Bangladesh is facing a double whammy: on the one hand, climate change-induced events continue to devastate the country; 6-7% of annual budget Bangladesh is working year after year to adapt to climate change. At the same time, the country must transition to capital-intensive clean energy as its reliance on fossil fuels increases costs and inflation. These competing priorities mean that Bangladesh will need to continue to invest in critical climate-resilient infrastructure and clean energy technologies for decades to come.
To achieve these goals, it is important for Bangladesh to streamline its financing schemes and identify viable sources of funding.
Drivers of the clean energy transition
Cyclone Remal, which hit Bangladesh in May 2024, 3.8 million people died and 150,000 homes were damagedThis is not a one-off event: Bangladesh is prone to cyclones of similar magnitude or larger, and such extreme events are likely to become more frequent in the future. As a result, the country will need more funding to adapt to climate change.
There are several reasons why Bangladesh should invest in clean energy. Dependence on imported fossil fuels is proving costly for Bangladesh. In addition to the volatile price of fossil fuels in the international market in 2022-23, recent Bangladeshi Taka (Tk) is 7 Taka per US Dollar The oil price surge in May 2024 has increased the cost of importing fossil fuels. As a result, Bangladesh Petroleum Corporation (BPC) has increased its import costs by approximately 5 billion taka (US$42.3 million) is scheduled to import fuel oil in May 2024. BPC’s annual costs could increase by Tk60 billion (US$510 million), enough to install a total of more than 0.5 gigawatts (GW) of rooftop solar power.
Imports of fossil fuels such as liquefied natural gas and coal are also now expensive, so the government will feel pressured to raise electricity and gas tariffs.
However, raising tariffs will not eliminate the subsidy burden. Taka 395.35 billion (US$ 3.34 billion) From the 2022-23 school year Taka 296.58 billion (US$ 2.51 billion) In the 2021-22 school year Electricity rates to increase by 15% from January to March 2023.
Bangladesh needs to invest more in renewable energy and energy efficiency to reduce fossil fuel imports and reverse the trend of rising subsidy burdens.
Energy transition will require billions of dollars in funding
According to the Integrated Energy and Power Master Plan (IEPMP 2023), Bangladesh will have a total of 37.8GW New renewable energy (mainly solar and wind) capacity by 2050 based on the Advanced Technology Scenario (ATS) (which adopts an intermediate growth scenario that takes into account the average of the growth rates projected in the country’s future plans and International Monetary Fund estimates). The IEPMP estimates that a total renewable energy capacity of 37.8 GW without energy storage systems will occur in Bangladesh. $37.4 billion.
However, the renewable energy capacity 26.2GW In 2050, in the intermediate growth case excluding ATS, the country 17% By 2050, renewable energy is expected to be less than 20GW, suggesting that installed renewable energy capacity will be less than 20GW.
IEEFA estimates that just installing 20 GW of renewable energy capacity, with 30% of that capacity in battery storage for four hours of backup, could require investments of around $1 billion per year by 2050.
Financing the energy transition
Bangladesh needs to set up a fit-for-purpose mission to put finance at the core and lead an effective energy transition, not just due to inadequate financing schemes but also due to challenges posed by the country’s current banking and finance framework.
For example, Bangladesh Bank Taka 4 billion (US$33.84 million) The amount of investment in environmentally friendly projects has recently 10 billion taka (US$84.6 million), However, the upper limit for financing solar power plants is Taka 300 million (US$ 2.54 million)Lending amounts are insufficient compared to the amount of capital needed, even for a 10-megawatt (MW) solar project.
Bangladesh should explore available financing avenues such as multilateral development banks (MDBs), green bonds, private equity funds, investment promotion and lending facilities to accelerate its energy transition.
- Infrastructure Development Company Limited, a non-banking financial institution (NBFI), is financing public-scale clean energy projects in Bangladesh with funding from multilateral and bilateral agencies. Similarly, Bangladesh Infrastructure Finance Fund Limited, another NBFI, can provide debt financing for clean energy projects. However, other local financial institutions also need to develop their capacity to access low-cost financing offered by MDBs. As the country largely imports clean energy technologies, financing in US dollars is paramount for smooth opening of letters of credit (LCs) for projects.
- Bangladesh Bank is policy It aims to have banks and financial institutions issue green bonds in 2022. Green bonds can help accelerate Bangladesh’s clean energy transition by raising funds for capital-intensive clean energy projects. Institutional investors have a big role to play as large renewable energy projects can require hundreds of millions of dollars in funding. Encouraging private investors in green bonds is essential if the government’s savings vehicle is to yield big returns.
- Renewable energy projects are often delayed due to a lack of capital among sponsors. Private equity firms with an environmental, social and governance (ESG) focus are likely to invest in renewable energy projects. These firms are still in their infancy in Bangladesh.
- The Bangladesh Bank Investment Promotion and Financing Facility, supported by the World Bank, has helped develop infrastructure projects in the country. Though the financing phase has ended, the start of a new phase could accelerate the energy transition. The scheme will be fit for purpose as the funds will be disbursed in dollars over a 20-year tenor.
Early preparation and capacity building of local financial institutions to identify and access finance are key to driving an effective and sustainable energy transition. The situation calls for a bold response to define a path forward that does not undermine the country’s needs in both climate adaptation and energy transition.
(This article was first Daily Star)
