Power cuts are back. Was this inevitable?

Bangladesh has 100% electricity coverage and over 50% surplus generation capacity. Still, ordinary people are losing their sleep over daily power outages as total electricity generation is falling behind the peak demand.

On July 3, the country resorted to 1,500 MW of load-shedding while there was a forecast of a 1,273 MW power cut. Many experts even contested these figures provided by the Bangladesh Power Development Board (BPDB) and argued that the load-shedding was even higher.

This perplexing development requires some explanation, and the rudimentary excuse of higher import prices for Liquefied Natural Gas (LNG) cannot explain the underlying deficiencies of both the BPDB and PetroBangla or, more broadly, the Power Division itself.

For starters, energy prices – including that of natural gas – have been rising since February thanks to the Russian invasion of Ukraine; subsequent sanctions on Russia and retaliation from Russia which created an artificial shortage of natural gas around the globe.

How natural gas prices affect power generation in Bangladesh

Power generation in Bangladesh has always been heavily reliant on gas. Over the past ten fiscal years, BPDB's share of electricity generation from natural gas gradually decreased from about 78% in FY 2010-11 to about 60% in FY 2020-21. It is worth mentioning that much of the natural gas-generated electricity has been replaced by electricity imports from India, which rose to 10% of total electricity generation and cost significantly more than domestic generation.

Consequently, when BPDB was exposed to an exogenous shock like the Russian invasion of Ukraine that increased the cost of producing electricity in both Bangladesh and India (its only source of imports), they had no other option but to cut down on generation resulting in the load-shedding we are experiencing every day.

The GoB had earlier pledged to achieve 10% electricity generation capacity from renewables by 2020. According to BPDB, as of July 2022, the total installed capacity of renewable power plants (solar and hydro) stands at 2.05%. Sluggish development in incorporating renewable energy into the mix has also allowed the current power shortage to have such severe ramifications.

Dr Khondaker Golam Moazzem, Research Director at the Centre for Policy Dialogue (CPD), said, "The government should have invested heavily in renewable energy sources and gradually phased out inefficient fossil fuel-powered plants. Then we would have been better equipped to handle a gas shortage."

As Dr Moazzem mentioned, there are questions regarding the efficiency of public plants. Many of these plants were built in the 80s with outdated technologies. Although the efficiency of public plants has risen from 31% in FY 2010-11 to around 40.7% in FY 2020-21, it still is extremely low and the increase in efficiency at best is stagnant. Experts have long argued that the government should phase out the inefficient fossil fuel-powered plants as soon as possible.

Where do we import LNG from?

BPDB's overreliance on natural gas portrays only half the picture. The other part concerns Bangladesh Oil, Gas and Mineral Corporation (PetroBangla) and where it purchases natural gas from. PetroBangla is the enterprise that supplies BPDB with natural gases, its dominant input in producing electricity.

Now the price of natural gas in the international market - supplied through pipelines regionally - does not affect Bangladesh much as the country is not part of any trans-border gas pipelines like Nord Stream between Germany and Russia. However, 24-26% of its consumed gas is imported from abroad, of which 6% comes from the spot LNG market, and the remainder comes from Oman and Qatar under long-term contracts.

There are important distinctions between the two sources of LNG imports. While the cost of importing LNG under long-term contracts is fixed at a predetermined price, i.e., $11 per million British Thermal Unit (BTU), the price of LNG in the spot LNG market is volatile and can change drastically subject to exogenous shocks like the Russia-Ukraine war.

A recent statement from PetroBangla says the prices in the spot LNG markets have risen to around $35 from below $25 a few months back. Consequently, the local gas supply has also fallen sharply from 3,500 million cubic feet per day (MMcf/d) to only 2,822, causing a shortage of around 700 (MMcf/d).

But experts have warned of this excessive dependence on LNG long ago, which put the country under significant financial stress. When PetroBangla decided to import LNG from abroad in 2018, its total operating expenditure skyrocketed from Tk68.57 billion in FY 2017-18 to a whopping Tk199.73 billion in FY 2018-19; of which Tk118.125 billion was spent on importing LNG cargo and regasification.

The cost of importing LNG rose even further in the following fiscal year to Tk175.03 billion. And for the first time, to cover for the sizable operating loss, PetroBangla received Tk25 and Tk35 billion subsidies from the government in the two fiscal years, considerably lower than what the state-owned enterprise asked for. It also took out loans from banks and requested funds from the Gas Development Funds (GDF). It is not difficult to see that PetroBangla's poor financial performance can be entirely attributable to expensive LNG imports.

Did we need to import LNG from abroad?

Not necessarily. According to most experts, Bangladesh hastily decided to import LNG from abroad before exploring its domestic options. The GoB had made a big deal of winning maritime disputes against Myanmar and India in 2012 and 2014, respectively. But the government has failed to explore the blue sector, and there appears to be no significant movement in that direction either.

"The government had not exploited all of its domestic production capacity before deciding to import LNG from abroad. Some studies suggest that domestic production would be able to cover electricity production if sufficiently explored," said Dr Moazzem. 

Requesting to remain anonymous, one former Chairman of the PetroBangla said, "We have not prioritised domestic exploration in the past and are suffering from the consequences now."

While others argue that it is a misconception that Bangladesh has the resources to be self-reliant in natural gas production, it can easily be argued that the size of the import payments could have been brought down significantly, and we probably would not have to rely on the volatile spot LNG market.

Why isn't the government subsidising imports of LNG?

Another question is often raised regarding the government's ability to subsidise energy payments in these trying times. Unfortunately, the government is fiscally constrained because of its infamously low tax-to-GDP ratio. On top of that, in the past year alone, it had to pay off around Tk26,000 crore in capacity payments alone. The government is also planning to introduce a universal pension scheme in the next fiscal year.

The government had already failed twice to provide PetroBangla with the subsidies it asked for, forcing it to seek loans from the banks. In the most recent budget, the government even cut down on many social security programmes while benefits in other programs like old-age allowances remained the same despite inflationary pressure. Given these precedences, it's unlikely that it would be able to subsidise disproportionately higher subsidy requirements from PetroBangla if it increases its LNG imports to meet peak demand.

Then, what should we do now?

I sought Dr Moazzem's insight for a solution to this crisis.

"In the short term, the government can take out loans from the IMF, the ADB, the World Bank or other development organisations to pay for its power generation costs," said Dr Moazzem.

"In the long run, the government should prioritise domestic natural gas exploration over imported LNG. Usage of renewable energy should be prioritised in electricity production and inefficient plants, as well as rentals and quick rentals, should be phased out," he added.

Seikh Rafi Ahmed. Sketch: TBS