Bangladesh's Renewable Energy Transition: Financing Opportunities and Challenges Case Study

Bangladesh's Renewable Energy Transition: Financing Opportunities and Challenges

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Introduction: Bangladesh's Renewable Energy Transition: Financing Opportunities and Challenges

Energy plays an important role in the development of one nation because it directly impacts the lives of people as well as the industrial sector, agricultural sector, and transportation sector. This shows that energy efficiency directly affects both individual living standards and national living standards, yet many nations are moving towards energy transition due to increased environmental concerns. In this regard, studies have highlighted the recent energy crisis at the global level, escalating the need for renewable energy and a shift towards sustainable energy for the reduction of climate impact created by fossil fuel use (Hussain et al. 2023). As a result, nations across the world are limiting the use and extraction of natural resources and imposing additional pressure on states to transition towards sustainable energy sources. Translation towards renewable energy needs an unprecedented transformation of the existing energy and power framework, which requires huge financing. Hence, this essay aims to highlight opportunities and challenges involved in terms of financing in developing countries like Bangladesh in the renewable energy transition.

Discussion

Opportunities and challenges of finance for Bangladesh in the renewable energy transition

Opportunities

Underway transition

The energy transition is imperative to the sustainable development of the national and world economies because it helps to reduce dependency on conventional energy sources which are limited. In a similar context, the transition towards green energy not only assists in reducing fossil fuel use but helps to cut down carbon footprint and other air pollutants (Borzuei et al. 2022). Thus, nations around the world may decrease their reliance on non-renewable fuels and energies by diversifying their energy sources. However, the lack of adequate framework and financial resources makes the transition to clean energy in developing nations quite difficult. Presently, the primary energy source of Bangladesh is natural gas because nearly 56% of the total energy used in this nation comes from natural gas (Gov BD, 2023). Biofuel is the second largest energy resource because it contributes 24% and oil and crude oil contribute 13% to the total energy use in Bangladesh (Gov BD, 2023). However, the transition towards renewable energy within Bangladesh is underway in support of global efforts but the country needs to meet Paris Agreement targets. To achieve the transition goal towards renewable energy Bangladesh is aiming to generate 40% of the total energy used from renewable sources by the year 2041 (Al-tabatabaie, et al. 2021). In this regard, this nation is developing a solar energy action plan which can generate up to 41 gigawatts of solar energy within the same timeframe of the 2041 fiscal year (Gulagi et al. 2020). According to the estimation of the National Renewable Energy Laboratory (NREL) Bangladesh has the potential to generate 240 GW of solar power along with 30GW wind power energy (Casamassima et al. 2022). However, in this regard, NREL estimated that Bangladesh will be in need to use 1.5% of the total available land which can impact the primary sector economic activities in the coastal region (National Bureau of Asian Research, 2022). This specific study suggests that Bangladesh has great potential to quickly build a framework for renewable energy, which can also aid in luring external funding. 

Integrated energy and power master plan

To reduce the potential of a fuel crisis, the Bangladeshi government recently said that it aims to produce 40% of all power from renewable sources (National Bureau of Asian Research, 2022). For instance, Bangladesh has taken the initiative to cut down the import of liquified natural gas (LNG) for the higher concern towards the energy transition (National Bureau of Asian Research, 2022). To combat the energy crisis, the Bangladesh government has drafted one integrated energy and power masterplan for the period 2024 to 2050 (National Bureau of Asian Research, 2022). It is expected that by meeting the goal of the integrated energy and power master plan the country would be able to develop a suitable energy network which has an affordable and sustainable energy supply chain. Presently, Bangladesh generates a total of 967 megawatts of renewable energy, which is just 3.7% of the total installed renewable power generation capacity of the country (ADB Org, 2023). In support of the funding of the Asian Development Bank, Bangladesh Recently acquired 84.63-megawatt solar electricity capacity by the year 2020 and it is expected to increase by 10% solar energy capacity in 2025 (ADB Org, 2023). Hence, the integrated energy and power master plan is creating a financing opportunity to help Bangladesh while transiting towards renewable energy.

