Duration: October 2022 – June 2023

Client: OXFAM

Sample Size: 30 Semi-structured Questionnaire Survey, 14 KIIs, and 33 IDIs

Responsibilities: Survey Tools Design and Developing ODK.

Contributed to this project while working at Change Initiative

Executive Summary

Climate change is a major threat to human civilization, with two-thirds of global greenhouse gas emissions linked to burning fossil fuels for energy. The Intergovernmental Panel on Climate Change warns that any delay in global action on adaptation and mitigation could lead to missed opportunities for a habitable and sustainable future. Despite contributing less than 1% of global carbon emissions, Bangladesh is one of the most climate-vulnerable countries, and without changes, it would see annual economic costs equivalent to 2% of its GDP by 2050, widening to 9.4% by 2100. The country is currently reliant on fossil fuels for energy with gas being the primary source and with coal accounting for almost 7%. However, solar PV and onshore and offshore wind energy costs have dropped by up to 80% in the last decade, making renewable energy increasingly affordable. The government of Bangladesh has been compelled to cancel ten coal-based power facilities worth $12 billion due to adverse pressure on foreign exchange reserves and economic crises. The government has also spent almost 90 thousand crore BDT to private power companies without taking any electricity, while the Adani coal power plant will cost Bangladesh over Tk 1 lakh crore in capacity charges over the next 25 years, and power from the plant will be 56.2% more expensive than other imported power. Bangladesh is predicted to have an annual mortality of 150,000 and 55 million people impacted by climate change by 2030. Bangladesh’s reliance on imported fossil fuels is not in line with global trends, and renewable energy is essential for energy security and to combat climate change.

Bangladesh has seen a significant increase in greenhouse gas (GHG) emissions, which rose by 59% from 1990 to 2012, with a 2% increase annually. As of 2019, Bangladesh emits around 237.70 million metric tons of carbon dioxide equivalent (CO2e). The government of Bangladesh submitted itsNationally Determined Contribution (NDC) in 2021 to meet the requirements of the Paris Agreement, and set targets to cut GHG emissions by 27.56 million metric tons of CO2e (6.73%) by 2030 in the energy, agriculture, and waste sectors. The government has also aimed to meet 40% of electricity demand from renewable energy sources by 2041. Bangladesh has a potential of 150 GW of utilityscale solar power plants and can install around 2 GW of rooftop solar PV systems on public buildings, railway stations, highways, industrial buildings, schools, colleges, and universities. According to a National Renewable Energy Laboratory (NREL) study, Bangladesh has a wind power gross potential of 30,000 MW, but more detailed feasibility studies are needed to determine the actual potential. China has saved $21 billion in additional coal and gas imports due to investing in solar energy. Bangladesh is expected to begin generating commercial wind power in 2023 and nuclear power by 2025.

Bangladesh needs USD 6 billion in the 15 months from April 2023 to meet the electricity demand, including an electricity import bill of USD 475 million from India this fiscal year and USD 52 million next year. Additionally, the import of furnace oil for IPP and rental power plants will require USD 890 million in the current financial year. However, the installation of 1 MW of solar power on a rooftop costs USD 0.80 million, while an IPP requires close to USD 1.4 million, and installing 1 MW of wind-powered electricity costs USD 3.66 million. If even one-third of the cost paid in imports is redirected to renewable energy, Bangladesh could have 6250 MW of rooftop solar, 3571 MW of solar IPP plant, and 1366 MW of wind power plant. Currently, Bangladesh is also facing issues with the payment of electricity import from India, with Adani electricity providing 760 MW, and the annual cost of importing electricity from India being approximately USD 659 million. PDB plans to take foreign loans to meet the obligation of forced electricity import. This is increase debt burden.

