Budgetary push for clean energy and energy security in Bangladesh

Bangladesh’s drive to fulfil energy demand, riding on quick-fix strategies and mostly relying on imports, helped in the short run but exacerbated its poor financial health. While fixing the problems will require long-term efforts, the upcoming national budget, to be unveiled in June 2024, will likely provide the country with an opportunity to address some of the key challenges of the energy and power sectors by outlining plans and making necessary financial allocations.

The forthcoming national budget could create a renewable energy fund to further stimulate the renewable energy sector’s progress, which has seen increased interest on the back of high energy prices and energy security concerns. Additionally, the budget may allocate more to the energy sector, which historically receives much less than the power sector, to explore domestic gas resources and, thus, reduce reliance on imported liquefied natural gas (LNG).

Creating a renewable energy fund

With fiscal challenges eroding the country’s capacity to clear full payments against imported fossil fuels and electricity produced by private power producers in the last one or two years, investment in clean energy is taking centre stage. Other factors, such as high and volatile fossil fuel prices and concerns about energy security, tempted the government to sign contracts with private investors for renewable energy projects of several thousand megawatts (MW) capacity in the last two years.

However, the experience points to a gloomy picture. Although new renewable energy projects have come online in the last two years, the pace and scale seem slow and inadequate.

Difficulty arranging expensive land, where ownership is fragmented, limits the country’s accelerated deployment of renewable energy. Furthermore, the private project developers shoulder the cost of long transmission lines, increasing the overall project cost.

Against these backdrops, the Bangladesh government may create a dedicated fund to turbo-charge the renewable energy sector amid the country’s heightened exposure to the international fossil fuel market. Allocating through the fiscal year (FY) 2024-25 budget, the government may aim to support at least three areas of renewable energy. It may cover the transmission costs of selected renewable energy projects. Likewise, it may allocate land to some renewable energy projects. The renewable energy fund may support the land acquisition cost. Shouldering such costs, the government may introduce reverse auctions in carefully selected projects to reduce tariffs. The government can further utilise the fund to pilot renewable energy projects with battery energy storage systems.

Bangladesh can take inspiration from its support for private-public-partnership (PPP) projects to create such a fund. Notably, it allocated Bangladeshi Taka (TK)25 billion (US$227.5 million) to PPP projects in FY2009-10 to bridge the infrastructure investment gap. This fund included PPP technical assistance worth Tk1 billion (US$9.1 million), a viability gap funding of Tk3 billion (US$27.3 million) and an Infrastructure Investment Fund of Tk21 Billion (US$191.1 million).

A similar bold and landmark ambition, if translated through a budgetary allocation for renewable energy, will likely help transform the country’s energy sector while containing costs and improving grid reliability.

Innovation in upcoming Annual Development Plan

The Annual Development Plan (ADP) 2023-24 already considered that nine renewable energy projects planned within its framework were inadequate. Therefore, the ADP, in the upcoming fiscal year, may strategically take up more renewable energy projects. This will be pragmatic as some of the power plants commissioned in the last one year or so do not receive sufficient gas to operate at a minimum capacity. Due to fuel shortages, some public sector power plants operate at very low capacities.

As new nuclear facilities will likely be online during FY2024-25, Bangladesh will have significant baseload capacity. Based on allocation in the forthcoming national budget, the ADP may turn the tide towards renewable energy.

Allocating more fund to the energy sector

Bangladesh continues to allocate more of its budget to the power sector instead of the energy sector. For instance, the Power Division, which takes care of the power sector’s development, received around 90% of the total budget allocated for Energy and Power Divisions from FY2017-18 to FY2022-23 (see Figure 1). Notably, it received a massive 97.1% of the allocated Tk348.2 billion (US$3.17 billion) in FY2023-24, leaving the Energy Division with a paltry Tk9.9 billion (US$89.5 million).

Source: Budget Speech (Archive), Finance Division, Ministry of Finance; IEEFA Analysis.

While a decade ago, Bangladesh’s lagging power system capacity influenced massive investment outlays in power infrastructures, the need and outlook now appear quite different. Allocations of hefty budgets to the power sector on a yearly basis have already thrown up several challenges for the energy sector, which has become increasingly import-dependent.

The national budget may consider allocating more funds to the Energy Division to strengthen Bangladesh Petroleum and Exploration Company (BAPEX) to enhance the company’s ongoing onshore gas exploration efforts and limit the growing reliance on imported LNG.

Rationalising duties on electric vehicles and renewable energy

Following approval of the budget of FY2023-24, any individual willing to buy a second personal transport, be it an electric vehicle (EV) or an internal combustion engine (ICE)-based, needs to pay an environmental surcharge, ranging from Tk25,000 (US$228) to Tk350,000 (US$3,187). As EVs are environment-friendly and people and interested buyers may already have an ICE car, the government should waive this environmental surcharge on EVs.

Furthermore, total tax incidences on EVs at the import stage are 89.2%, including a supplementary duty of 20%. Such supplementary duty is also applicable to hybrid cars. As the government envisages reducing 3.39 million tonnes of carbon dioxide (CO2) emissions from the transport sector by 2030, such high import duties on EVs will limit the country’s ambition. Instead, the government may increase the duties for second ICE cars and channel part of the revenue to build charging stations for electric and hybrid vehicles.

Additionally, rooftop solar accessories are subject to import duties ranging from 11.2% to 58.6%. As rooftop solar can help generate clean energy without affecting land, the government may revisit the tax structure and bring it down to give a major boost to the rooftop solar sector.

The current situation is a reality that reinforces the urgency of frontloading efforts for renewables, creating a conducive ecosystem for EVs and reducing demand growth in imported fuels like LNG. By creating a renewable energy fund and increasing budgetary allocation to the Energy Division, the upcoming budget may help attract more private capital most effectively and efficiently and improve Bangladesh’s overall energy security.

This article was first published in The Daily Star.