Mongolia’s growing economy and resource riches are a tempting opportunity for project sponsors and lenders. But the country’s first project financing of any significant size is not for a mine, railway, or conventional power plant, but for a wind farm.

The $122 million Salkhit wind farm is the first independent power project of any kind in Mongolia, and closed in July 2012 after suffering few major hindrances. This suggests that the country’s framework for developing and financing energy assets is mostly acceptable to lenders – or development finance ones, at least – though the project’s small size allowed it to come to market with little political interference.

The developer and still majority owner of the 49.6MW wind farm is Newcom, a local conglomerate with interests in telecoms, real estate and infrastructure, and conspicuously little mining. Newcom’s willingness to steer clear of the politically charged resources sector might explain why it managed to close its landmark financing, while the mighty Rio Tinto slogs towards close on the $4 billion financing for its $6.2 billion Oyu Tolgoi mine.

But Salkhit, as a first for the country, involved considerable technical challenges. The infrastructure necessary to bring turbine and other wind farm components to the project site, let alone the construction and operational capacity necessary to support the facility, are scarcely in existence. The resource, located 75km from capital Ulaanbaatar, is very strong – the site’s name, Salkhit Uul, means windy mountain – but Mongolia’s private power market is untested.

Salkhit should displace existing dirty coal-fired capacity, or given Mongolia’s breakneck growth has produced power demand that rises between 8% and 10% per year, displace some future coal-fired capacity additions. According to the sponsors, the plant will avoid the burning of 150,000 tonnes of coal per year. It will sell all of its output to state-owned utility NETN under a 26-year power purchase agreement, the first PPA ever to sign in the country, which includes a feed-in tariff. When the plant comes online in the middle of this year it is expected to run at a capacity factor of 39%.

The project is also Mongolia’s first ever independent power project, and all of the other generating capacity in the country is in state hands and is on average 40 years old. Of this 856MW of coal-fired combined heat and power capacity, only 75% is in operations. The capacity that is in operations spews out particulate matter at a prodigious rate, making Ulaanbaatar an even more polluted capital city than its neighbour Beijing.

Mongolia passed a renewable energy law in 2008, but lenders had not tested the law’s provisions before Salkhit. Newcom was fortunate in having an early-stage relationship with the European Bank for Reconstruction and Development, which has a long track record of working in transitional power markets in transition, and which had agreed in 2009 to make an equity investment in the project. It was also fortunate that the EBRD and its fellow senior lender FMO declined to insist on a sovereign guarantee of the offtake agreement, instead asking Mongolia’s government simply to assure that the plant would benefit from priority dispatch.

The EBRD and FMO each took a 13.75% equity stake in project company Clean Energy, with Newcom retaining 51%, and the plant’s turbine supplier and operations and maintenance contractor, General Electric, taking a 21.5% stake through GE Pacific Private. GE’s proven 1.6MW XLE turbines required some modifications to cope with the Mongolian weather, but reassured lenders about performance risk.

GE’s interest in Mongolia’s wind sector surprised some observers, given the country’s small installed base, and the high costs of servicing wind farms in such a remote, if windy country. But it gives GE a head start in supplying other generating and transportation infrastructure equipment. It also positions GE well to supply any subsequent phases at Salkhit, or Newcom’s other developments in the country.

The memorandum of understanding that GE and Newcom signed in September 2010, on which the Salkhit investment is based, covered energy, and also water, rail, aviation and healthcare projects. Newcom’s sprawling empire, which includes an airline and telecoms company, will offer GE plenty of ancillary opportunities.

FMO provided $42.6 million of Salkhit’s $85 million in 15-year debt, while the EBRD provided $42.4 million. Some of FMO’s commitment came from the Interactive Climate Change Fund. Rounding out the equity requirement is just under $37 million in equity. The financing signed in March 2012, at the same time as the equity investments formally signed, and closed on 17 July, when the financing met its conditions precedent.

The balance of plant contractor on the plant is Leighton, which already operates under contract two coal mines in the country – Ukhaa Khudag and Khushuut – both of them in much more remote regions than where Salkhit is located. The Leighton contract covers 17km of new road, a substation and switchyard, and the cabling to connect the power export infrastructure to the turbines.

Closing the first limited recourse financing in Mongolia required the lenders to spend time getting to grips with the country’s underlying legal framework. Companies with foreign ownership exceeding 25% cannot pledge immovable property such as land to lenders, and the next best option – land use rights – cannot be pledged as security.

Clearing up these issues will have helped hugely in the structuring of future power financings in Mongolia. But lenders on forthcoming deals will not be as relaxed about the security and offtake package on offer as the development finance institutions on Salkhit.

The coal-fired CHP5 project, on which Newcom is also a sponsor, will be the most obvious source of a push towards greater clarity, because the 415MW CHP5 will require an upfront investment orders of magnitude greater than Salkhit, and is being procured as a PPP, with the Asian Development Bank advising the sponsor. GDF-Suez owns 30% of the winning consortium, and Sojitz and POSCO each owning another 30%.

The prospect of Korean and Japanese export credit agency support means that Mongolia may be willing to offer more robust support than it had to on Salkhit. The Salkhit plant, at 50MW, will meet a respectable 5% of the country’s generating fleet, but CHP5 will be equivalent to more than 30%. If Mongolia is to make good on the 2008 law’s promise of renewables accounting for 20-25% of demand by 2020, then it will need to make its independent power framework as lender-friendly as it can.

There is another option for renewables developers in Mongolia, however. Official Mongolian policy is for the country’s economy to avoid becoming more dependent on its neighbour China, and studies are underway for export infrastructure that might give its resources producers more export options. But wind farm developers could take advantage of Chinese power demand to export power across the border. Newcom, for instance, is examining sites further south in the Gobi desert region for projects that might profitably sell their output to Chinese buyers. 

Clean Energy LLC
STATUS
Signed March 2012,
closed 17 July 2012
SIZE
$122 million
DESCRIPTION
49.6MW wind farm located in Salkhit Uul, Mongolia
SPONSORS
Newcom (51%), GE Pacific Private (21.5%) EBRD (13.75%), FMO (13.75%)
DEBT
$85 million 15-year loan
TURBINE SUPPLIER
GE
BALANCE OF PLANT CONTRACTOR
Leighton
PROVIDERS
The European Bank for Reconstruction and Development, FMO
SPONSOR TECHNICAL ADVISER
Sgurr
LENDERS’ TECHNICAL, MARKET AND ENVIRONMENTAL ADVISER
Mott MacDonald
SPONSORS’ INSURANCE ADVISER
Marsh
LENDERS’ INSURANCE ADVISER
Willis
SPONSORS’ ENVIRONMENTAL ADVISER
Black & Veatch
LENDERS’ LEGAL COUNSEL
Norton Rose; GTS (local)
GE LEGAL COUNSEL
Hogan Lovells