IEEFA update: Improving power sector resilience and price stability in Bangladesh

Overcapacity, capacity payments, subsidies and tariffs are set to rise

Prior to COVID-19, Bangladesh already had an excess capacity leading to significant capacity payments to plants lying idle. The excess capacity comes from overestimated forecasts of power demand growth that have led to excessive capacity additions. Overcapacity translates to reduced utilization rates of plants. 

Tax revenue or consumers end up paying for the poor economics of fossil fuel plants

In 2018-19 utilization was only 43%, which is below the global average of 54% and well-below the financial assumption of these plants of 80%. Due to the inflexible standard clauses of power purchase agreements (PPAs), reduced utilization translated to capacity payments to idle plants reached Tk90bn (USD1.1bn) in 2018-19. Moreover, in fiscal year 2018-2019, coal imports rose 70 percent year-on-year to 5.754 million tonnes, equivalent to at least USD520 million, contributing to the USD15.49 billion trade deficit.  

It’s clear from the tariff structure in the power purchase agreements (PPAs) that tax revenue or consumers end up paying for the poor economics of fossil fuel plants as either government or consumers guarantee payments for underperformance in the form of capacity payments and reimbursable cost payments stipulated in the power supply agreements. The loss from unused power is greater than revenue from Bangladesh’s top export industries – leather, leather products and footwear, valued at USD1.08bn and jute, valued at USD899m. 

12% of Bangladesh’s population (19 million people) still lack electricity access

Before COVID-19, Bangladesh Power Development Board (BPDB) was making significant losses. In fiscal year 2018-19, the government subsidy required to compensate BPDB to avoid a major loss and cash flow shortfall, rose again to reach Tk80bn (USD936m). The BPDB expected that the subsidy required in 2019-20 would rise again to Tk90bn (USD1.1bn). This will now likely need to be even, greater given the fall in demand as a result of COVID-19.

IT IS AN OPPORTUNE TIME TO INVOKE THE FORCE MAJEURE CLAUSE to trigger negotiations with coal power providers in order to protect the government and consumers from the inflexible standard clauses of PPAs leading to higher prices and larger subsidies. Not doing so means unused power will continue to be guaranteed through government subsidies and the electricity bills of families and small businesses who can ill afford it. Current and future PPAs should promote equitable risk sharing while protecting consumers and the Bangladesh government from high electricity prices and increased subsidies. 

Moreover, despite overcapacity, 12% of Bangladesh’s population (19 million people) still lack electricity access while millions more suffer from a lack of reliable power. This means that the concept of moving power from a large power plant through a high voltage line in one direction towards low voltage wires and eventually to consumers has neither delivered on electrification goals nor affordable prices. In order to reach the last mile of electrification, a domestic modular renewable energy system with battery storage is a cost-effective solution as it is a good substitute for grid infrastructure while being able to supply power at the point of demand. 

Resilience through technology modernization

Globally and regionally in South Asia, renewable energy is already less than two-thirds the cost of imported fossil fuels. Bangladesh is well-positioned to take advantage of modernized technology in the form of modular renewable energy systems and grid upgrades to reduce costs and provide affordable energy to households and industry.

Renewable energy is already less than two-thirds the cost of imported fossil fuels

Less reliance on imported fuel avoids the ups and downs of volatile commodity markets can give valuable price stability to enable the realization of ‘Vision 2041’ of Prime Minister Sheikh Hasina, which aims to accelerate growth in high-value agriculture, trade and industry, education and healthcare, and transport and communication. 

Domestic renewable energy and storage can provide Bangladesh with much needed price stability, more resilience to external shocks, provide employment, improve its competitiveness and thus improve growth potential.

Opportunity for Bangladesh to enable energy resilience

COVID-19-induced project delays provides an opportunity to reset energy development policy and redirect resources to support economic fundamentals and energy price stability to enable the realization of ‘Vision 2041’. 

In a recent letter to the Ministry of Finance Economic Relations Division, the Power Division stated its intention to replace the 350MW Gazaria Coal fired power plant with grid upgrades to reduce system losses in the rural electricity system. Rather than simply being cancelled, existing fossil-fuel proposals could be redirected to more appropriate grid modernization and hybrid renewables and storage projects. 

More appropriate, modular renewable energy (without capacity payments) with storage and grid investments to meet lower demand growth and reduce the overall system cost while improving domestic energy security, resilience and employment opportunities.

Sara Jane Ahmed is an energy finance analyst with IEEFA.

This article first appeared in The Business Standard.

 

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Bangladesh Power Review – Overcapacity, Capacity Payments, Subsidies and Tariffs Are Set to Rise Even Faster

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