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The Financial Express
Swasti Lankabangla Swasti Lankabangla

Reviewing existing energy policy


Reviewing existing energy policy

The fundamental role of electricity in shaping the global economy is widely acknowledged nowadays. No country has managed to develop beyond a subsistence economy without ensuring that a large section of its population has the minimum access to electricity. Bangladesh is no exception to this requirement. The pace of development activities in different sectors of Bangladesh was significantly affected due to lack of access to electricity, weak infrastructure, and mismanagement of energy resources. For instance, the population's access to electricity was only 50.0 per cent and more than 80.0 per cent of the electricity in Bangladesh was produced by natural gas until 2009.

Having realised the importance of the power sector, the present Awami League government started reforming the energy sector since 2009 to ensure an efficient energy sector for future economic stability. For example, the government strengthened the fuel diversification process, allowed the privately owned oil-fired Quick Rental (QR) power generators, increased the allocation of energy share for the mega projects in the national budget and Annual Development Programme (ADP) fund.

The outcome of all these efforts can be visible now through the landmark achievements in the energy sector. For instance, installed generation capacity has increased from 5,272 Megawatt (MW) in 2009 to 20,618 MW in 2020, and nearly 96.0 per cent  of the population is now under the electricity coverage. These achievements in the energy sector have eventually aided Bangladesh to make significant progress over the last few years from the socio-economic standpoint such as increased per capita income level, life expectancy, literacy rate, self-sufficiency in food production, and poverty reduction.

However, Bangladesh's performance in improving the share of  off-grid power generation by expediting exploitation of renewable energy sources is still unsatisfactory. More than 90.0 per cent of the electricity is generated mainly from fossil fuels: natural gas and imported oil. So far, only 628 MW of electricity (3.0 per cent of the total generation capacity) has been produced from renewable sources, which iis far less than the actual target of generating 10.0 per cent. 

If we look at the allocation for the energy sector in ADP in the given table, it is further revealed that the renewable energy sector has been somewhat left aside while formulating energy policies. Moreover, expenditure allocation for Sustainable and Renewable Energy Authority (SREDA) has not been quite impressive. On average, SREDA received Tk. 6.01 crore from 2015 to 2020.  Although it is proposed that the share of the power and energy sector is 13.0 per cent in the ADP 2020-21, the detailed breakdown of the project list and related info is still not available at the official website of the Implementation Monitoring and Evaluation Division.

The global Covid-19 pandemic has already slowed down Bangladesh's economic activities, which is evident from the recent statistics of the Bangladesh Economic Association (BEA). Around 3.5 crore people have become poor within the last three months in the urban areas. Given the living expenses in the urban areas and the post-pandemic salary cut will further expedite urban to rural migration process and mobilise economic activities in the rural areas. One of the government's main challenges is to ensure adequate employment generation for these newly unemployed people and to strengthen the off-grid renewable energy technologies in the rural areas for economic competitiveness.

It is worth noting that renewable energy sources are inexhaustible. Therefore, the Bangladesh government is aiming to enhance the contribution of renewable energy to 10.0 per cent of total power generation with a special emphasis on solar energy-based electricity. A total of 1,221 MW power from the renewable sources are either under construction or in the planning process. For sustainable energy, the government has adopted measures to install solar panels on the rooftops of every educational institution in the country. Besides, electricity has been provided to the people living in off-grid areas by installing 58 lakh solar home systems. To further facilitate the solar energy market, the government has decided to provide VAT exemption for  up to 60 AMP solar battery production for partner organisations of Infrastructure Development Company Ltd (IDCOL).

However, these initiatives for developing the renewable energy market may not be sufficient enough during Covid-19 and  in the aftermath. Bangladesh has major constraints for renewable energy expansion, namely, land availability, meteorological conditions, high prices, institutional bottlenecks, lack of credit access and monitoring capacity, after-sales service issues, and other technical and non-technical market barriers. To address these issues, increasing renewable energy integration while maintaining electricity supply stability, investments in Research and Development (R&D) to check  feasibility of the renewables projects, infrastructural development, and the diffusion of modern and advanced technologies to the rural areas are highly recommended.

