisions, for example by extending them to capital goods necessary for hydrogen production, or to the inputs necessary to build transmission and distribution infrastructure. This could send a clear signal to the market that the government is privileging investment in areas that support its low carbon objectives, and encourage incumbent investors to modify their own investment activities and plans.
R3.4: Conduct public-private dialogues on specific regulatory and policy barriers to renewable hydrogen production and applications in Mongolia
By virtue of being a frontier technology, there is a significant degree of uncertainty regarding the specific regulatory and policy barriers to the development – and use – of renewable hydrogen beyond its traditional industrial applications. As discussed in Chapter 3, many of these uncertainties relate to certification and standardisation requirements for hydrogen production and its derivatives, as well as industrial safety standards for its use and transport. As private projects continue to develop and as the government advances with the articulation of its own hydrogen ambitions, a public-private working group with a specific mandate to identify and address regulatory and policy barriers to hydrogen production and its application in Mongolia could further strengthen investor confidence and demonstrate the government’s willingness to facilitate the emergence of a high-potential green industry.
R3.5: Accelerate reforms to improve attractiveness of renewable energy sector, balancing the need to create incentives for the private sector with long-term sustainability of public finances
The renewable energy sector in Mongolia must be developed if the country is to meet its commitments set out in its NDC, regardless of whether Mongolia decides to develop a renewable hydrogen industry or not. Yet, at the same time, the country’s vast renewable potential is one of its main comparative competitive advantages as a potential hydrogen producer, and indeed the potential to produce low cost, clean energy could support the decarbonisation of the Mongolian economy and even attract energy-intensive industrial investors looking to decarbonise their production. While Mongolia’s renewable hydrogen do not change the need to develop the renewable energy sector, they do add additional economic rationales for doing so. In addition, while the current electricity grid is too carbon-intensive to provide power for renewable hydrogen production, should that change and if the rules of additionality can be met as discussed in Chapter 3, then it will only increase the competitiveness of hydrogen production in Mongolia. Understanding and addressing the barriers that continue to restrict – or dissuade – investment in the sector must be a priority for the government going forward. This includes accelerating the ongoing reforms to regulated electricity prices (increasing the returns of dedicated renewable projects while also increasing the rentability of hydrogen projects with proprietary renewable energy infrastructure that can sell surplus electricity to the grid), undertaking reforms to Mongolia’s feed-in tariffs and ensuring that their attractiveness for investors is properly weighed with public financial sustainability, and addressing investor concerns in the power purchasing agreement framework.
Recommendation 4: Align Mongolia’s industrial development with low carbon outcomes
Overview
The policy and regulatory framework to incentivise investment in Mongolia’s low carbon transition remains at an early stage of development. Firms lack the knowledge, technology and incentives to innovate in and adopt new solutions that can align their industrial activities with low carbon outcomes. There are however a number of reforms and policies that could significantly raise the contribution of the private sector to low carbon innovation and technology adoption. Such reforms could be technology-neutral, giving directionality to firm-level investment and innovation decisions in a way that aligns with low carbon transition objectives without pre-determining which solutions they explore. There are two key areas where Mongolia can substantially increase the prospects for the development of a renewable hydrogen industry whilst ensuring that the development of such an industry benefits the local industrial ecosystem.
The first is to make it more attractive for firms and the innovation system that supports them to direct their investments and resources towards activities that support low carbon outcomes. This means sending signals through the innovation and industrial policy framework that there is a clear economic rationale to invest in low carbon technologies, innovation, and capacities. At the same time, there is a need to make it not just more attractive but also easier for firms to undertake those investments.
