Capacity payment in our PPA is anticompetitive
Bangladesh's power sector has long been grappling with the challenge of capacity charges. These charges, a significant component of the tariff paid to private power producers, have been a subject of contention due to their structure, calculation methods, and potential for market distortions
Private companies follow a Power Purchase Agreement (PPA) of 1996, revised in 2004, with the government (Bangladesh Power Development Board). According to the PPA, the tariff includes (i) capacity charge or rental payment and (ii) energy payment. Capacity payment can be non-scalable (fixed charge) or scalable (inflation-adjusted) for operations and maintenance (O&M) expenses. Energy payment is composed of primary fuel like gas and secondary fuel like lubricants.
During bidding, the bidders submitted a capacity charge by taking into account a fixed debt interest charge and the required return on equity on a fixed amount of debt and equity. Operations and maintenance expenses like employee salaries and benefits, depreciation, insurance, and spare parts were scalable and therefore adjusted for inflation. Energy charge is determined by joint metre readings by companies and BPDB and multiplied by fuel price adjusted for inflation.
Problems with our capacity payment
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There are many confusions in the agreement: (i) If actual availability is less than dependable capacity (90% of installed capacity), then rental payment shall be paid pro rata, i.e., as a ratio of actual availability to 90% of installed capacity (covenant 8.4 of PPA between BPDB and an electricity company). Schedule 2, however, says that the plant load factor shall be a minimum of 25% of the dependable capacity. It means that a full capacity charge shall be paid if actual output is more than 25% of the dependable capacity.
Then ii) the final bid acceptance letter (tender acceptance notice by the Power, Energy, and Mineral Resources Ministry dated 6.1.2008) says that the capacity rate is based on 70% of the dependable capacity. As a result, the capacity rate was already overstated.
Moreover, (iii) the interest rate at the bidding time (2008–9) was around 14%, which is still paid now when the market interest rate is around 9 to 12%; (iv) the fixed profit rate, which was higher in the bidding time compared to now when the profit rate is lower because of increased competition in the power sector now.
Instant power plants (IPPs) anticompetitive
The Quick Enhancement of Electricity and Energy Supply (Special) Order 2010 aggravated the problem: (i) the Public Procurement Act 2006 is not applicable, i.e., tender is not applicable (Section 3); (ii) the government may take any plan on power and energy for quick implementation (Section 4); (iii) the government will publish advertisements and communicate with a single or limited number of organisations for investment, and the cabinet committee will accept or reject proposals (Sections 5, 6, 7); (iv) no question will be allowed on acceptance or rejection of proposal (Section 9); (v) no clause like in the bidding process before the Special Order Act 2010 was available in the Act.
It should be mentioned here that even before the 2010 Act, the bidding process (PPA 1996, 2004 above) can be assumed to be non-transparent if we consider such a non-competitive Act can come into force. Furthermore, there are instances of providing contracts to influential political leaders.
Indian and Indonesian capacity payment
The tariff notification for electricity under the Electricity Supply Act 1948 has the following provisions: In India, fixed charges shall not be more than 70% of the tariff, and fuel charges shall not be more than 50% of the tariff.
There is also an upper ceiling for a fixed charge per kwh (Bidding Guidelines and Bidding Documents for Procurement of Power, Ministry of Power). Operations and maintenance expenses shall not be more than 2.5% of capital expenditure.
Secondary energy like oil and lubricants is paid at 5 ml/kwh in the stabilisation period and at 3.5 ml/kwh in the subsequent period. In Indonesia, the tariff cannot be more than the government's (PLN) selling price to consumers. In Bangladesh, there is no ceiling for the above-capacity charges.
In Bangladesh, interest is allowed at a fixed rate existing at bidding time, but in India, it is a variable rate. The pro-rata system (payment for actual output less than capacity) is in place in India, whereas in Bangladesh this is absent in instant power projects.
Competition in the power and energy sector
In India, the bidding process involves first, second, and third rounds. Whereas in the Bangladeshi power purchase agreement, this is absent. Importantly, for instant power projects (quick power plants) after the 2010 special order, there is no requirement for compulsory competitive tender, but in India, it is always mandatory.
In Bangladesh, power plants have to sell electricity only to the government (BPDB), whereas in India, power plants can sell 20% of installed capacity (open capacity) to retail, industrial, and commercial customers.
Captive power plants (CPPs) recently, however, can sell the excess electricity in the market by using the existing government transmission and distribution network and paying wheeling charges to the government (Policy Guidelines 2007 of the Ministry of Power, Energy, and Mineral Resources).
Consequences
In Bangladesh, the capacity charge is estimated by the bidders, whereas in India it is estimated on the market rate (there is a ceiling on capacity payment). That is, India keeps a continuous watch on market prices. Since Bangladesh does not require compulsory competitive tendering for instant power projects, there is scope for higher capacity charges. Since pro-rata is absent in Bangladesh, there is always payment of capacity charge even if there is no electricity.
In 2023, IPPs generated 8494 MW, rental plants (with tender) 373 MW, and CPPs generated 797 MW. So around 87% of electricity in the private sector was generated by IPPs without tender. The recent cost per kwh is Tk14.6 from IPP (without tender) and Tk12.5 from rental (with tender).
BPDB always makes losses because of subsidies and anticompetitive elements in PPA (Tk117,654 million in 2023), West Bengal Power Development Corporation Ltd. (India), and PLN (Indonesia) always make profits (Rs 3,474 million in India and $984 million in Indonesia in the same year).
Why idle capacity?
42% of capacity is shared by the public sector, 41% by the private sector, and 7% by joint ventures. Fuel was guaranteed to the bidders, but a serious shortage took place.
Increasing costs of imported coal, HFO, diesel, and other fuels and BPDB's inability to pay outstanding bills caused this idle capacity. According to experts, certain excess capacity — around 20% — is needed to ensure an uninterrupted power supply.
However, the electricity demand forecast of the government did not go with the actual GDP growth for reasons beyond control, particularly crises in the international market.
Out of a total of 87 private sector IPPs, 23 plants operated at less than 25% plant factor (BPDB Annual Report 2021-22). Other than political and economic factors, the capacity charge itself has flaws, as mentioned above.
Dr Dhiman Chowdhury is Professor and Chair at the Department of Accounting and Information Systems, Dhaka University.
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.
