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Power producers’ worst days due to two dollar rates

Originally posted in The Business Standard  on 21 November 2022

The government pays fuel import bills based on the central bank-dictated exchange rate that was significantly lower than what banks were charging importers during settlement of their LCs

Private sector power generation, which had been lucrative to investors over years due to their protected business model, has faced a massive unforeseen problem this year— foreign exchange (forex) losses.

Independent power producers (IPP) who use imported heavy fuel oil (HFO) to run their plants have already incurred around Tk3,000 crore in foreign exchange losses only because of the two dollar rates that prevailed over the period of May-September, said Imran Karim, president of the Bangladesh Independent Power Producers Association (BIPA).

The government pays fuel import bills based on the central bank-dictated exchange rate that was significantly lower than what banks were charging importers during settlement of their letters of credit (LCs).

“An LC opened at Tk86-87 per dollar was settled at Tk105 or even more few months later and we could not ask for the higher rate while submitting bills to the Bangladesh Power Development Board (BPDB),” said Monirul Islam, the chief financial officer of Baraka Patenga Power Ltd.

Three HFO-run plants under his company incurred over Tk125 crore in foreign exchange losses in the July-September, while profits from the plants were nearly half of that in the same quarter last year.

Publicly listed companies which run HFO-based power plants have suffered either losses or profit declines in the last two quarters.

However, the problem was resolved after the Bangladesh Bank made the banking industry-fixed dollar rates official in the mid- September, said Islam.

BIPA President Imran Karim told The Business Standard that his association had requested the government to compensate some of the forex losses alongside paying the industry’s receivables within a rational period of 90-100 days, which stretched to over 150 days from 50-60 days this year.

Due to no imports by themselves, gas-fired plants did not suffer any forex losses, but due to the ongoing gas shortage government bought less power from them, said Mojibul Islam Patoary, assistant general manager of finance and accounts at United Power Generation and Distribution Company.

The highest dividend paying local listed company, for the first time in its life, incurred losses in the April-June quarter due to its HFO-fired plants’ forex losses and less income and profits from gas-fired ones.

“The extent of forex losses depended on what was your LC opening rate and the rate at which you settle them,” he said, adding that after July the gap between the two forex rates narrowed down for his company and it helped the company come back to profits.

Imran Karim of the BIPA said over half of the private sector power generation capacity is HFO-based and the plants are the best option right now considering the cost of liquefied natural gas (LNG) imports.

Fueling power plants through imported LNG that soared sharply in the global market after the war in Ukraine would cost over Tk30 to produce one unit power, which is half for HFO-plants, he said.

“We expressed our readiness to serve through the HFO plants.”

But, before that, the government should pay the industry’s bills receivable faster enough alongside compensating for the forex losses under the “Through Up” option mentioned in the power purchase agreement clauses, he said adding that, the forex losses and delayed bill payment pushed majority plants in a financial hardship that most are unable to continue fuel imports, while the dollar crisis in banks further worsened the situation.

BIPA Vice President Humayun Rashid said power producers had their worst days in the last six months and the prolonging billing cycle is adding to companies’ finance costs.

Around Tk19,000 crore in fuel import bills of the IPP industry are receivable from the government, according to the BIPA.

All the power producing companies’ share prices are stuck on the price floors at the bourse of Dhaka and Chattogram as investors are worried about how firms weather their tough times.