The second key area for action is to make it easier for industrial firms to access the technologies and innovations that can support their decarbonisation and access new opportunities in low carbon value chains. An inclusive and durable low carbon transition for Mongolia’s industry will require equipping firms and workers with the skills, knowledge, and capacities to maximise the opportunities involved in low carbon technology adoption and innovation. Doing so will ensure that Mongolian firms, both those that currently operate and those which the government hopes to see emerge as its industrialisation policy advances, are able to competitively position themselves in new, emerging green industries, while also adapting their current activities to changing regulatory and consumer demands. On one hand, this requires supply-side innovation and technology policies to facilitate the transfer of technologies and know-how to firms and workers. On the other hand, it requires demand-side, market-shaping policies that create demand for low carbon innovation in the domestic economy.
R4.1: Establish a public low carbon innovation policy and technology laboratory for Mongolia
The laboratory would act as a focal point for low carbon projects in Mongolia, centralising information on their focus and aims, it could monitor the effectiveness and status of various technology-specific and technology-neutral barriers to low carbon innovation, investment and technology adoption. To avoid duplication, the laboratory could be embedded within an existing project development agency, such as the New Recovery Policy Accelerator. This would allow the early-stage support of a strategically important area of industrial and low carbon development to be embedded in a high-impact, dynamic institution with a cross-sectoral mandate.
R4.2: Consider the introduction of a low carbon R&D tax credit for the private sector and state-owned enterprises
The introduction of a low carbon R&D tax credit would send a clear signal to firms – both private and state-owned – that the government is ready to place a premium on investments that might support the low carbon transition of industry. While such credits are generally horizontal and untargeted, Mongolia could consider applying a level of conditionality – such as that set out in Mongolia’s Sustainable Development Goals Financing Taxonomy – to direct firm-level innovation activities towards low carbon objectives.
R4.3: Mobilise development and domestic finance to support directed innovation financing tailored to Mongolia’s low carbon needs
OECD research suggests that there is a greater justification in using targeted, grant financing for innovation in emerging technologies with a strong sustainability potential but which remain far from the market (OECD, 2023[2]). Proposals such as those made by the World Bank Energy Sector Management for Development (ESMAP), the OECD, the Global Infrastructure Facility and the Hydrogen Council to establish ‘lighthouse’ projects for hydrogen production in emerging and developing economies, which can help to crowd in and scale development finance for hydrogen development, are indicative of the financing opportunities that could be available to Mongolia should it advance with its hydrogen ambitions (OECD, World Bank, ESMAP, GIF, Hydrogen Council, 2024[3]). Mongolia already has experience with securing development finance for sustainability objectives – such as through its use of Japan’s Joint Crediting Mechanism – and could consider a more explicit policy of orientating development finance towards innovation in low carbon areas that may have a strong social impact but limited commercial viability. There are also a number of concessional green finance instruments available domestically in Mongolia (see, for example, the activities of the Mongolian Green Finance Corporation), but these mostly relate to the residential sector. There is scope to expand the availability of concessional finance instruments with an explicit goal of low carbon technology adoption in industry.
R4.4: Establish a technology transfer unit within Mongolia’s higher education and research institutions with a mandate to promote and enable low carbon technology transfer
A dedicated unit, either with a higher education institution (HEI) affiliation or operating across a consortium of institutions, to identify opportunities for domestic and international low carbon technology transfer for domestic industry could overcome informational asymmetries between Mongolian industry and science and research, and facilitate opportunities for domestic industry to capitalise on opportunities in emerging green industries or in the low carbon transitions of their current area of industrial activity. The advancement of the unit’s activities could be made part of the explicit mandate of local HEIs and research institutions.
R4.6: Explore options for academic-industry placements in emissions-intensive sectors to facilitate technology transfer
In many firms, particularly SMEs and certain SOEs, there is often a lack of internal capacities – financial, knowledge and skills – to adopt and use new technologies that might support firms with productivity, innovation and their decarbonisation. The government could consider a specialist academic placement programme, whereby doctoral students or suitably experienced graduate students are encouraged or academically rewarded for placement periods within a firm with the aim of supporting their uptake and use of a specific technology or other form of innovation with a view to addressing a low carbon objective.
