Low-cost energy security in the national budget

Our electricity generation capacity, with limited natural gas resource, has reached 22,562 MW, bringing 93 percent of people within the electricity network. The country was once in a deep electricity crisis until private plants made revolutionary improvements in power generation.

The then government speedily signed power purchase agreements ranging from 10 MW to 300 MW of electricity with Independent Power Producers (IPPs) Small Power Plants (SPPs) and Rental Power Producers (RPP). Power Purchase Agreements (PPAs) were signed under the "Speedy Supply of Power and Energy Special Provision Amendment Act". The act made provisions for quick implementation of all power and energy projects, including natural gas, coal, LNG and petroleum product import and extraction.

Power production capacity has more than quadrupled today compared to 2006. Since 2010, the government prioritised power generation under the 34,000 MW Power Saving Master Plan (PSMP) target, using fuel mix. The power sector allocation in national budget started increasing after 2010 to cope with growing expenditure.

The special act facilitated the rise in power generation to ensure uninterrupted power supply, despite drawing criticism. It allowed for speedy power generation without tender, which is a lengthy process. The tenure of the act was extended in 2014, 2018 and finally till 2021.

BPDB spends around Tk9,000 crore yearly to pay private plants, and the bill increases if the dollar value strengthens. PHOTO: MIGA/WORLD BANK

Now, 84 private power plants contribute to 54 percent of power generation in Bangladesh.

The revised PSMP, however, has unrealistically targeted 82,000 MW until 2041.

The non-production in private power plants and non-supply of fuel are compensated through capacity payments in US dollars. BPDP spends more in electricity and fuel purchase than in operating state-run plants, and these commitments to power producers have raised the government's cost. Our state-run power sector was already underperforming and the growing cost enfeebled it more.

Incremental private power plants payments affected government expenditure, though the PSMP stated 50 percent of electricity production should be done using coal as a low-cost strategy, which was disregarded. To reduce the cost burden of the government, the electricity tariff hikes regularly take place. Tariff was hiked seven times since 2010 and a hike is imminent again unless cost is economised.

The overall budgetary allocation in power and energy sector is Tk26,758 crore in FY21, whereas it was Tk26,154 crore in FY20, Tk20,956 crore in FY18, and Tk14,498 crore in FY17. The trend indicates consecutive budget growth in this sector due to increasing power production cost and fuel price variance.        

Local natural gas supply has alarmingly declined, and the demand and supply gap reached around 800 mmcfd. About 500 mmcfd LNG was imported to meet shortage from 2018. Geological surveys indicate that our proven gas reserve may diminish by 2024 and a probable reserve of 10 TCF may diminish after 2030 based on our consumption trend.

Many IOCs – Chevron, Santos and Kris – are leaving as Bangladesh is no longer feasible cost- and reserve-wise. In the budget of FY21, energy and mineral resource sector allocation reduced by Tk581 crore to reach Tk1,836 crore. Primary energy requires larger budget to support gas exploration, supply and power generation for attracting private investment.

BPDB spends around Tk9,000 crore yearly to pay private plants, and the bill increases if the dollar value strengthens. Subsidy was around Tk522.60 billion in the last 10 years and a significant amount went to private plants. 

Covid-19 has distressed the global economic system, including our economic order. Electricity demand sharply declined to 8,500 MW against 12,000 MW usual production, leaving many power plants redundant while PPA guaranteed the payment to idle plants.

The harsh reality is that the troubled economy is in dire need for fiscal revival. Utility bill deferment, lower bill collection and regular payment to power producers were made for public interest at heavy cost to the government. As the pandemic persists, the distressed economy demands austerity strategies in major sectors, including power.

The government declared stimulus packages worth Tk1.15 trillion for the private sector to tackle the pandemic-induced crisis. However, stimulus demand is on the rise though the government revenue dried with a Tk1 trillion shortfall in FY20. In this harsh reality, a Tk5.68 trillion budget was proposed with a Tk1.9 trillion deficit in FY21.

Vulnerable businesses demand waiver of VAT and SD on utility bills for another quarter and it may be considered for public welfare, though the cumulative burden will be on people as a new cost incidence. Slim revenue and fuel import will further weaken the fiscal strength of the government. Taking the entire economic gamut, the PPA feels unilateral and needs balanced revision for low-cost energy supply and fiscal easing.

Local economic behaviour and operation are changing, aligning with changing global economic context amidst the pandemic. Gas-based PPA should not be renewed considering the slim gas reserve.

In the current situation, 16 new power plants with 19,100 MW capacity must be rethought, when current electricity production is unutilised. A 'no production, no payment' strategy for PPA, and local currency payment, can be introduced to reduce foreign currency pressure and current account imbalance.

Of the country's daily grid gas supply of around 2,800 mmcfd, IOCs share 60 percent. Bibiyana owned by Chevron is the largest gas reservoir of 29 gas fields, though its reserve is declining. ONGC Videsh Ltd India and Daewoo were allocated two exploration blocs under two model PSCs.

The government planned the drilling of 108 wells by 2021 but only 29 have been drilled so far. Lack of funds, modern technology and expertise have jeopardised gas exploration. Our exploration and seismic survey processes need to be fast addressed. Otherwise, industry and power producers will end up suffering.

Sourcing Tk26,758 crore in the budget of FY21 is challenging in the current context. The national budget should rationally guide resource and activities allocation for power and energy divisions, balancing overall energy sector development. Power transmission and distribution operation should get more budget than generation works.

After revising the PPA, the savings may be channelled to transmission, distribution work and government plants for uninterrupted power supply. The special act for speedy power supply can be revisited accordingly. In the long run, large, local fuel-backed and combined cycled efficient plants need to substitute the small power plants for sustainable power sector.

We also require alternative, home-grown and low-cost power supply solutions in the energy mix. Home solar system is a proven model for rural electrification that needs to expand. Bangladesh is recognised as the second-largest home solar user in the world. Local coal can be used as low- cost energy solution to reduce world fuel market reliance.

The government could have signed longer-term forward market deals for securing low-cost liquid fuel and LNG import as fuel price hits record lows in pandemic time. The gas sector development fund was created for gas sector development in 2010 and budget provided Tk200 crore of GDF to incur expenses, and the same idea can be replicated in power sector to provide relief to power sector regulators to some extent.

The national budget made the highest allocation in PPP subsidy and interest, Tk36,610 crore, which is 21.63 percent higher than that of FY20 and the subsidy swells every year due to unplanned project expenditure. Better coordination and austerity planning by government agencies can save subsidy. Otherwise, general taxpayers bear the huge expenditure burden.

The budget should also prioritise speedy completion of key energy infrastructure, both land and floating storage and regasification units (FSRU), to increase LNG storage capacity and distribution network. Power production and gas supply has to be ensured for energy security.

Our private investment to GDP ratio hovers around 23 percent. The current stagnation will challenge the 8.2 percent economic growth target and 25 percent investment target in the national budget. Tariff hike will weaken industrial investment potentials. Predictable, low-tariff and uninterrupted energy can revive our low-cost manufacturing and export competitiveness.

Reflecting the pro-business promises of the government, the national budget could have laid out an energy sector roadmap and revised the PSMP with all stakeholders' support for lower fiscal burden and tariff solutions. Indeed, low-cost and reliable energy security can fight back the economic crisis and ease the process of economic transformation of Bangladesh in 2024 and beyond.

AKM Asaduzzaman Patwary is Additional Secretary, R&D Dept, DCCI. He can be reached at [email protected].