Low Carbon Development Options for DFID Bangladesh

Scoping Mission – 31 July – 14 August OWEN JENKINS, Head, Climate Change and Energy Unit, DFID IndiaFAISAL ISLAM, Climate Change and Environment Advisor, DFID Bangladesh RITIKA GOEL, Senior Energy and Climate Policy Advisor, BHC - DFID India

TABLE OF CONTENTS

1. EXECUTIVE SUMMARY 32. BACKGROUND 3

a. Country Context 3b. Donor Engagement 3

3. OPTIONS FOR LCD ENGAGEMENT 3a. Energy access for the ultra-poor 3b. Household-level opportunities (rural) 3c. Household and commercial opportunities (urban) 3d. Enhanced Industrial Efficiency 3e. Agriculture and Municipal Opportunities 3f. Power Sector Reform 3

4. DECIDING BETWEEN OPTIONS: CRITERIA AND RECOMMENDATIONS 3

a. Criteria 3b. Recommendations 3

1. EXECUTIVE SUMMARY

Bangladesh has low energy use and low greenhouse gas emissions. Less than half of the population of 160 million has access to electricity, with many relying on traditional biomass. Energy demand already exceeds supply by a significant margin and is rising fast. The gap is a major political issue. Domestic energy resources are limited, with gas reserves depleting and coal potential not yet exploited. Renewable energy is in its infancy. The price of imported energy means that this is unlikely to fill the gap. Pricing, regulatory and governance issues also mean energy is not used efficiently.

In this context, there are a range of options for interventions which can deliver significant results on poverty and in moving Bangladesh towards a lower carbon pathway. This report examines opportunities in renewable energy and energy use efficiency (the latter in a range of sectors, including well beyond the energy sector itself. Options fell into five main areas:

- Energy access for the ultra-poor, whose livelihoods, health and well-being are stunted by a reliance on biomass;

- Rural household-level opportunities, through supporting accelerated deployment of renewable energy systems (primarily solar);

- Urban household opportunities, through installation of solar systems in buildings;

- Enhanced industrial efficiency, where demonstrating the value of more efficient resource use can have big leverage;

- Agriculture and municipal opportunities: there is significant scope for improving resource efficiency in agriculture, with carbon benefits, while municipal planning has a big impact on future emissions;

- Power sector reform is key both to lowering the future carbon pathway and in meeting the challenge of energy supply.

A number of internal and external factors were considered in deciding between these options. The report recommends that:

- existing climate-specific trust funds should not be used to scale up low carbon work;

- DFID Bangladesh should use its existing programmes to:o add energy assets to the bundle provided to the ultra-poor;o provide support to scale up deployment of solar home systems;o explore the scope for supporting enhanced energy efficiency

under the private sector programme;

o work with the government and ADB to install renewable energy systems in clinics and schools

- DFID’s regional initiatives on urban resilience and planning should include Bangladesh components;

- DFID Bangladesh should initiate new programmes, with additional ICF funding, for work on partial risk guarantees (or other risk mitigation instruments) and for a new power sector reform programme.

2. BACKGROUND

The DFID Bangladesh Strategic Programme Review (SPR) highlighted the need to explore further the opportunities for low carbon development (LCD) in Bangladesh, with a particular focus on leveraging the private sector. A scoping mission was conducted in August 2011 to explore the opportunities for LCD investment and to inform current and future programming. The objectives were to:

Assess the adequacy of the existing and pipeline programmes that work in low carbon development in the DFID Bangladesh portfolio.Explore opportunities for new programming with a particular focus on the private sector and extreme poor.Identify the needs of stakeholders for LCD at national, sub-national and sectoral levels.Review LCD initiatives by other development partners and private sector in order to explore the potential for joined up working. Explore the opportunities for addressing the effectiveness of multilateral delivery channels in support of low carbon development.Contribute to the Strategic Process Review’s ongoing work and provide practical and strategic options for implementation across the programmes. Inform DFID Bangladesh’s strategic influencing agenda for LCD.

The mission was conducted by Owen Jenkins (Head, Climate Change and Energy Unit, DFID India), Faisal Islam (Climate Change and Environment Advisor, DFID Bangladesh), and Ritika Goel (Senior Climate and Energy Policy Advisor, British High Commission/DFID India). The mission carried out desk research and met with the private sector, civil society, bi- and multilateral development partners, government and other stakeholders in Bangladesh. This report summarises the findings and recommendations of the mission.a. Country Context

Figure 1: Bangladesh GDP per unit of Energy Use (PPP dollar per kg of oil equivalent)1

In 2005, Bangladesh emitted less than 0.2% of world’s GHG emissions, reflecting very low energy consumption. But despite this low per capita energy use, Bangladesh cannot meet even its current energy demand. That demand is growing by around 10% a year. And while energy efficiency is improving (figure 1), resources are still not used efficiently. Less than half the population of around 160 million has access to electricity. A large proportion still relies on traditional biomass to meet their energy needs. In rural areas in 2005, 75% of people were not connected to the grid, in contrast to 50% of those in Dhaka.2 Without large subsidies, off-grid rural households cannot afford the cost of grid expansion. But energy demand is on a long-term upward trajectory (figure 2), with electricity demand growing at over 500 MW per year, due to population growth, a rapid increase in demand for electrical appliances and industrialization.3 Expanding energy resources are essential for national economic development and individuals’ energy access in the years ahead.

