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Bangladesh must plan for the energy transition to renewables

May 24, 2021
Simon Nicholas
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Key Findings

The Bangladesh government’s new 8th Five Year Plan (8FYP) shows the government now has an increased focus on renewable energy, energy efficiency and the financial sustainability of the power system.

Bangladesh's 8th Five Year Plan clearly acknowledges many of the major issues impacting Bangladesh’s fossil fuel-based power system – and solutions to fix them - which should inform the government’s new Integrated Energy and Power Master Plan now under development.

JICA must deliver a low- or zero-emissions plan as promised, not fund Matarbari 2 coal plant.

Executive Summary

The Bangladesh government’s new 8th Five Year Plan (8FYP) provides strong evidence that the government has changed its thinking on power development since 2016.

From a reliance on coal and LNG which have put an unsustainable financial strain on the power system, the Plan shows the government now has an increased focus on renewable energy, energy efficiency and the financial sustainability of the power system.

The 8FYP clearly acknowledges many of the major issues impacting Bangladesh’s fossil fuel-based power system – and solutions to fix them.

These identified solutions should inform the government’s new Integrated Energy and Power Master Plan (IEPMP) that is now under development, which will drive energy development for decades. It would make no sense if the 8FYP and the IEPMP were not aligned.

The 8FYP clearly acknowledges many of the major issues impacting the power system – and solutions to fix them

The Japan International Cooperation Agency (JICA) funded the IEPMP’s predecessor – the 2016 Power System Master Plan (PSMP 2016), a plan which called for a major roll-out of power stations to be fuelled by imported coal and LNG. Unsurprisingly, coal- and LNG-fired power generation were technologies that Japanese companies were keen to sell to developing Asian nations like Bangladesh.

Indeed, JICA itself financed the Matarbari 1 coal-fired power plant which is currently under construction by Japanese company Sumitomo Corporation. JICA is also considering financing a second coal power plant in Bangladesh – Matarbari 2 – despite Matarbari 1 reportedly being three-and-a-half years over-schedule and almost 50% over-budget.

In March 2021, JICA signed a Record of Discussions with the Bangladesh government for the development of the new IEPMP.

In its announcement of the signing of the Record of Discussions for the IEPMP, JICA talks of a “transformation to a low or zero carbon energy system”, noting that its work will contribute to two of the 17 Sustainable Development Goals established by the United Nations General Assembly in 2015 - Sustainable Development Goal 7 (Affordable and Clean Energy) and 13 (Climate Action).

This change in tone from JICA gives rise to an expectation that the Matarbari 2 coal power proposal will not be funded by JICA.

Bangladesh’s 8FYP gives insight into what the high level content of the new IEPMP should be:

“the Power Sector Master Plan 2016 (PSMP) will be updated and power expansion programmes will be based on updated demand projections, better use of existing capacity and selection of least-cost options for new generation.”

Furthermore, a key theme for the 8FYP is:

“increased focus on energy efficiency gain, renewable energy and financial sustainability”.

The 8FYP clearly acknowledges Bangladesh’s power overcapacity problem as well as solutions to address it. The Plan also notes that a future in which Bangladesh becomes more reliant on imported coal and LNG risks seeing the cost of electricity rise even further, highlighting the price volatility risk that comes with LNG reliance.

The major LNG price spike in January 2021 ought to be a warning

The major LNG price spike in January 2021 ought to be a warning for any nation planning to become more reliant on LNG. Japan – which is highly dependent on imported LNG – saw its electricity prices surge to record levels in January 2021 as LNG prices rose dramatically.

Significantly, the 8FYP acknowledges that the issues of overcapacity and the rising capacity payments that accompany it, as well as a rise in reliance on expensive fossil fuel imports jeopardise the financial sustainability of the power system.

The 8FYP has also identified that continued subsidisation of fossil fuels has contributed to Bangladesh not meeting its previous renewable energy targets. This means Bangladesh has not been able to capitalise on the ever-lower global cost of solar and wind power which can help Bangladesh reduce the average cost of power generation, improving the financial sustainability of the power system.

What Should Be Expected From the Integrated Energy and Power Master Plan

The 8FYP has insightfully identified the major issues faced by Bangladesh’s power system.

The fact that the new IEPMP ought to be aligned to the 8FYP and that JICA has committed to planning for a “low or zero carbon energy system”, means that high level expectations for the JICA’s new plan can be listed:

  • Given that the 8FYP has clearly identified power overcapacity as a problem, the new IEPMP must address this by prioritizing grid investments so that better use can be made of existing capacity.
  • To further address overcapacity, the new IEPMP must employ more realistic power demand growth forecasts to prevent the continued over-build of new power capacity.
  • The 8FYP has clearly targeted a least-cost power generation system. This means that the new IEPMP must abandon the expensive pipeline of coal-fired power plants that are yet to begin construction. This would also help address the overcapacity problem by limiting further additions of large power plants. It should be expected that JICA will not provide funding for the Matarbari 2 coal power proposal, and that this project will be amongst those cancelled.
  • Furthermore, a least-cost power system cannot be achieved by replacing coal power proposals with LNG-fired power. To be aligned with the 8FYP, the new power plan must not include increased emphasis on LNG-fired power. Given the full life cycle emissions of LNG are comparable to that of coal, JICA cannot contribute to “a transformation to low or zero carbon energy system through formulating a comprehensive, long-term energy plan” if that plan calls for increased import and combustion of LNG.
  • The 8FYP has clearly identified energy efficiency gains as a key goal. Energy efficiency can help limit the amount of new power capacity needed to meet demand growth, meaning low-cost renewable energy can fulfil a greater proportion of that growth. Fortunately, Japan is an energy efficiency world leader and well placed to help Bangladesh planned for increased efficiency as well as being able to provide many of the efficient products that can achieve it.
  • A least-cost power system needs to embrace the plunging cost of renewable energy. A significant scaling up of renewable energy ambition would see Bangladesh enjoy the rapid decline of solar power tariffs seen in globally.
  • In addition to solar, wind power potential should not be neglected by the IEPMP, particularly given that the most recent technology can utilise wind resources considered unexploitable several years ago. The potential for offshore wind also needs to be considered by the JICA.
  • The long-term outlook of the IEPMP means that plans should be put in place for the roll out of power storage technologies like batteries that can store renewable energy in the future.

Press release: New power and energy master plan must be designed in Bangladesh’s best interests, not Japan’s


 

Simon Nicholas

Simon Nicholas is IEEFA’s Lead Energy Finance Analyst for Bangladesh, Pakistan and the global steel sector as well as Asian seaborne thermal and coking coal markets.

Simon’s focus is on the energy transition, the long-term outlooks for coal and steel as well as the need for emerging nations to establish financially sustainable power systems to support their development.

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