The government, Rio Tinto and Turquoise Hill Resources have struck a long-term power supply deal, which would give Mongolia more influence over the multibillion-dollar copper-gold megaproject Oyu Tolgoi.

Rio Tinto said on Monday that the agreement on the preferred domestic power solution for the 6.8 billion USD Oyu Tolgoi project “paves the way for the government to fund and construct a state owned power plant at Tavan Tolgoi.”

Rio’s Chief Executive of Copper and Diamonds Arnaud Soirat said, “This agreement provides a potential pathway to securing a domestic power supply for the Oyu Tolgoi mine and underground project for the benefit of all shareholders and the wider community. We look forward to working with the government of Mongolia to progress the solution.”

Simply put, Rio and Turquoise Hill are forbearing the construction cost of the coal-fired power plant, which is estimated to cost nearly 1 billion USD. The government currently owns 34 percent of Oyu Tolgoi project, which is Mongolia’s biggest source of foreign direct investment. On the other hand, Rio’s majority-owned Turquoise Hill holds 66 percent stake, though Rio manages the mining operations.

In 2018, the government reached an agreement with Oyu Tolgoi LLC for the construction of the Tavan Tolgoi-based power solution for the Oyu Tolgoi copper-gold mine by June 30, 2023. Earlier this year in February, Turquoise Hill submitted a Tavan Tolgoi Power Plant (TTPP) feasibility study, based on a 300 MW coal-fired power plant to be located approximately 150 kilometers from the Oyu Tolgoi mine in Tsogttsetsii soum of Umnugovi Province, with a total project cost estimate of up to 924 million USD. This proposal shocked the government, as the cost was much higher than expected.

Back then, Minister of Energy Ts.Davaasuren noted, “TTPP project with development cost two to three times higher than world market prices is financially impossible to be realized.” He warned that the date of first dividend distribution from Oyu Tolgoi project could be pushed back due to the high cost of the power plant.

This led to the sides revising the 2018 Power Source Framework Agreement (PSFA). Now, the three parties will work toward finalizing a power purchase agreement by the end of March 2021. The amended PSFA also proposed timetable for development, with construction of the TTPP set to begin no later than July 1, 2021 and commissioning within four years thereafter.

Once built, the long-awaited TTPP is anticipated to bring a number of advantages, including ensuring reliable domestic power source for the mining industry based in southern Mongolia and boosting the economic yielded of the Oyu Tolgoi project by saving coal transportation costs.

Until the commissioning of the state-owned plant, Rio will continue to source power for the surface mine and underground project from China.

“Oyu Tolgoi currently uses imported power and both the government of Mongolia and Oyu Tolgoi have committed to extending the current arrangement to ensure continued stable power is supplied to the mine and underground project until the state owned power plant is commissioned and is able to supply stable, reliable and continuous power,” Rio said in a statement.

At full production, Oyu Tolgoi is projected to produce 95,000 tons of ore on a daily basis, tripling its current annual copper concentrate production rate.