Figure 2: Bangladesh Energy use (kg of oil equivalent per capita)4

50

100

150

1971 1976 1981 1986 1991 1996 2001 2006

1 Source: Tradingeconomics.com2 UNDP, Energy and Climate Change: Strategic Programme Framework 2006-20103 World Bank, 20094 Source: World Bank Development Indicators, as viewed on 19.08.2011http://data.worldbank.org/indicator/EG.USE.PCAP.KG.OE/countries/BD?display=graph

Currently, over three quarters of power generation capacity is based on natural gas (figure 3). Over half of domestic gas production is used for electricity generation. Fertilizers, industry, households and captive power generation are the other major gas consumers. The Bangladesh Climate Change Strategy and Action Plan, 2009 predicts that known gas reserves in Bangladesh are expected to be used up in about a decade.

Figure 3: Bangladesh Installed Capacity as on March 2011

Approximately three billion tons of high quality coal reserves have been discovered in Bangladesh in five different fields. Most is only likely to be accessible as open-cast mining, with its likely related environmental, social and agricultural issues. Almost all industries use captive, mostly diesel based generators, an estimated 12% of sales, and 2% of GDP goes towards the additional cost of running these generators. According to the World Bank Investment Climate Assessment (ICA), shortfalls in electricity could be costing the country two percentage points of growth per year.5

The energy crisis underlines the need for Bangladesh to use scarce resources more efficiently. The climate action plan admits that ‘Bangladesh is an energy inefficient country’. Industry and households are largely energy inefficient, partly because electricity is hugely subsidised. The energy subsidy bill is likely to double to 80 billion taka (US$ 1.1 billion) in the current fiscal year and would go up further to 150 billion in the coming fiscal year, driven by a slew of diesel and furnace oil fired power plants coming online to meet the severe electricity shortage.6

Figure 4 highlights the present energy situation and the challenge of meeting the energy demand by 2050.7

Figure 4: The challenge of meeting energy demands in 2050

Metric 2010 2050

Capacity 5.5 GWp ~200 GWp

Demand 40 TWh (4.6 GW) 1,267 TWh (145 GW)

Supply 28 TWh (3.2 GW) 1,267 TWh (145 GW)

5 World Bank, Implementation, Completion and Results Report, March 20096 http://www.thenews.com.pk/TodaysPrintDetail.aspx?ID=45481&Cat=3, as viewed on 19 Aug. 117 Imperial college London, ‘Enabling a transition to low carbon economies in developing countries Case Study: Bangladesh’, January 2011

Metric 2010 2050

Grid Centralised Interconnected smart grids

Fuel Gas Centralised Generation

Coal, Nuclear or SolarSignificant Distributed Generation

Transport Limited AccessExpensive, Reliant on gas or oil imports

Subways and public transport in urban areas, National and regional high speed railways, Electric Vehicles for private users

Population 160 million 200 million

Electricity Access

60 million 200 million

The Bangladeshi government has set a target of electricity for all by 2020 with a generation capacity of 20,000 MW. It plans to increase power generation to 13,000 MW by 2015, mainly through coal generation. It also plans to reduce energy subsidies, introduce Renewable Energy Certificates (RECs) and expand cross-border trading. To meet future energy demand, the government is aware that renewable options of energy generation need to be explored. In terms of resource, solar seems the most promising, though biomass (from rice husk and other agricultural residues) also seems abundant. A detailed assessment of wind and other renewable resources is required, as is a study of competitive uses of biomass, to determine availability for energy generation. With ADB assistance, the Bangladesh government also plans to set up 500 MW solar projects by 2015, including solar irrigation pumps, solar rooftop installations in urban areas and mini solar grid plants in rural areas. The Energy Department also plans to work on a strategy paper on providing energy access for the poor. ADB is also helping prepare a ‘Strategic Energy Plan for GHG emissions’, which they expect to release in September 2011. Bangladesh has a large and vibrant civil society; those working on harnessing solar energy and organic waste include Grameen Shakti, BRAC and the Rural Service Foundation. The donor community is also active on climate change. The Bangladesh Climate Change Resilience Fund (BCCRF) – a US$110 million multi donor trust fund managed by the World Bank - has been set up to aid implementation of the government’s Climate Change Strategy and Action plan (BCCSAP). The government has also allocated USD 300m from its own resources to plan and implement climate projects under the BCCSAP. US$ 100 million has already been allocated to implement projects under the fund; most are pilots or demonstrations. Low carbon growth is one of the BCCSAP pillars, but there has so far been no clear thrust for implementation.

A Climate Change Unit has recently been set up under the Ministry of Environment and Forests. Its aim is to coordinate climate change related activities for the Government of Bangladesh, and to monitor and evaluate the approved projects under the government’s climate change trust fund. b. Donor Engagement The donor community has also been engaging on climate change mitigation and the energy sector in Bangladesh. The most notable and possibly the most successful of these interventions has been large scale roll-out of Solar Home Systems (SHS), of which more details are in section 3.b below. USAID recently entered into an agreement with the government and will work on GHG inventory, emissions modelling, renewable energy, energy efficiency and forestry. ADB has been working on energy sector reform, and financing energy infrastructure including power plants and transmission lines. The World Bank and Government of Bangladesh launched a CFL disbursement programme, under which 5 million CFLs were distributed in return for incandescent bulbs in 2010. The World Bank is also working on financing energy efficiency in brick kilns, rural electrification and renewable energy. GIZ is implementing ‘The Sustainable Energy for Development Programme’ with the Ministry of Power, Energy, and Mineral Resources, disseminating SHS, biogas digesters, and energy-saving cooking stoves and rice parboiling systems, and working on energy efficiency. UNDP is working on several climate change mitigation projects, mainly capacity building. This includes piloting work on energy efficiency for brick kilns and support on appliance standards and labelling.

