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Why Bangladesh’s energy market is so hard for renewable energy investors to navigate

Eleris Energy Global, a USA-based company, is about to scrap its plan to set up a 1,000MW solar power plant after failing to get permission to build it in almost two and a half years. Entering a joint venture with Bangladesh Army Welfare Trust, the American company had leased 5,000 acres of marshland for its $1.79 billion solar project for 25 years. The power plant was to be implemented on an island along the coast.

Emran Hossain

Obstacles in renewable energy growth

Since it entered the joint venture in February 2022, Eleris spent Tk 50 crore for the development of its project with engineers working at home and abroad. ‘We have no idea what is happening with us? We don’t know whether or not we are going to get the permission at all,’ said Zakir Hossain Khan, managing director of the project. People involved in the joint venture feared that the solar power project might be scrapped if they failed to get the approval by next February.

What made it so difficult for the USA Company to get permission to build a large-scale solar power plant that could have helped Bangladesh deliver on its promise of substantially increasing renewable energy share in the energy mix is hard to pinpoint.

Many obstacles like this are holding back renewable energy growth in Bangladesh.

What about our renewable energy targets?

With an installed power generation capacity of over 27,000MW, renewable energy currently accounts for only about 3 per cent. The installed capacity does not include about 3,000MW of captive power, electricity produced by industries using fossil fuels for their use.

Bangladesh has repeatedly failed to achieve its renewable energy targets. Renewable energy was supposed to generate 5 per cent of all electricity produced in 2015 and 10 per cent of electricity produced in 2020.

For years land scarcity was produced as the major obstacle to implementing renewable energy projects, especially large-scale solar energy projects. Authorities only saw potential in rooftop solar and said that wind power also did not hold much potential. The rooftop solar and solar irrigation potentials remained underused as well because of what experts said was a discriminatory financing policy.

Bangladesh, on the other hand, expanded its fossil fuel-based power generation capacity, providing sovereign guarantees to loans, arranging far more land than needed for fossil fuel-based power plants, and guaranteeing hefty profits with capacity charges. Installed fossil fuel-based power capacity rose by more than 300 per cent since 2009.

Bangladesh even passed an indemnity law to protect fossil fuel expansion, ensuring that power projects can be passed without competitive bidding. Uncompetitive bidding, protected by the indemnity law of the Quick Enhancement of Electricity and Energy Supply Act 2010, gave rise to a controversial system in which experienced, big renewable energy investors choose not to participate, energy experts observed.

Collusive approval process

Change Initiative, a think tank, in a report last year listed some of the problems facing renewable energy projects – permitting delays, land acquisition problems, financing difficulties, uncompetitive power bidding, currency fluctuations and power market instability.

A working paper released in March by the SOAS Anti-corruption evidence research consortium, led by SOAS, University of London, revealed that Bangladesh’s power projects are approved through a collusive approval process. The working paper reported the existence of ‘syndicates’ and ‘consultants’ comprising government officials, politically connected individuals and journalists negotiating power projects behind the scenes. To navigate through this collusive approval process one must make it informal.

The collusive approval process is responsible for substantially raising electricity prices, making renewable energy as costlier as fossil fuels, and bears even worse consequences, the working paper observed.

‘The effect is likely to be worse, because once [politically] connected businesses have worked out how to deal with the syndicate and pay for the approval, there is nothing to stop them setting prices that not only recover the money they spent in informal payments but achieve additional profits on top of it,’ read a paragraph of the working paper.

Potential investors without strong political connections are likely to find Bangladesh’s environment too risky, the working paper said.

‘Politically unconnected investors face high investment risks and stay away from the sector; as a result, there is an absence of checks on collusion between the remaining investors and public officials, and this results in high prices that threaten the financial viability of the power sector, which further increases risks for unconnected investors and so on,’ the working paper said.

Bangladesh saw its power price rise threefold since 2009. The cost of electricity generation from renewable energy is also way more than in other countries.

In another study released in 2018, which examined 61 operational and planned power plants, it was revealed that the average capital cost of a power plant in Bangladesh was double the global average.

As a result of these collusive agreements, the working paper said, private power plants in Bangladesh generate expensive electricity, resulting in approximately $1 billion in annual subsidies borne by taxpayers.

The working paper estimated that the levelized cost of electricity of solar power projects in Bangladesh is 3.87 times higher than that of India and 1.47 times higher than Vietnam, one of Bangladesh’s export competitors.

Lack of best practices in renewable energy sector

The opportunity to manipulate tariffs and make hefty profits resulted in a host of inexperienced, sick companies swarming Bangladesh’s renewable energy market, destroying the space for renewable energy expansion.

Among the approved list of renewable energy projects, some are owned by companies specializing in poultry, feed mill and real estate businesses, infrastructure construction companies, ready-made garment, and education businesses, and even in manpower business.

Energy experts say that implementing a quality project to harness solar, wind, and hydro energy at an affordable cost requires diverse knowledge, especially in densely-populated Bangladesh, where land is scarce and any infrastructural expansion threatens to reduce agricultural land.

The presence of so many amateur renewable energy investors partly explains why Bangladesh has not been able to implement a single quality renewable energy project in the past 16 years, since the adoption of the renewable energy policy of 2008.

The chief adviser of Bangladesh Solar and Renewable Energy Association, a platform for renewable energy traders, Dipal Barua said that reputed investors avoid getting involved in anything that is not transparent despite it bringing good profits.

