Bangladesh clean energy finance drive comes with challenges

Bangladesh’s energy sector is still struggling to overcome high imported LNG prices and the impact on its economy. Clean energy finance innovation could provide a way of escape but it’s still laden with challenges.

The South Asian country of some 172 million people relies heavily on imported LNG for its power generation needs. But much of that is procured on the volatile spot market, which makes it vulnerable to price fluctuations. According to government data, around 54 percent of the country’s energy demand is met from natural gas.

These high prices have led to power outages, major blackouts and have impacted industrial production. This in turn has led to the country seeking financial help, much of it from the International Monetary Fund (IMF). Bangladesh’s external debt reached a record high of US$103.8 billion last June, up from US$99.3 billion in the previous quarter.

“Bangladesh started importing LNG in 2019 with Qatar accounting for 80 percent of the country’s supply since then. Total imports have now surpassed 6 bcm per year,” Jules Verriere, Business Analyst for Enerdata, told Gas Outlook. He added that state-run Petrobangla has long-term contracts in place with Qatar and U.S. suppliers and is seeking to secure further deals in the context of rising demand and volatile prices in APAC.

New gas price tariffs

Added to the fray, a new policy is being considered that would increase the gas price tariff that Bangladeshi industrial users and captive power generation producers will have to pay, up by 151 percent and 145 percent, respectively. The country’s ministry of power, energy and mineral resources decided in principle in January to put in place the new pricing structure to reflect global LNG import prices. If accepted, users will have to pay a tariff of Tk 75.72 (US$0.62) per cubic meter for gas use beyond the sanctioned load. Currently, users pay a flat Tk30.75 (US$0.25) per cubic meter rate, even if they exceed the sanctioned load.

That proposal hasn’t been received well. Dhaka–based The Business Standard said in a report the same day the news was announced that the “proposed significant hike in gas prices has ignited widespread concerns among industrialists, who fear that the move could cripple the country’s economy.”

Now, however, there are renewed calls for Bangladesh to pivot from over-reliance on fossil fuel imports and beef up its fledgling renewables sector. But that could be easier said than done.

Minimal support

Despite the growing need for sustainable energy solutions, Bangladeshi banks and financial institutions are providing minimal financing to this sector, said Khondkar Morshed Millat, a faculty member of the Bangladesh Institute of Bank Management. Moreover, Bangladesh aims to generate 40 percent of its energy from renewables by 2040, but to date only 3.6 percent of the required funds were allocated to the sector.

A significant commitment from the private sector will be needed to alleviate the problem, a new Institute for Energy Economics and Financial Analysis (IEEFA) report found. “Bangladesh Bank’s low-cost green refinance schemes, offered at up to 5 percent interest rates, can enable the private sector to channel this capital towards clean energy projects,” it said. “These low-cost schemes increase the viability of clean energy projects as opposed to loans offered at market rates.”

Yet, Bangladeshi renewable energy schemes in the past have received a moderate response. In 2009, Bangladesh Bank launched a refinancing programme, ETP, for green energy with a fixed rate initially at 10 percent, then lowered to 5 percent.

The country’s Central Bank also offered a programme, GTF, with a 5 percent financing rate for green energy. However, the programmes received what the IEEFA report called a “tepid” response. Between January 2018 and September 2024, the highest disbursement rate for the ETP program was 40.1 percent, while the GTF’s disbursement rate was only 19.05 percent.

Change Initiative, a Dhaka-based think tank, attributed the dismal performance of both programmes to permitting delays, land acquisition problems, financing difficulties, uncompetitive power bidding, currency fluctuations and power market instability.

The IEEFA report added that the Central Bank’s refinancing process is lengthy, with requirements for too many documents. Green energy project proponents first apply to financial institutions for loans at market rates, it said, then these financial institutions proceed to Bangladesh Bank for refinancing schemes. However, that’s where complications arise. If Bangladesh Bank doesn’t approve the application for refinancing, borrowers will have to bear high interest rates that might render the project unviable.

Remedies

One remedy would be for the Central Bank to periodically organise awareness-raising events for major stakeholders to address their concerns by ensuring that the interest rate for clean energy projects is up to 5 percent with a flexible loan tenure, up to 10 years. It should also debunk misinformation regarding the documents and lengthy process, the IEEFA report added. 

It further called for Bangladesh’s Sustainable and Renewable Energy Development Authority (SREDA), the agency responsible for advancing clean energy in Bangladesh, to bridge the information gap that affects the use of low-cost green funds. It also suggested that the Bangladesh Solar and Renewable Energy Association (BSREA) publish periodicals with updated terms and conditions of green refinance schemes for its members and stakeholders. 

High upfront costs for financing renewable energy projects in Bangladesh present another hurdle for renewable energy projects, a recent Rajawali Institute report found. Required innovative financing mechanisms, more government support, and partnerships, including public-private-partnerships (PPP) with international organizations, or development banks to share costs, risks, and expertise could offset this, the report said.

Pre-financing renewable energy projects is another way to meet these challenges, the IEEFA report said. It recommend that Bangladesh Bank evaluate the scope of refinancing at an early stage and eliminate any uncertainty that various industries experience with its schemes.

However, at the end of the day, soaring power generation costs, derived from costly fossil fuel imports, could drive demand for green energy finance at a faster rate than before and necessitate financing changes. Renewable energy offers a potentially cheaper and more sustainable long-term solution for the country than fossil-fuel based power generation. 

(Writing by Tim Daiss; editing by Sophie Davies)