3. OPTIONS FOR LCD ENGAGEMENT

Options for LCD interventions can be broadly classified into three groups: promoting renewable sources of energy (e.g. solar, biogas), enhancing energy efficiency (e.g. improved cooking stoves, minimizing system losses, co-generation), and protecting/promoting carbon sinks (e.g. afforestation).

Of these, the first two options are discussed below as offering the most significant potential for scaling up. DFID Bangladesh does not have a comparative advantage or recent experience in managing carbon sinks and its potential contribution to LCD in Bangladesh is limited.

The options are discussed according to possible entry points, staring from micro-level interventions and moving up towards sector-specific options.

a. Energy access for the ultra-poor

Access to energy is a precondition for economic progress and better standards of living. Yet some 80 million people in Bangladesh do not have access to the grid and rely primarily on biomass and kerosene for cooking and lighting. The bottom 10% - 20% of this group are so poor that they can barely afford to buy kerosene. This lack of access to modern forms of energy imposes significant costs on the ultra-poor households in the form of:

Health impacts from smoke and carbon monoxide from traditional stoves in poorly ventilated kitchens;Fire risks;Time cost (2-3 hours of foraging for biomass per day)Loss of productive time after sunset;Lack of time for homework for school going kids;Lack of education and entertainment from TV;Lack of security for women collecting water or responding to nature’s call at night;Lack of business activities after sunset.

Considering these impediments to development and the very limited ability of the ultra-poor to pay for alternative energy sources, a number of options have been introduced by NGOs in rural communities that could be incorporated in existing DFID Bangladesh programmes. These include:

a. Improved cooking stoves (ICS): the technology has been field tested and refined over the years. The present model, which is being sold commercially on an installment basis, has gained acceptance among its rural clients. Given that these stoves lower consumption of biomass by 50%, eliminate smoke and carbon monoxide, and cost only approximately USD 12 per unit, ICS could be included in the asset bundle provided to ultra-poor households through DFID Bangladesh’s extreme poor focused programmes such as CLP-2 and CFPR.

b. Solar lantern: a typical unit uses a small solar panel and an LED light that provides 4 hours of high quality light per charge and may cost around US$16-$20 per unit. Considering the range of benefits from access to high quality light and the relatively small unit cost, solar lanterns could also be included in the asset bundle provided to extremely poor households.

c. Low wattage solar home system (SHS): It is possible to introduce low-wattage (10 and 20 watt) SHS through subsidized micro-credit or installment arrangements. Presently, NGOs are offering low-watt SHSs through a ‘micro-utility scheme’ that allows the buyer to rent some of the light bulbs to her neighbors and thereby lower her monthly cost. The owner typically pays a low initial payment of only 10% (US$ 160 for a 20 watt system) and the rest are paid in 42 monthly installments (approximately US$ 3.5 per month). Service charges for these low wattage systems are waived to the user (i.e. subsidized).

The potential for scaling up the provision of ICS and solar lanterns through DFID Bangladesh’s existing programs is considerable. For example, providing ICS and solar lantern to half a million beneficiaries of CLP-2 alone would require a grant of US$ 14 million. Though the formal cost-

benefit analysis for such a transfer is not readily available, the potential benefits are likely to significantly outweigh the cost. Moreover, solar lanterns would significantly reduce the use of kerosene and so lower subsidy payments by the government (in India, each unit of the Sun King solar lantern is saving USD 30 per household per year in government subsidy)8.

b. Household-level opportunities (rural)

The potential for promoting renewable energy (solar and biogas in particular) in rural and urban households is huge. In fact, as mentioned above, a silent revolution is already taking place in off-grid areas of Bangladesh through a semi-commercial program supported by a number of donors (World Bank, ADB, GIZ, KfW, and Islamic Development Bank) and administered by the Infrastructure Development Company Limited (IDCOL).

Since 2003, IDCOL has been refinancing its 30 partner NGOs in distributing SHS and building bio-gas plants through micro-credits to rural households. To date, IDCOL has supported the installation of about 1 million SHSs and over 18,000 biogas plants. Its goal is 2.5 million SHSs in off-grid areas by 2015 (equivalent to 150 mega-watt) and over 37,000 biogas plants by 2012 (see Box 3a for a snapshot of a typical SHS).

IDCOL’s model of refinancing, quality assurance, capacity building and working through MFIs has worked very well so far – some 35,000 new SHS are being installed every month and the loan repayment rate has remained close to 99% over the years. The World Bank, one of the main sponsors of IDCOL renewable energy program, sees IDCOL’s SHS project as an example of global best practice.

IDCOL has a robust program and plans for scaling up its renewable energy program. In addition to SHS, IDCOL has financed solar mini-grid, solar irrigation pumps and biogas based power plants.8 Wall Street Journal (12/3/2009). http://online.wsj.com/video/solar-lanterns-bring-light-to-rural-india/DF984955-AFB1-4C0E-9C0C-02AA32A3A247.html, viewed on August 18, 2011.

Fig. 6 Sun King solar lantern sold in India at a subsidized price of US$4 (market price is US$15 per unit).

