Cars fill the street in Dhaka, Bangladesh

Could the Energy Crunch in Bangladesh Have Been Avoided?

As the Bangladesh government implements the highest increase in fuel prices in 20 years and rations power supplies, we ask our energy experts Tara Laan and Shruti Sharma if the crisis could have been avoided and how the energy system can be reformed.

August 18, 2022

What was the reason behind the energy price hike in Bangladesh?

Tara Laan: What we see today has a long history. Bangladesh has been subsidizing energy for many years and because the majority of their petroleum products are imported, they are subject to world market prices. Bangladesh Petroleum Corporation buys fuel at world market prices and then sells it more cheaply to the consumers, racking up debt, which is subsidized by the government. As international prices increased during this energy crisis, debt has accumulated and the situation has become financially unsustainable. To control the escalating subsidy bill, the government had to hike prices, even though prices recently stabilized.

Are there mechanisms that can protect countries from crises like this one?

Tara Laan: Almost everybody on the planet is affected by high energy costs at the moment, but there are ways to reduce the impact of volatile fossil fuel prices. 

First is switching support from fossil fuels to people. Instead of subsidizing fuel, the government could have allocated that money toward cash transfers and other social assistance measures, supporting people directly and targeting assistance to lower-income parts of the population. 

Second, there’s the issue of reducing fossil fuel demand. Countries that are 100% dependent on fossil fuels, particularly when they have to import those products, are very vulnerable to the volatile prices that we are seeing now. What we need is investment in renewable energy, which is more secure and much more stable in price.

The answer is not more fossil fuels. You are never going to saturate the planet enough with fossil fuels to reduce volatility in prices.

Tara Laan

Shruti Sharma: There are fiscal solutions that can help ease price fluctuations and limit fossil fuel subsidies without putting pressure on consumers.

It may sound counterintuitive, but one of them is taxation. We saw this strategy in India last year; when the price of oil was low, the government increased taxes on the retail selling price, subsequently, when prices started to rise, taxation was reduced. Taxation creates the space to adjust prices and cushion price hikes. It also allows governments to raise revenue that can be used to support the most vulnerable groups in times of high prices.

Another key element is the targeted approach. It’s important to understand which petroleum products are used by the poor and reform fossil fuel subsidies in a way that protects these groups, including women and girls. Some energy sources, like kerosene, are predominantly used by low-income groups and can be easily identified. Others, like diesel, are used more broadly and require strategic solutions and control mechanisms to make sure that electricity generation, public transport, and food security are protected while subsidies are removed. 

Transmission towers stand behind the Turag River in Bangladesh
Transmission towers by the Turag River in Bangladesh.

What would you say to those who claim that the only solution to the Bangladesh energy crisis is investing in local gas and coal infrastructure? 

Shruti Sharma: The crisis we see today in Bangladesh is a pricing reform challenge rather than an energy supply issue. Fossil fuel prices will continue to be volatile in the future. With Bangladesh’s natural gas reserves dwindling dramatically and externalities related to fossil fuel consumption such as air pollution and climate change intensifying, now is the time to diversify the energy mix beyond fossil fuels.

Tara Laan: If you look around the world, a lot of countries with huge supplies of coal and gas are suffering from this energy crisis. Australia is one of the largest natural gas exporters and yet they are suffering from gas shortages and high gas prices domestically. Despite being major coal producers, China, India, and Indonesia have also not been immune to the energy crisis. The answer is not more fossil fuels. You are never going to saturate the planet enough with fossil fuels to reduce volatility in prices.

What we need is to get away from fossil fuels and instead focus on renewables, which we know are more stable in price and are getting cheaper than all forms of fossil fuel for power generation at least.

Solar panels pictured on a building roof.
Rooftop solar panels in Bangladesh.

What is the renewable energy potential in Bangladesh today?

Shruti Sharma: Bangladesh has opportunities for renewable energy; however, there are implementation and infrastructure challenges which need to be addressed. Currently, renewables account for 4% of all electricity generation in Bangladesh, out of which solar accounts for 3%. This is low compared to the government’s failed target of generating 10% of electricity from renewables by 2021. The pace of achieving targets for on-grid solar has been slow because of several factors like difficulty in acquiring land and a lack of tariff policies that promote the solar industry, among others. Despite these challenges, there has been success with solar home systems and the introduction of solar irrigation pumps. There are a lot of opportunities to expand these types of systems, taking pressure off the electricity grid and reducing the need for expensive diesel pumps and generators.

For grid-connected renewable energy to be more widely adopted, however, the electricity grid in Bangladesh may need to be upgraded to align with the distributed and variable nature of wind and solar energy. This upgrade, however, can happen gradually. Grid upgrades also deliver other benefits, like increased cross-border electricity trade. Bangladesh currently purchases contractual power from India, which offers Bangladesh cheaper electricity compared to that produced domestically through diesel or coal. Both Bangladesh and India are on the brink of formalizing electricity trade, which can then help Bangladesh access electricity at more economical rates and control the subsidy bill.

Tara Laan: You’ve got to keep in mind rising fossil fuel prices and decreasing renewable energy costs will incentivize the transition to clean energy. What the government needs is a plan for transitioning, to remove the barriers for renewables—like fossil fuel subsidies—and to provide the necessary infrastructure and policy settings that will accelerate the uptake of clean energy. Communication and consultation are also critical to bring people along with an energy sector reform agenda.

What’s next for Bangladesh’s energy system?

Tara Laan: There’s a big element of trust that must be rebuilt. The public doesn’t think they should be the ones burdened with higher energy costs if they don’t feel that the government’s handling the public funds properly.

To regain this trust, there needs to be transparency and a clear plan on how to support the most vulnerable as energy prices rise. This, of course, means finding funds for social protection and direct payments for the poor.

The government could look for such revenue from the taxes already imposed on fuel imports and sales. Revenue can also be raised from a competitive and profitable energy supply sector, but this will require a rethink of the current energy market. 

The government should plan any further price hikes in a phased manner that avoids shocks to household budgets, especially for the poorest.

Shruti Sharma

Shruti Sharma: The fossil fuel price hike in Bangladesh will have an impact on the country’s most vulnerable, but there are mechanisms that can be implemented to provide targeted support to those who need it most.

Moving forward, there should be a shift toward opening the energy sector to private players and encouraging Bangladesh Petroleum Corporation to work more with the regulator, which will allow it to function at arm's length from the government and operate under market conditions. The government should plan any further price hikes in a phased manner that avoids shocks to household budgets, especially for the poorest.

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