A paper on Bangladesh’s energy mix shows that the demand for energy is on the rise and that renewable energy financing is essential for sustainable energy development. According to a report by the International Trade Administration, Bangladesh’s demand for power will be 50,000 MW in 2041 compared to 8,000 MW in 2015, which will require between USD 37.2 billion to USD 100 billion in investments between 2030 and 2050 to produce 40% of power from renewable energy. A survey conducted in 2017 shows that while 70% of respondents are interested in solar electricity, 64% of them believe that the service provided along with the product makes it difficult to opt for solar, and 55% blame the difficulty on the lack of availability. Despite the positive public perception of solarenergy, social acceptance is a major factor in ensuring the success of renewable energy. The cost per kilowatt-hour of combined cycle electricity with gas available under long-term contracts is currently BDT 14-22, while the cost of fuel is BDT 12, whereas it is possible to get solar power within BDT 10 per kilowatt-hour, and the levelized cost of energy for utility-scale solar PV as of 2021 was USD 54/MWh or BDT 5.67/KWh, making it a more cost-effective option than traditional fossil fuels. However, lobbying from “vested interest groups” is preventing Bangladesh from prioritizing renewable energy over fossil fuels, and a lack of a roadmap for fund access from international sources is also hindering growth in the renewable energy market.

Objectives and Rationale

In light of the above facts, this study intended to a) Identify the current state of renewable energy financing, especially in the context of policies, international treaties and agreements, and short and long-term goals along with an assessment of what has been achieved so far; b) Specify the types of financial instruments and institutions involved in funding renewable energy projects; c) Analyze the risks in RE financing and barriers to enabling environment to investment in renewable energy; d) Suggest possible de-risking mechanisms and way forwards that are conducive to risk-averse financing; and e) In the long-term, to encourage stakeholders to take steps towards de-risking the investment climate for renewable energy. The key rationales of the study are intensification of the dollar drainage and foreign reserve crisis; restriction on imports of capital machineries and fuels due to US$ crises led to frequent power outage and load shedding; escalation of the global energy price; Bangladesh Power Development Board is at risks of bankruptcy as compare to amounts in FY2020 the operating loss has been doubled in FY2021; and Dependency on foreign markets, import rose sharply from 1.5% in 2020 to 20.36% in 2021.

Methodology

The study used a mainly qualitative approach and collected both primary and secondary data to analyze the state of renewable energy financing in Bangladesh. The study used a review of policies, articles, and reports linked to renewable energy and its finance, as well as key informant interviews with a rangeof stakeholders, including academicians, government representatives, multilateral funding entities, private sector representatives, policymakers, renewable energy specialists, finance specialists, and economists. The study also conducted a quantitative analysis based on a survey of thirty private sector representatives, who provided information on the risks and de-risking mechanisms for renewable energy finance in Bangladesh. The survey identified several risks, including power market risk, permits risk, social acceptance risk, hardware risk, developer risk, grid/transmission risk, off-taker credit risk, financing risk, currency risk, and sovereign risk.

Renewable Energy Finance: Demand-Supply Perspective

As of March 2023, Bangladesh has 25,782 MW of installed capacity for electricity generation, but only 3.7% of the capacity is from renewable energy (RE) sources. The country has failed to meet its policy targets for electricity generation from RE sources in 2015 and 2021. The government of Bangladesh has undertaken initiatives to speed up the adoption of RE, but many of these have failed the feasibility test. Linear and non-linear trend analyses show that Bangladesh’s estimated need for net energy generation by 2041 may reach 160,000 GWh. To meet the country’s anticipated electricity consumption, Bangladesh would need 45,000 MW of installed capacity for energy generation, and approximately 18,000 MW of installed capacity from RE sources to fulfill the nation’s pledge at COP26 to produce 40% of its power from renewable sources by 2041. The energy transition in Bangladesh is expected to be based on 85% solar and 15% wind power between 2025 and 2040. The total cost for the next 15 years would be approximately USD 26.5 billion if the energy mix is 15% wind, 30% NMS solar, and 55% IPP solar. Nonetheless, the cost of solar panels has decreased dramatically over the years, and it is anticipated that this trend will continue into the future. The Paris Agreement emphasizes developed countries’ financial assistance to countries that are less endowed and more vulnerable, while grant-based climate finance is crucial to ensure climate justice.

