Bangladesh needs $1b yearly to generate 20% electricity from renewables by 2030: IEEFA

Highlights

• To generate 30% of electricity from renewable energy by 2040, $1.46 billion needed annually from 2030-40
• Public finance unlikely to entirely meet the funding requirements
• Land acquisition challenges, currency volatility, lower sovereign rating among main investment barriers
• Reinstating 'project implementation clause' to attract investment suggested

Bangladesh will require more than $980 million annually till 2030 to materialise the target of producing 20% of electricity from renewable sources set out in the Renewable Energy Policy 2025, according to a latest report of the Institute for Energy Economics and Financial Analysis (IEEFA).

The report, titled "Catalysing renewable energy finance in Bangladesh," published today (25 June), also says, to generate 30% of electricity from renewable energy sources by 2040, Bangladesh needs to funnel $1.46 billion annually from 2030 to 2040.

According to the IEEFA, policy uncertainty, offtaker and currency risk, land acquisition challenges, and a downgraded sovereign rating may limit capital flows into the renewable energy sector in Bangladesh. Public finance is also unlikely to entirely meet these funding requirements, necessitating large-scale private investment.

Mustafizur Rahman, distinguished fellow at the Centre for Policy Dialogue (CPD), said financing renewable energy largely depends on the will power of the policymakers given the size of the country's development budget.

"In the development budget, we earmarked more than $20 billion each year and spending to the tune of $1-1.46 billion is not challenging – if we set our priority. Pressure of financing in renewable energy will lessen if the government is able to create a congenial environment for the foreign and local investors," Mustafiz told TBS.

Challenges in renewable energy financing

The IEEFA has identified several challenges in attracting private investment in the renewable energy sector.

The challenges are policy and regulatory changes, offtaker risk, technology and performance risk, weak project pipelines, a cumbersome loan disbursement process, land acquisition challenges, currency volatility, and lower sovereign rating.

Apart from that, abrupt policy changes have also played a negative role to dent the investor confidence which ultimately minimised the inflow of foreign capital, it says.

Local investors and sponsors are not keen to invest in utility-scale renewable energy projects due to the lengthy land acquisition process, the IEEFA says, adding that the removal of the "implementation agreement" clause, similar to a sovereign guarantee, deters them from submitting proposals against the government's tenders.

On the debt front, the IEEFA says, Bangladesh's low credit ratings will increase the cost of foreign loans, which are essential for the country's economic growth and energy transition.

"The devaluation of the Bangladeshi Taka by a massive 27% against the US dollar between May 2022 and January 2025 further complicates project financing. Loans are even more difficult to secure for small projects," says the IEEFA.

Financial institutions often demand high collateral and perceive small-scale projects as risky, limiting access to financing for renewable energy ventures.

What can be done to attract investors

The IEEFA says the government can earmark land for utility-scale projects through proper resource mapping. The government can also address land acquisition challenges through the Public-Private Partnership model.

This can help mobilise private investment in renewable energy through special economic zones, thereby circumventing land acquisition uncertainties.

Policy certainty and a gradual transition from unsolicited project award to a competitive bidding process will help attract the consistent investment the sector needs until 2040.

The government can help establish a currency hedging facility to mitigate currency risk. Multilateral Development Banks (MDBs), international climate finance institutions and bilateral development financial institutions can support the creation of this facility, the IEEFA says in its recommendation.

To attract investors, it says, "The Bangladesh government may reinstate the 'project implementation clause' as a sovereign guarantee, dispel any uncertainty over payment owing to the Bangladesh Power Development Board's hefty subsidy burden or establish a funding mechanism to provide revenue assurance to renewable energy producers, mitigating counterparty risks."