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Excess power capacity puts financial burden on Bangladesh

SAM SUNDAY FEATURE-ENG-12-07-2020
Ruppur Nuclear Power Station, Bangaldesh

It wasn’t long ago that Bangladesh was plagued by power shortages. But having developed by leaps and bounds in the last decade or so, Bangladesh now has a power generating capacity far in excess of its requirement.

However, this is not a blessing but a burden on the exchequer and the people at large, says a study by Simon Nicholas and Sara Jane Ahmed for the Institute of Energy Economics and Financial Analysis (IEEFA).

The problem is compounded by the fact that the Sheikh Hasina-led Bangladesh government is eager to add to its power generating capacity exponentially by 2041. Hasina’s Vision 2041 envisages the abolition of extreme poverty and turning Bangladesh into an upper middle income country. Since power is needed to turn the wheels of industry and commerce, the government is to set up 14 China-funded coal fired power plants.

In November 2018, the Bangladesh Power Development Board (BPDB) published a report titled: “Revisiting Power System Master Plan (PSMP) 2016.”Assuming 60% utilization for coal and LNG plants, the BPDB report said that Bangladesh can generate 281 TWh (terawatt hours) of power in 2029-30. Based on the revisited PSMP, Bangladesh will have the capacity to generate 58% more power than needed in 2029-30.

But according to the IEEFA study done by Nicholas and Ahmed, this is 104 TWh more than required. The IEEFA’s conservative estimate takes into account the IMF’s forecast that Bangladesh’s GDP growth in calendar year 2020 will drop to just 2%. Signs of such a decline are already there. Bangladesh’s knitwear and readymade garment (RMG) sector has already been hit with US$ 6 billion of cancelled or postponed orders due to the coronavirus pandemic. The RMG sector accounts for more than 80% of the nation’s exports.

Although the IMF’s latest forecast sees a significant recovery in Bangladesh’s GDP growth in calendar year 2021, that is far from certain because of the pandemic, Nicholas and Ahmed argue.

Excess Capacity, generation Issues

Even prior to the construction of the China-funded and under-utilized Payra mega coal plant, Bangladesh had excess capacity that had led to huge “capacity payments” to plants lying idle.

A “capacity payment” is a payment made to a power producer to enable him to retain his capacity even though only a part of it is used. The unused capacity is retained in order to meet any increase in demand later.

Excess capacity apart, there is gross under-utilization of existing capacity in Bangladesh. In 2018-19, utilization was just 43%. “On some days up to two-thirds of capacity goes unutilized, a situation that has worsened in recent years and has led to rising capacity payments. In fiscal year 2018-19 capacity payments to idle plants reached US$1.1bn. This is greater than the value of Bangladesh’s top export industries such as leather, leather products and footwear, which are US$1.08 billion.”

“The China-funded Payra coal-fired power plant is reportedly receiving capacity payments of US$19million a month whilst half its capacity is idle due to a delayed transmission line connection,” Nicholas and Ahmed point out. 

Compensation to BPDB

The BPDB is making significant losses each year which has led to the need for larger government subsidies. The pandemic-induced economic downturn threatens to reduce BPDB’s revenues even more while the board continues to make capacity payments to power producers.

The government has to subsidize BPDB because the retail tariffs for electricity are lower than the rate at which it generates or purchases power. In fiscal year 2018-19, a US$ 936 million subsidy was given to the BPDB. Furthermore, for the first time, the entire subsidy provided in 2018-19 was treated as a “grant” and not a loan. The BPDB expects that the subsidy required in 2019-20 will rise again to US$1.1billion. Ultimately the bill is paid by the taxpayer.

Retail tariff hike

Apart from subsidizing BPDB, government has had to raise revenue by increasing the retail price of power. In February 2020, the retail tariff was increased by 5.3% to Tk7.13 per unit. More tariff increases should be expected in future, the study warns.

A revenue or subsidy increase was required to partially address the huge US$1 billion loss that BPDB stated it is on course to post in fiscal year 2019-20, a figure likely to be made worse by the Covid-19 pandemic, Nicholas and Ahmed say.

The Bangladesh Minister for Power, Energy and Mineral Resources has maintained that the introduction of a large fleet of new power stations fuelled by imported coal and LNG will bring down the cost of generation which are comparatively high when imported oil and diesel are used to generate power.

But this is a misleading, say Nicholas and Ahmed. Firstly, it would be prudent to include renewable energy benchmarks when making comparisons. Secondly costing should take into a variety of factors. “To compare costs appropriately across technologies, all costs should be considered, including the cost of new infrastructure needed, fuel prices, exchange rate, and increase in project costs as a result of delays,” they argue. Coal and LNG driven power plants need a lot of infrastructure and these are expensive, the researchers point out.

Pitch for renewable sources

Nicholas and Ahmed suggest that the Hasina government should go for locally available natural gas, wind and solar energy instead of using imported coal and LNG to fuel power plants. The former are less expensive to set up and maintain.

“BPDB’s own domestic gas-fired plants had a per unit generation cost of Tk2.5/kWh in 2018-19, well below the expected cost of imported coal- and LNG-fired power. The replacement of domestic gas with imported coal and LNG will see Bangladesh’s overall cost of power generation increase in the long term,” they warn. 

The cost of renewable energy is now declining in Bangladesh. In September 2019 a new solar plant became operational with a tariff of US$65/MWh. With proper backing and commitment from the Bangladesh government, the cost of renewable energy would decline even further as seen in other parts of South Asia. International firms are now leaving coal and pitching for renewable sources of energy. Bangladesh could ask the Chinese to offer plants based on renewable energy in place of coal.

Nicholas and Ahmed argue that by using renewable sources of energy and local sources of energy, Bangladesh will be sheltered from international political crises and shocks on the energy supply front. And, importantly, environmental pollution can be avoided.