Low Carbon Development Options for DFID Bangladesh

TABLE OF CONTENTS

1.EXECUTIVE SUMMARY

2.BACKGROUND

a.Country Context

b.Donor Engagement

3.OPTIONS FOR LCD ENGAGEMENT

a.Energy access for the ultra-poor

b.Household-level opportunities (rural)

c.Household and commercial opportunities (urban)

d.Enhanced Industrial Efficiency

e.Agriculture and Municipal Opportunities

f.Power Sector Reform

4.DECIDING BETWEEN OPTIONS: CRITERIA AND RECOMMENDATIONS

a.Criteria

b.Recommendations

  1. EXECUTIVE SUMMARY

Bangladeshhas low energy use and low greenhouse gas emissions. Less than half of the population of 160 million has access to electricity, with many relying on traditional biomass. Energy demand already exceeds supply by a significant margin and is rising fast. The gap is a major political issue. Domestic energy resources are limited, with gas reserves depleting and coal potential not yet exploited. Renewable energy is in its infancy. The price of imported energy means that this is unlikely to fill the gap. Pricing, regulatory and governance issues also mean energy is not used efficiently.

In this context, there are a range of options for interventions which can deliver significant results on poverty and in moving Bangladesh towards a lower carbon pathway. This report examines opportunities in renewable energy and energy use efficiency (the latter in a range of sectors, including well beyond the energy sector itself. Options fell into five main areas:

-Energy access for the ultra-poor, whose livelihoods, health and well-being are stunted by a reliance on biomass;

-Rural household-level opportunities, through supporting accelerated deployment of renewable energy systems (primarily solar);

-Urban household opportunities, through installation of solar systems in buildings;

-Enhanced industrial efficiency, where demonstrating the value of more efficient resource use can have big leverage;

-Agriculture and municipal opportunities: there is significant scope for improving resource efficiency in agriculture, with carbon benefits, while municipal planning has a big impact on future emissions;

-Power sector reform is key both to lowering the future carbon pathway and in meeting the challenge of energy supply.

A number of internal and external factors were considered in deciding between these options. The report recommends that:

-existing climate-specific trust funds should not be used to scale up low carbon work;

-DFID Bangladesh should use its existing programmes to:

  • add energy assets to the bundle provided to the ultra-poor;
  • provide support to scale up deployment of solar home systems;
  • explore the scope for supporting enhanced energy efficiency under the private sector programme;
  • work with the government and ADB to install renewable energy systems in clinics and schools

-DFID’s regional initiatives on urban resilience and planning should include Bangladesh components;

-DFID Bangladesh should initiate new programmes, with additional ICF funding, for work on partial risk guarantees (or other risk mitigation instruments) and for a new power sector reform programme.

  1. BACKGROUND

The DFID Bangladesh Strategic Programme Review (SPR) highlighted the need to explore further the opportunities for low carbon development (LCD) in Bangladesh, with a particular focus on leveraging the private sector. A scoping mission was conducted in August 2011 to explore the opportunities for LCD investment and to inform current and future programming. The objectives were to:

  • Assess the adequacy of the existing and pipeline programmes that work in low carbon development in the DFID Bangladesh portfolio.
  • Explore opportunities for new programming with a particular focus on the private sector and extreme poor.
  • Identify the needs of stakeholders for LCD at national, sub-national and sectoral levels.
  • Review LCD initiatives by other development partners and private sector in order to explore the potential for joined up working.
  • Explore the opportunities for addressing the effectiveness of multilateral delivery channels in support of low carbon development.
  • Contribute to the Strategic Process Review’s ongoing work and provide practical and strategic options for implementation across the programmes.
  • Inform DFID Bangladesh’s strategic influencing agenda for LCD.

The mission was conducted by Owen Jenkins(Head, Climate Change and Energy Unit, DFID India), Faisal Islam (Climate Change and Environment Advisor, DFID Bangladesh), and Ritika Goel (Senior Climate and Energy Policy Advisor, British High Commission/DFID India). The mission carried out desk research and met with the private sector, civil society, bi- and multilateral development partners, government and other stakeholders in Bangladesh. This report summarises the findings and recommendations of the mission.

