The case for bringing retired power plants back online

Highlights:

• Retired oil plants could provide cheaper electricity without capacity charges.

• HFO generation costs may fall near Tk20 per unit.

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• Five expired-contract plants could supply around 500MW to Bangladesh's grid.

• LNG price increases have sharply eroded gas power's cost advantage.

• Bangladesh's biggest power-sector constraint is insufficient fuel, especially gas.

• No-payment arrangements could reduce subsidies while easing gas shortages.

Bringing retired oil-fired power plants back into operation with no capacity charge could be cost-effective under the current circumstances as sharp rise in global LNG prices makes electricity from gas-fired plants more expensive gradually, Power Division officials believe.

HFO-based power generation is more expensive still, with the cost currently reaching around Tk25-Tk30 per unit, particularly because most of these plants are operating at only around half of their capacity, they said.

Independent power producers said the cost of HFO-based generation could fall to around Tk20 per unit if the plants are allowed to operate closer to their full potential.

This is where the government's decision to revive some retired plants under the "No Electricity, No Payment" arrangement becomes significant as no capacity charges would be required to run those plants.

Plants' owners will be paid only for the electricity they actually supply to the national grid, while they will have to arrange the fuel at their own cost.

State Minister for Power, Energy and Mineral Resources Aninda Islam Amit told parliament on 7 September that the national grid is expected to receive around 500MW from five power plants whose contractual terms have expired. No capacity charges will be required for electricity generated by these plants.

The government has also allocated Tk6,000 crore to generate up to 4,000MW of electricity from HFO-fired power plants.

Power sector insiders say if HFO plants can increase their combined generation from the current level of around 2,000MW to 4,000MW, their per-unit generation cost could come down to nearly Tk20 – potentially making them cheaper than gas-fired generation under the current LNG price regime.

Cheap gas-fired power is no longer cheap
Power officials explained how the arrangements would reduce the price gaps in electricity from plants powered by gas, coal and oil.

For years, gas-fired power generation has been considered the cheapest option for Bangladesh, with the average production cost often cited at around Tk8-Tk10 per unit.

But that calculation does not tell the whole story.

A major reason gas-fired electricity has remained cheap is the subsidised price facilitated to power plants.

Petrobangla said the cost of blended gas supplied to all consumers rose to Tk46.25 per cubic metre during July-September amid the soaring cost of imported LNG.

The Bangladesh Power Development Board, however, receives gas at a subsidised price of Tk15.50 per cubic metre, leaving a cost gap of Tk30.75.

Petrobangla said its weighted average sales price during the period was Tk23.90 per cubic metre, with an average price gap of Tk22.35.

In other words, the often-quoted Tk8-Tk10 cost of gas-fired electricity does not reflect the full economic cost of the fuel.

Petrobangla estimates that if the gas subsidy were removed, electricity generated from gas-fired plants would have cost around Tk14-Tk15 per unit even before the Iran war.

Spot LNG prices have climbed to around $23-$28 per MMBtu, compared with roughly $9-$10 before the war. As a result, the cost advantage that gas-fired power generation traditionally enjoyed has been substantially eroded.

With LNG prices now more than double their pre-war levels, the effective cost of electricity from gas-fired plants can reach around Tk30 per unit.

That fundamentally changes the economics of the power sector.

Coal-fired generation has also become more expensive, with the average production cost rising to around Tk15-Tk17 per unit amid tight international coal prices.

The capacity is there, but fuel is not
According to the latest August report of the BPDB, the country's installed power generation capacity stands at 28,797MW.

Gas-fired plants account for the largest share, around 42%, or 12,154MW. Coal-fired plants account for 23%, or 6,509MW, while HFO-based plants make up 19%, or 5,607MW. Electricity imports from India and Nepal account for another 9%, or 2,670MW. The remainder comes from diesel and renewable energy sources.

The biggest constraint at present is fuel.

Gas-fired power plants, despite accounting for more than two-fifths of the country's generation capacity, are unable to operate at their potential because of inadequate gas supply.

Generating around 6,000MW from gas-fired power plants, even at a load factor of below 50%, requires at least 1,000 mmcfd of gas.

But declining domestic gas production and LNG regasification challenges have made it difficult to meet that requirement. Average gas supply to power plants has hovered around 800-850 mmcfd, requiring the government to decide to bring back old oil-based plants along with exploring other options.

Why "No Electricity, No Payment" makes sense now
Under the model, plant owners bear the cost of keeping the plants available and arranging fuel. The government pays only when electricity is actually dispatched to the grid.

This means no electricity, no payment — and, crucially, no capacity charge.

For the government, that provides some temporary fiscal relief at a time when power and energy subsidies are already putting enormous pressure on public finances.

It also creates an opportunity to direct scarce gas supplies towards industries that are struggling to maintain production because of inadequate gas pressure and supply.

When gas-fired generation is no longer as cheap as it used to be and existing plants cannot be fully utilised, bringing some retired plants back into operation under a no-capacity-payment arrangement may be a rational short-term response, power officials said.