Shuren Hydro-Electric Station

Development Project

Mongolia is expected to enjoy high levels of sustained economic growth over the coming decade due to its rapidly developing mining sector. The rising demand for new sources of energy heavily outweighs current supply, creating the need for a reliable and sustainable domestic energy supply. Mongolia has a hydropower potential of 56000 GWh per year but has only harnessed one percent (75 GWh) of this potential. This obvious void has created the possibility for a high impact investment with considerable growth potential.

After the recent success of a hydroelectric pilot project, the Mongolian Government has given highest priority status to the development of a large-scale hydropower facility on Mongolia's largest river, the Selenge. The proposed project will provide solutions to a long list of socioeconomic and environmental issues by satisfying long-term peak load demand, reducing hazardous pollution levels, reducing dependence on high cost Russian energy imports and creating energy security and independence.

The ongoing development of large scale mining projects over the next decade will create enormous demand for electricity, which cannot be met by existing supply. Mongolia currently imports high cost energy from Russia to cover its peak capacity consumption, a dependence that will only increase with the growth in mining. Currently, Mongolia's energy sector consists almost exclusively of coal-fired thermal power plants, which have contributed to high levels of air pollution in the capital city of Ulaanbaatar and created a potential health risk for over 1 million people, effectively one third of Mongolia's population. Desertification due to climate change poses another considerable risk, with local warming reaching 2.0 degrees, 3 times the global average. It is therefore imperative that Mongolia develop a secure and sustainable mix of domestic energy sources to cover rising demand, reduce air pollution and carbon emissions and reduce dependence on Russia.

The Shuren Hydropower project represents a near perfect solution to Mongolia's energy needs and will be a major step towards sustainable socieconomic development. The project will reduce greenhouse gas emissions by 700,000 tons per year and generate energy that is infinitely renewable, clean and domestically supplied. In addition, the the facility will provide water storage, energy storage and flood and drought mitigation. DBM has been entrusted with the responsibility of financing the project and is currently reaching out to investors.

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Leverage and risk

Someone in the office asked me about leverage in reference to the global financial crisis and how governments can induce commercial banks to lend money.  So I did a little bit of research about it.

Leverage is a general financial term that refers to a variety of ways to multiply profits.  For most cases this means borrowing.  Leverage also means multiplying risk.  So say you have enough money to buy one cow for 400,000 tugriks.  Instead of buying one, you decide to borrow 3,600,000 tugriks from your bank and buy ten.  Now you can make ten times more milk from your cows.  At the same time, you become vulnerable to ten times more risk... if the winter is very cold, which is very possible in Mongolia, then you could lose all ten cows.  You could be left with no cows, no money and you owe the bank 3,600,000 tugriks.  

Now consider the financial crisis.  During the boom years banks used mortgage backed securities to leverage their profits.  But they undervalued risk and did not maintain enough equity capital to act as a buffer in the event of a crisis in the market.  In fact, instead of keeping significant amounts of capital they bought insurance to cover the possibility of large scale defaults.  When the housing crisis hit, insurance companies like AIG were not able to cover the large volume of filings from the banks.  Many banks did not have enough capital to survive and either failed or needed large scale bailouts to stay afloat.  Now that the crisis is over banks are choosing to grow their capital reserves instead of lend out money.  They now have to factor in the possibility of a financial crisis in their spread sheets.  The government has tried to induce lending using quantitative easing (this is the process of lowing interest rates in order to allow banks to barrow cheaply from the government)  but banks continue to be reluctant to take advantage of the low interest rates and leverage their profits.