Will BPDB become a ‘white elephant’?

Originally posted in The Daily Star on 10 August 2023

Bangladesh’s power sector, which is touted as a major area of achievement of the current government, has become a source of serious concern over the last few years. The financial condition of the Bangladesh Power Development Board (BPDB) – the main public agency of Bangladesh’s power sector – has been worsening for some years now. The operating loss of the BPDB went from Tk -6,200 crores in FY 2018 to Tk -27,477 crores in FY 2022, an increase of 217.1 percent over four years. A recent report from the Implementation Monitoring and Evaluation Division predicted that the BPDB’s total loss for FY 2023 and FY 2024 could be Tk 1,13,532 crores – meaning that the average annual loss will be Tk 56,766 crores. Though a number of measures have been undertaken to reduce losses, including upward adjustment of retail prices of electricity (once in January, February, and March) as a measure to meet the IMF conditionality, such measures cannot meaningfully reduce the financial losses of the BPDB. In other words, the problem of the increasing growth of BPDB’s losses is not related to the rise in energy prices alone.

A major reason behind these rising losses is that the BPDB’s financial burden has increased due to capacity payments against the excess electricity generation capacity (technically called the “reserve margin”). Over the last five years, the excess power generation capacity has increased from 31.3 percent in 2018 to 35.2 percent in 2023. The excess capacity was only six percent in 2015 (as per our calculation). Considering the energy requirement, a reserve margin of around 10 percent is considered to be an acceptable limit in an emerging developing country. Because of the overwhelming amount of excess capacity, the BPDB has to spend a substantial amount of money on capacity payments every year. Capacity payments to private, rental, and quick rental power plants have increased from Tk 5,376 crores in FY 2017 to as high as an estimated Tk 28,000 crores in FY 2023. The percentage change in the amount of capacity payment is unbelievably high – 420 percent from 2016-17 to 2022-23. In the last one year, the change in capacity payments was up by 16.7 percent. It should be noted that the total capacity will further rise to 31,000 MW by 2025, and the excess capacity by that time will be as high as 36 percent (or 11,191 MW).

To cover the additional expenses, the BPDB has taken subsidised credit from the government every year. The amount of subsidies has increased from Tk 4,000 crores in FY 2017 to Tk 23,000 crores in FY 2023, and this is expected to rise to Tk 32,000 crores in FY 2024. But even the increasing sectoral subsidies are failing to meet the amount required to settle capacity charges. Consequently, the BPDB has been passing over a part of its annual capacity payment from one year to the next. In other words, the BPDB’s financial condition is more dire than what actually appears on its financial statements.

The weak financial state of the BPDB is partly due to the high per unit price of electricity. The per unit electricity purchase price from the public and private sectors has also increased. In the case of the public sector, the purchase price has increased from Tk 4.52 kWh in 2018 to Tk 4.75 kWh in 2023. On the other hand, in the private sector, the purchase price has increased from Tk 5.72 kWh in 2018 to a staggering Tk 11.55 kWh in 2022. These rising prices are not associated with the changes in the energy costs as the government is the one solely authorised to import energy and supply fuel to power producers at predetermined prices. The issue is that the per unit purchase price from independent power producers (IPPs), rental and quick rentals plants did not decline, but rather increased during this period. This has put additional financial pressure on the BPDB.

Official data shows that BPDB incurred losses, but also transferred cash to the exchequer, paid dividends, and invested in fixed assets. Such financial activities have been carried out without addressing the BPDB’s overgrowing financial losses. And again, it has all the while been acquiring subsidised credit from the government. Overall, the financial transparency of the BPDB is questionable.

Such a weak financial state of the BPDB has resulted from excess investment in power generation both under the public and private sectors. A myth has gained prominence over the last decade that the power demand will increase sharply because of the rise in private investment. Although the demand for electricity has a direct positive relation with a rise in investment, the rise in investment as a percentage of the GDP during the last decade was insignificant at 0.02 percent. More importantly, the reported rise in private investment was miniscule at only 0.38 percent. Hence, the investment made in power generation so far have largely turned out to be redundant and have resulted in excess capacity. Moreover, the BPDB is bound to pay all capacity charges to private producers whether or not the electricity is used in the national grid. The question is: despite having little growth in power demand and excess capacity, why did the BPDB sign contracts with the IPPs which included the capacity payment clause?

The contracts signed with IPPs fall under the Quick Enhancement of Electricity and Energy Supply (Special Provision) Act, 2010. The Act has been extended four times and will be operational till 2026. It has facilitated the government to sign contracts/deals with companies without bidding. When the loadshedding situation in the country was acute, the Act allowed the government to sign contracts quickly with the private companies and acquire a swift supply of electricity. However, this act has also been increasingly burdensome as it does not ensure competitive bidding.

Moreover, the BPDB has been exhibiting an overwhelming dependence on fossil fuel-based power generation systems, for which energy is usually imported. However, there are alternate solutions for reducing this financial burden by promoting renewable energy-based power generation, transmission, and distribution. Even the new Integrated Energy and Power System Master Plan (IEPMP), which is already at the approval stage, has not promoted the use of renewable energy but has instead suggested coal, LNG, nuclear, and other so-called advanced technologies for power generation. Such a plan will not help reduce the financial burden on the BPDB. Besides, any new power purchase agreements should be done based on the “No Electricity No Pay” clause in order to gradually phase out the capacity payment provision. Overall, there is a growing concern that a large part of the investment made in the power sector, and the resulting operational expenses, would turn the Board into a white elephant. But a set of prudent and appropriate measures with proper political vision (without any bias towards certain quarters) could turn it into a “tiger.” But this seems a far-fetched possibility at present.

Dr Khondaker Golam Moazzem and Helen Mashiyat Preoty are involved in the CPD Power and Energy Unit of the Centre for Policy Dialogue (CPD).