BACKGROUND

1.1. General overview of Mongolian electric power system

The electric power system in Mongolia consists of three independent electric power systems: the Central Energy System (CES), the Western Energy System (WES), and the Eastern Energy System (EES). In 2001 the Government of Mongolia (GoM) has taken major steps toward restructuring the energy sector by passing the 2001 Energy Law, establishing the Energy Regulatory Authority (ERA) and establishing a set of rules and regulations to promote private sector investments in the energy sector. The GoM has created 18 Joint Stock Companies (JSC) including generation, transmission and distribution entities and National Dispatch Center or NDC, which together comprise the energy sector.

The share entitlements of these companies (except NDC) were distributed as follows:

41% - to the Ministry of Infrastructure

39% - to the State Property Committee

20% - to the Ministry of Finance and Economy.

The NDC is responsible for dispatch of the CES transmission network. It was created as a LLC and its shares were distributed to the Ministry of Infrastructure (51%) and to the State Property Committee (49%).

The main Mongolian electric system is operated by the Central Energy System (CES) which represents 80% of all Mongolia electricity supply. The CES power supply is comprised of five coal burning generating plants and interconnection to UES of Russia. The other two networks – EES and WES are quite small. WES operates on imports of electricity from Russia, EES has one CHP with installed nameplate capacity of 36 MW, of which only 7 MW is available.

For the purposes of evaluation of market model in Mongolia the focus is on the CES system and its entities. Total installed nameplate capacity of CES is 753 Mw of which only 633 Mw are available. There is also a contract with Inter RAO of Russia to supply up to 160 Mw of capacity through a double circuit 220 KV line, normally operating at 110 KV level. The contract is in effect through December 31, 2007. There is also a contract with Inter RAO for the export of power. The export is utilized to transfer excess power caused by heat demand during the off-peak electricity demand hours. Since the contractual price for exported power is very low, the export is in effect used to dump power.

1.2. Adequacy of generating resources to maintain reliability and quality of power

supply

The existing capacity of CHP plants is generally sufficient from the point of view of installed capacity requirements of the power system with the annual peak of the order of 550 MW, which occurred this season in December 2005. However the power plants’ equipment is in most part very aged, the youngest plant – Ulaanbaatar CHP 4 commenced its operation in 1981 and is the only plant capable of participating in frequency regulation, perform load following and to provide limited operating reserve. There currently is no capability to regulate system frequency and to withstand contingencies without reliance on the interconnection with Russia.

1.3. Transmission System and NDC

The CES transmission system interconnects three main load centers - Ulaanbaatar, Darkhan and Erdenet and the power plants in these cities by a 220 KV transmission line ring.