Recommendation 5: Define a role for the government in stimulating demand for low carbon technologies
Overview
One of the major barriers to developing any low carbon industrial project in Mongolia is a lack of demand for low carbon goods and services in the country, both in terms of the market size and market preparedness. While the domestic industrial market is small, it is growing, and the government has a clear commitment to developing many industrial activities in which the integration of low carbon fuels and technologies will be necessary for their sustainability and competitiveness. While it is also true that there is scope for external markets to become drivers of low carbon industrial output in Mongolia, experience from the country as well as from throughout the region points to the importance of domestic off-take in reaching final investment decision in low carbon industrial projects.
There is an emerging consensus across the OECD that the many supply side policies for low carbon technologies that have been implemented in recent years have not yet been met with a commensurate commitment of demand side policy interventions. Given that stimulating demand for low carbon goods and services depends in large part on addressing the market failures that have created the need for such goods and services in the first place – namely, the failure of industries and consumers to price in the negative environmental and climate externalities of a business as usual scenario – there is a clear economic and climate rationale for governments to play a role in accelerating the uptake of low carbon technologies, particularly in hard-to-abate sectors. The scope of that role will nevertheless be determined by the financial capacities of the government in question, which in emerging economies are generally lower than in most OECD members.
While there is therefore a need for the Mongolian government to play such a role in the country, there is also a need to define it in terms that make effective use of more limited resources. In this regard, there are two main areas that policymakers in Mongolia could consider for action. The first is to identify the extent to which the ‘business as usual’ policy and regulatory framework acts as an implicit dampener on domestic demand; how, for example, policy and price signals around coal usage in industrial and energy sector development translates into investor sentiment regarding low carbon markets in Mongolia as well as the competitiveness of those low carbon industrial activities relative to highly polluting and emissions-intensive alternatives. The second is identify what interventions the government can proactively take to stimulate demand for low carbon industrial technologies in the industries that are in greatest need of low carbon solutions for their future sustainability and competitiveness.
R5.1: Conduct a socio-economic assessment on the impact of fossil fuel subsidies on investment in and demand for low carbon technologies
While it is important to ensure that subsidy reform does not create a distortionary imbalance between energy supply and demand, which risks triggering price increases that would hit the poorest segments of society the hardest, most international organisations and research agree that a rationalisation and gradual reduction of fossil fuel subsidies are fundamental ingredients of a successful low carbon transition. In Mongolia, the heavy subsidisation of coal in particular sustains very low electricity prices which in turn may weigh on the investment attractiveness of the renewable energy sector and technologies that could support the low carbon transformation of industry. An inventory exercise of all direct and indirect fossil fuels would be an important starting point in this regard.
R5.2: Design a policy toolkit to stimulate demand for low carbon technologies in Mongolia’s industrial sector
Mongolia lacks a policy toolkit to stimulate demand in low carbon technologies. While certain provisions do exist within the fiscal and customs framework to lower capital costs for renewable energy projects (R3.3), these are not strategically applied; beyond these provisions, there are no ‘market shaping’ policies that are relevant to low carbon technologies. There are a number of policies that the government could consider as it develops a strategy not just for the production of renewable hydrogen, but also its use – and the use of other low carbon technologies – within Mongolian industry. These can be technology specific mandates and quotas; the replacement of ‘brown’ hydrogen with renewable hydrogen in existing industrial activities, or targets to use a defined amount of renewable hydrogen in certain activities, such as public transport or mining. Should they be financially sustainable and aligned with the government’s strategic aims, the government might also consider direct subsidies for the use of renewable hydrogen in hard-to-abate sectors through tax credits, subsidies for the capital and operational expenditure for renewable hydrogen production and use, or more technology neutral instruments such as carbon contracts for difference.
