Optimizing Power Generation: Minimizing Costs of Idle Plants in Bangladesh

Bangladesh, a country known for its power blackouts, has the capacity to produce electricity that outpaces demand and pays millions of dollars monthly to power plants when they are idle. The government has spent over $9 billion since 2009 to subsidize power firms using an overly optimistic forecast for economic growth, resulting in a bloated electricity capacity that the government has committed to paying for.

In September, state minister Nasrul Hamid revealed that the Bangladesh government paid $7.5 billion to 82 large private producers as a capacity charge and $2.8 billion to smaller oil-fired power producers as rental payments over 14 years. These subsidies are used to cover the cost of electricity without the government buying from them.

A 2022 study by SOAS University of London and the BRAC Institute of Governance and Development found that the subsidy is calculated at 60% of the revenue a plant would get for supplying its total capacity to the government, the only buyer of electricity in the country. The country generates 28,000 megawatts daily, 40% more than peak demand, but frequently experiences blackouts due to government rationing of U.S. dollars for fuel import.

The country faces a shortage of fuel resources like gas and coal, and the Ukraine war has caused a rise in fuel prices, hampering fuel supply. Despite agreements with some private producers, the government continues to pay subsidies for excess capacity that now has reached more than 40%. Professor Badrul Imam, an expert on energy and power in Bangladesh, believes that a country can have a 20-25% surplus capacity but should never be double what’s needed.

Bangladesh’s previous governments were criticized for failing to produce enough electricity to support the country’s economic growth. In 2008, the Awami League pledged to increase power production, predicting that the country would require 21,000 megawatts of electricity a day by 2021. However, a 2013 government document explained that a 1% increase in GDP leads to a 1.5 percent increase in electricity demand. The document predicted a significant increase in electricity demand due to the country’s annual growth rate of 8% by 2015 and 10% by 2021. However, the International Monetary Fund shows that the economy grew 6.4% in 2015 and 6.9% in 2021.

The government acknowledged that its projections were overestimated, and in 2016, a 137-page study funded by Japan contradicted the hypothesis that Bangladesh’s electricity demands would keep rising at 1.5 times its GDP growth rate. The document also noted that per capita energy consumption in Bangladesh was smaller than in Thailand, Indonesia, and Vietnam and that the economy has grown with relatively small energy input. Industrial economist Moazzem argued that Bangladesh’s growth was primarily driven by a boom in its service sector, and without an increase in the industrial sector’s share in the economy, electricity demand would not rise.

Bangladesh’s government has been criticized for its subsidies to private power producers, which have been a subject of controversy due to the government’s efforts to provide legal and regulatory protections. In 2010, a law was enacted to boost power production, shielding government employees and private producers from future legal liabilities and allowing the government to purchase electricity directly from companies without competitive bidding.

This has helped meet rising electricity demands but has also fostered profiteering, according to two research papers. A 2017 paper found that Bangladesh purchased more electricity from expensive oil and diesel-fired plants than cheaper gas-run ones, costing the country $1.4 billion in a single year. Non-competitive “collusive contracts” also cost Bangladesh an additional $1 billion a year.

Bangladesh’s Finance Minister Mustafa Kamal promised to phase out subsidies when existing contracts with private power companies expire, but Nasrul Hamid, the state minister for power and energy, pledged to increase capacity to 40,000 megawatts by 2030 and 60,000 megawatts by 2041. The Department of Power has been accused of favoring certain companies, despite having national data on demand and supplies.

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