Policy and investment need to prioritise renewable energy

Illustration: TBS

Green finance is now a prevalent and powerful terminology in the banking sector. Our central Bank—Bangladesh Bank (BB) provides a complete guideline regarding green banking, resulting in all of the scheduled public and private banks initiating their green activities. 

A yearly sustainability ranking has been developed based on their performance. 

Banks provide loans for addressing environmental issues such as renewable energy (RE), energy and resource efficiency, alternative energy, liquid waste management, solid waste management, circular economy, eco-project financing, environment-friendly brick production, green/environment-friendly establishments, green agriculture, green socially responsible financing, blue economy financing, and information and communication technology.

Even though it is less than necessary, the loan disbursement for green finance mostly rises annually in Bangladesh. According to the BB report, green finance's percentage of total loan disbursement was 3.96% in 2020, 3.06% in 2021, 4.97% in 2022 and 7.25% in 2023.

In 2024, it was 13.16% from January to March (Q1), it was 15.38% in April-June (Q2) and 16.83% in the July-September quarter (Q3).

A recent study by the Centre for Environment and Participatory Research (CEPR) and Coastal Livelihood and Environmental Action Network (CLEAN) shows that 43 out of 62 commercial banks invested in green finance. 

While these green initiatives assist in reducing greenhouse gasses, creating a fossil-fuel-free country will require more investment in the RE sector. The government is committed to achieving 10% RE by 2025 and 100% by 2050, while RE sources currently contribute around 3% of the total energy mix. 

Bangladesh's primary renewable energy sources include solar, wind and biomass. Solar energy has slightly increased, but growth through the banking sector has so far not been up to the mark. 

If we want to achieve 10% of RE by 2025, we need to invest Tk24,303 crore immediately, which is quite difficult to achieve. However, if we consider the target 30% RE by 2030, an amount of Tk87,657 crore is required in the next 6 years. 

A comprehensive mechanism is required to mobilise finance, including budget allocation, subsidy, tax exemption, import policy rationalisation, feed-in tariff, and long-term soft loans from public and private financial institutions.

In the last six years, domestic banks financed Tk73,172 crore in green financing. The amount was only Tk9,875 crore in 2018-19, reaching Tk22,960 crore in 2023-24. 

On average, green finance has increased by 27.8% per year. Although the rate decreased by 8.5% from 2018 to 2021, when other sectors were included in the green financing taxonomy, the rate of investment increased by 77% between 2022 and 2024. 

According to a BB report, commercial banks financed only Tk2,111 crore for RE in the last six years, which is 2.9% of the total green finance. The amount was between 2.2% to 2.5% from 2018-19 and 2019-20. It slightly increased from 3.5% to 3.7% between 2020-21 and 2021-22. 

The amount was further increased to 4.1% in 2022-23 but decreased to 2.2% in 2023-24. With this trend, the targets of 2030 and 2050 will not be achievable. 

All of us know that 'green banking' generally refers to environmentally friendly financing for development. According to the BB guidelines, all banks and financial institutions have initiated environment-friendly banking activities. 

BB also introduced a Green Transition Fund (GTF) in 2016 to promote green financing. A GTF guideline was promoted for this purpose. A standard Sustainable Finance Policy (SFP) was also updated in 2023 to guide banks and financial institutions. 

All green activities are related to emissions but not directly linked to the transition from fossil fuel to renewables. We need to invest more in renewables for the transition.

The Government of Bangladesh (GOB) has already taken some initiatives to boost RE in the country. It provides 15 years of tax exemption for RE-based independent power producers (IPP), which includes 100% tax exemption for 10 years, 50% for 3 years and 25% for the last 2 years. 

The Chief Advisor has also called on China to establish solar module manufacturing facilities in Bangladesh. 

Additionally, a tender is set to come out soon for 30 to 40 RE projects. The government has also called multilateral and bilateral partners to finance RE in Bangladesh.

Banks are also facing some limitations. Most commercial banks do not have any human resources to analyse the economic potential of RE projects or technical know-how. 

Most of the small and medium RE entrepreneurs do not have enough expertise to formulate a bankable project with revenue, fixed costs, and profit and loss analysis. It is difficult for a bank to provide finances for a private RE project in the absence of a guaranteed long-term private Power Supply Agreement (PSA). Without a guarantee, banks will not be enthusiastic about financing individual rooftop solar systems due to the massive gap in trust.

To meet the renewable target, we need to consider some points.

The government must create a renewable energy fund under BB to provide concessional finance for commercial banks so that they can provide soft loans to small and medium RE entrepreneurs. 

Furthermore, reviewing BB's green financing guidelines and ensuring at least 25% green finance for RE projects as well as extending green finance to microfinance institutions (MFIs) to spread to rural areas will go a long way.

The government must also ensure compulsory disclosure of the green projects for transparency.

They must also begin initiating a feed-in tariff (FIT) for individual and small RE entrepreneurs so that they have a guaranteed profit for their investments. Tax exemptions must also be provided on the import RE accessories so that the upfront costs come down for the individual households and industries. 

Additionally, the government should Provide a subsidy of at least 30% on the installation cost for individual rooftop solar systems and establish national industries for producing RE accessories. 

Finally, it is also essential to upgrade the power of the Sustainable and Renewable Energy Development Authority (SREDA), and establish a RE division (RED) under the Ministry.

Gouranga Nandy, Free-lance Journalist and Chairman, CEPR (Centre for Environment and Participatory Research), can be reached [email protected].
 

Hasan Mehdi, Chief Executive, CLEAN (Coastal Livelihood and Environmental Action Network), can be reached [email protected].

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.