R5.3: Use low carbon conditionalities in public procurement, including in Mongolia’s state-owned enterprises
Given the particularly large footprint that the state retains in some of the country’s hard-to-abate sectors, public procurement is one area where the government could immediately stimulate demand for low carbon technologies. Mongolia has explored the use of ‘green’ procurement for a number of years, but the government has yet to leverage the ability of the significant purchasing power of the state and state-owned enterprises to create demand for low carbon technologies and send clear market signals to industry and investors about the government’s low carbon objectives. A more explicit low carbon approach to public procurement could support the adoption of technologies at an early stage of commercialisation in strategic sectors, including mining and energy.
R5.3: Support the emergence of a local hydrogen production industry through bilateral trade agreements with key countries for off-take contracts
Given the importance of external off-takers for the economic viability of Mongolian renewable hydrogen production, there may be a role for the government to play in facilitating and supporting potential external off-take contracts through bilateral agreements. For example, in the case of China, where there is the potential for significant renewable hydrogen demand in the coming years, there may be a role to play for the government in establishing agreements with the relevant purchasing authorities or enterprises, and by extension giving greater clarity to hydrogen producers in Mongolia on what opportunities there might be for export to the Chinese market. This type of international dialogue may also be important for the development of the supportive export infrastructure that will have to be built should Mongolia export hydrogen in the future.
Recommendation 6: Ensure the sustainable use of Mongolia’s water resources for hydrogen production
Overview
Water availability for renewable hydrogen production is a critical concern for policymakers and for potential investors in Mongolia, and more broadly in Central Asia, a region facing water scarcity issues bound to be aggravated by climate change. In Mongolia, the problem takes the form of a spatial mismatch between the water resource availability, concentrated in the North of the country, and centres of water demand, largely in the Ulaanbaatar area and the South Gobi desert. As the South Gobi region is seen as the most promising location for renewable hydrogen production means, there is a high risk that the development of this sector at scale will aggravate water stress in this region.
Available data, which relies on a few studies based on laboratory conditions, allow to estimate that producing 1 kg of hydrogen in the South Gobi desert of Mongolia would require to abstract just above 40 litres of groundwater, out of which 70% (about 28 litres) would be consumed while the rest (12 litres) would be discharged under the form of brine (from water pre-treatment required for the electrolysis) and warm water (from the cooling process post-electrolysis). Although the required amount of water for developing pilot projects remain relatively limited when compared to consumption in other sectors, the development of a renewable hydrogen sector at scale does can lead to large volumes of water consumed. Under these estimates, a 1 MT capacity industrial development of renewable hydrogen production (a relatively standard mid-term capacity target considering international approach to hydrogen production plans) would lead to a water consumption of about 30,000 thousand m3/year, which is close to the forecasted water needs of the mining industry in the South Gobi region by 2030, mining being the primary industrial user in this region.
Adopting a “nexus” approach to hydrogen and water management, i.e. an approach acknowledging the inextricable link between the two sectors, cognisant of the fact that policies in one area will affect the other, can help address risks resulting from this relationship and uncover opportunities for synergies. Uncertainty regarding sustainable access to water at the horizon of investments (which, in the case of renewable hydrogen projects, are long-term), can impede the attraction of financing into the sector. A clear and reliable water policy framework that manages water disruption, environmental risks and potential social conflicts around water will contribute to de-risking investment in the sector. On the other hand, envisaging water and hydrogen linkages can lead to economic opportunities, for example through the development of a circular economy approach in which wastewater is used for renewable hydrogen production.
R6.1: Integrate water sustainability as a central pillar of a national renewable hydrogen strategy
Mongolia needs to make water considerations central to its approach to hydrogen development. There is a need to pursue the analysis undertaken in this report to understand present and future water resource availability, as well as present end future water demand across uses, and assess what can be allocated to hydrogen production, based on its expected value for the national and local economies. This discussion, as well as the mainstreaming of water efficiency requirements into an approach that aims to develop the renewable sector, can be done through a dedicated working group under the steering platform that this report is recommending for developing a renewable hydrogen strategy. Actions for integrating water sustainability into renewable hydrogen development can entail:
Including the effects of an industry scale-up on water sector in the discussion about renewable hydrogen production targets. In the short-term, the effort can focus on securing access to water for enabling the development of pilot projects while establishing the conditions for ensuring that it does not create tensions with other uses and does not contribute to unsustainable water resource depletion. In the longer run, there is a need to carefully envisage the water volumes that can effectively and sustainably be engaged in renewable hydrogen production and understand how this can constraint the scale at which a renewable hydrogen sector can develop. Considering the linkages with national industrial and regional and local development plans and strategies can make sense, as plans for reducing specific water-intensive industrial activities, for example, can have an impact on the total water availability for other purposes.