  1. Country Context

Figure 1: Bangladesh GDP per unit of Energy Use (PPP dollar per kg of oil equivalent)[1]

In 2005, Bangladesh emitted less than 0.2% of world’s GHG emissions, reflecting very low energy consumption. But despite this low per capita energy use, Bangladesh cannot meet even its current energy demand. That demand is growing by around 10% a year. And while energy efficiency is improving (figure 1), resources are still not used efficiently.

Less than half the population of around 160 million has access to electricity. A large proportion still relies on traditional biomass to meet their energy needs. In rural areas in 2005, 75% of people were not connected to the grid, in contrast to 50% of those in Dhaka.[2] Without large subsidies, off-grid rural households cannot afford the cost of grid expansion. But energy demand is on a long-term upward trajectory (figure 2), with electricity demand growing at over 500 MW per year, due to population growth, a rapid increase in demand for electrical appliances and industrialization.[3] Expanding energy resources are essential for national economic development and individuals’ energy access in the years ahead.

Figure 2: BangladeshEnergy use (kg of oil equivalent per capita)[4]

Currently, over three quarters of power generation capacity is based on natural gas (figure 3). Over half of domestic gas production is used for electricity generation. Fertilizers, industry, households and captive power generation are the other major gas consumers. The Bangladesh Climate Change Strategy and Action Plan, 2009 predicts that known gas reserves in Bangladesh are expected to be used up in about a decade.

Figure 3: Bangladesh Installed Capacity as on March 2011

Approximately three billion tons of high quality coal reserves have been discovered in Bangladesh in five different fields. Most is only likely to be accessible as open-cast mining, with its likely related environmental, social and agricultural issues.

Almost all industriesuse captive, mostly diesel based generators, an estimated 12% of sales, and 2% of GDP goes towards the additional cost of running these generators. According to the World Bank Investment Climate Assessment (ICA), shortfalls in electricity could be costing the country two percentage points of growth per year.[5]

The energy crisis underlines the need for Bangladesh to use scarce resources more efficiently. The climate action plan admits that ‘Bangladesh is an energy inefficient country’. Industry and households are largely energy inefficient, partly because electricity is hugely subsidised. The energy subsidy bill is likely to double to 80 billion taka (US$ 1.1 billion) in the current fiscal year and would go up further to 150 billion in the coming fiscal year, driven by a slew of diesel and furnace oil fired power plants coming online to meet the severe electricity shortage.[6]

Figure 4 highlights the present energy situation and the challenge of meeting the energy demand by 2050.[7]

Figure 4: The challenge of meeting energy demands in 2050

Metric / 2010 / 2050
Capacity / 5.5 GWp / ~200 GWp
Demand / 40 TWh (4.6 GW) / 1,267 TWh (145 GW)
Supply / 28 TWh (3.2 GW) / 1,267 TWh (145 GW)
Grid / Centralised / Interconnected smart grids
Fuel / Gas
Centralised Generation / Coal, Nuclear or Solar
Significant Distributed Generation
Transport / Limited Access
Expensive, Reliant on gas or oil imports / Subways and public transport in urban areas, National and regional high speed railways, Electric Vehicles for private users
Population / 160 million / 200 million
Electricity Access / 60 million / 200 million

The Bangladeshi government has set a target of electricity for all by 2020 with a generation capacity of 20,000 MW. It plans to increase power generation to 13,000 MW by 2015, mainly through coal generation. It also plans to reduce energy subsidies, introduce Renewable Energy Certificates (RECs) and expand cross-border trading.

To meet future energy demand, the government is aware that renewable options of energy generation need to be explored. In terms of resource, solar seems the most promising, though biomass (from rice husk and other agricultural residues) also seems abundant. A detailed assessment of wind and other renewable resources is required, as is a study of competitive uses of biomass, to determine availability for energy generation.