Figure 5: Improved cooking stove marketed through IDCOL (market price is US$12 per unit).

Some of these technologies, e.g. solar irrigation, can make a significant contribution to the rural economy under the right circumstances. Tables 3a and 3b summarize IDCOL’s projected interventions in the renewable energy sector and corresponding financing needs.

Box 3a. Key features of a solar home systemCustomized capacity – 10 to 135 WattPackage includes a solar panel, battery, circuits, converter, charger, 3-4 light bulbs (CFL or LED)Min 15% down payment, 2 or 3-year payback, 6%-8% service rate3-year after sale service20-year panel, 5-year battery lifeApprox. 6000 solar technicians (mostly women) trained Lead NGOs: Grameen Shakti, BRAC and Rural Services Foundation.

The scheme is not yet perfect. Many batteries of the SHSs distributed under the programme are now reaching the end of their 5 year life and need replacing, at a cost of approximately 10,000 taka. There is a need to introduce a scheme for battery re-financing and disposing of the old battery in an environmentally sustainable manner. Some NGOs like Grameen Shakti have started designing and executing such programmes.

Table 1: IDCOL’s renewable energy program targets (2011-2016)9

Type of project

Up to Jun’11

Jul-Dec’11

2012 2013 2014 2015 2016 Total

Solar home system

~1 mn 0.18 mn 0.47 mn 0.52 mn 0.31 mn 2.5 mn

Biogas plant 19,118 5,589 13,000 18,200 23,660 30,758 39,665 150,000

Solar Mini-grid

1 1 2 3 3 10

Solar Irrigation Pump

1 59 90 150 200 500

Biogas based Power Plant

1 24 25 50 100 200

Rice-husk Based Power Plant

1 1 2 3 3 10

9 Islam Sharif. (25 July 2011). Raising Additional Funds for IDCOL’s Renewable Energy Programs. Power point presentation made by IDCOL at the Radisson Hotel, Dhaka.

Partnering IDCOL is an obvious entry point for DFID Bangladesh if it wanted to invest in LCD through a ‘tried and tested’ model and see results on the ground quickly. Alternately, DFID Bangladesh may specifically target the innovation and piloting components of IDCOL’s initiatives and contribute towards developing and introducing new and cost effective renewable energy based technologies that may eventually revolutionize the economy and landscape of rural Bangladesh.

Table 2: IDCOL’s financing requirementsfor 2011-201611

Type of project Credit(million USD)

Grant(million USD)

Total(million USD)

Solar home system 381 45 426

Biogas plant 25 18 43

Solar Mini-grid 1.2 2 3.2

Solar Irrigation Pump 6 10 16

Biogas based Power Plant 4 2.4 6.4

Rice-husk Based Power Plant 1.8 0.6 2.4

Total Fund Requirement 419 78 497

Under negotiations with various donors 377 15 392

Likely financing gap 42 63 105

c. Household and commercial opportunities (urban)

The Government of Bangladesh’s goal is to have 5% of power from sun, wind, biomass and biogas by 2015 and 10% by 202010. This contrasts with less than 1% today.

In support of this goal, the government has introduced a regulation requiring installation of solar systems in all urban residential and commercial buildings as a precondition to granting access to the grid. Residential buildings using up to 2KW of electricity a day will have to meet 5% of their power consumption from renewable energy sources. The requirement rises to 7% for commercial buildings and factories consuming up to 50 KW of electricity and 10% for power users above 50 KW11.

The market is not ready to meet this demand for renewable energy which will mostly have to come from solar based systems. IDCOL, the largest financier of solar systems for off-grid areas, is interested in exploring a market-based mechanism for urban consumers. Presumably, IDCOL would need sponsors (donors) to provide grants for TA and soft loans to pilot solar and waste-based systems in urban areas, to support banks and private sector companies in supplying, installing and maintaining 10 Power Division, Ministry of Power, Energy, and Mineral Resources. (November 6, 2008). Renewable Energy Policy of Bangladesh, p. 7.11 MD Fazlur Rahman. (May 28, 2011). Power for 12 lakh new subscribers: PDB resumes giving connections after 2 years. The Daily Star. http://www.thedailystar.net/newDesign/news-details.php?nid=187512, viewed on August 18, 2011.

renewable energy systems. It may take some years for this system to evolve and be fully functional but this is potentially another entry point.

d. Enhanced Industrial Efficiency

Bangladesh’s prospects for low carbon growth through improving energy and resource use efficiency are potentially huge. However, due to the diversity of industries and complexity of the technologies employed, it was beyond the scope of this study to identify all such opportunities. Instead, an attempt was made to identify significant current efforts in the private and public sectors, specifically those with technical assistance (TA) from development partners.

One such effort has been supported by DFID Bangladesh through its private sector portfolio. The South Asia Enterprise Development Facility (SEDF), the technical assistance wing of the International Finance Corporation (IFC), has just completed a productivity improvement project for the Washing, Dyeing and Finishing (WDF) factories in Narayanganj. This project covered 15 factories (of a cluster of about 1700) on a pilot basis. Each factory underwent a thorough review of its production process and energy use pattern leading to repair, alteration and retrofitting of the production plants and processes, producing significant savings in energy and water use, better environmental quality and cost savings (see Box 3b). While the TA was provided by SEDF, repair and capital costs were borne by the factories.

