Energy prices have huge impact on inflation: study

Price shocks in coal, oil, and liquefied natural gas (LNG) have profound effects on inflation, exchange rates, and reserves, according to new studies of the South Asian Network on Economic Modeling (Sanem).
For example, a 10 percent increase in coal prices leads to a 0.3 percent uptick in the consumer price index (CPI), while a 10 percent rise in LNG prices results in a 0.2 percent increase in inflation.
The CPI reflects the average change over time in the prices of a specified set of final commodities and services representing the market basket of a given group of consumers, according to the Bangladesh Bureau of Statistics.
Sanem presented three studies, organising a dialogue titled “Exploring a Sustainable Pathway for Bangladesh’s Energy Transformation Towards Green and Clean Energy” at BRAC Centre Inn yesterday.
The first study, titled “Macroeconomic Effects of Energy Price Fluctuations: Evidence from Bangladesh”, explored the ripple effects of global fossil fuel price shocks on Bangladesh’s macroeconomy.
Sanem Senior Research Associate Md Tuhin Ahmed presented findings that show a significant and immediate impact on inflation, particularly the CPI, when coal and LNG prices rise.
Additionally, the study revealed that energy price fluctuations have a noticeable effect on Bangladesh’s exchange rate.
A 10 percent increase in crude oil prices causes a 0.16 percent depreciation in the value of the taka against the US dollar while LNG price hikes similarly lead to a 0.15 percent depreciation.
These price shocks also exacerbate net exports. For instance, a 10 percent rise in coal prices results in a 0.25 percentage point decline in net exports.
However, despite these substantial effects on inflation and the exchange rate, energy price shocks have not shown a direct, significant impact on GDP in the short term.
The second study was titled “An Assessment of Institutional Quality and Political Economy Dynamics of the Power and Energy Sector in Light of the Renewable Energy Transition in Bangladesh”.
It highlighted that the poor regulatory quality, lack of policy coherence, and weak institutional capacity hindered Bangladesh’s energy sector transformation.
The problematic Quick Enhancement of Electricity and Energy Supply (Special Provision) Act, 2010, which bypasses competitive bidding and undermines transparency, led to inflated electricity prices, said Ahmed while presenting the second study.
A 2023 amendment to the Bangladesh Energy Regulatory Commission (BERC) Act further centralises power, eliminating public hearings and allowing the government to set energy prices unilaterally, according to the study.
It said the Bangladesh Power Development Board (BPDB), which controls most electricity distribution, monopolises the market, limiting private sector involvement and creating opportunities for rent-seeking behaviours.
The third study, titled “Assessing Investment Needs for Renewable Energy Transition in Bangladesh by 2041”, estimated the investment requirements to transition Bangladesh’s energy sector to renewable sources, particularly solar and wind.
Sanem Research Associate Ekramul Hasan presented an analysis indicating that the country’s current renewable energy capacity of 1,219MW, which is 4.16 percent of the total generation, was far from sufficient in meeting future targets.
The total investment, including fixed operating costs for renewable plants, range from $60.31 billion to $76.13 billion depending on the target and cost assumptions.
A key challenge in mobilising these investments is the high upfront costs, particularly for energy storage systems, although costs are expected to decline globally, it said.
To address these needs, the study recommended mechanisms such as public-private partnerships (PPPs), green bonds, and concessional financing from international bodies like World Bank and Asian Development Bank, according to the study.
Sanem Executive Director Selim Raihan said relevant stakeholders, such as ministries and other departments, do not have a clear understanding of green and clean energy and there was a lack of sincerity in the renewable energy sector.
“In the last 10 years, we have seen corruption, wrong policies, and wrong focus in the energy sector, and because of this, macroeconomic stability has also been affected,” he said.
The transition towards a sustainable energy path, or towards renewable energy, has faced many obstacles in that path, Raihan added.
“We have urged the government to review this whole thing and develop a new strategy,” he said.