Who really benefits from higher electricity prices?

    Originally posted in The Business Standard on 22 January 2023

    The government has recently raised the electricity price for consumers by five percent on average, bypassing the procedures of the Bangladesh Energy Regulatory Commission (BERC). Not only that, the State Minister for Power, Energy and Mineral Resources Nasrul Hamid said that, from now on, electricity prices will be “adjusted” in the first week of every month by executive order.

    The concern is that, since the single buyer Power Development Board (PDB) continues to suffer huge losses while purchasing electricity from the private sector, it will practically be price hikes in the name of adjustments, at a time when people are already under huge pressure due to rising prices of daily commodities. Last August, the government increased fuel prices (diesel, kerosene, petrol and octane) by Tk 34 to Tk 46 per litre. After widespread criticism, it was later reduced by Tk 5 per litre, but it did not have any effect on rising prices of goods. So, past experience indicates that even if the price of electricity is reduced in any month, it is unlikely to reduce pressure on prices of goods and services. Rather, this monthly adjustment is only likely to further disrupt prices.

    It has been reported that electricity price was raised to fulfil IMF conditionalities of reducing power and energy subsidies. But why do these subsidies have to be paid in the first place? Where does the money go, and who benefits? The subsidies exist because the PDB buys power at high costs from privately owned power plants that are dependent on imported liquid fuels.

    On top of that, a large part of Bangladesh’s power generation capacity remains idle, but the PDB is contractually obliged to pay rent (capacity charge) to power plants. In the last 12 years, from FY2010-11 to FY2021-22, the PDB has spent Tk 90,000 crores on capacity charges only. Every year, with the increase in private sector power generation capacity, capacity charges also increase. In turn, PDB’s losses go up, and there is pressure to hike prices. While electricity prices for consumers have gone up 11 times in 14 years, losses and subsidies have not decreased.

    If there is a leak at the bottom of a water tank, no matter how much water is poured, the tank will not be filled. Private power plants are the holes in the tank of the power and energy sector. In 2020-21, the average generation cost of per unit electricity was Tk 6.61, which increased by 43 percent to Tk 8.84 in 2021-22. But the PDB’s own power plants cost Tk 5.02 per unit, and state-owned power plants cost Tk 4.47, whereas private sector rental power plants cost Tk 9.80 and independent power producers (IPP) cost Tk 11.55.

    It is clear that PDB is incurring losses by buying electricity from private sector IPPs and rental power plants. Due to capacity charges, it costs up to Tk 55 per unit to buy electricity from some IPPs, and up to Tk 27 per unit from rental power plants. Excess expansion of power generation capacity on one hand, and increasing dependency on imported primary fuels such as LNG, diesel and coal, without giving due importance to local exploration and extraction on the other, is also responsible for PDB’s losses.

    For example, in 2012-13, when the power generation capacity was 8,500 MW, PDB’s loss was Tk 5,430 crore. In 2017-18, against production capacity of 15,410 MW, PDB losses increased to Tk 9,310 crore. In 2021-22, against production capacity of 21,680 MW, the loss was about Tk 28,000 crores.

    The government has to provide this money as loans or subsidies so that PDB can pay private power producers. And in order to reduce this amount, an arrangement has been made to take that extra money from people’s pockets. Whether it is to comply with IMF conditionalities or to reduce government losses, the increase in electricity prices will increase people’s losses. More money than ever will flow from public pockets into the pockets of private producers. Ultimately, the power price hike means saving the mechanism of PDB buying power from private owners at higher prices, while keeping the losses bearable.

    The IMF sets many loan conditions for reforms, but it has no position against private sector profiteering on public money. Nor did it give any conditions to scrap the undemocratic Quick Enhancement of Electricity and Energy Supply (Special Provision) Act 2010, using which the government is giving lucrative contracts to local and foreign investors without any competitive bidding. The IMF agenda is to either privatise the country’s public sector, or operate the public sector with profit-oriented policies by reducing subsidies, so that they become open to private investors. So, it is expected that if a country seeks an IMF loan, it will receive conditions to reduce subsidies.

    The question is, why did the economy fall into a situation where dwindling reserves forced the government to seek an IMF loan? Although the Russia-Ukraine war has been blamed for the ongoing economic crisis, in reality, the growing budget and trade deficit, money laundering through bank loans and transfer pricing, construction of expensive debt-based infrastructure, and increasing dependency on expensive energy imports had been there long before the war started. By giving excuses about IMF conditionalities, the government cannot avoid responsibility for increasing electricity price, because it is their mismanagement that led to Bangladesh’s economy falling into the trap of IMF conditions.

    Finally, it needs to be clarified whether it is mandatory or beneficial for the overall economy to increase the price of electricity if there is a shortfall between the generation cost and selling price of electricity.

    Initiatives should be taken to keep the cost of generation low to reduce the deficit. Increasing prices while keeping all the mechanisms that increase the cost of production does not reduce the deficit. Rather, the deficit continues to grow, leading to a need to increase the price again and again. This is evident from the continuing deficit of thousands of crores of taka, despite repeated price hikes during this government’s tenure.

    If there is still a shortfall due to some unavoidable reason, then subsidies have to be given. Due to the multiplier effect of electricity price hikes, the price of other commodities increase, as do the people’s sufferings from inflation. So, a portion of the tax-VAT paid by the people should be allocated for subsidies to prevent public suffering.

    In such a scenario, public money is used for public benefit if subsidies go to the public sector. But if the power sector is privatised, the public money is given to the private sector, guaranteeing them extra profits. Regardless of whether that money comes from subsidies or higher prices, it is still public money. To utilise public money for public benefit, the power and energy sector needs to be freed from the domination of vested private interests, and must be in the hands of the public sector instead.