With ADB assistance, the Bangladesh government also plans to set up 500 MW solar projects by 2015, including solar irrigation pumps, solar rooftop installations in urban areas and mini solar grid plants in rural areas. The Energy Department also plans to work on a strategy paper on providing energy access for the poor. ADB is also helping prepare a ‘Strategic Energy Plan for GHG emissions’, which they expect to release in September 2011.

Bangladesh has a large and vibrant civil society; those working on harnessing solar energy and organic waste include Grameen Shakti, BRAC and the Rural Service Foundation. The donor community is also active on climate change. The Bangladesh Climate Change Resilience Fund (BCCRF) – a US$110 million multi donor trust fund managed by the World Bank - has been set up to aid implementation of the government’s Climate Change Strategy and Action plan (BCCSAP). The government has also allocated USD 300m from its own resources to plan and implement climate projects under the BCCSAP. US$ 100 million has already been allocated to implement projects under the fund; most are pilots or demonstrations. Low carbon growth is one of the BCCSAP pillars, but there has so far been no clear thrust for implementation.

A Climate Change Unit has recently been set up under the Ministry of Environment and Forests. Its aim is to coordinate climate change related activities for the Government of Bangladesh, and to monitor and evaluate the approved projects under the government’s climate change trust fund.

  1. Donor Engagement

The donor community has also been engaging on climate change mitigation and the energy sector in Bangladesh. The most notable and possibly the most successful of these interventions has been large scale roll-out of Solar Home Systems (SHS), of which more details are in section 3.b below.

USAID recently entered into an agreement with the government and will work on GHG inventory, emissions modelling, renewable energy, energy efficiency and forestry. ADB has been working on energy sector reform, and financing energy infrastructure including power plants and transmission lines. The World Bank and Government of Bangladesh launched a CFL disbursement programme, under which 5 million CFLs were distributed in return for incandescent bulbs in 2010. The World Bank is also working on financing energy efficiency in brick kilns, rural electrification and renewable energy. GIZ is implementing ‘The Sustainable Energy for Development Programme’ with the Ministry of Power, Energy, and Mineral Resources, disseminating SHS, biogas digesters, and energy-saving cooking stoves and rice parboiling systems, and working on energy efficiency. UNDP is working on several climate change mitigation projects, mainly capacity building. This includes piloting work on energy efficiency for brick kilns and support on appliance standards and labelling.

  1. OPTIONS FOR LCD ENGAGEMENT

Options for LCD interventions can be broadly classified into three groups: promoting renewable sources of energy (e.g. solar, biogas), enhancing energy efficiency (e.g. improved cooking stoves, minimizing system losses, co-generation), and protecting/promoting carbon sinks (e.g. afforestation).

Of these, the first two options are discussed below as offering the most significant potential for scaling up.DFID Bangladesh does not have a comparative advantage or recent experience in managing carbon sinks and its potential contribution to LCD in Bangladesh is limited.

The options are discussed according to possible entry points, staring from micro-level interventions and moving up towards sector-specific options.

  1. Energy access for theultra-poor

Access to energy is a precondition for economic progress and better standards of living. Yet some 80 million people in Bangladesh do not have access to the grid and rely primarily on biomass and kerosene for cooking and lighting. The bottom 10%-20% of this group are so poor that they can barely afford to buy kerosene. This lack of access to modern forms of energy imposes significant costs on the ultra-poor households in the form of:

  • Health impacts from smoke and carbon monoxide from traditional stoves in poorly ventilated kitchens;
  • Fire risks;
  • Time cost (2-3 hours of foraging for biomass per day)
  • Loss of productive time after sunset;
  • Lack of time for homework for school going kids;
  • Lack of education and entertainment from TV;
  • Lack of security for women collecting water or responding to nature’s call at night;
  • Lack of business activities after sunset.

