Renewing Bangladesh’s energy transition

Originally posted in East Asia Forum on 19 March 2023

The Boston Consulting Group predicted that Bangladesh’s economy will reach US$1 trillion by 2040. The World Bank also lauded Bangladesh’s strong track record of growth and development and the country is among the top three readymade garments exporters in the world.

But despite these encouraging statistics, the country is struggling to pay its energy bills due to a dollar crisis, high capacity charges for power and increasing power generation costs. As a result, frequent power cuts are back.

Three key challenges plaguing Bangladesh’s energy sector are overcapacity, growing power generation prices and fuel shortages. The installed capacity of power plants far exceeds the actual demand for power in the country. This overcapacity issue arose from the government’s commissioning and approval of new power plants based on ambitious growth projections without assessing the actual need. Overall utilisation of the power system plummeted to a mere 40 per cent in the 2019–20 financial year.

Bangladesh’s heavy reliance on imported fuel, following the depletion of its natural gas reserves, has exacerbated the overcapacity problem. Instead of prioritising renewable energy sources, the country has turned to other fossil fuels such as coal, oil and liquefied natural gas (LNG). This import reliance became even more problematic since measures taken by the US Federal Reserve System led to a dollar crisis in 2022.

The sudden devaluation of the Bangladeshi taka impacted the remittance flow which created difficulties in paying for imported fuel. The Russia–Ukraine war has also created volatility in the global fossil fuel market, increasing prices significantly. These factors have resulted in fuel shortages and the cessation of major power plants’ operations, further burdening struggling taxpayers with capacity charges.

The combination of overcapacity and a reliance on imported energy has led to a significant rise in power generation costs, with the cost of electricity production per unit increasing by 33 per cent in 2021–22. This trend is likely to continue, pushing power tariffs and energy subsidies even higher. These challenges will persist as long as Bangladesh continues to depend on imported fuel, highlighting the urgent need for a renewable energy transition.

Despite early efforts to promote renewable energy in the 2010s, Bangladesh has fallen short of its goals. The government aimed to generate 5 per cent of its electricity from renewables by 2015 and 10 per cent by 2020. But as of June 2023, this share is less than 5 per cent. The government has now set new targets, aiming to produce 15 per cent of electricity from renewables by 2030, 40 per cent by 2041 and 100 per cent by 2050.

But the prospects of reaching these targets appear bleak. If all the ongoing projects detailed in the Bangladesh Power Development Board’s 2022 Annual Report are completed, Bangladesh’s renewable energy installed capacity will only reach 7 per cent by 2027.

To significantly reduce overcapacity and achieve the goal of producing 40 per cent of electricity from renewable sources by 2041, Bangladesh would need to install around 20,000 MW of renewable energy-based power generation systems from 2028 to 2041. This colossal task requires substantial annual investments of US$1.71 billion from 2024 to 2041, excluding the cost of energy storage and grid modernisation.

Yet weak financial institutions, negative balance of payments and downgraded credit ratings due to economic mismanagement may hinder Bangladesh’s ability to mobilise the necessary investments for renewable energy. Corruption and imperfect competition resulting from collusive contracting might also discourage foreign investments in the power sector.

Considering the rising power generation costs and possible disruptions due to global conflicts, experts have suggested policies to increase the share of renewable energy in the energy mix. In May 2023, Bangladesh borrowed US$1.4 billion from the International Islamic Trade Finance Corporation to pay the July 2023–June 2024 fuel imports and sought an additional US$900 million in July 2023.

This loan is larger than the estimated annual investment of US$1.71 billion that Bangladesh needs to build renewable energy-based power plants. Repurposing the budget in favour of renewables should be considered as a possible solution.

But LNG supply agreements signed in June 2023 with Qatar and Oman suggest that the government is yet to think about a radical shift from fossil fuels to renewable energy. This increased reliance on imports will perpetuate Bangladesh’s energy vulnerability, prolong the dollar crisis and make it more challenging to pay import bills in the coming years.

A study found that the solar power potential of Bangladesh is 50,174 megawatts, which is around 80 per cent of the country’s projected energy demand of 60,000 megawatts in 2041. Producing 80 per cent of electricity from renewable sources can reduce Bangladesh’s reliance on imported fossil fuels and contribute positively to its balance of payments.

Bangladesh needs to prioritise its renewable energy transition to overcome its energy crisis. By reducing overcapacity, decreasing power generation costs and mitigating fuel shortages, renewable energy sources can provide a sustainable and reliable solution. Significant financial investments, improved governance and a policy commitment to renewable energy are essential for Bangladesh to achieve its energy security and sustainability goals.