The policy review chapter of this report includes the analysis of various policies related to renewable energy that have affected renewable energy finance. The Renewable Energy Policy of Bangladesh waspublished in 2008 and provided a regulatory guideline for renewable energy in Bangladesh. The policy set the target of 10% of all electricity from renewable sources by 2020. It is being revised, as of March 2023, and the areas of concern in the draft have been expressed in this report. SREDA, despite being the focal agency for renewable energy projects, seem to not be living up to their roles. Quick Enhancement of Electricity and Energy Supply (Special Provision) Act, originally enacted in 2010, is one of the major legal instruments that have enabled the unchecked growth of the fossil fuel industry in Bangladesh. The single-buyer model which was established through the Private Sector Power Generation Policy of Bangladesh has been looked at from a critical point of view. The Net Metering Guidelines document was released in 2018 and it emphasized the importance of rooftop solar as 1 MW of solar takes about 3 acres of land and Bangladesh has a land scarcity issue. In Bangladesh’s NDC commitment as presented in 2021, the set target was 4.1 GW RE by 2030; this is quite ambitious as it is presently 0.5GW.

Moreover, the Mujib Climate Prosperity Plan (MCCP) envisages a renewables roadmap towards energy independence and outlined that Maximized Renewable Energy and Storage Infrastructure includes 30% variable renewable energy by 2030, setting the trajectory for low carbon growth towards 100% zerocarbon energy by 2050 and net-zero by 2050s. The Bangladesh Climate Change Strategy and Action Plan 2009, Bangladesh Delta Plan 2100, Perspective Plan 2021-2041, and The Eight-Five Year Plan has also been covered. The Sustainable Finance Policy for Banks and Financial Institutions has been reviewed extensively to identify the gaps in policy that are becoming bottlenecks for financing renewable energy projects. The policy’s inclusion criteria and environmental objectives have limitations, and renewable energy is not a specific focus. Furthermore, the policy lacks a clear instruction on identifying funding sources and new technology financing, among other issues.

Enabling Environment in Promoting REF in Bangladesh

The chapter on Enabling Environment in Promoting REF Bangladesh discusses the progress and challenges in promoting renewable energy in Bangladesh. The 2016 Power System Master Plan sets a target of 2 GW of renewable energy capacity with 2,337 MW of installations by 2020, making up 10% of the overall generating mix. Wind-based energy is expected to grow the most as it only contributes 0.6% to the country’s renewable energy-based generation. However, private sector finance for the renewable energy transition is still below the required amount. The revised 2016 Power System Master Plan aims for a generation mix by 2041 of 35% gas, 35% coal, 15% cross-border imports, 10% nuclear, and 5% oil. From 2017 to 2020, renewable energy production capacity increased almost four-fold, from 501 MW to 1,971 MW. However, the country still relies heavily on coal and private investment is required for sustainable growth of the renewable energy industry. Bangladesh Power Development Board’s operating loss has doubled in FY2021 compared to FY2020 due to a massive fiscal burden created by foreign exchange drainage from energy imports. Moreover, the country’s dependency on foreign markets rose sharply from 1.5% in 2020 to 20.36% in 2021. There is a lack of coordination between government agencies and disproportionate energy subsidies for fossil fuel-based IPPs. The draft IPEMP should prioritize major investments in renewable energy supply to reduce potential macroeconomic shocks. However, the IPEMP focuses on unproven technology for Bangladesh, which needs to be reconsidered. A blackout in October 2022 affected more than 130 million people and could have been avoided with a smart grid. The grid’s digitization needs more financing to make it less susceptible to supply, price fluctuations, and other factors. Finally, due to the country’s single-buyer model, the offtaker, BPDB, has a significant credit risk, which can leave IPPs without payment. According to data from the Land Ministry, the potential for renewable energy generation in Bangladesh is around 28,106 MW across the country, with higher potential (22,319 MW) in Chittagong, if 5% of the non-agricultural khash-land is used. However, this estimate may change slightly based on solar radiation and wind flow.

