Is Bangladesh government turning away from coal?

In late June, state minister for power Nasrul Hamid stated that the Bangladesh government was seriously reconsidering the nation's plans for coal-fired power plants.

According to comments made at a Centre for Policy Dialogue web discussion, Bangladesh is now considering limiting coal-fired power development to five gigawatts (GW), and with a greater focus on more LNG-fired power.

With the operational 525 megawatt (MW) Barapukuria coal plant, the 1,320MW Payra coal plant essentially completed, and the 1,320MW Rampal and 1,200MW Matarbari plants under construction, Bangladesh will soon have 4.4GW of operational coal power, meaning that the coal-fired generation build has all but ended if the 5GW limit becomes the policy.

The state minister justified this significant rethink by noting that not only were LNG-fired power plants more efficient and cleaner than coal-fired generators, LNG prices were now looking cheaper in the long run.

Elsewhere, the state minister has acknowledged that Covid-19 has significantly changed the outlook for power demand growth, saying the government has engaged consultancy firm PwC to review the economic impacts of coronavirus on the power sector.

He has also noted that some oil-fired power plants, which generate power at a high cost, will start a retirement process.

If Bangladesh really is limiting coal power development to 5GW, then this is an extremely significant development for the coal industry across Asia. Bangladesh has almost 18GW of proposed coal-fired power plants in the development stage of its project pipeline, according to Global Energy Monitor data. If 5GW is indeed to be the limit of the nation's coal power development, then virtually none of that pipeline will move forward to construction.

This development also calls into question the need to ask the Japan International Cooperation Agency (JICA) to fund a second coal power plant in Matarbari. The Japanese government recently confirmed that JICA will proceed with a preparatory survey for a second Matarbari coal plant. JICA also helped prepare Bangladesh's 2016 Power System Master Plan which is not fit for purpose in a post-coronavirus economy and needs to be replaced.

A positive step forward

If this stated willingness to move away from coal power becomes the actual policy, then this change would indeed be a long overdue and a positive step forward for Bangladesh's power system.

In May 2020, the Institute for Energy Economics and Financial Analysis (IEEFA) published a report which highlighted that the growing overcapacity and capacity payments to power plants that lie idle much of the time were putting Bangladesh's power system in a perilous financial position. A shift away from developing large coal power plants is prudent, given the current overcapacity, and the fact that Covid-19 will significantly lower power demand growth for the foreseeable future.

A move to cut excessive and expensive oil-fired power capacity is also a sensible step. But new oil-fired power plants are still being developed in Bangladesh – a situation that must be remedied to avoid unnecessary expense.

Meanwhile, avoiding burdensome coal power capacity payments will only benefit Bangladesh if the nation is not alternatively locking itself into expensive capacity payments for LNG-fired power plants.

Although LNG does have advantages over coal, including reduced air and water pollution, Bangladesh must avoid overbuilding this type of power plant as it threatened to do with coal power. A full reassessment of power demand growth expectations in the wake of Covid-19 will be required to avoid this potential problem.

Bangladesh should also be mindful of some of the particular problems that LNG brings with it. In addition to needing expensive infrastructure for LNG delivery, these fossil fuel's greenhouse gas emissions are broadly similar to coal if the whole product lifecycle is considered.

A more ambitious renewable energy policy would avoid such issues. With no fossil fuel requirement, wind and solar power do not require expensive fuel transport infrastructure and logistics, and do not produce greenhouse gases. Renewables' contribution to air and water pollution is also zero.

Bangladesh's positive change in focus away from coal does not side-step the need for more investment in renewable energy and power grid enhancements. Improvements to the grid would help reduce high transmission and distribution losses. It could also help deliver electricity from places with excessive power to areas with shortages, helping to address the overcapacity problem.

Further commitment to renewable energy would enable Bangladesh to take advantage of the declining cost of wind and solar power generation, limiting the need to increase power subsidies and consumer tariffs that importing fossil fuels would require.

In this light, the establishment of a joint venture between Bangladesh and China for the development of 500MW of renewable energy capacity is another positive step. With China's opportunity to develop coal-fired power in Bangladesh possibly closing, further Chinese investment in solar and wind power could be available to Bangladesh.

Although reliance on imported LNG will bring its own issues, stepping away from further coal power construction and oil-fired power shutdowns would be a beneficial move for Bangladesh. Such a change in direction would help the nation avoid further overcapacity and the expensive capacity payments to power plants standing idle as a result.

This, in turn, would help reduce the financial pressure within the power sector, reducing the need for further hikes in power subsidies and tariffs at a time when the nation will be seeking an economic recovery from the Covid-19 pandemic.

Simon Nicholas, is an IEEFA energy finance analyst. He can be reached at [email protected]