Govt's move to slash power subsidies: Phasing out costly plants, pushing renewables

Infograph: TBS

Summary:

• Phase out inefficient plants to lower electricity generation costs and reduce system losses
• Prioritise cheapest fuel sources and diversify the fuel mix for efficiency
• Conduct regular audits to reduce capacity payments to Independent Power Producers (IPPs)
• Increase renewable energy investment to meet the 10% target by 2030
• Align tariffs with production costs while phasing out subsidies by 2026

To address the growing financial burden of subsidies in the power sector, the Ministry of Finance has put forward recommendations to lower electricity generation costs by phasing out outdated and inefficient rental and independent power producers and reducing system losses.

To manage costs, the ministry has advised regular audits of the power plants' production capacities to reduce payments for capacity charges to Independent Power Producers (IPP). It has also recommended prioritising the use of the cheapest available fuel sources for power generation.

The recommendations come as part of the upcoming budget discussions, where the Power Division has requested Tk30,575 crore for development and operations, but the ministry has proposed an allocation of Tk13,658 crore, excluding subsidies.

These recommendations were presented in a report during a recent meeting between the Ministry of Finance and the power sector officials.

The report also pointed out that, when determining tariffs for private and joint venture power plants, it is essential to ensure proper procedures are followed and that government approval through the Cabinet or Advisory Council is obtained.

The ministry has also recommended increasing investments in renewable energy production instead of relying on costly, fuel-intensive power plants, as the current progress towards the 10% renewable energy production target by 2030 is minimal. 

IPP contracts under scrutiny: legal risks loom as govt eyes 'no electricity, no payment' deals

Furthermore, the finance ministry has advised the Power Division to rationalise electricity demand and reserve margins (extra capacity) based on their feasibility, while also focusing on reducing production costs by diversifying the fuel mix.

Zahid Hussain, a former lead economist at the World Bank's Dhaka office and member of the interim government's energy task force, told The Business standard that reducing subsidies is easier said than done.

"Efforts, however, are being made to reduce electricity costs," he added.

He explained that they are focusing on halting capacity charges for IPPs who have already recovered their investment and are operating profitably. 

Negotiations with IPPs will be conducted on a "no electricity, no payment" basis, he added.

He also noted that many power purchase agreements include clauses for arbitration in Singapore International Arbitration Centre in case of disputes. Therefore, the government must pay compensation if it cancels any contracts unilaterally without a ruling from the Singaporean court. 

"However, if irregularities or corruption in signing these PPAs are proven in court, the government may be able to cancel the contracts," he added.

Finance ministry proposes 55% cut in power division budget, excludes subsidies amid IMF reform push

Despite several price hikes in the past, the government paid Tk33,000 crore in subsidies, including special bonds, to the power sector last year. For the current fiscal, Tk19,500 crore has been allocated, with a total subsidy allocation of Tk62,000 crore in the revised budget. 

The government has also committed to phasing out subsidies by 2026 as part of its agreement with the IMF for a $4.7 billion loan.

System losses, soaring costs threaten grid efficiency despite 40% excess capacity

The report highlights that managing electricity production capacity, reducing production costs, and minimising system losses will be major challenges for the government in the coming years. 

It noted that system losses, including transmission and distribution losses, were 14.6% in FY12 but reduced to 10.3% by the last fiscal year. Despite the overall reduction in system losses, transmission losses have increased from 2.4% to 3.1%. 

It projected that system losses will remain at 10.83% by the end of the next three fiscal years.

Additionally, many private power plants are relying on high-cost fuels due to limited gas supply, contributing to the rising cost of electricity production. Without efficiency improvements, the cost is expected to continue increasing.

According to the Finance Ministry's calculations, the average bulk production cost per unit in FY21 was Tk6.61, while the bulk tariff was Tk5.13, resulting in a loss of Tk1.48 per unit. 

This loss has worsened in the current fiscal year, with the average production cost rising to Tk12.31 per unit, while the tariff remains at Tk7.04, resulting in a loss of Tk5.27 per unit.

The Finance Ministry also reviewed investments in power generation, transmission, and distribution over the past decade. It found that, despite meeting generation targets, electricity demand has not grown as expected, widening the gap between capacity and peak demand. 

The reserve margin, the difference between capacity and peak demand, was 11,621MW at the end of the last fiscal year. Although demand was expected to grow by 8% annually, actual growth has been lower. 

While a 20% reserve margin is ideal, Bangladesh currently has nearly 41%, which has raised the opportunity cost of investment, according to the ministry's report.

Bangladesh aims to achieve a production capacity of 40,000MW by 2030 and 60,000MW by 2041. The first 1,200MW unit of the Rooppur Nuclear Power Plant is set to be operational by 2025.

Interim govt's efforts

The Hasina government had initially planned to increase electricity prices every three months to reduce subsidies. However, since the interim government took office in August, no price hikes have been implemented. 

The Ministry of Finance recently informed the chief adviser that electricity and gas prices will be raised if inflation falls below 6.5%.

As part of efforts to reduce electricity production costs, Power and Energy Advisor Muhammad Fauzul Kabir Khan announced that an agreement for the Matarbari coal-based power plant has been finalised, with the tariff set at Tk8 per unit. 

Tariff revisions are underway for other coal-based plants, as well as gas- and oil-based plants, to bring down production costs. A review committee has also been formed to assess tariffs, including capacity charges, for IPPs.