Diversification of energy mix and cut down of subsidies on conventional energy

Additionally, diversification of the energy mix needs Bangladesh to address long-standing reliance to ensure a gradual shift towards renewable energy. However, to improve the renewable power generation capacity, this country needs to attain a 40% target by boosting carbon capture capacity and storage capacity (Think-Asia, 2019). It is expected that government support to increase the storage capacity of renewable energy can assist in increasing funding opportunities. The Bangladesh government recently decided to cut down subsidies and moved to increase energy and power prices in the 2020 fiscal year (Amin et al. 2022). In this regard, experts have mentioned that such a strategy is putting pressure on the industrial sector and small local businesses, which have very limited power to cope with the energy price hike (Think-Asia, 2019). Though, diversifying the energy mix and subsidy reduction approach of the government helps to gain financial support to develop climate change trust funds.

Climate change trust fund

The Bangladesh government has introduced the Climate Change Trust Fund (Nicholas and Ahmed, 2020). More to the context, the introduction of the Climate Change Trust Fund helped Bangladesh to foster a transition towards renewable energy by providing financial support (Bhandary, 2022). Being an active participant in international climate dialogue, Bangladesh is being able to bring attention towards vulnerable economies. In this decade, Bangladesh is being able to scale up financing, which is one of the main opportunities of financing while transiting towards renewable energy.

Green banking

The green banking trend is increasing within Bangladesh, which can make significant contributions to help this nation towards the transition to renewable energy (Chowdhury et al. 2021). Hence, green banking is another opportunity of fencing for transition to green energy as it fosters environmentally friendly practices. The Bangladesh government has developed a special policy framework which covers three phases of green banking to provide financial support to the energy transition goals (Nicholas and Ahmed, 2020). In phase one, this specific framework has provided financial support to the policy formulation, environmental risk incorporation, credit risk management, climate risk fund, green marketing activities, as well as disclosure and reporting of green banking (Islam et al. 2021). The main goal of phase two was to provide support to sector-specific environmental policies, rigorous climate education programs, and green strategic planning, as well as disclosure reporting (Islam et al. 2021). In the third phase, the green banking initiative provided financial support to develop innovative products which aid the transition to green energy and improve association with reporting standards (Islam et al. 2021). Therefore, utilizing this opportunity, this country can meet sustainable development goals in terms of energy transition through socially responsible practice. This indicates that the risk of climate change has transformed banks more than financial intermediaries, as banks are connected to environmental protection. Therefore, it can be said that the connection of the banking framework of Bangladesh in resolving the issues of a broader ecosystem can help in managing inclusive financial risks by developing links with intergovernmental panels.

Support from Asian Development Bank

The Asian Development Banks joined GEAPP to improve energy access in Southeast Asian developing nations like Bangladesh (Asian Development Bank, 2021). After joining GEAPP, the Asian Development Fund allocated 35 million USD to the energy access and transition fund for the energy transition of Bangladesh and other south-east Asian countries (Asian Development Bank, 2021). It is expected that, leveraging the financial support received from the “GEATTF” funds, developing nations would be able to improve their access to renewable energy, which will eventually accelerate the energy transition agenda of Bangladesh. Additionally, the Asian Development Bank has promised in the COP26 to provide 100 million USD to support banks in combating climate change issues in developing nations (Asian Development Bank, 2021). In this regard, it is found that the specific initiative taken by the Asian Development Bank not only helps Bangladesh to combat climate change issues, but it would also accelerate the transition to clean energy while eradicating energy poverty.

More to the context, it is found that the Asian Development Bank additionally provided 45.44 million USD to help Bangladesh in developing a solar solution (Asian Development Bank, 2021). This specific fund will only be used to develop an upgraded solar photovoltaic pumping solution for agricultural irrigation in Bangladesh. Additionally, the 20 million USD loan of ADB to Bangladesh is just for the power system efficiency improvement project, which will help to improve off-grog solar solutions across the nation (Asian Development Bank, 2021). This particular support not only helps to improve the agricultural system but will also help to meet the renewable energy transition goals. On the other hand, the Asian development bank has promised that additional 25.44 million USD in financial grants will be provided to Bangladesh for the encouragement of off-grid solar photovoltaic pumping (Worldbank, 2022). This particular initiative might help the nation boost the irrigation capacity of the agricultural sector along with the transition to renewable energy.