Box 3b. Cleaner production in Washing, Dyeing and Finishing factories

Driver: Improve productivity and reduce operating costCo-benefit: Reduce environmental managementInterventions: - metering and monitoring of gas and water use- insulation of pipes and valves- fixing faulty stream traps- power factor improvement- replacing magnetic ballasts in tube lights- better storage and disposal of wastesTangible benefits (avg. per factory): - CO2 reduction 20,000 tons/year; - water savings 30-40 million litres per month- US$ 1 million / yearScale up: Cover 200-300 out of 1700 (15 done on pilot basis). TA: $2m; TA + investment: $20-30 million

SEDF now wants to scale up this project to 200-300 WDF factories over the next 3-4 years. The idea is to create a demonstration effect by showcasing the benefits in terms of enhanced productivity and energy efficiency for the participating factories. SEDF anticipates that approximately US$ 2M

will be needed for TA to some 200 factories, to be selected on a first come first served basis. If TA is combined with a soft loan component (through one or more private banks), the rate of transformation would be much quicker. Such a fund (US$ 20 to 30 million) could be managed by the investment team at IFC. At present, IFC is interested in consolidating its environment and climate change portfolios under a single climate change head. IFC is keenly interested in working with DFID Bangladesh on scaling up the productivity and energy efficiency enhancement model for the WDF sector.

The WDF factories are part of the supply/value chain for the ready-made garments (RMG) sector that generates over US$ 12 billion annually in export earnings. The RMG sector itself may benefit directly by switching to better production management and energy efficiency measures.

In fact, the WDF model could be adapted for other industries as the generic processes are similar. The Ministry of Industry (MoI) and the Ministry of Power, Energy, and Mineral Resources (MoPEMR), have shown a keen interest in enhancing energy production, distribution and use. In particular, MoI showed interest in using bagasse from sugar mills for generation of heat and electricity (cogeneration). They also discussed the prospect of using effluent treatment plants (ETPs) for reduction of GHG emissions – presently only two of the fifteen state-owned sugar mills have ETPs. Similar opportunities exist in state-owned fertilizer factories and steel mills.

Table 3: Options for Energy Efficiency InterventionsPossible Intervention Target audienceTechnical support to encourage lending for energy efficiency projects

Commercial Banks

Line of credit to commercial/ national banks to provide soft loans to energy efficiency projects

SMEs/ Energy intensive industries

Partial Risk Guarantee Fund to provide guarantees for a certain percentage of outstanding loan in case of loan default

Commercial Banks

Venture Capital for technology innovation

Startups

Regulatory reform support to encourage industrial energy efficiency including tax incentives

Government

Aggregating carbon market opportunities for disbursement of energy efficient appliances, SMEs, commercial buildings

Service Providers

Capacity building and support to entities willing to function as Energy Service Companies (ESCOs) in the clean energy space

Service Providers

Another promising sector with a high emission reduction potential is brick kilns. There are 4000 registered and possibly another 4000 unregistered brick factories in the country, most around the large metropolitan districts. Most use biomass (mostly wood), used tyres and coal for burning bricks made from clay and silt. Although some are now using natural gas, most continue to rely on more polluting sources of energy due to lack of access to, or shortage of, gas supply. This is also a sector where energy use efficiency is very low and a lot of heat is simply wasted with the hot air and smoke up the chimney.

Against this backdrop, UNDP piloted a GEF-funded project to introduce improved brick making technology that traps and reuses carbon and heat, and produces significantly better quality bricks. In the face of growing demand for construction materials and tighter environmental regulations, the prospects for improved brick kilns appear good, provided some barriers to entry are addressed: high initial capital cost, availability of suitable land, establishing consumer confidence in improved bricks, and higher unit cost. The technology used for making improved bricks (e.g., Hybrid Hoffman Kiln) is well known and has been recognized for claiming carbon credits. Thus, bundling ten or so units together for Certified Emission Reductions (CER) will make such projects even more attractive financially.

Figure 7: Examples of innovative public sector financial mechanisms12

12 DEFRA, SEFI, BASE, Public Finance Mechanisms to Increase investment in Energy Efficiency, 2006

The economics of brick making suggests that eventually this technology should be adopted by the private sector without subsidy. But in the short to medium term, there is a need to give some support to conversion of some suitably located traditional brick kilns to improved ones, to create a demonstration effect across the country (in return for initial grants, project sponsors may claim rights to carbon credits). DFID Bangladesh could discuss this further with UNDP and IDCOL, who have been involved with such conversions in the past.

The following table provides possible options/ financial instruments that might be used to increase energy efficiency in large industries and SMEs.

e. Agriculture and Municipal Opportunities

This is a broad area with many potential areas for intervention. Not all are yet commercially viable but there is a need to pilot new and promising technologies so that these can be adapted to local needs and circumstances. Opportunities in the agriculture sector

In the agriculture sector, biogas plants based on cow dung, organic waste and poultry litter are getting increasingly popular. NGOs are providing support for plants of various sizes, from 1.2 m3 (for a single household) to 4.8 m3 (3-4 households). Biogas is a mix of about 60% methane and 40% carbon dioxide, which can be directly burned for cooking and lighting. The residue from the plant is a valuable bio-fertilizer that can be applied to crop fields and fish ponds. Operation of a biogas plant is more technically challenging than using a solar home system as it requires regular feeding of the digester and regulating the pressure inside the gas dome. However, the rate of building new biogas plants has increased in the recent past due to local capacity building and availability of subsidy to cover a part of the installation cost.