A renewable energy project takes off with a company expressing its interests to the power ministry, accompanied by a complete project proposal with proof of land availability. The ministry evaluates the proposal the completion of which depends on the company’s capacity to navigate the collusive approval process.

Years could be spent having the PPA signed with the Bangladesh Power Development Board before construction begins.

A review of 75 renewable energy projects listed by the BPDB, including the 10 projects in operation, revealed a host of companies that do not have any prior experience in renewable energy but did not face many difficulties in securing permission from the government.

For instance, Enam Medical College Hospital, a private institution based in Savar and owned by former state minister for disaster management and relief Enamur Rahman, together with two Chinese companies, received approval in November last year for a 100MW solar power plant in Feni with a tariff of Tk 11 per unit.

There are half a dozen textile and garment companies, several construction companies, real estate businesses, agro-product sellers, and a motorcycle manufacturer among the companies permitted for renewable energy projects.

Even a recruiting agency, along with two partners, including one from China, got approval to build a solar power project in Bandarban. The recruiting agency was among the 150 agencies listed in 2020 by Bangladesh Manpower Export and Training as institutions that did not participate in 25 years or more in manpower export.

Fu-Wang Bowling and Services is another company listed by the BPDB as approved for building a 47MW solar power plant in Panchagarh. The solar project was listed as shelved, but it was never canceled. The Dhaka-based Fu-Wang Club was accused of evading more than Tk 41 crore in VAT in 2021.

Shunfeng Investment Ltd, a Chinese company, has two solar power projects. One of the projects rolled into operation in March 2021, four years after being approved and about two and a half years after the signing of the PPA. In 2019, Shunfeng announced plans to sell one of its subsidiaries and shed overseas operations because of debt burdens, according to Renewables Now, a provider of business news and market intelligence services. The other solar power project taken up by the Chinese company was approved in December 2018 and would not come into operation until June next year.

A solar power project should ideally be completed in 13 months, said Hasan Mehedi, member secretary, Bangladesh Working Group on Ecology and Development, explaining two other essential components of a quality project – reliable supply of electricity and the use of quality machinery.

The 30MW solar power project in Rangpur came online in August 2022, almost eight years after it was approved and exactly five years after the signing of the PPA.

Bangladesh’s largest solar power project of 200MW in Gaibandha came online in January last year, about eight years after being approved and over five years into signing the PPA.

Approved in 2015, the Dharmapasha 32MW solar power plant in Sunamganj is yet to be operational, eight years after the PPA was signed.

Countries involved in building renewable energy projects

A total of 12 countries are involved in 75 renewable energy projects, including the ones already in operation, with a capacity of 5,489.6MW. China alone is engaged in building 22 power plants with a capacity of 1,601MW.

Bangladesh is involved in building 1,258MW, followed by Singapore co-financing solar power projects with 728MW capacity, United Arab Emirates co-financing 470MW, Japan 400MW, India 250MW and Germany, Netherlands, United Kingdom and Korea co-financing 100MW or a bit more each.

Countries like Norway, France, and the United States have invested in solar power projects with capacities of only 50 MW each.

Some approved solar power projects have been waiting to sign the PPA for six years.

The tariff per unit for these approved projects ranges between Tk 20.87 and Tk 7.68. The average tariff is above Tk 10 per unit.

In 2022, the International Renewable Energy Agency estimated the global average cost of solar electricity to be Tk 5.42, saying that solar energy production costs have fallen by 89 per cent and wind energy costs by 69 per cent since 2010.

In 2023, solar tariffs dropped to Tk 5.8 in Japan and Tk 3.04 in India.

The Institute for Energy Economics and Financial Analysis’s lead energy analyst, Shafiqul Alam, estimated that the reasonable solar power tariff in Bangladesh should be Tk 8.5 per unit, which can be easily reduced to Tk 6.5 with some government initiatives. If the government arranges for acquiring land for renewable energy projects and evacuating power, the capital cost for renewable energy projects would be greatly reduced, he said.

The government builds transmission lines to take power from fossil fuel-based power plants. Renewable energy investors have to build their power evacuation system because their plants are often located far from the national grid.

High import duties

The government’s discriminatory policy towards renewable energy is also evident in high import duties on solar panels meant to be used in small projects. The duties were more than doubled to 26 per cent from 11 per cent in the financial year 2021-22.

The import of an inverter, a key element in solar projects, requires a 37 per cent duty if it is to be used in small projects, while a 58.6 per cent duty is payable for importing the aluminum frame used in solar projects and a 15.26 per cent import duty is slapped on the import of walkway, a solar project accessory, said renewable investors.

The most significant renewable energy achievement, in which over 6 million solar home systems were installed since the 1990s, was lost when Bangladesh implemented 100 per cent electrification.

Institutional investments in renewable energy sector

Banks are reluctant to extend loans to renewable projects as they are long-term investments compared with fossil fuels, generating a slow return.

The non-banking sector also finds renewable investment not very profitable.

The major renewable capital source is the government-owned Infrastructure Development Company Limited, established in 1997. But IDCOL lends at high interest, up to 9 per cent, higher than the rate at which it accessed part of its fund from donors.

The working paper of the Change Initiative, referring to a private EPC company official, revealed that IDCOL became part of the ‘syndicate’ and can also play a negotiating role in facilitating the progress of approvals.

Another EPC official with a long record of working with the IDCOl, which was investigated by Anti Corruption Commission in 2018 for irregularities and corruption, the working paper noted, alleged that his company had to distance itself from IDCOl unable to participate in informal practices to get approval.

 

 

 

 

 

 

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