Averting currency crisis without power sector reform
Digital Bangladesh should not settle for an antiquated power sector19 May 2022 Editorial Desk
The currency crises that are plaguing Sri Lanka and Pakistan today may not be as distant for Bangladesh as we wish to believe. While our economy has performed much better than these two countries, we do share one common challenge: just like Pakistan and Sri Lanka, our actual cost of producing power is among the highest in the world. This inflated power production cost is stymieing government's sustainable growth agendas.
The alarming devaluation of Taka recently portend significant challenges that lie ahead. In the kerb market the exchange rate stood at 102 BDT/USD on Tuesday of this week. The country is depleting forex reserves fast. The main driver of this depletion is our outsized import bill that cannot be paid by the combined earnings from our exports and most importantly our migrant worker remittances. To maintain sufficient forex reserve levels, we are taking on more foreign debt. According to Bangladesh Bank's website, our external debt obligations passed USD 90 billion and is increasing rapidly. The heavily regulated power sector has a lot to do with our deteriorating forex reserve situation. In Bangladesh, government is the sole purchaser of power. The sector is highly regulated, utilizes the most expensive fossil fuels in the planet, has eliminated tendering process altogether in awarding contracts to independent power producers (IPPs), offers heavily subsidised power prices and pays capacity payments even for underutilised private power plants.
Every few years a false narrative is invented, and plundering follows in our energy sector. First was the narrative that a gross shortage of power (this was true initially) can only be met by bypassing competitive bidding process that resulted in higher tariffs. The new narrative today is no industrial gas or power connections outside of special economic zones because country is running out of agricultural land.
While there is definitely a case for government-backed economic zones, private ones hardly make sense. Setting up a capital-intensive industry in a potential competitor's yard leaves little room in protecting trade secrets. There are also issues around getting mortgages or access to promised shared facilities. In theory land prices will likely increase in these private economic zones while remain depressed in other potential industrial areas of the country. It's mindboggling why existing policies cannot be beefed up to curb unplanned development of industrial sites while protecting agricultural lands.
The energy sector is infested with irregularities and examples of such are abound. For instance, back in 2016 the last fuel based 10 IPPs were awarded. Despite positive notes stating that "all conditions are met with no violation of processes" from BPDB chairman and power secretary, two out of the 10 projects located in Shantahar and Bagerhat, were not awarded to a foreign/local consortium despite being the lowest qualified bidder. Subsequently this 200 MW capacity was awarded though a dubious emergency contract award process bypassing competitive tendering at twice the rate to a local company which will result in 1000s of crores BDT of excess tariff payments over 15 years.
Subsequently the consortium filed a case; however, the Government Purchase Committee rejected the reconsideration order by court stating BPDBs mystery report claiming there is no demand in both the locations nearly two years after contract award (to the other 8 IPPs). Without effective competition, naturally tariffs have spiraled out of control from private power plants.
Such irregularities aside, Bangladesh utilises the most expensive fuels such as LNG and furnace oil to run almost 40% of its power generation capacity. With crude prices reaching over USD 100/barrel and spot LNG prices skyrocketing to over USD 30/MMBTU, it is not economically viable to manufacture ready-made garments and other low margin products for export using such fuel. Nearly 48 per cent of power generation is occurring using imported fuel today literally draining our forex reserves. Volatility of fuel prices have become more of a concern today than high prices alone.
Volatility makes fossil fuels an unreliable source of energy for manufacturing as it makes it difficult to ascertain actual production cost when taking orders from buyers abroad. Although Bangladesh has started importing electricity from India through a grid-interconnect, the capacity hasn't been expanded beyond 500MW. BPC is losing BDT 15 crores per day at current prices of imported fuel according to recent media reports. Consolidating purchase of all imported fuel by BPC will substantially reduce our fuel bill while reducing pilferage.
With huge overcapacity and an antiquated provision in power purchase agreements that has been eliminated in most parts of the world, Bangladesh is also paying substantial sums as capacity charges to IPPs in USD even while plants are sitting idle. According to various media reports, government paid BDT 13,200 crores in 20-21 just as capacity payments. Notably disturbing is the fact that almost 1/2 of our generation capacity sits idle. India doesn't offer capacity charges; Pakistan is also planning to eliminate these after reducing capacity charges with IPPs through negotiations.
Subsidised power has an adverse effect that may be contributing directly to negative balance of payment situation existing in the country. The demand for subsidies in different sectors has called for almost unsustainable budget allocations for FY22: around BDT 11,500 crore of additional budget allocation is required for the power sector, additional BDT 21,000 crore to import LNG, and about BDT 18,500 crore additional to produce fertilisers using natural gas.
Exports powered by subsidised energy do not reflect true production costs and as such most likely severely overstates net contribution to our economy. Some of our low margin exports may well be impacting our forex reserves negatively due to subsidised power usage. The Prime Minister, after realising the issue has directed relevant agencies to gradually do away with subsidies at a recent Executive Committee of the National Council (ECNEC) meeting held in February of this year.
Not all is gloomy for our power sector, however. One of the best decisions of this government is the implementation of the Rooppur Nuclear Power Project. With target capacity of 2400 MW initially and 4000 MW when fully implemented, Bangladesh will free itself to a great extent from fossil fuel price uncertainty soon. The project will ensure Bangladesh's energy security to a great extent. As opposed to the large-scale units, small modular nuclear reactor based (SMRs) power plants ranging up to 300 MW capacity can be implemented within 2-3 years; something government can look into expeditiously.
Additionally, the government is considering connecting to India's Energy Exchange (IEX) that will allow Bangladesh access to substantially cheaper electricity prices relative to imported fuel based local alternatives. The trading platform brings Burma and Nepal based power sources into the picture while ensuring real time market prices. Looking at currently trade prices of electricity on the exchange, Bangladesh can save 60-7 per cent on electricity purchases from the exchange compared to local imported fuel-based power plants.
The country has also been making headway in expanding use of renewable power nationwide. Currently rooftop solar panels generate over 700 MWs mostly in rural areas. Industrial rooftop solar usage is also increasing driven by higher tariffs of grid electricity. Because of land constraints large solar projects in Bangladesh are impractical.
An efficient deregulated power sector that allows any producer to supply to any buyer based on real time competitive rates is what digital Bangladesh should be striving towards. The sector needs central oversight of Bangladesh Investment Development Authority to root out irregularities and ensure timely implementation of private ventures. It is not a pipedream but a necessity for the economy to become competitive and thrive.
It is worthwhile to note that both Sri Lanka and Pakistan depleted substantial part of their forex reserves burning fossil fuel generating electricity. The reform of power sector must start immediately to avert a currency crisis like Sri Lanka down the road. Bangladesh cannot afford to allow its most critical power and energy sector to become the indigenous variation of an oligarch producing facility.