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For security and affordability, Bangladesh must shore up renewable energy

November 18, 2022
Shafiqul Alam

Key Findings

Easing lending norms for coal-based power plants might dent Bangladesh’s recent strides towards a clean energy transition.

With the risk of coal projects being stranded assets in the coming years, Bangladesh must not invest in new coal-based plants other than those nearing completion.

Increasing renewable energy capacity would address some of the sector's challenges and enhance energy security and affordability in Bangladesh.

Bangladesh Bank, the country’s central bank, recently withdrew the lending cap for coal-based power plants. The move aims to facilitate purchasing of coal needed to operate new coal power plants of 6,754 megawatts (MW) capacity that would come online within a few years. However, as the decision allows the banks to lend beyond their 25% cap to a single borrower, it may encourage the private sector to bring forward proposals to build more coal power plants in the future.

Easing lending norms for coal-based power plants might dent the country’s recent strides towards a clean energy transition.

Easing lending norms for coal-based power plants might dent the country’s recent strides towards a clean energy transition. In June 2021, amid uncertainty over international funding for new coal-fired plants and environmental concerns, Bangladesh scrapped 10 coal-based power plants from the pipeline. The declaration of shoring up renewable energy capacity to 40% by 2041, as part of the Mujib Climate Prosperity Plan, reinforced the government’s commitment to clean energy.

Fossil-fuel-based electricity generation has already thrown up several challenges for the power sector. Instead, increasing renewable energy capacity would address some of the sector's challenges and enhance energy security and affordability in Bangladesh.

Challenges of the Power Sector

One of the key challenges that the country’s power sector is grappling with is overcapacity.

In 2022, the Bangladesh government announced 100% electricity access in the country following its commendable efforts in ramping up installed power generation capacity five-fold. However, while installed capacity has increased considerably, power demand has not been able to keep pace.

Against the installed capacity of 22,512MW, excluding off-grid solar and captive systems, the highest demand served by the national grid was 14,792MW on 16 April 2022. A study by the Institute of Energy Economics and Financial Analysis (IEEFA) based on Bangladesh Power Development Board (BPDB) data substantiated that the country only utilised 40% of the power capacity during 2019-20.

A closer inspection of BPDB data from 1 to 7 November 2022 shows that the highest demands for electricity during morning and evening peaks were 10,385MW and 11,116MW, respectively. During mid-May 2022, the evening peak demand for electricity was close to 14,000MW against the morning peak of around 11,500MW. Therefore, the country’s power system has a good amount of surplus capacity.

With no sign of a dramatic rise in power demand in the country, surplus power capacity will only rise once the planned 6,754MW of coal-fired plants come online over the next few years.

The other key challenge for the sector is rising costs. A recent report shows that the average cost of per unit electricity generation has soared to Bangladesh Taka (Tk) 10 (~US$0.095) in 2022 compared to Tk6.81 (~US$0.065) during fiscal year (FY) 2020-21. The steep rise in the average cost of electricity production is mainly because of the high cost of imported diesel, furnace oil and Liquefied Natural Gas (LNG). Notably, a fresh price hike for electricity and gas is imminent amid the fiscal strains on the power sector.

With more coal-fired capacity coming online, concerns remain about the price and affordability of the fuel

With more coal-fired capacity coming online, concerns remain about the price and affordability of the fuel. Reportedly, the Asian coal price per tonne hit US$457.8 in September 2022, which is 3.5x the effective coal price of US$130/tonne, as considered in the BPDB annual report for FY2020-21.

While the price of coal is falling, it still hovers around USD325 per tonne. With 4.12 million tonnes of coal consumed annually in the operational 1,320 MW Payra power plant alone, the demand for imported coal will shoot up by an additional 20 million tonnes once the new coal-fired plants come online. This would affect the energy security of the country.

Overall, the challenges the power sector experiences today emanate from the increasing focus on imported fossil fuels-based development alongside the quest for power sector security instead of energy security. The addition of power generation capacity, irrespective of rational assessment of demand, continues to result in a high level of surplus capacity. 

Energy Security and Sustainability will be Key

Bangladesh could increase the share of renewable energy to serve the part of the morning peak demand and/or reduce fossil fuel usage during the day to minimise the average cost of electricity.

Rough estimates show that the levelised costs of energy from rooftop solar and utility-scale solar are Tk5.5 (~US$0.052) and Tk7.6 (~US$0.072), respectively, against the BPDB’s current average electricity generation cost of Tk10 (~US$0.095). Moreover, the Power Cell analysis of last year substantiated that the cost per unit of electricity generation at the Payra plant using imported coal would be Tk7.78 (~US$0.074). The elevated price of coal in the international market suggests that electricity from Payra coal-fired plant would be costlier than the rate calculated last year.

According to Infrastructure Development Company Ltd. (IDCOL), industrial rooftops of the country could accommodate 5,000MW of solar systems. Since net metering guidelines are already in place, industries could take advantage of cost-competitive renewable energy and reduce their average energy cost to remain competitive. In light of the seeming land scarcity, a thorough land resource assessment of the country could help identify the areas for utility-scale renewable energy projects. Finally, the country has planned for some 97 special economic zones, which could be a good fit for renewable energy projects.

Restrict Future Capital Investment in New Coal-Fired Projects

With the risk of coal projects being stranded assets in the coming years, Bangladesh must not invest in new coal plants other than those nearing completion. Therefore, while Bangladesh Bank has removed the lending cap for coal-fired projects, banks should refrain from financing new coal power plants.

As fiscal pressures mount due to decreasing foreign currency reserves, cost-competitive renewable energy options, like rooftop solar and utility-scale solar, are better suited to shore up capacity in the national grid. This would help meet the goals of enhancing energy security and affordability. In addition, it would help relieve fiscal burdens on the energy and power sectors. Moreover, surplus capacity in the sector would allow flexibility in operation with the increasing share of renewable energy.  

 

This analysis first appeared in The Daily Star

Shafiqul Alam

Shafiqul Alam is IEEFA’s Energy Finance Analyst for Bangladesh. He has more than a decade of experience in the energy and climate change sectors. His interests primarily center on renewable energy, energy efficiency, climate finance, and policy instruments to spearhead the clean energy transition.

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