Monitoring closely the anticipated water needs of renewable hydrogen projects under development. Most available data rely on a limited number of cases reflecting laboratory rather than real-life, at scale conditions. Monitoring effective water parameters of real-life projects, as pilot projects develop in Mongolia, will help build knowledge reflecting local conditions.
Developing a database of hydrogen-water metrics used for domestic standards, benchmarking and innovation. Standards should cover water efficiency in the production process as well as wastewater and brine management.
Including water efficiency as a key component of innovation and technology transfer measures relating to renewable hydrogen development. This can include consultations with the mining sector with a view to transferring water stewardship practices from this sector to the renewable hydrogen sector, where applicable.
Integrating water efficiency as a criterion for assessment and approval of renewable hydrogen projects and for the granting of incentives. In particular, strategic environmental assessments (SEAs) and Environmental Impact Assessments (EIAs) should be used and effectively carried out, the former for assessing renewable hydrogen policies, programmes and plans, and the latter for renewable hydrogen projects.
Investigating opportunities for co-location and cross-sectoral co-operation between water and renewable hydrogen with a focus on wastewater use, as well as opportunities for the co-location of hydropower infrastructure and renewable hydrogen production. These opportunities should be assessed first through feasibility studies and detailed economic analysis, and then tested via pilot projects.
R6.2: Embed industrial water use policy supporting sustainable access to and use of water into the broader national water management framework
According to the Mongolian law on water, hydrogen project developers are industrial water users. Adopting the nexus approach from the perspective of water sector management means that water authorities should be aware and ready to manage such new water use, including by building the knowledge and capabilities for doing so. It also means that specific tools of the water management framework that play a role in incentivizing water efficiency and sustainable water use can be strengthened. In particular, a sound water allocation regime that establishes conditions for accessing water resources taking into account the economic and social value of water use will be pivotal. To this end, the government of Mongolia can consider the following measures:
Improve cross-sectoral coordination at Centre of Government level by strengthening the role of the National Water Council and ensuring coherence across water policies. As plans to develop renewable hydrogen production in the country develop, there will be a need to include this sector in the framework of the Council’s activities.
Enhance institutional capabilities, notably of RBOs, through targeted training and capacity-building exercises as well as adequate financial resourcing. This will be pivotal to ensuring that RBOs have the capacity to deal with additional water use at the local level, should renewable hydrogen develop. Specific awareness of hydrogen-related water issues will need to be built.
Ensure multi-stakeholder dialogue in water matters with proper level of representations across sectors and better transparency and publicity of processes. In the case of hydrogen, this will participate in the better implementation of SEAs and EIAs and can play a great role in preventing conflicts and ensuring local public support for renewable hydrogen project development.
Improve water data systems to facilitate evidence-based policymaking and enforcement of regulations, as well as water resource mapping including for industrial purposes. Groundwater resources still need to be better assessed in Mongolia, as there remains knowledge gaps as to how much water there is and whether this water is replenishable or not. While progress is being done in this area, accelerating the building of this knowledge will help assess the feasibility of developing renewable hydrogen production at scale. Improving data will be critical for enabling clear and informed dialogues on possible industrial development targets as discussed in recommendation 6.1. It will also be fundamental for monitoring the effects of climate change on the water sector.
