How merchant plants are redefining Bangladesh’s energy sector

Bangladesh is stepping into a new chapter in its energy journey with the Merchant Power Plant Policy (MPPP). Under this policy, private power producers will be able to sell electricity directly to businesses and consumers through the national grid, opening the market to competition.

This contrasts with the traditional Independent Power Producer (IPP) model where the government is the sole buyer. Under the new policy, the government will buy only about 10-20% of power from such plants and focus on providing transmission infrastructure for a fee. 

This policy is expected to end the era of government sole-buying and create opportunities for  independent power sales, fostering competition and efficiency in the power sector. The goal is ambitious: to ease the government's financial strain from capacity payments and costly fossil fuel imports, helping curb foreign currency depletion and temper inflation. At the same time, this shift is designed to spark efficiency, foster competition, and create room for renewable energy to grow. 

Yet, as Bangladesh takes this bold step, the real story will unfold in the years ahead—tracking how foreign investors respond, how green energy flourishes, and what this all means for the electricity bills of everyday consumers.

The IPP model has been criticised for adding financial pressure, as capacity payments are mostly in dollars and rely on fossil fuel imports. These have strained Bangladesh's foreign currency reserves and fueled high inflation.

The new policy aims to reduce BPDB's financial liabilities caused by mandatory capacity payments and high procurement costs that currently drive up the subsidy requirement. Currently, the BPDB owes a large amount in outstanding payments to power producers, which contributes heavily to the subsidy burden.

The merchant power policy aims to alleviate these problems by allowing private producers to negotiate electricity prices directly with consumers, potentially lowering tariffs through competition.  The policy also promotes the development of a spot market for electricity trading, though  Bangladesh still needs to develop the required ecosystem for this market to function effectively. 

The transition is closely tied to the growth of renewable energy in Bangladesh, particularly  solar power. Merchant power plants facilitate private investment in renewable projects by enabling companies to buy electricity directly from producers, helping reduce carbon  emissions. 

Agreements such as the MoU between private firms and multinational  companies to build solar power plants illustrate this shift. The policy also encourages transparency, investor confidence, and mobilisation of finance with expectations to achieve significant renewable energy targets by 2030 and 2040.

Challenges and considerations 

Navigating the complexities of Bangladesh's power sector brings several key challenges and considerations to the forefront. Managing the consumer base carefully is crucial to avoid overlaps with government entities, while addressing price and subsidy implications becomes essential in a more liberalised market. 

At the same time, robust regulatory oversight is needed to ensure compliance and effective management as the sector evolves, and potential conflicts of interest must be handled diligently to maintain transparency and trust.

Investor confidence rests on transparency and government assurances, especially vital for  foreign stakeholders. The policy aims to streamline business processes, curb corruption, and involve local conglomerates more actively in power generation. 

Bangladesh's approach towards merchant power plants reflects a strategic pivot to liberalise the sector, enhance financial viability, promote renewable energy, and optimise market dynamics. This shift underscores the emphasis on direct power transactions between producers and consumers, fostering efficiency and sustainability. 

The ongoing transition is marked by evolving policy frameworks and burgeoning investment engagements, signaling a progressive trajectory for the sector. 

For those delving deeper into the realm of merchant power plants in Bangladesh, targeted  searches can unveil recent data insights and specific case studies, offering a more comprehensive understanding of this evolving landscape. 

How will it affect BPDB's subsidy burden? 

Merchant power is set to play a pivotal role in reducing Bangladesh Power Development Board (BPDB)'s subsidy burden this year. This strategic shift empowers private producers to autonomously vend electricity, ultimately bolstering financial efficiency. 

The new policy aims to reduce BPDB's financial liabilities caused by mandatory capacity payments and high procurement costs that currently drive up the subsidy requirement. Currently, the BPDB owes a large amount in outstanding payments to power producers, which contributes heavily to the subsidy burden. 

The government's subsidy for the power sector in fiscal year 2025-26 is set to be around Tk350 billion, which is nearly half of the subsidy for the previous year, signaling efforts to reduce financial stress on BPDB. 

The transition to merchant power is expected to help reduce the overall cost burden on BPDB by  allowing more cost-efficient and competitive power sales, thus lowering the tariff deficit and  subsidy needs. 

The objective is clear: diminish government payment responsibilities to IPPs. This initiative aligns seamlessly with the overarching goal of slashing  power subsidies by half in the fiscal year 2025-26. The dual focus on enhancing financial  management within the power sector and safeguarding supply stability underscores a  proactive approach towards sustainable energy economics. 

Sketch: TBS

Nazmul Haque Faisal is the Executive Vice President, Corporate Affairs, at Infrastructure Development Company Limited (IDCOL).

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.