Why must the public bear the burden of capacity charges?

The government has decided to increase electricity prices four times a year over the next three years to withdraw all subsidies from the power sector. At present, the wholesale price of electricity is Tk 7.04 per unit on average. If the subsidies are withdrawn, this rate will have to be raised to more than Tk 12. In that case, the average electricity price at the consumer level, which is Tk 8.95 now, will almost double to Tk 15.

This decision has come at a time when people are already under a lot of pressure due to the increased prices of daily commodities. Last year, gas prices were increased by an average of 82 percent in January and electricity prices were increased by an average of five percent in three phases between January and March, contributing to inflation. In March this year, electricity prices were again raised by Tk 0.34 to Tk 0.70 per unit.

If this decision is implemented, this will surely add to consumer spending, more so because of the increased production costs of everything that requires electricity for production. In addition, these price hikes will affect electricity bills in residential areas, irrigation, industries, education, religious institutions and healthcare facilities, among others. A rise in irrigation costs will impact agriculture as higher production costs will in turn raise the prices of all agricultural products, including rice. This will have a ripple effect on the economy, and as a result, the lives of low and fixed-income people will be even more adversely impacted.

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IMF prescription to raise energy prices is anti-people, illogical

It is being argued that the price hike is required to reduce subsidies in the power and energy sectors to comply with IMF conditionalities. The question is: why do the subsidies have to be paid in the first place, and where does the subsidy money go? Moreover, increasing prices is not the only way to reduce subsidies—they can also be reduced through cost-cutting. Why is the government then only interested in increasing prices, rather than reducing costs by preventing irregularities, corruption and waste?

First of all, subsidies are required because Bangladesh Power Development Board (BPDB) has to buy power at high prices from privately owned power plants run by imported and expensive liquid fuel. The purchasing cost from the private sector is much higher than the cost of generating power from the public sector. When power generation in the private sector increases, the average cost of power generation in the country increases. According to BPDB annual reports, the average cost of power generation per unit was Tk 6.61 in 2020-2021, Tk 8.84 in 2021-2022, and Tk 11.33 in 2022-2023. In 2022-23, the generation cost of BPDB's own power plant was Tk 7.63 per unit, and the cost of other state-owned power plants was Tk 6.85. On the other hand, the average generation cost was Tk 14.62 for independent power producers (IPPs) and Tk 12.53 for rental power plants. Just a year earlier, IPP and rental electricity generation cost was Tk 11.55 and Tk 9.80, respectively (BPDB Annual Report 2021-22, page 96; PDB Annual Report, 2022-23, page 98). As a result, the BPDB is incurring losses by purchasing power from IPPs and rental power plants, and the government has to cover these losses with subsidies.

According to a report in Bonik Barta, the revised budget for the 2023-24 fiscal year estimated the power sector subsidies to be Tk 39,406 crore. On the other hand, the capacity charge payment has been estimated at more than Tk 32,000 crore—around 81 percent of the subsidies given to the power sector. In FY2022-23, capacity charges were paid to the tune of Tk 26,000 crore, which was 65.76 percent of the total subsidies given to the power sector.

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Power sector must answer for its persistent failures

Now, we know that a large part of the power generation capacity remains unused throughout the year. But even if the power is not purchased, as per the agreement, BPDB as the sole buyer of power has to pay the capacity charges to the power plants. Last year, capacity charges of more than Tk 26,000 crore were paid when 41 percent of capacity remained unused. Capacity charges have cost Bangladesh more than Tk 1 lakh crore in the last 14 years. Every year, with the increase in power generation capacity in the private sector, the amount of capacity charges keep rising and the losses incurred by the BPDB rise in tandem. To reduce these losses, electricity prices have been increased 12 times at the wholesale level and 14 times at the retail level over the last decade and a half. Yet, the losses and subsidies have not decreased; rather, pressure has been created to increase the prices of electricity repeatedly.

Meanwhile, despite the underutilisation of the existing power generation capacity, new capacity addition has not stopped. For example, while the capacity of the existing gas-based power plants cannot be utilised fully due to lack of gas, new gas-based power plants are being constructed. Recently, two gas-based power plants of Summit and Unique groups started operating in Meghnaghat, Narayanganj with a total capacity of 1,167 MW. Aside from this, there is a 718 MW Reliance power plant waiting to start operating. All these will increase BPDB's costs even more.

The real problem in Bangladesh's power and energy sectors is the implementation of power and energy projects one after another, without competitive bidding, under the umbrella of the Quick Enhancement of Electricity and Energy Supply (Special Provision) Act, 2010, for the benefit of various domestic and foreign investors—without any accountability. As a result, on the one hand, power plants with excess capacity have been constructed with the provision of capacity payment. On the other hand, power generation has become more dependent on imported primary fuels like LNG, oil and coal. Meanwhile, due importance has not been given to the exploration and extraction of domestic gas reserves, as well as renewables. Without addressing the root causes, no matter how much the price of electricity is increased, the crisis in the power and energy sectors will not be solved. Rather, the country's economic crisis will deepen and people will suffer even more.

Kallol Mustafa is an engineer and writer who focuses on power, energy, environment and development economics. He can be reached at kallol_mustafa@yahoo.com.

Views expressed in the article are the author's own

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