The largest house-hold level biogas program in Bangladesh is the National Domestic Biogas and Manure Program, being implemented by IDCOL with support from the Netherlands Development Organization (SNV). Its target is to install over 37,000 biogas plants by 2012 (see Box 3c).

A number of poultry litter based commercial biogas plants have recently been set up by large poultry firms with technical support from IDCOL and its partner NGOs. Some of these units produce not only gas for cooking but also sufficient volumes for generating electricity. Larger biogas operators often sell excess gas to neighboring households and generate extra money that shortens the pay-back period. There seem to be regulatory issues over selling surplus electricity from biogas plants using public or private grid. Larger poultry firms are interested in biogas based electricity generation but would like to have either a buy-back guarantee at a suitable price or a provision to sell the electricity directly to private customers.

Should DFID Bangladesh decide to support the renewable energy initiatives of IDCOL, it could include support for both SHSs and biogas plants. Alternately, DFID may consider supporting research on establishing a baseline for various types of feeds and enhancing the quality of the

slurry to be used as bio-fertilizer (Waste Concern, a well-known NGO dealing with waste management issues, has done a lot of research on this but there are still knowledge gaps). This would be a smaller but strategic intervention that could have significant national impact on lowering of GHG emissions from Bangladesh’s agriculture sector and promoting renewable energy.

Other low-carbon opportunities in agriculture include solar irrigation pumps and improved management of soil, water and fertilizer to reduce GHG emissions from crop fields. Of these, solar irrigation seems to have good prospects provided the high capital cost is dealt with and government subsidy for diesel is diverted to solar pumps. At the moment, pilot pumps rely on fixed solar panels and have a relatively large command area (4-5 acres). Given the small size of agricultural plots in Bangladesh, a smaller (and perhaps a mobile) unit would be more suitable and affordable. While the present model can be replicated in government run projects (e.g., in the Barind Tract), more research is needed to find the optimal size and mode of operation of solar pumps in Bangladesh.

Municipal opportunities

Urban areas are characterized by higher standards of living and a high population growth rate (mainly due to rural to urban migration), which leads to a higher per capita energy consumption and a rapidly growing demand for energy. As a result, there are more opportunities for low carbon development in urban areas. But the political, institutional, financial and legal conditions may make it very difficult to implement such measures.

Apart from the household level interventions discussed earlier, other areas may include mass transit and better traffic management, energy efficient buildings and facilities (offices, schools, hospitals, markets, commercial and industrial buildings etc.), energy efficient street and public space lighting, urban green space management, and waste management.

These are difficult to tackle and involve significant investment in infrastructure. The associated regulatory and institutional challenges could also be significant. At the moment DFID Bangladesh does not appear to have the in-house capacity to engage in large infrastructure projects. In Bangladesh, urban planning and infrastructure related issues have been supported by other development partners, most notably by the World Bank, Asian Development Bank, and JICA.

Despite this, the scope for new and innovative interventions cannot be overlooked entirely. The solar street lighting project for Dhaka and Khulna funded by the Asian Development Bank is a good example. This initiative is part of a larger City Region Development Project (US$ 120 million), which aims to improve drainage, water, urban transport and other facilities in the cities of Dhaka and Khulna and their surrounding towns.

DFID Bangladesh could also consider providing technical assistance to scale up urban programmes in areas like improved building codes, appliance standards and labeling programmes, planning processes and helping municipalities devise low carbon planning approaches. An area which is relatively new is the Public-Private-Partnership (PPP) waste to energy project that is about to begin in the small municipality of Tongi. This US$ 7.5 million project, to be implemented by BRAC, will use some 100 tons of organic waste per day (extracted from 150 tons of municipal solid waste) to produce biogas and generate electricity that

Box 3c. National Domestic Biogas and Manure Program (NDBMP)IDCOL is implementing the National Domestic Biogas and Manure Programme (NDBMP) with support from GoB, SNV- Netherlands Development Organization and Kfw. Under the project a total of 37,269 domestic-sized biogas plants will be financed during 2006-2012. The overall objective of the NDBMP is to further develop and disseminate domestic biogas plants in rural areas with the ultimate goal to establish a sustainable and commercial biogas sector.

Gas produced through these plants is used for cooking and lighting of rural households. In addition, the slurry, a by-product of biogas plants, being a very good organic fertilizer, is used to maintain soil fertility and increase crop production. The slurry is also used as fish feed.

A fixed dome design biogas plant is promoted under this programme. The design has basically two types; a) for cattle dung and human excreta, and b) for poultry droppings. Each has 6 sizes of plants of different capacities, with larger sizes producing enough gas for multiple houses while others are used for single household.

IDCOL is implementing the programme through partner organizations including private companies, NGOs, and microfinance institutes. At present 32 POs are implementing NDBMP.