Support from World Bank

Leveraging opportunities provided by the “scaling up to the phase down” framework of the World Bank, Bangladesh can identify financing challenges and opportunities (Worldbank, 2023). According to the World Bank Group, nearly 90% of the roughly one trillion dollars of coal-fired power generation that is at risk of being left stranded is found in nations with low or middle incomes (Worldbank, 2023). In order to achieve the growth required in the production of lower-carbon electricity, it will be necessary to mobilize capital flows to achieve energy transition goals. Additionally, implementation of this six-step virtuous cycle framework might help Bangladesh to set the foundation to overcome barriers to renewable energy in terms of financing (Worldbank, 2023). Additionally, the Bangladesh government has already signed a 515 million USD agreement with the World Bank to increase access of 9 million people to the renewable electric supply across the nation (Worldbank, 2022). This is demonstrating opportunities available for Bangladesh for the renewable energy transition in terms of financing. Additionally, Bangladesh might be able to promote biomass resources by increasing the use of renewable resources and energies, which generate low carbon.

Challenges

Critical geographic location and high population density

Bangladesh, a relatively low-lying nation that lies within the Ganges-Brahmaputra Delta, is extremely vulnerable to the effects of climate change and sea-level rises because nearly 75% of Bangladesh's territory lies less than 10 metres above the sea level (Magnan et al. 2022). Hence, climate change risk caused by uncontrolled natural energy resource extraction is making Bangladesh extremely vulnerable. On the other hand, the adverse effect of climate change can extremely impact the country because of the higher density of the population. For instance, it is required to mention that the population density of Bangladesh is 1265 people per square kilometre and the total population is 2.11% of the world population (Worldbank, 2023). Considering the population density of this nation, it can be said that climate change risk will impact the majority of the people living in this nation.

Orthodox economy and supply chain challenges

By understanding the concept of an orthodox economy, individuals can develop insight into people's decision-making in the face of scarcity (Chowdhury et al. 2021). Hence, elaborating on this concept, we can understand what challenges Bangladesh can face in terms of financing while transiting towards sustainable energy. However, scarcity refers to the human demand towards goods, services and resources which are available (Bhandary, 2022). On the other hand, increased cost of production can be the potential cause of resistance from textile owners because it is one of the largest sectors of Bangladesh, which is labour incentive and the nation believes in an orthodox economy (Di Virgilio, 2020). In this context, it is discovered that the conventional concept of economic development, which equates economic growth with development, is one of the major obstacles to the switch to renewable energy. Hence, an ingrained view of orthodox economic growth is one of the major threats to Bangladesh towards a transition to renewable energy. Additionally, the volatility in the international market caused by Russia's invasion of Ukraine is one of the main issues, which is increasing LNG supply chain challenges (Zakeri et al. 2022). This shows that an unstable political environment is another issue that could have a negative financial impact on the switch to renewable energy since it disrupts the supply chain.

From the orthodox economic development point of view, the use of power is expanding gradually along with the increased use of technology not only in Bangladesh but across the world. For prolonged and successful growth in economic efforts and the alleviation of poverty, a sufficient and dependable source of power is a crucial condition (Barry, 2021). It is seen that the use of modern technology needs enormous amounts of electricity and it is one of the biggest challenges to handle in the era of the fourth industrial revolution. Moreover, the use of electricity has become a necessity in every aspect of our lives, which would not be at all incorrect. It is now necessary to expand the current power infrastructure and advanced technology, increase security, and restructure it to handle the rising demand, but in a sustainable way. In this regard, these issues can be resolved with the introduction of the smart renewable or green energy grid but a higher level of efficiency in environmental management is required (Khalil et al. 2021). In this regard, the World Bank has provided additional monetary support of 250 million USD just for environment management (Word bank, 2023). Therefore, by utilizing the resources of a developing nation, this country can minimize the financial challenges of environmental management.

