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Nov 01, 2014

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Green Energy Financing in Bangladesh1

by Bikash Singha Sutradhar2 Assistant Director, Bangladesh Bank Head Office, Dhaka, Bangladesh Email: bikash.singha@gmail.com

1 Paper presented in IFAD-APRACA FinPower Regional GreenFinance Forum: Integrated Clean and Renewable Energy and Environmental Sustainability Components into Rural Financing.2

Views expressed in this paper are the authors own and do not necessarily reflect the views or policies of Bangladesh Bank.

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Preface

Increasing the use of renewable energy is seen by many as a solution to the manifold problems for developing countries like Bangladesh. Though the initial cost of solar energy is pretty high (approximately USD 200 minimum, where as income of many rural household is less than a dollar a day), it can be offset by no or minimum variable cost and can be installed in the remotest areas including the char (river basin) lands, where people are deprived of most modern and many primary amenities including health and education. Integrated cow/poultry rearing and biogas plant can bring in a development movement by providing nutrition (milk and meat), fuel (biogas) and organic fertilizer (manure) from a single farm and can help reduce rural poverty. Increasing the use and access of renewable energy, especially in the households can help combat the power and energy crisis and help ensure adequate grid electricity and natural gas supply for the industrial usage. Renewable energy is also an adaptation and mitigation option as it is more carbon efficient and adoptable in many adverse geographical and environmental conditions and thus might help Bangladesh in negotiating with the developed world for providing better assistance to combat climate change, a problem where Bangladesh remains only at the receiving end. This paper sets forth to provide a brief overview of the renewable energy and its financing status in Bangladesh and the related issues including the policy strides, actors involved, success stories and the future prospects.

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CONTENTS Preface Bangladesh: Introduction An Overview The Rural Financial System Renewable Energy Clean Energy and Energy Use Climate Change Issues and Policies Regarding Renewable Energy Initiatives by The Government Renewable Energy: A Chronological Advancement Renewable Energy Policy Budget (2009-10) Announcement and Energy Use Organizations Working on Renewable Energy Participation of Community and Other Stakeholders Solar Power Brings Hopes for Char People Solar-Powered Hospital Major Players In Renewable Energy Expansion Infrastructure and Development Research and Development Rural Financing Policies In Integrating Energy And Environmental Sustainability Related Policies Financing Mechanism of IDCOL Bangladesh Banks Refinance Scheme For Renewable Energy IDCOL Model: A Success Story On Solar Energy EDCL Model: A Success Story On Biogas Conclusion Bibliography

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Acronyms BB BERC BOI BPDB CC GHG CDM DESA FSA GDP GOB IA IPP LGED MOF MPEMR MRA NEP PSIDF PSMP RE REB RETs RFP SCB SEDA SRO UP Bangladesh Bank Bangladesh Energy Regulatory Commission Board of Investments Bangladesh Power Development Board Climate Change Green House Gas Clean Development Mechanism Dhaka Electric Supply Authority Fuel Supply Agreement Gross Domestic Product Government of Bangladesh Implementation Agreement Independent Power Producer Local Government Engineering Department Ministry of Finance Ministry of Power, Energy and Mineral Resources Microcredit Regulatory Authority National Energy Policy Private Sector Infrastructure Development Fund Power System Master Plan Renewable Energy Rural Electrification Board Renewable Energy Technologies Request for Proposal State-owned Commercial Banks Sustainable Energy Development Agency Statutory Regulatory Order Union Parishad