Considering these impediments to development and the very limited ability of the ultra-poor to pay for alternative energy sources, a number of options have been introduced by NGOs in rural communities that could be incorporated in existing DFID Bangladeshprogrammes. These include:

  1. Improved cooking stoves (ICS):the technology has been field tested and refined over the years. The present model, which is being sold commercially on an installment basis, has gained acceptance among its rural clients. Given that these stoves lower consumption of biomass by 50%, eliminate smoke and carbon monoxide, and cost only approximately USD 12 per unit, ICS could be includedin the asset bundle provided to ultra-poor households through DFID Bangladesh’s extreme poor focused programmes such as CLP-2 and CFPR.
  2. Solar lantern: atypical unit uses a small solar panel and an LED light that provides 4 hours of high quality light per charge and may cost around US$16-$20 per unit. Considering the range of benefits from access to high quality light and the relatively small unit cost, solar lanterns could also be included in the asset bundle provided to extremely poor households.
  3. Low wattage solar home system (SHS): It is possible to introduce low-wattage (10 and 20 watt) SHS through subsidized micro-credit or installment arrangements. Presently, NGOs are offering low-watt SHSs through a ‘micro-utility scheme’that allows the buyer to rentsome of thelight bulbs toher neighbors and thereby lower her monthly cost. The owner typically pays a low initial paymentof only 10% (US$ 160 for a 20 watt system) and the rest are paid in 42 monthly installments (approximately US$ 3.5 per month). Service charges for these low wattage systems are waived to the user (i.e.subsidized).

The potential for scaling up the provision of ICS and solar lanterns through DFID Bangladesh’s existing programs is considerable. For example, providing ICS and solar lantern to half a million beneficiaries of CLP-2 alone would require a grant of US$ 14 million. Though the formal cost-benefit analysis for such a transfer is not readily available, the potential benefits are likely to significantly outweigh the cost. Moreover, solar lanterns would significantly reduce the use of kerosene and so lower subsidy payments by the government (in India, each unit of the Sun King solar lantern is saving USD 30 per household per year in government subsidy)[8].

  1. Household-level opportunities (rural)

The potential for promoting renewable energy (solar and biogas in particular) in rural and urban households is huge. In fact, as mentioned above, a silent revolution is already taking place in off-grid areas of Bangladesh through a semi-commercial program supported by a number of donors (World Bank, ADB, GIZ, KfW, and Islamic Development Bank) and administered by the Infrastructure Development Company Limited (IDCOL).

Since 2003, IDCOL has been refinancing its 30 partner NGOs in distributing SHS and building bio-gas plants through micro-credits to rural households. To date, IDCOL has supported the installation of about 1 million SHSs and over 18,000 biogas plants. Its goal is 2.5 million SHSs in off-grid areas by 2015 (equivalent to 150 mega-watt) and over 37,000 biogas plants by 2012 (see Box 3a for a snapshot of a typical SHS).

IDCOL’s model of refinancing, quality assurance, capacity building and working through MFIs has worked very well so far – some 35,000 new SHS are being installed every month and the loan repayment rate has remained close to 99% over the years. The World Bank, one of the main sponsors of IDCOL renewable energy program, sees IDCOL’s SHS project as an example of global best practice.

IDCOL has a robust program and plans for scaling up its renewable energy program. In addition to SHS, IDCOL has financed solar mini-grid, solar irrigation pumps and biogas based power plants.

Some of these technologies, e.g. solar irrigation, can make a significant contribution to the rural economy under the right circumstances. Tables 3a and 3b summarize IDCOL’s projected interventions in the renewable energy sector and corresponding financing needs.

Box 3a. Key features of a solar home system
/
  • Customized capacity – 10 to 135 Watt
  • Package includesa solar panel, battery, circuits, converter, charger, 3-4 light bulbs (CFL or LED)
  • Min 15% down payment, 2 or 3-year payback, 6%-8% service rate
  • 3-year after sale service
  • 20-year panel, 5-year battery life
  • Approx. 6000 solar technicians (mostly women) trained
  • Lead NGOs: Grameen Shakti, BRAC and Rural Services Foundation.

The scheme is not yet perfect. Many batteries of the SHSs distributed under the programme are now reaching the end of their 5 year life and need replacing, at a cost of approximately 10,000 taka. There is a need to introduce a scheme for battery re-financing and disposing of the old battery in an environmentally sustainable manner. Some NGOs like Grameen Shakti have started designing and executing such programmes.