The programme is being implemented in all the districts of Bangladesh. IDCOL provides Taka 9,000 as a subsidy to the households who install biogas plants to IDCOL/SNV/Kfw standards. IDCOL is also providing refinance covering 80% of the loan to households at 6% interest rate and 7 year tenor with 1 year grace period. Total project cost is estimated as EUR 23.61 million and will be borne by individual households, SNV, KfW and GOB

would be sold back to the municipality at an agreed price. Given that there are six large city corporations and more than 20 cities with over 100,000 people in the country, there is an untapped opportunity to invest in developing renewable energy from urban solid waste and at the same time significantly enhancing urban environmental quality. The added co-benefits include less land needed for landfill, organic fertilizer, and carbon credits from reduction of GHG emissions. This appears to be a win-win area and DFID Bangladesh may consider supporting a few initiatives on a pilot basis, with BRAC a potential implementing partner.

f. Power Sector Reform

Power sector reform offers a rich area for engagement. The Ministry of Power, Energy and Mineral resources has indicated that they would welcome assistance in retrofitting old power plants, supporting renewable energy interventions (particularly solar), and energy efficiency. DFID Bangladesh could develop a power sector reform programme, focusing on:

Technical assistance for energy efficiency improvements in power plants, potentially complemented with direct financing;Encouraging use of clean coal technologies and working to remove barriers; Development of a yearly power sector baseline database, that would greatly facilitate development of CDM projects for all sectors;Working to strengthen and support the soon to be formed Sustainable Energy Development Agency (SEDA). The mandate of SEDA is to promote renewable energy and energy efficiency;Support to energy subsidy reform;Improving the efficiency of transmission and distribution, partly through capacity building and reorganization of institutions responsible for implementationFinancing solar projects in healthcare and educational facilities under the government’s plan to set up 500 MW solar projects by 2015. The Energy Department indicated that both grants and loans would be required for this ADB-supported initiative;Strengthening the grid system to achieve a “smarter”, more reliable grid, with minimal losses and the ability to absorb additional renewable capacity;In the longer term, working with the Energy Department to design a Renewable Energy Certificate (REC) mechanism;Working with BERC (Bangladesh Electricity Regulatory Commission) to fix appropriate renewable energy tariffs;The Energy ministry is currently writing a policy paper on how to provide ‘Energy for the poor’. This will includes encouraging improved cook stoves and providing better energy access. DFID Bangladesh could help in refining and implementing some of the emerging recommendations.

A case study for successful power sector reforms carried out in Madhya Pradesh, India, with support from DFID India, is provided in Box 3d.

4. DECIDING BETWEEN OPTIONS: CRITERIA AND RECOMMENDATIONS

As the preceding sections have shown, there is a potentially huge field of activity in the area of low carbon development. This section looks at the factors DFID Bangladesh should consider when taking decisions on an expanded LCD programme, in order to find the highest value opportunities and a sensible balance between challenge and opportunity.

Box 3d. Madhya Pradesh Power Sector Reform, India (£18.5 million, 2006-10)Case Study: Madhya Pradesh Power Sector Reform, India

• In 2005/06, nearly half the state’s power was lost to leakages and theft, leaving millions without access.

• The state government was forced to spend a third of its budget – over £1 billion – to repair the damage and subsidise the flagging power companies in a state rife with child malnutrition and extreme poverty

BEFORE AFTER

• Reduced power sector subsidies freed £30 million per year for health, nutrition, education etc.

• Systemic improvements leading to reduced losses and additional revenue generation of £26 million per year

• Cost of supply recovered improved from less than 80% to over 95%

• MOUs worth £28 billion for private participation in generation signed for a capacity of 45,465 MW

£18.5 million, 2006-2010

Case Study: Madhya Pradesh Power Sector Reform, India

• In 2005/06, nearly half the state’s power was lost to leakages and theft, leaving millions without access.

• The state government was forced to spend a third of its budget – over £1 billion – to repair the damage and subsidise the flagging power companies in a state rife with child malnutrition and extreme poverty

BEFORE AFTER

• Reduced power sector subsidies freed £30 million per year for health, nutrition, education etc.

• Systemic improvements leading to reduced losses and additional revenue generation of £26 million per year

• Cost of supply recovered improved from less than 80% to over 95%

• MOUs worth £28 billion for private participation in generation signed for a capacity of 45,465 MW

£18.5 million, 2006-2010

a. Criteria

We divide these factors into two broad sets – those relating to the external impact of potential interventions and those relating to internal capacity and priority questions within DFID-Bangladesh.

External factors

Potential for development resultsAny interventions must fulfill the DAC and International Development Act requirements for UK ODA and deliver significant and concrete poverty results.

Potential for low carbon resultsSimilarly, as LCD work, any spend must deliver either direct mitigation or (more often) help put Bangladesh on a lower carbon pathway compared to business as usual.

Potential for influence and leverageInterventions must have the potential to influence investments by others (including the private sector, GoB and other donors) through the knowledge, best practice or business models they develop.

Potential for scaleOur interventions must be able to deliver at scale. They should have either:(i) a proven and effective business model with the potential for quick

scale-up with DFID investment; or(ii) potential to address a knowledge or capacity gap which is a key

obstacle to scale-up.

Sustainability after DFID’s interventionInterventions should be sustainable after DFID’s exit.

AdditionalityOur investments should deliver results which would not otherwise have been achieved: i.e. add to government, other donor, private sector or NGO activity.

Internal factors

Ease of implementationHow easy will the proposed intervention be to implement? What are the obstacles which would need to be overcome?

Human resource intensive?Does the intervention require significant human resource to be deployed alongside spending, for influencing or other non-spending activities?

Skills set needed exists in DFID-B?Could the intervention be done with existing skills and staff in DFID-B?

Relevance to ICF LCD priorities

How good a fit is the proposed intervention with the low carbon development priorities of the International Climate Fund?

C-Del?Would the proposed intervention score as C-Del?

b. Recommendations

On the basis of the criteria described above, we believe that there are significant LCD opportunities which DFID Bangladesh should pursue. These are set out below, and in an attached matrix which scores them against our suggested criteria. (NB - while we are confident that the broad outcomes are right, time has not permitted the detailed quantification, particularly of results and VFM, needed to validate the recommendations. These actions will need to be done through the strategic business case and appraisal processes.)

