Asia’s Energy Transformation: Bangladesh

This is the second in an Infrastructure Ideas series looking at the way energy use is changing in Asia’s major economies, and the momentous choices facing policy-makers there today. Following the previous post covering Pakistan, this post features the world’s 8th most-populous nation – and the country with one of the five biggest project pipelines for new coal-fired generation: Bangladesh.

Bangladesh, known as East Pakistan from 1949 to 1972, is the most densely populated country in the world. Its energy profile has many similarities with that of Pakistan: both countries have enjoyed significant domestic natural gas resources, which played a major role in the development of the countries’ power grids – Bangladesh’s even more than Pakistan’s. Both Pakistan and Bangladesh are relatively low-income, and have among the lowest per capita levels of energy consumption in the world, and among the highest aspirational rates of growth for future energy consumption (Bangladesh’s growth rate has been in the 6-7% per annum range). Both countries subsidized consumption of domestic natural gas resources by keeping prices well below those prevailing internationally, and in part as a result reserves have been in decline and the ability to keep supplying gas-fired power plants is now in question. Both countries have largely untapped domestic coal reserves, generally of low quality, and coal enjoys a major role in future energy planning in both. Bangladesh and Pakistan are also late-comers to renewable energy (leaving aside Pakistan’s large hydropower capacity), with Pakistan having turned somewhat earlier to initial wind and solar power auctions.

Critically, both countries face a similar fork in their energy roads: build substantial new coal-fired electricity generation capacity – potentially making them among the 3 or 4 largest builders of new coal plants in the world – or encourage large-scale development of wind and solar power. The policy choices these two countries make will have major implications for their economies and people, as well as for global climate.

Thinking about growth is essential for understanding Bangladesh’s energy choices. The country’s total power generation capacity in 2015 was only 10 Gigawatts: more than 40 countries produce more electricity than this, while only 7 have more people than Bangladesh. And this is after roughly doubling Bangladesh’s capacity in the last decade. Bangladesh’s energy policy calls for raising power capacity by 2030 to 30 Gigawatts – triple the amount of electricity produced today. That’s growth! Bangladesh needs this much power, both to make up for its very low current consumption, and to support the high growth rate of its economy.

The issue for the country is that its current sources of energy cannot keep up with existing capacity, let alone this projected tripling. Today three-quarters of electricity in Bangladesh is supplied by natural gas, and Bangladesh is running out of it. Reserves are projected to be exhausted somewhere around 2029. Taking advantage of the changes in the natural gas industry – which in the last decade have made it an internationally traded commodity – Bangladesh has begun to invest in import terminals to bring external natural gas into the country. This makes plenty of sense as policy. However, the new imported gas is likely to be needed entirely to substitute for declining domestic gas sources, and is unlikely to be a major source of new capacity. Concerned as well as it is by today’s over-reliance on gas, Bangladesh’s government has focused on diversifying energy sources, which again makes sense. The question is how best to do this.

The Government of Bangladesh’s stated energy plans have for years focused on one principal answer: develop coal. While coal produces less than 500 MW of electricity in Bangladesh today, government projections have shown 2030 capacity as high as 20 Gigawatts – essentially all the planned increase in electricity production for the country. A 20 Gigawatt coal-fired pipeline would place Bangladesh – which is not in the 40 largest power producers today – 5th in the world in new coal-fired capacity: after only China, India, Vietnam and Indonesia. Bangladesh also has an important friend ready to support this policy choice: China. Bangladesh is a country of focus for China’s Belt and Road Initiative, and for Chinese financing generally. IEEFA has reported that Bangladesh has the most proposed coal-fired capacity and funding offered from China of any other country, totaling $7 billion for 14 Gigawatt of capacity (somewhere between 1/3 and ½ of total estimated costs for these projects).

Aside from China, support for coal-fired development draws from two other major sources: one, an outdated sense of economics, and two, perceived greater profitability. Bangladesh has been worrying about running out of natural gas and needing new energy sources for over a decade; during most of this time, coal has been accepted as the lowest-cost alternative, and still today many planners and onlookers think of it that way. Given the historical subsidy for domestic gas, electricity has been relatively cheap for Bangladeshis, and politicians are wary of new capacity forcing a sharp increase in prices. This sense of coal’s cheapness has fallen out of tune with today’s realities, but opinions have been slow to adapt. Coal-fired plants are also, universally, very large projects. Very large projects also, universally, give the greatest opportunities for large profits – regrettably often of the corrupt kind: it is much easier to get rich skimming off a mega-project than from dozens of small-to-mid-size renewable projects. Coal-based electricity also means large-scale domestic coal mining, with similar opportunities.

The big drawback for a coal-based plan for Bangladesh is economic reality. The perception of coal’s cheapness does not match its real costs (and here we only mean economic cost, without speaking of externalities like emissions). Developing Bangladesh’s coal mines will be very expensive, and very large greenfield projects also come with very large risks of delays and cost overruns. Transporting the coal to power plants can also be expensive. Importing coal also has high transport costs, as Bangladesh has virtually none of the needed import infrastructure it would require to feed several coal-fired plants. So coal feedstock is not likely to prove very cheap. A best case, looking costs in neighboring India, is that Bangladesh would produce coal-fired electricity at $0.08/ kilowatt hour – about the average retail price for electricity in the country today. More likely, with all the required ancillary infrastructure, large-scale coal power would cost at least $0.10/ kilowatt hour.

By contrast, auctions almost everywhere for wind and solar power are seeing prices at $0.07/kilowatt hour – even at $0.03/kilowatt hour in a handful of countries. Prices for generation continue to drop. Prices for energy storage, required to make intermittent wind and solar power available around-the-clock, are also dropping fast. The economics of wind and solar will increasingly be better than those of large-scale coal.

The problem for Bangladesh and its policy-makers today is that successful auctions for large-scale wind or solar power require significant planning. Planning is required not only for the new generation plants, but also for associated storage, and for upgrading the transmission grid to deal with large amounts of intermittent power supply. The planning is made trickier due to the lack of available land in Bangladesh, unlike in Pakistan. While Bangladesh has some excellent people resources in its ministries and administration, it doesn’t have a great many of them. One dead-end answer being looked at has been to have the government be the one to build solar plants: this has not worked anywhere outside China (excluding China, wind and solar generation is nearly 100% privately owned), including countries with much more public execution capacity than Bangladesh.
Still, this looks like a better set of problems to have to solve than those associated with coal.

These are big decisions for Bangladesh. Get it wrong and power prices will go up, with attendant political risks. Do nothing, and the economy will strangle for lack of power. Do coal, and the climate equation for everyone gets worse.

Lately, there are positive signs that Bangladesh is making the needed course correction. The Bangladesh Power Development Board’s 2016 Annual Report noted an expected eleven new coal-fired plants to be commissioned in the next five years. Its 2018 Report has this down to three, of which one – the Rampal project – has already seen repeated delays. Gas-fired projects are moving forward closer to the expected rate, with the GE and Mitsubishi joint venture with Bangladesh’s Summit Group – signed in July 2018 to establish five power plants along with gas import facilities – slated to become the country’s largest private investment on record. But wind and solar will be needed to fill the gap and help Bangladesh keep up with growth. Another country to watch for big decisions.