Tariff hike alone won’t solve power sector woes: Experts

As the government considers raising electricity prices next month to trim subsidies, energy experts caution that relying solely on tariff hikes may not offer sustainable solutions to power sector challenges.

They argue that addressing the heavy burden of capacity charges and transitioning the sector into a competitive market are necessary steps to ensure its long-term viability.

The government aims to phase out power subsidies over the next three years in line with the IMF's loan condition. At a briefing in the Secretariat on 20 February, State Minister for Power Nasrul Hamid hinted at a potential 4% power tariff increase at both bulk and retail levels. If put into effect, this adjustment would mark a year since the last hike.

Mohammad Hossain, the director general (Power Cell) at the Bangladesh Power Development Board (BPDB), told TBS, "Power prices could be raised by 4-5% in two phases – once before Ramadan and again after Eid. This move is expected to reduce the power sector's subsidy by Tk15,000 crore."

According to the BPDB, removing the subsidy entirely could lead to a 78%-81% increase in electricity prices. Hence, it suggested a gradual price hike, which would be more manageable for the public. As a result, power prices could be raised in multiple phases this year.

Energy expert Professor M Shamsul Alam told TBS, "If the government merely raises power prices without addressing capacity charges in the power sector, it will not offer a sustainable solution.

"Instead, by terminating capacity charge agreements with power plants and establishing a competitive integrated power market, the government could potentially provide electricity to the public at a lower cost without the need for subsidies."

Khondaker Golam Moazzem, research director at the Centre for Policy Dialogue, also made similar observations.

The capacity charge is what the government must pay whether or not electricity is produced upon the commissioning of a power plant.

According to finance ministry sources, the government allocated a subsidy of Tk42,893 crore to the power sector in FY23, with a significant portion directed towards capacity charges.

BPDB data shows that around Tk17,155.86 crore was disbursed for capacity charges in FY23.

State Minister Nasrul Hamid in parliament last year said over the past 14 years, the government paid power plants more than Tk1.4 lakh crore in capacity charges.

Former Buet professor Ijaz Hossain told TBS that the government is compelled to subsidise electricity due to mismanagement, specifically regarding capacity charges.

"Despite electricity demand being around 17,000MW to 18,000MW, the government has created a capacity of 30,000MW, resulting in excess power plants compared to demand. Consequently, the government incurs substantial capacity charges, even though many plants are not generating electricity," he said, predicting that in the next one to two years, with power generation capacity reaching 40,000MW, additional capacity charges will need to be paid.

Ijaz Hossain also said that while the government is raising electricity prices following IMF conditions, it has not adjusted fuel oil prices accordingly. The current diesel price exceeds international rates significantly. This dual policy disproportionately impacts low-income individuals.

However, Nasrul Hamid at the briefing mentioned that the automatic pricing mechanism for fuel oil could come into effect as early as March, aligning with international market conditions. 

Criticising the government's plan to increase electricity rates, energy expert Shamsul Alam said the government's focus should be on curbing unjustified and wasteful expenditures in the electricity-fuel sector.

"If electricity prices rise, it will disproportionately affect the general public. This is because the prices of goods from all manufacturing companies relying on electricity will also increase. Ultimately, the burden will be borne by the common people already grappling with soaring inflation," Shamsul added.

The overall inflation again saw a spike in January this year reaching 9.86% following a drop in December last year, according to the Bangladesh Bureau of Statistics (BBS) data released on 15 February.

In FY23, Bangladesh's average inflation climbed to a 12-year high of 9.02%.

Shamsul Alam said with inflation already high, any increase in power prices would further exacerbate the situation.

However, Nasrul Hamid said the government's planned power price increase would not impact lifeline customers.

"We will finalise the decision in such a way that its effects will be limited within the customers who use power the most," he said.

In addition to households, the anticipated power price increase is expected to significantly impact the industrial sectors of the country.
Mohammad Hatem, executive president of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), told TBS, "Production has already decreased by half due to insufficient gas supply. Delays in shipment schedules have led many buyers to request air shipments, while others are seeking discounts. Some buyers have even requested order cancellations. Given this situation, an increase in power prices would further exacerbate the negative impact on production."

Typically, the Bangladesh Energy Regulatory Commission would need to hold a public hearing to increase prices, followed by coordination efforts.

However, due to recent amendments to the law, the government now has the option to issue an "executive order" to adjust prices swiftly without going through the usual process.

5% hike in March last year

The last increase in power prices occurred in March 2023, with a 5% adjustment as part of regular recalibration. Following this hike, the weighted average electricity price reached Tk8.24 per unit.

A review by the Power Development Board revealed that the current average retail price of electricity stands at Tk8.25. Wholesale figures per unit of electricity are priced at Tk6.70. 

To eradicate subsidies entirely, the government aims to escalate the wholesale price to Tk12.11. This substantial adjustment would result in a consumer-level increase of Tk14.68.

Power debt amounts to Tk44,000cr

The Power Development Board purchases electricity from both public and private power plants in Bangladesh, as well as imported electricity. Subsequently, it sells this electricity to power distribution companies at a price lower than the procurement cost, with the remaining amount subsidised by the Ministry of Finance.

However, due to the ongoing dollar crisis and insufficient revenue collection, the finance division is not able to pay the subsidy to the power sector on time.

The Power Development Board owes substantial amounts to various entities, including private power plants, India's Adani Group, Bangladesh Petroleum Corporation, and Chevron, totalling around Tk44,000 crore.

Power prices rise 121% in 14 years

According to Power Development Board data, over the past 14 years, electricity prices have surged by a minimum of 121% for consumers across 12 rounds of increases. 

In 2009, the power generation capacity stood at 4,942MW, with the retail electricity price at Tk3.73 per unit. Over the subsequent 14 years, power generation capacity has soared to 29,174 MW, accompanied by a rise in retail price per unit by Tk8.25. 

The Power Development Board's average expenditure per unit of power generation escalated from Tk8.84 in FY22 to Tk11.33 in FY23.