We make recommendations for four possible vehicles:

existing multi-donor and government Bangladesh-specific climate funds;DFID Bangladesh programmes;existing and planned DFID regional programmes;new programmes funded from the International Climate Fund.

(i) Existing Bangladesh-specific climate funding vehicles

We considered the scope for delivering an increase in low carbon work through the existing donor and government trust funds. Our consideration raised concerns that that existing funds:

have no provision for ear-marking funds for specific activities. Since our view is that there are some quite focused needs on which DFID-Bangladesh could usefully focus, this is a significant drawback;

have no current engagement with the private sector – a significant issue when several recommendations need private sector input;

are heavily adaptation-focused. Although Bangladesh’s Action Plan’s pillar 5 covers mitigation, this is undeveloped, and the funds have no experience in designing or implementing low carbon projects;

have so far been slow to programme. This is likely to be still more true for new areas;

are proving difficult to programme for small projects. The experience has been that it is difficult to engage WB interest for projects worth 25M or less. Many of our recommended interventions would be below this (at least initially).

We therefore recommend that existing funds are not suitable vehicles for funding a scale-up in LCD work. This should be kept under review – it is

possible that, as the funds evolve, they will overcome some of the issues highlighted above.

(ii) Through DFID Bangladesh programmes

A number of the options above appear to offer good opportunities for low carbon work within existing DFID Bangladesh programmes. We recommend:

that energy asset(s) be added to the bundle of assets provided to the ultra poor through programmes such as CLP-2 and CFPR. Further work will be needed to determine the returns to inclusion of improved cook stoves, solar lanterns, or both;

that DFID provide grant support to finance the installation of Solar Home Systems through IDCOL via existing private sector programmes (NB – this could also be done as a stand-alone intervention under an ICF programme.)

that DFID explore the scope for supporting initiatives to enhance industrial energy efficiency; one entry point being the WDF sector, on the back of the successful piloting and the demonstrated scope for scaling up.

that existing health and education interventions, working with ADB and the Government of Bangladesh, provide support to RE installation for health and educational establishments.

(iii) DFID regional interventions

There are a number of current and planned regional interventions by DFID Asia Division which provide scope for additional LCD work in Bangladesh. A number of the adaptation-focussed programmes already have significant Bangladeshi components, such as the South Asia Water Initiative and the South Asia Alliance for Climate Resilience. We recommend that LCD elements for Bangladesh be explored for the following programmes:

Urban Resilience: There is work underway to develop a programme funded by Policy Division, ART and DFID India on urban resilience across Asia. LCD angles, including traffic management, lighting, waste management and building efficiency should be incorporated into a Bangladesh component focusing on two or three major cities.

Planning: planning decisions at national and sub-national level have a key role in determining long-term carbon trajectories, as well as having major development impacts. We recommend a Bangladeshi component for the regional programme under design which will provide flexible support to those involved in integrating climate change issues into medium and long-term planning processes.

(iv) Additional International Climate Finance (ICF) spend

Despite Bangladesh’s relatively low carbon emissions, there are sectors where there is a good fit between development outcomes and the ICF’s low carbon goals, with scope also for the use of C-Del, particularly in the outer years. We recommend bids be developed for additional ICF spending for:

ADB Partial Risk Guarantee Funds: an existing regional project, focused on solar power in India, is exploring the scope for financial risk mitigation for clean tech projects. Additional work should be done to explore the scope for a Bangladeshi partial risk guarantee fund to support investment in industrial energy efficiency, under this existing regional project. Although the vehicle would be a regional project, additional funding would be needed from ICF for a new Bangladesh component.

Power sector reform and on-grid solar: technical, regulatory, tariff and market failures in the power system are key obstacles to the development of efficient, effective and low carbon energy solutions in Bangladesh. We recommend that DFID Bangladesh develop a programme to support power sector reform. Detailed design work would (obviously) be needed, but we would envisage this starting with flexible technical assistance to the Energy Ministry and other key actors, with reform opening the way to larger scale investments in low carbon on-grid energy in the longer term. This could potentially include investment in solar parks through the existing ADB initiative to deliver 500 MW of solar power by 2015.

IDCOL Solar Home Systems: see above: our primary recommendation is to pursue investment in home systems via existing private sector work, but this could also be considered as a new ICF programme.

ANNEX A: CRITERIA AND RECOMMENDATIONS(Numerical scores are against a range 1 (weak) – 5 (very strong))

Development results

Carbon results

Influence & leverage

Scale Sustainability Additionality Ease of implementation

Human resources

Skills ICF-relevant

C-Del? TOTAL (vs. 50)

Energy assets for the ultra-poor

5 2 3 3 4 5 5 5 4 2 Y 38

Solar home systems (IDCOL)

3 3 3 4 5 2 5 5 4 2 Y 36

Energy efficiency and CDM in WDF

3 4 3 2 4 3 4 4 3 3 Y 33

RE for schools & clinics

3 1 2 2 4 3 3 4 3 2 Y 27

Urban resilience

4 2 3 3 3 3 2 3 3 3 N 29

Planning 3 3 3 4 4 3 2 3 2 3 N 30Partial Risk Guarantee

3 4 4 4 3 3 4 2 2 4 Y 33

Power sector reform

4 5 4 5 3 4 3 1 2 5 Not at first, but scope later

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