Consider revising the water tariff system in water allocation regimes for further incentivising water efficiency and addressing water pollution. This can be particularly critical in the South Gobi region where water is submitted to great and increasing pressure. Water tariffs have been on an increasing trend in the past years, but there is still room for a differentiated approach across uses that reflect economic and social value of consumer activity and incentivise water efficiency. This logic should apply to renewable hydrogen production in the future, should this activity develop. In this regard, it will be important to implement the recommendations of made by the OECD in the framework of the National Water Policy Dialogue in Mongolia for improving the approach to water tariffs and establishing fully-fledged water allocation regimes in areas where they are needed.
Integrate future renewable hydrogen sector needs in water infrastructure planning and management. This could entail adopting a logic of “hub” with the co-location of energy, transport and industrial activity such as mining, which is a key market for hydrogen within Mongolia. This can help reduce infrastructure costs thanks to shared use, enable the development of agglomeration economies and lead to circular economy approaches.
Recommendation 7: Ensure hard infrastructure development can support a future low carbon economy
Overview
Whether Mongolia pursues a renewable hydrogen industry or not, significant investment will be necessary in new and upgraded ‘hard’ infrastructure to underpin sustainable and low carbon economic growth in Mongolia. The challenge – and opportunity – for policymakers in Mongolia is to ensure that decision-making on infrastructure planning and investment can support different directions of sustainable growth at once, and to maximise the co-benefits of new infrastructure development. This is partly a question of planning and strategic decision-making; in such a large and densely populated country, how can Mongolia ensure that any new infrastructure serves the largest number of constituents most effectively?
At the same time, as discussed throughout this report there are a number of infrastructure needs that are of particular importance to any future hydrogen industry, and understanding where those needs are and how this infrastructure can support domestic users will be key to attracting the necessary investment and ensuring that these investments create a positive impact on the local economy. New infrastructure for renewable energy generation and transmission is one obvious example. As discussed in Chapter 3, significant new generation capacity will need to be installed if Mongolia is to produce renewable hydrogen at scale, while new generation and transmission capacity will be necessary in general to meet rising electricity demand and integrate a higher level of variable renewable energy into the national grid. As discussed in Chapter 4, new infrastructure for water use is another example, while upgrading of industrial infrastructure at the firm-level will need to take place in order for the domestic industrial base to absorb low carbon technologies and fuels.
R7.1: Mainstream potential infrastructure requirements for low carbon fuels into industrial policy planning, including for industrial clusters
The government has ambitious industrial policy ambitions, with these continuously developing through the work of the Standing Committee on Industrialisation Policy and other relevant government bodies. Given the future importance of low carbon fuels for Mongolian industry in the future, in both tradeable exported products and non-tradeable industrial products, there is a strong rationale to ensure that policymaking on industrial policy planning explicitly mainstreams the anticipated infrastructure for low carbon fuel use and its transportation. While there are long-standing discussions on the development of steel, oil refining and cement industries – all of which are hard-to-abate – in Mongolia, there are no explicit plans to integrate low carbon considerations into the supportive infrastructure for these industries (e.g., to ensure that new blast furnaces for steel can be switched to hydrogen or co-fired with hydrogen or ammonia). This does not mean that firms are not exploring low carbon and more environmentally sustainable options on their own – there are firms, for example, in both the mining and cement industry that have integrated ‘higher’ cost technology and infrastructure options into their operations. That firms are undertaking these investments without any significant policy push to do so is an encouraging development, but a more concerted effort through policymaking and strategic planning can ensure that such investments are the norm for new projects rather than the exception.
