Debt-Ridden System Soon to Disappear

Few people in Ulaanbaatar leave their home with the light on when they go out, and televisions switched on when they sleep. But for the citizens of developed countries, the concept of efficient energy use is part of their mentality. It is believed that Mongolians, who resolve their heating and power energy issues at much lower costs comparing to other countries, admit they are very close to facing an energy crisis. Fortunately, it seems that the crisis has been avoided thanks to the Government’s resolution to enhance the energy sector.  
In developed countries, the cost of electricity is much higher than in Mongolia. In Denmark, 1kWht of electricity costs 36.6 cents, Italy 28.4 cents, in countries such as Cambodia and the Philippines, just over 10 cents. In Mongolia, starting from May 1st, the cost of electricity will reach MNT71 to MNT84 (approximately 7 cents) per kWh.

But the Government should recognize that it has firmly kept energy tariffs low, causing much damages to the country’s energy sector development in addition to breaching market laws. Because of the Government fixed energy tariffs policy, energy plants could not carry out technological overhauls to the extend they intended due to the necessity to reduce their expenses. The energy sector was forced into a difficult situation in which it became indebted.
The actual cost of producing 1kWh of energy in the central region has reached MNT115. This energy is sold to households between MNT71 and MNT84, to economic entities at MNT88 and to mining companies at MNT100. The Dalanzadgad thermal power station produces 1kWh of energy at approximately MNT300 and sells it at MNT79.8. The Government makes up for the differences with money collected from taxpayers and from the budget fund. Last year it distributed subsidies worth MNT34.6 billion in total: MNT19.6 billion to local plants and MNT15 billion to the central region plants respectively.            

In fact, were the energy sector healthy, it could significantly contribute to the state budget instead of being a burden. In 2010, the amount of value added tax and corporate income tax paid by larger energy companies exceeded MNT66 billion. An income worth billions of togrogs could be gained by improving the energy sector as large mining deposits of strategic importance are about to become operational. But the energy sector in Mongolia will only attract investors once the right conditions are created and tariffs revised to sell energy at prices higher than production cost.
It is praise worthy that the authorities have started to understand and support the energy sector. On December 9, 2010, the Parliament issued Resolution No.72 on Actions to Be Taken on Fuel and Energy Sectors. The resolution gives the opportunity to gradually increase coal and energy prices until 2014. However, the Parliament also included a clause in the resolution to protect the most vulnerable part of the society. Households whose monthly consumption of electricity reaches 150kWh will benefit from the same current tariffs until 2014. It has been estimated that 20% of the total income of the energy sector comes from households, of which 64% consume electricity up to 150kWh. Specialists have emphasized that the Government’s decision to ensure that everyone be treated fairly is the basis of a healthy energy sector. 

Representatives of the energy sector are glad that the debt system between coal mines and energy companies will be eliminated thanks to the Parliament resolution No.72.  It will result in creation of opportunities to improve the debt and total capital ratio and renovate and upgrade facilities with long term loans from domestic and foreign sources.  “However, it would be insufficient to say that tariffs will be fully liberalized under Parliament resolution,” T. Tserenpurev, Head of the Energy Policy Department, Ministry of Minerals and Energy, explained. “It is important to understand that the resolution will give Mongolia the opportunity to run its operations in the energy sector without loss by 2014.” “The price increase starting from May 1st provides us [energy sector] with the capability to be prepared for the 2011-2012 winter,” N. Myagmarsuren, Chairman of the Energy Regulatory Agency, noted before to announce that tariffs should reach MNT115 for 1kWh by 2014.      

According to specialists, a little help from the Government can improve the sector. In 2008, the energy companies’ debt exceeded MNT55 billion, but by the end of 2010, the debt was reduced to MNT29.3 billion. This is the consequence of the energy tariff increase which took place in the last two years in addition to governmental subsidies. Hence, thanks to a gradual increase of heating and electricity prices until 2014, energy companies will soon get rid of their debts and become profitable. Eventually, Mongolia will become a country which does not import but exports electricity; the energy sector will cease being a burden to the state budget and start generating profits thanks to which further investments will be made.