Electricity consumers look set to bear the burden of additional payment the government plans to make to private producers to help them offset the loss in furnace oil import due to exchange rate volatility.
The government has decided to pay for furnace oil imports – imported by the furnace oil-based Independent Power Plants (IPPs) — on the payment-time exchange rate of the dollar rather than the purchase-time rate.
This true-up payment – a payment made to adjust for any difference between prices at the time of purchase and the time of payment – system will lead to a rise in the cost of electricity production and government subsidy expenses as the taka has been devalued against the dollar significantly.
After obtaining approval from Prime Minister Sheikh Hasina, the Bangladesh Power Development Board (BPDB) has sought input for the proposed power purchase agreement (PPA) from relevant ministries.
Following scrutiny by the Ministry of Law, the BPDB will sign the agreement with each IPP individually. The IPPs have requested the government to put the new agreement in effect from January last year.
Once this agreement comes into effect, the BPDB is expected to face an additional annual expenditure of Tk3,000 crore.
The Bangladesh Independent Power Producers Association (Bippa) has also sought penalty interest for delayed bill payments by the government.
The BPDB has given consent to this request and forwarded it to the Power Division. The Power Division will take a decision on the penalty interest issue upon approval from the law ministry.
Bippa said loss of exchange rate fluctuations compounded with delayed payment cycles have put the companies in a precarious financial position with many approaching their credit limits with their banks and financial institutions.
"All our member companies who generate electricity by importing furnace oil have suffered huge financial losses due to the depreciation of the taka against the dollar. These losses were compounded due to BPDB's extreme delay in payment. Now LC opening banks are unwilling to process new LCs as they foresee further depreciation of the taka. The banks identified that some of the power companies do not have the financial capacity to cover these foreign exchange losses in the future," said Bippa President Faisal Khan.
The bill payment process takes about two months.
However, since the financial year 2021-22, the government has been taking more time to pay these bills due to the financial crisis. Currently, the government is almost five months behind in payment of dues. Currently, bills till last February are pending with the Finance Ministry.
The subsidy amount for September last year has not yet been released in full. In September last year, the subsidy demand was Tk4,000 crore, of which the finance division has released Tk3,200 crore so far.
In the budget of the current fiscal year, Tk35,000 crores have been allocated as subsidy to the power sector and the entire amount will be spent to meet the subsidy demand of the last fiscal year. The subsidy demand of the current financial year has to be met from the allocation of the next financial year.
The Finance Ministry has agreed to reduce the subsidy of the power sector to zero by 2026 in the $4.7 billion loan agreement with the International Monetary Fund (IMF). Hence, this additional cost of power generation will ultimately be borne by the consumers.
Finance Division officials said if additional payment is required due to exchange rate fluctuation, the government has to take responsibility for it. The government also follows this rule in paying the debts of foreign companies.
Imran Karim, former president of Bippa, told The Business Standard that the furnace oil-based IPPs had to incur a loss of around Tk4,500 crore since FY22 due to the huge depreciation of the taka against the greenback. When the previous power purchase agreement (PPA) was made between the government and IPPs, the dollar rate was much lower than now.
"Now after the prime minister's consent, the BPDB and Power Division have taken the initiative to enter into separate agreements with the IPPs. After signing this agreement, the government will pay the bills according to the exchange rate at the payment time. As a result, the IPPs will not have to incur new losses. However, the old losses will remain," he said.
Imran Karim also said the investment in Furnace Oil Based Power Plant is about $4.5 billion. So, if this sector collapses, the banking sector will also collapse. Two or three banks of the country will collapse instantly.
Power plants in Bangladesh require over five million tonnes of furnace oil annually, with around 4.5 million tonnes being imported directly by the power plants' authorities themselves.
Imran Karim said, "According to the PPA signed by the IPPs with the BPDB, the government has to pay the outstanding bill with interest as a late payment liability if the government fails to pay the bill within the stipulated time. If the oil and gas import bill cannot be paid on time, the Bangladesh Petroleum Corporation pays the foreign supplier with interest. But even though this clause is mentioned in the contract with IPPS, no interest payment is being paid by the government."
"We have written to the BPDB asking for late payment interest," he added.
According to the data of the Power Division, there are 33 furnace oil-based IPPs in the country. The power generation capacity of these companies is 5,851 MW.