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1. Bangladesh: Introduction 1.1 An Overview Bangladesh is situated between 20.30 - 26.38 degrees north latitude and 88.04 - 92.44 degrees east latitude. Placed between the Bay of Bengal and the Himalayas, Bangladesh is a South Asian country with a land area of 144,000 sq. kms. populated by around 150 million people. Dhaka, the capital city and also the most densely populated, is placed just in the middle of the country. Less than a couple of hours flight from Katmandu, the country is enriched with the beauty of nature and warmth of the simplicity of common people. The world's longest sea beach; Cox's Bazar, the Coral Island Saint Martins and the beautiful mangrove forest Sundarbans are waiting to welcome you all. Three quarters of Bangladesh population live in the rural areas The fact clearly suggests the importance of rural financing for the overall development of Bangladesh. Bangladesh's predominantly agricultural economy depends heavily on an erratic monsoonal cycle, with periodic flooding and drought. The country's main endowments include its vast human resource base, rich agricultural land, relatively abundant water, and substantial reserves of natural gas. Despite being one of the world's poorest and most densely populated countries, Bangladesh has made major strides to meet the food needs of its increasing population, mainly through increased domestic production. The agricultural land here is devoted mainly to rice and jute cultivation, although wheat and maize production has increased in recent years. Nonetheless, an estimated 10% to 15% of the population faces serious nutritional risk mainly due to lack of employment scopes, which again calls for increased financing in the rural areas of Bangladesh. Among the recent major developmental issues of Bangladesh, climate change is getting the highest priority as it is a cross-cutting issue. Poverty reduction through income generation is another important issue, especially for rural Bangladesh. Being a small country having a very large population, no Government in Bangladesh can ignore the food security issue. Access to finance is still a major issue for Bangladesh despite the fact that non-governmental organizations are playing a remarkable role in dealing with microcredit for the rural poor. Power is considered as a major factor of production. The people of Bangladesh have very limited access to energy mainly due to limited availability and network. Electricity and natural gas are the major sources of power in Bangladesh. But only around 20-25% of the population has access to electricity. During summer, the country faces a severe load shedding causing a great concern for the governments. Access to natural gas is much lower (less than 5%) and is confined in Dhaka and the eastern part of the country (Dhaka, Comilla, Chittagong, etc) with the recent addition of Rajshahi. Per capita consumption of commercial energy and electricity in Bangladesh is one of the lowest among the developing countries. In 1990, more than 73% of total final energy

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consumption was met by different type of biomass fuels (e.g. agricultural residues, wood fuels, animal dung, etc. 1.2 The Rural Financial System Despite substantial bank branch expansion and emergence of microfinance institutions (MFIs), limited access to basic financial services still remains a deprivation suffered by large segments of the poorer rural and urban population in Bangladesh, more hurtful than other deprivations in restricting opportunities of freeing themselves from the poverty trap. Financial inclusion of the poorest, particularly their access to small-sized credit for incomegenerating self-employment activities (microcredit) is a major tool in Bangladesh for combating poverty. Microcredit was pioneered by Nobel Laureate Dr Yunus in the late nineteen seventies and by now extensively replicated worldwide. The coverage of financial services is still incomplete. In Bangladesh, rural finance consists of formal and informal financial institutions, small and large, that provide small-size financial services to the rural poor, as well as larger size financial services to agro-processing and other small and medium rural enterprises. Rural finance also covers a wide array of microfinance institutions (MFIs), ranging from indigenous rotating savings and credit associations and financial co-operatives to rural banks and agricultural development banks. Rural finance is a vital tool in poverty reduction and rural development.

Rural Financing

Formal

Informal

Commercial Banks Specialized Banks BRDB BSBL NGOs

Traditional money lenders Landlord Relatives Neighbors Shopkeepers

Figure-1: Rural Financial Structure of BangladeshFormal rural financial markets in Bangladesh comprise rural branches of nationalized commercial banks, a sizeable number of private banks, cooperative banks and societies and specialized banks such as the Bangladesh Krishi Bank and the Rajshahi Krishi Unnayan Bank. Government institutions and programmes such as the Bangladesh Rural Development Board (BRDB), Bangladesh Samabay Bank Limited (BSBL) are also playing a significant role.

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However, the non-governmental organizations dealing with microcredit are still playing the most prominent role and many people in rural Bangladesh call the MFIs like BRAC, ASA or Proshika as banks. Currently 48 scheduled banks are operating in Bangladesh under the direct supervision of Bangladesh Bank (the central bank of Bangladesh) of which 38 are having either private or foreign ownerships. Apart from the State-owned commercial banks (Sonali Bank Ltd, Janata Bank Ltd, Agrani Bank Ltd) and the the specialized banks for agriculture- Bangladesh Krishi Bank and Rajshahi Krishi Unnayan Bank, the other banks have a very slim presence in the rural areas of Bangladesh. The Central Bank is pushing the banks for expanding their operations in the rural areas by imposing pro-rural rules but the responses are showing examples