R7.2: Support the co-location of renewable energy infrastructure with industrial demand
There is a clear rationale for the government to support the co-location of renewable energy infrastructure with sites of industrial demand. One of the main challenges for the Mongolian authorities with the integration of additional variable renewable energy into the grid is the grid’s inflexibility. One consequence of this is that it is difficult for energy-intensive industrial firms to decarbonise their activities through electrification, something which has led certain industrial firms to invest in proprietary co-located renewable energy infrastructure; another, more hydrogen-specific consequence is that it is currently not possible to use the national grid to power electrolysis for hydrogen development, which would be the most competitive option over the longer-term. Linked to R7.1, by sending clear signals through strategic planning, investment policy, and the regulatory framework, the government can encourage public and private sector investment in renewable energy infrastructure that is co-located with industrial users. Along with residential use in Ulaanbaatar, industry represents the biggest demand and source of demand growth for power. The national power system is currently struggling to meet this demand, leading to costly electricity imports from Russia. More dedicated co-located energy infrastructure for industry would lower the demand from power-intensive industrial users on the national grid, thereby allowing more variable renewable energy to gradually be integrated into the national power system (both supporting the decarbonisation of the power system and increasing the capacity of the grid to eventually be used to produce renewable hydrogen) and supporting the decarbonisation of industry through direct electrification.
R7.3: Explore a hub and spoke model for water infrastructure
As with other areas of supportive infrastructure for low carbon industrial growth, there is a clear economic and environmental rationale for co-locating new water infrastructure with demand in the industrial and energy sectors. A ‘hub and spoke’ model of water infrastructure development could reduce the transportation and processing costs of water for hydrogen production, while creating opportunities to derive new value from co- and by-products of industrial processes (for example, using the oxygen produced via electrolysis as an input for water treatment processes), therefore enabling and reaping the benefits of a circular economy.
Recommendation 8: Align the development Mongolia’s renewable hydrogen industry with international standards, certification, and regulatory requirements
Overview
Should Mongolia wish to develop renewable hydrogen for export, then developers will have to ensure that the hydrogen developed in the country is compliant with the emerging rules and standards that will govern international hydrogen markets. At present, there is a lack of awareness in Mongolia – both in the public sector as well as in the hard-to-abate industrial sectors in which hydrogen is being both developed and applied – about these rules and standards. There is therefore a risk that the significant investments that are being mobilised for hydrogen research and development will lead to outcomes that are misaligned with these external standards, limiting the competitiveness of a future Mongolian hydrogen industry. At the same time, while there are a limited number of applications of hydrogen in Mongolia at present, the production and transmission of renewable hydrogen as well as its application in new industrial processes will likely require a significant reassessment of the regulatory framework for hydrogen production and handling.
R8.1: Establish a government body to monitor and engage with international certification and standardisation policy development for renewable hydrogen
A new body for hydrogen certification and standardisation could act as a one-stop-shop for information for local producers. There are significant, unresolved international debates on questions of standardisation and certification of renewable hydrogen. The resolution of these debates will have major implications for the methods and value-chain considerations for renewable hydrogen production, transport, storage, and use. Mongolia should ensure that its national standardisation institutions, notably the National Energy Centre which currently is responsible for the implementation of hydrogen-related regulation and its inspection, have a clear mandate to engage in these debates, to disseminate the necessary knowledge domestically, and are equipped to sufficiently monitor and accredit hydrogen industry projects.
R8.2: Undertake a comprehensive, cross-sectoral regulatory review to ensure that the domestic legal framework is coherent with the production, transportation, storage and use of renewable hydrogen
The production of renewable hydrogen in Mongolia, as well as its use in a broader range of industries and sectors, will require significant revision to the regulatory and legal framework that governs hydrogen and other hazardous materials. The challenge facing Mongolia is not dissimilar to that facing policymakers in many OECD countries, and there is significant scope for Mongolia to participate in and learn from international discussions on hydrogen regulation. Given the transversal regulatory nature of hydrogen production and use – in so far as it affects many different sectors and policy areas – the work that would need to be undertaken to update the legal and regulatory framework for hydrogen is likely to be very substantial and require the mobilisation of significant government capacities. Nevertheless, such an exercise is likely to be of fundamental importance for the future application of hydrogen in Mongolia as well as for its production, and as such this exercise should be a major component of any government policy to develop Mongolia’s hydrogen industry in the future.
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