On 27 August, the Ministry of Power, Energy and Mineral Resources (MPEMR) of the interim Bangladesh government cancelled the contracts of 42 power plant projects, including 37 which were renewables-based. The plants were either at pilot stage, or had received a letter of intent (LOI) from the Bangladesh Power Development Board (BPDB), issued when required compliances have been fulfilled, and construction can commence.
The cancelled contracts had been signed, or were in the tendering process, under the Speedy Enhancement of Power and Energy Supply (Special) Act 2010, a law passed by the previous government which allowed the MPEMR to accept unsolicited contractual arrangements. The interim government announced that all future public procurement will instead be carried out following open tendering procedures that prioritise transparency.
Of the cancelled projects, 30 were to be set up under joint ventures or ‘build-own-operate’ initiatives by investors from 15 different countries, in which private companies were sold rights to construct and run power plants for a period of time.
Several investors, including overseas investors who received LOIs, have already invested a considerable amount in their respective projects, estimated at USD 200 million in total. Unless the government reviews its position on the projects, its decision to cancel them may lead to legal disputes.
Additionally, the cancellation of so many renewable energy projects, without presenting alternatives, will likely have created an impression amongst investors that the interim government is not fully committed to pursuing the expansion of clean energy, overshadowing its other initiatives to spur investment in renewables.
However, as we share in a recent presentation at the Bangladesh-China Renewable Energy Forum, we believe a win-win solution can still be arrived at. This can be achieved if the interim government floats tenders amongst the investors of the cancelled projects for new renewable-energy plant projects under the “reverse auction” method, in which the lowest price submitted wins the bid. It should also continue to pursue the open and competitive tender process it has opted for in future renewable energy projects. Pursuing both options simultaneously will reassure overseas investors and financiers looking to invest in Bangladesh’s renewable energy sector, while minimising the fallout from the project cancellations.
These options could positively contribute to the development of renewables in Bangladesh by building investor confidence in the interim government and the country’s business environment. It is especially important to ease the concerns of potential financiers from China, the largest global investor in the renewable energy sector, and a country with an overwhelming share in investment Bangladesh’s renewable energy sector.
China’s current and potential stake
The cancelled projects have a proposed electricity generation capacity of 5,300 MW, of which 3,100 MW was allocated to the 37 renewable energy projects. Chinese investors were the third-largest source of investment and finance, having had four renewable energy-based power plant projects totalling 450 MW lined up.
The four China-financed plants are owned by Independent Power Producers (IPPs) – private owners that generate power to sell to the grid. Financing structures ranged from a joint venture (Lama), to a 70% ownership stake (Madarganj) and 100% ownership (Ghoradhap and Gauripur). The cancellation of these projects is likely to have varying financial implications for the Chinese and other investors and financiers.
While China’s total capacity in the four projects may seem small, the country has a track record in investment in energy in Bangladesh. According to data from the American Enterprise Institute, from 2010 to 2023, Bangladesh received USD 12.3 billion in investment from China in its energy sector. Over half of this was invested in coal-based projects, and just 4.8% in projects for alternative sources of energy. The country has much more capacity to increase its investment in renewables, especially given its aims to increase renewable energy investment and pledges to stop building coal power plants overseas, and Bangladesh should seize this opportunity to attract further Chinese investment.
Additionally, encouragement of Chinese renewable energy investment would help strengthen overseas financing in Bangladesh’s renewable energy sector by attracting other foreign investors.
Future options for investors in renewable energy
The Special Act, which was last amended in 2021 and renewed up until 2026, was publicly criticised for two key reasons: a lack of transparency, and because it meant the contracted price of power was significantly higher than what was possible under an open-bidding process. From 2022 to 2023, nearly a quarter of the country’s power was generated from privately owned furnace-oil-fired power plants, prices for which were three times more expensive than other fuels.
These prices had created a large financial burden on the BPDB, the public agency in charge of procuring generated electricity. The decision of the interim government to cancel the unsolicited public contracts, which are yet to enter the construction phase, is expected to ease this.
The BPDB is preparing to float tenders for the development of 10 grid-connected solar power plants in the private sector, each with a capacity of 50 MW. This would be the first project tender under the new open and competitive process, which is expected to secure better deals for the MPEMR than those signed under the previous administration.
Power Division senior secretary Habibur Rahman has said the tenders will be beneficial to those who have already procured land for the project, but will be done through a competitive bidding process.
Under our proposed “reverse auction” method, the government would offer the same sites for a project, with a proposed capacity and quoting an initial price, against which bidders offer decreasing prices; whoever submits the lowest price would win the bid. Under this system, a price would be arrived at that is likely lower than what was offered under the cancelled contracts, benefitting the BPDB and potentially reducing the burden on consumers.
Developers who have already secured land would be in a good position to put bids in for such ventures since they already have LOIs secured. Additionally, new technologies available in the market have made set-up and operational costs much lower today compared to when the initial negotiation took place, minimising any potential reductions in profit.
The reverse auction method promotes cost efficiency, fair project allocation and a reduction in tariffs, benefiting both local and foreign firms, ultimately leading to better rates for power generation.
Since generated capacity of renewable energy in Bangladesh, at 4.5% currently, is still some way off its goal of 15% by 2030, there is significant scope for adding renewables-based power generation capacity in the grid. Given this, the government could consider negotiating further tenders with the holders of the cancelled contracts under either of these processes.
China’s comparative advantage in the manufacturing of parts, equipment and machinery for renewable energy, as well as better installation and operating services, and access to capital and financing, are likely to make its bids the most competitive in both processes. More broadly, this advantage means the country’s investment under these processes is expected to accelerate further.
The interim government has created expectations about energy transition in the country by undertaking targeted measures for promoting local and overseas investment on renewable energy. Using the open and competitive bidding process and the reverse auction method would not only promote renewable energy-based power generation in the country, but would also sustain the interest of investors already involved in Bangladesh’s renewable energy sector and present a positive image about the country’s business environment to prospective investors.