Therefore, the land acquisition process should be time-bound, and the accountability of the concerned officials should be ensured to meet the national target of generating RE-based power. Mapping is needed for renewable projects as 3.89% of Bangladesh’s total land is barren, and land availability information is necessary for planning and setting up renewable energy projects. A Land Information System (LIS) is suggested for managing land-related information and keeping it up to date.

A section of the chapter is dedicated to IDCOL, which is the primary financial intermediary for renewable energy projects in Bangladesh. IDCOL is funded by development partners through bilateral or multilateral funding from development partners and multilateral financial institutions. However, its recent financial performance in renewable energy has declined due to factors such as the collapse of the Solar Home System (SHS) program and the government’s introduction of free rival solar energy systems. The lack of a knowledge-based policy framework as well as immature and inefficient management have resulted in classified loans. To popularize RE projects, shared equity ownership among stakeholders could be a solution. More effective allocation of REF institutions is required, as well as transparent, better knowledge-based, and practice-oriented leadership.

Risks in RE Finance in Bangladesh: Investors’ Experiences

The chapter discusses the importance of securing financing for investors involved in renewable energy (RE) projects. There are several green financing options available for enterprises willing to invest in the RE sector, supported by the government through IDCOL and other agencies. Bangladesh Bank is also operating four direct refinancing schemes for promoting investments in green projects, with a total worth of BDT 15.5 billion and a green technology fund (GTF) equivalent to USD 200 million. ‘Sustainable Finance Policy for Banks and Financial Institutions’ lists 68 green products, projects, or initiatives applicable for term finance. Enterprises in the PV assembly and manufacturing sector have received green financing support from the government and BB, with 66.7% receiving support from the government and 8.3% from BB. Additionally, 38.9% and 11.1% of power plant producers have received green financing support from the government and BB, respectively. The risks for Bangladesh’s RE sector were analyzed based on twelve risk factors, including currency, labor, sovereign, permit, financing, off-taker credit, power market, land acquisition, social acceptance, developer, hardware, and grid/transmission risks. Currency risk, permit risk, and financing risk are the top three factors influencing the cost of capital in Bangladesh’s RE sector, according to the survey results. Additionally, 43.3% and 40.0% of enterprises mentioned land acquisition risk and power market risk, respectively, as major factors influencing the cost of capital. Market risks, financial risks, regulatory risks, and other implementation risks are perceived to be more critical to increasing the cost of capital than technological readiness and its associated risks.

Recommendations

The chapter, “Discussion and Way Forward” recommends what can be done to overcome the barriers in the path of renewable energy finance. The renewable energy and financing policies in Bangladesh need clear and actionable strategies to achieve their ambitious targets. Policies like the 8th five-year plan, NDC, and renewable energy policy set ambitious targets but lack an action plan or strategy. To address delays in permits, Bangladesh should adopt India’s E-application portals and public grievance application. Establishing green banks and financial institutions in Bangladesh can revolutionize renewable energy financing mechanisms, providing the push that the private sector needs to make significant investments. Green banks use innovative ways to catalyze investments that lead to lowcarbon and climate-resilience. Several national and international sources of RE finance and potential reforms in different policies can be used to access public funds, such as investing in governmentowned assets like green bonds, Sukuk, and using capital subsidies, grants, and tariff-based mechanisms to attract private investment. Additionally, policymakers’ lack of conviction in their plans, technical knowledge, and the lack of support from financial institutions are barriers to better policymaking. Bangladesh has an opportunity to invest venture capital in the renewable energy sector. India has set ambitious renewable energy targets and achieved remarkable success in producing renewable energy. The National Board of Revenue (NBR) and Sustainable Finance Unit of the Bangladesh Bank should work towards the government’s renewable energy targets. The high customs duty on solar inverters and solar panels in Bangladesh is making setting up solar energy expensive, and NBR should revise the list of HS codes accordingly.

