Making electricity price increases acceptable

Bangladesh Energy Regulatory Commission (BERC) is planning to increase electricity prices from March 1, 2020, according to a TBS report dated February 21.

Electricity price shock to the public purse is analogous to the way electricity shocks the human body. Depending on the intensity of the current and the type of muscle it travels through, electricity shock can just scratch or tear muscles or cause cardiac arrest.  In case of electricity price increases, the effect is first on the economy's nervous system causing some pain and anxiety. The effects may clear up with time or be permanent depending on the absorptive capacity of different economic agents and how well the shock conducts through their ecosystem.

The intensity of the price shock is expected to be 15-20 percent.  This will immediately hit the household budget as well as the cost of production and trade. Businesses, however, are able to pass on the shock forward through price increases and even backward by paying less for other inputs.  The effect on their profits clear up through time more or less.  No such recourse is available to the consuming households, of whom the low-income groups risk heart blockage manifested in severe budget crunch. 

The electricity shock therapy is sometimes needed, for instance to reactivate a failing heart.  The heart that is failing in this case is that of the Bangladesh Power Development Board (BPDB).  The price adjustments are intended to cut BPDB losses incurred for producing and buying power at costs higher than the selling rates. Yet, despite increasing average retail electricity rate from Tk 3.81 per kwh in 2010 to Tk 6.85 per kwh in 2019, BPDB losses has increased from Tk 636 crores in 2009-10 to Tk 10,272 crores in 2018-19.  The critical question is why losses have increased 16.2 times when prices increased 1.8 times in the past decade?

Part of the answer is 2.3 times increase in electricity generation.  If selling price is below the buying price, then total losses can grow with growth in volume even if the difference between the buying and selling price is shrinking. Another part is increase in gas prices which increased electricity production costs.  Bangladesh raised the price of domestic natural gas by a weighted average of 32.8 percent in July 2019 following 22.7 percent hike in March 2017 and 26.3 percent hike in September 2015. However, both together cannot explain such massive rise in losses, a phenomenon akin to the oxygen poor blood in the electrical wiring of a heart overwhelming the oxygen rich blood thus causing a persistent deterioration in its conduction system. The running of BPDB's finances in a coordinated and normal rhythm appears to have been inhibited by factors other than electricity generation and unit cost increases.    

BPDB's problem is more like a disease caused by destructive bacteria and parasites. The destructive bacteria in this case is corruption.  A process of binary fission appears to have come into play as a result of which the bacteria of corruption produced a new parasite in the form of rental power plants.  These plants played a critical role in balancing the overall electricity ecosystem when the country needed emergency power supply over a decade ago.  It helped cope with the more deadly infection on investment, production and trade from having to manage demand under crisis conditions. 

The shortage of gas led to the use of more expensive liquid fuels to generate power using short-term rental plants.  This was supposedly a temporary expedient until more low-priced domestic gas or coal-fired base-load capacity came on board. The duration of these rental companies were 3-5 years, but they are still alive and well.  LNG imports have begun to replace the use of imported liquid fuels for power generation.  This is less expensive than oil-fired generation.  The BPDB is keeping around one-third of overall power plants idle for a lack of demand. Electricity demand did not increase as much as expected. This resulted in capacity payments which soared from Tk 17.9 billion in FY10 to Tk 89.3 billion in FY19, according to BPDB data. These payments account for nearly 90 percent of the BPDB losses!  Thus, the parasite that served as a savior initially later turned the host BPDB into a zombie, keeping it alive while consuming it from inside out.

A better timing together with visible efforts to improve the efficiency and reduce rent seeking in the power sector will make the electricity price increases more acceptable.

The timing of the forthcoming electricity price increase could not have been much worse.  Nonfood price inflation rose to 6.3 percent (year-on-year) in January, boosted largely by cost push factors. This will only be exacerbated by the electricity tariff increases, causing further knock on effects on costs across the board and at different stages of the supply chain.  In addition, making a living has become tough of late because of decline in exports, slowdown in investments, deteriorating governance in banking, long unresolved unease of starting and running business and increased external risk due to the spread of coronavirus.

There remains significant potential for increasing efficiency. Credit is due to power sector managers for reducing total system losses from 16.6 percent in 2010 to less than 13.6 percent in 2016.  Collection efficiency has also improved significantly. Yet, there is considerable room for both technical and non-technical improvements in the management and operation of the power system.  Current manually operated dispatch protocols result in unnecessary pre-emptive use of expensive fuel oil- and diesel-based generators.  Electricity can be obtained at lower average cost by allocating more of the existing domestic gas to power generation, modernizing dispatch protocols and removing transmission bottlenecks that prevent lower cost power from reaching load centers.

According to the World Bank, up to 63 percent cost savings are potentially achievable using the same amount of gas if automated dispatch systems follow merit order and that a 23 percent increase in the amount of gas allocated to electricity generation could potentially reduce the average cost of power by 77 percent. 

Renewing costly rental power contracts when there is a surplus generation capacity makes no economic sense. According to media reports, more than one-third of the total installed capacity remained idle on April 29, 2019 - day that saw the highest ever power generation. In the winter season, the idle capacity is even greater. In the context of the rising demand for power, the real problem is not the existing installed capacity, but the capacity payments and the nature of power plants. In addition, the fixation of tariff on power procured from privately-owned plants is anomalous. Tariff varies from plant to plant even when the type of fuel used is the same. Unexplainably, the owners of furnace oil-based power plants enjoy duty free import of their fuel and other fiscal benefits! The power sector needs efficient sized plants having permanent structure, not continuation of temporary rental plants with fiscal privileges.

Electricity price adjustments will most likely continue.  The cost of power supply to end-users is projected to rise as a result of fuel substitution from low-cost domestic natural gas to more costly LNG and coal. Allowing the power price to reflect the cost of generation can create incentives for conservation and efficiency in the use of power. Electricity pricing decisions will be better empathized if it followed a transparent rule linking prices with the costs of providing electricity to the users. The rationality and predictability of the electricity pricing process can limit the damage of the price shock to temporary contraction in the directly affected parts of the economy.  The overall economy can, in addition, be spared from any permanent or lingering effect if BPDB is inoculated from the corruption bacteria and kept free of the parasites.

The author is an economist.