Increased production costs and decision-making issues

It is found that the transition towards renewable energy has increased the cost of production in the textile industry in Bangladesh (Bhandary, 2022). For example, production cost at Shah Fatehullah Textile Mills Limited has increased by 40% in just two years due to the hike in gas prices (Think-Asia, 2019). Therefore, it can be said that the limited import of LNG is one of the main reasons behind the hike in gas prices, which is making a negative impact on the orthodox view of development. Another study has mentioned that there is no shortage of money in providing funds towards the energy transition of developing nations but such developing nations lack the infrastructure to use received funds at the right place (Think-Asia, 2019). Therefore, the national government needs to communicate with public financing institutions to develop a strong strategic mandate for financing energy transition. However, with increasing priority to the financing sector, which is based on technology, developing countries can minimize financing challenges from the early adoption stage to the mature stage (Yan et al. 2022). In this regard, developing nations can face difficulty examining points of financing which require more attention. Therefore, decision-making is one of the primary challenges related to the transition to green energy in terms of financing.

High tax on renewable energy and slow growth GDP

On the other hand, it is found that solar power is still costly for the textile industry of Bangladesh because It imposes a 37% to 58% tax when installing rooftop solar technology (Think-Asia, 2019). This is one of the main challenges being faced by the industrial sector while transiting towards renewable energy. Therefore, it can be said that by reducing subsidies towards additional energy, the Bangladesh government can witness slow growth of national GDP as it is temporarily decreasing the scope of economic development by imposing additional cost to the industrial sector. In a similar context, Guan et al. (2023) said that nations which follow orthodox economic views do not realise that national resources, land, and water have limited supply and aim to develop the nation by uncontrolled use of natural resources. However, the Bangladesh government could incorporate changes in terms of energy use by developing better strategies towards the renewable energy transition. Though, the traditional view of economic development present within national politicians can create the biggest constraint while collecting funds for the transition towards renewable energy. Another study has suggested that to achieve sustainable development goals, one nation needs to make choices about the sustainable use of non-renewable energy resources by going out of the orthodox economic development viewpoint (Saltelli et al. 2021). Unless the nation can witness constraints from society.

Rapid urbanization and aggressive industrialisation

Eventually, minimizing the challenge of environment management, Bangladesh would be able to handle other financial crises related to the energy transition. It seems that rapid urbanization and industrialization had successively increased the demand for electricity within Bangladesh (Voumik et al. 2023). For instance, at the time of independence, only 3% of the population had access to electricity and it increased to 59.6% by the year 2012 and 97% as of the 2020 fiscal year (Gov BD, 2023). This is indicating that to transition to renewable energy, the nation requires huge investment but due to the downward growth of the GDP it is possessing a greater challenge. Decreased GDP can gradually create financial challenges in the way of the energy transition. Hence, the government should make progress with thoughtful initiatives which hold the capability to maintain a balance between energy transition and financial development. However, the Bangladesh government has taken the initiative to suddenly reduce subsidies towards traditional energy and power users but it is increasing the cost of energy and power across the nation, which is one of the main challenges (Barua and Aziz, 2022). This reflects that the strategy is aggressive and is not linked with realistic objectives and goals.

Decreased fossil fuel subsidies and inefficient policy-making tools

Another obstacle could be attributed to the reduced fossil fuel subsidies, which are increasing the financial burden on society and businesses (Chen et al. 2022). Besides, inefficient policy-making tools are another risk because these are not suitable to meet government objectives towards energy transition. After all, these tools are regressive and undermine initiatives for energy efficiency (Chen et al. 2022). Therefore, before minimizing subsidies to conventional energy, the government authority needs to develop a realistic objective and realistic tool which has the capability to meet the government's objective related to the energy transition. Another reporter highlighted that by reducing subsidies to conventional energy, member states of the United Nations can help to cut down total global emissions by up to 11% within the year 2030 (Nature, 2021). Reduction of subsidies can discourage fossil fuel use, natural gas use and the use of other natural resources. But, it is hard to meet transition goals in developing countries as it can create contradiction to orthodox economic development.

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Conclusion

At the end of the evaluation, it can be concluded that ADB and World Bank are providing monetary support to Bangladesh to reduce friction while shifting towards green energy. Moreover, this initiative taken by the ADB and World Bank can help the nation change the orthodox economic development point of view by promoting the transition towards sustainable or renewable energy. However, the government ought to proceed with well-thought-out initiatives that have the potential to retain the equilibrium between the shift to clean energy and financial development. Nevertheless, the Bangladeshi government has taken action to abruptly reduce subsidies for traditional energy and power use, but doing so is raising energy and power prices nationwide, which is one of the nation's biggest problems.

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