Multilateral development banks (MDBs) such as ADB and IFC play a significant role in financing renewable energy projects in Bangladesh, but progress is being hindered by the lack of concerted effort and the absence of short-term renewable energy goals from the side of policymakers. Solar irrigation pumps have a lot of potential, and it is important to invest in them. A solution suggested by an IFC specialist is for MDBs to act as energy auditors. Renewable energy financing in Bangladesh is increasing gradually, but private entities such as banks and non-banking financial institutions are not as active in the field as would be desirable. They perceive renewables as not being as lucrative as other investments. Trials and pilot projects are recommended to fully understand the practical implications of implementing renewable energy projects.

Recommendations include allowing land lease-based loan facilities to RE entrepreneurs and developing Virtual Power Purchase Agreements. The establishment of a harmonized, well-regulated energy market, long-term national transmission/grid plan, and transparent and fraudulence-free timebound enforcement mechanism are necessary to address power market risk and permit risk. A program to promote awareness of policymakers and experts about the potential of RE and harmonized local content and industrial policy for hardware risk are needed. The promotion of competitive skilled labor and on-grid rooftop PV and aggregative financing models are needed to address developer and financing risk. Partial indexing of local currency tariffs in power purchase agreements and political risk insurance for equity holders are recommended to address currency and sovereign risk, respectively. Bangladesh’s over-generation capacity needs to be reduced to align with international standards. Establishing green banks can revolutionize the renewable energy financing mechanism in Bangladesh, and Bangladesh Bank must encourage investment in renewable energy through incentives. The National Board of Revenue must also reduce customs duty on solar panels and inverters, which are vital machines needed for the production of solar energy.

Cross-country experiences are focused on. Comparison with neighboring India, which has seen remarkable growth in renewable energy in the last 15-20 years, yielded several recommendations for mitigating the risks, including transparent and coordinated process when applying for project approval, technical training programs, competitive bidding process, energy risk management and insurance programs, increasing the percentage of green investment, incentivizing foreign investment, and reducing subsidies to fossil fuels.

Under the Policy and Legal category, the Speedy Supply of Power and Energy (Special Provision) (Amendment) Act 2010 should be abolished to open up the competitive bidding process for renewable energy (RE) investors, especially for attracting foreign direct investment (FDI) in the energy sector. The only allowed Power Purchase Agreement (PPA) should be based on competitive bidding. There is inconsistency in setting RE targets and vested interest groups have intervened unnecessarily. The Sustainable and Renewable Energy Development Authority (SREDA) should be more empowered to handle this issue. Legislative reforms should be implemented to enact well-designed and harmonized policies. Institutional and Technical Capacity is the second category and includes suggestions like: the government should establish research and development centers to drive innovation and competitiveness in the early-stage RE industries. Development banks should initiate financing campaigns to raise awareness of renewable energy and support community-based projects. SREDA should have a one-stop service to receive applications, show the progress of applications and provide project information to ensure a transparent process and timely response from the authorities. The government should allow land lease-based RE entrepreneurs to carry out power plant projects. According to the third category “Economic”, the government should create a transparent, long-term national RE strategy and targets to guide investment decisions. In accordance with the government target to generate 40% of power from RE by 2041, investment in renewable energy would reduce both the drain on foreign currency and fiscal burden. International funding should be aligned with the US$2 billion in the MCPP planned to be spent for both energy efficiency and renewable energy, 40% of which will be sourced from concessional or derisking tool or grant. Governance and Integrity measures include standard PPA, nation-wide mapping on RE potential and automated approval process.