The Centre for Policy Dialogue (CPD) claims that the issue of generation overcapacity, underutlisation of the power plants, inefficiencies, and the fiscal burden has aggravated during the Covid-19 period and further expected to worsen in the post-pandemic period in the country. For instance, the overcapacity rate in 2020 is found to be well above the targetted reserve capacity of 25.0 per cent, as mentioned in the Power Sector Master Plan (PSMP) 2016.  Moreover, CPD further discusses that most of the power plants (over 55.0 per cent) operate at a lower efficiency level (less than 40.0 per cent).

Given these backgrounds, we argue that a pragmatic intra- and inter-sector shift in resource allocation in the energy sector and a revision of the power sector master plan is necessary for the next couple of years for the Bangladesh economy. Firstly, the government can consider re-evaluating the effectiveness of the mega projects for electricity from fossil fuels. As the electricity demand seems to be met by the present generation capacity, allocations for relatively larger and old energy projects can be diverted to renewable energy technologies. 

Secondly, the government can revisit the policies regarding QR power generators. These rental power plants were introduced as a smart solution in 2009; however, the capacity charge paid by the government for the idle QR generators keeps soaring. In 2019, the government paid Tk. 89.21 billion as capacity charge, which is the highest amount ever recorded. Given the reduced demand for electricity and the existing generation capacity, it is high time to think about phasing out QRs by not renewing the contracts further and, if possible, bringing changes in the existing agreements. The government can further redirect free resources to renewable projects over the next few years. Our model generated results also find that shutting the QR power generators can increase the GDP by 0.45 per cent.

Thirdly, the subsidy for imported fossil fuels remains a significant burden for the Bangladesh energy sector. The average amount of subsidy allocated for the energy sector for the last seven years is around 6,241 crore taka. Since the oil price has already fallen and is expected to remain low given the lesser demand of the global transport sector, it is an ideal time for the government to reduce subsidy from oil products or diversify subsidy from non-renewables to the renewable sources. Subsidy reductions can lessen inefficiency and improve welfare by cutting down unwanted losses faced by institutions in the energy sector. Our simulation results show that the removal of oil subsidy can increase GDP by 0.25 per cent through resource mobilisation in the long run.

The simulation further shows that electricity demand will fall by 8-10.0 per cent  over the next few years due to the adverse consequences of Covid-19. In fact, during the time of general holidays in the past three months, the peak electricity demand also keeps falling. There is a growing concern that the economy will slow down in the following years, and our present generation capacity can provide a reliable supply of electricity to support economic activities. So, the question that naturally comes is if,

in addition to the resource diversification from non-renewables to renewable sources, it is rational to free some resources from the energy sector and reallocate in the other important sectors like health, education, agriculture, and, the social safety programmes in the next couple of year's proposed budget.

The following figure shows that the oscillations in the energy budget have not negatively affected the GDP growth rates earlier. Our simulation exercise shows that the GDP growth rate will be close to 5.0 per cent, for which a 4.0 per cent share in the energy budget equivalent to Tk 40.00 billion is sufficient. So, lowering the budget allocation in the energy sector may not possibly bring any distortion in a couple of years. 

During these recovery periods, we recommend that the government review the existing energy policies and develop a strategic plan for the future development of the energy sector. For instance, a particular focus can be given for developing more efficient transmission and distribution mechanisms to provide uninterrupted electricity to the consumers. Initiating more research and development programs for future exploration and extraction of the cheap gas-based solutions for electricity production can be another focal point. The government should also clearly identify the existing market barriers for developing renewable energy sectors and revise the renewable policies. Adopting a diverse range of energy efficiency programs also needs to be introduced and executed for the country's future energy security. Finally, based on our simulation model's findings, we recommend that the government can also add competition among the power generators to increase economic welfare and ensure future investment in the energy sector.

The writer is Associate Professor, School of Business and Economics, North South University and Director, Accreditation Project Team (APT), North South University. sakib.amin@northsouth.edu

The author develops a dynamic model to analyse different scenarios of the Bangladesh energy market. Research support is received from Farhan Khan and Foqoruddin Al Kabir.

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