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Study: Bangladesh’s power sector heading towards financial disaster

  • Published at 04:35 pm May 18th, 2020
Payra Thermal Power Plant
Aerial view of the coal-fired Payra Thermal Power Plant in Patuakhali, Bangladesh Dhaka Tribune

Complications will arise due to the current plan to increase power capacity, based on a switch to expensive imported coal and LNG

Bangladesh’s plan for significant coal- and LNG-fired power plant additions will lock the nation into substantial overcapacity, with major financial implications, says a study.

Investments in renewable energy and grid are needed to meet lower-than-expected demand, which is also significantly lowering further by the Covid-19 pandemic, said the new study — titled “Bangladesh Power Review: Overcapacity, Capacity Payments, Subsidies and Tariffs Are Set to Rise Even Faster.”

The study was released on Monday by the Institute for Energy Economics and Financial Analysis (IEEFA), which examines issues related to energy markets, trends and policies.

It said Bangladesh already has major power plant overcapacity with only 43% capacity utilization of existing power plants in fiscal year 2018-19.

Significant capacity payments to idle power plants are helping drive the need for increasing government subsidies to the Bangladesh Power Development Board (BPDB) to cover its financial losses, said the report.

It said, in FY2018-19, the government subsidy to the BPDB rose again to reach Tk8,000 crore (Tk80 billion or $936 million). It was Tk4,500 crore (Tk45 billion or $530 million) in the previous financial year.

The pre-Covid-19 low usage rate had resulted in Tk9,000 crore (Tk90 billion or $1.1 billion) capacity payments for power plants sitting idle, necessitating both government subsidies and electricity price hikes for consumers, the study found.

It warned that the Covid-19 pandemic’s impact will also mean long term power demand will be lower than the forecast, making overcapacity by 2030 worse if the current plan for coal- and LNG-based power capacity additions is continued. 

The study’s lead author Simon Nicholas said, based on their own forecast of power demand growth, which takes the economic impact of Covid-19 into account, they calculate that Bangladesh is on course to have capacity that can generate 58% more power than the nation needs by 2030.

“A long-term switch from cheap domestic gas towards more expensive imported coal and LNG, combined with the severe, long term overcapacity Bangladesh is on course for is likely to see subsidies continue to rise,” said Nicholas, energy finance analyst with IEEFA.

Bangladesh needs to regain control

The IEEFA report also found that the power tariffs for consumers can also be expected to go up.

The economic impact of Covid-19 means such huge subsidies are going to be harder to maintain as the government bails out flailing industries, said the report.

It drew stunning similarities to the rapidly escalating financial crisis of the BPDB, resulting from existing overcapacity whilst pushing forward with completion of the coal-fired Payra thermal power plant.

Half the capacity of Payra plant will sit idle forcing the BPDB to make additional payments of Tk160 crore (or $19 million) per month, said the study.

The report suggested that Bangladesh needed to consider regaining control of its power sector by renegotiating coal and LNG plants to more appropriate, modular renewable energy — without capacity payments — and grid investments to meet lower demand growth.

This would reduce the overall system cost while improving domestic energy security and resilience.

It also found that the country had suitable amount of land for renewables.

“The Covid-19 induced delay to coal power projects gives Bangladesh an opportunity to reset energy development policy and redirect resources to support economic fundamentals and energy price stability to enable the realization of Vision 2041,” said Nicholas.

He suggested that large fleets of big coal and LNG plants are increasingly less appropriate to meet lower-than-expected demand growth in developing nations.

The report’s co-author Sara Jane Ahmed highlighted that Indonesia provided important lessons for Bangladesh, as it was already suffering from the financial impacts of an overreliance on coal power.

“Indonesia’s PLN — the state-owned power utility — has seen its over-commitment to coal power lead to a rapid escalation in government subsidies which reached an enormous $5bn in 2018,” she said.

“Bangladesh needs to change direction or head down the same road as Indonesia towards a financial crisis within its power system,” added Ahmed.

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