Power tariff hike is a bad idea, increasing efficiency should be the focus

Our economy has been undergoing a transition prompted by many crises, including the pandemic, global war and inflation. While the economy weathers this crisis, the sudden tariff hike has come like a bolt from the blue.

The proposed bulk electricity tariff hike is closely associated with the recent gas tariff hike as 59% total electricity production uses natural gas as input.

To compensate for the substantial cost of fuel management, the technical team of BERC has recommended increasing the price of electricity in the country by 57.8%, as opposed to the proposal of the Power Development Board (BPDB) to increase the price by 65.56%.

Currently, power generation is largely dominated by private plants (IPP, SIPP and rentals). The engagement of the private sector ensured access to electricity to almost 100% of the population. This is encouraging given that only a few years ago, Bangladesh regularly suffered from power shortages.

But with the Russian invasion of Ukraine, the fuel import prices have considerably risen and consequently, the price of electricity is about to rise as well.

Our power generation capacity has reached the 23,000MW mark. However, peak electricity production remains below 14,000MW. Currently, Bangladesh has more than 50% surplus electricity generation capacity and these remain idle since energy sourcing and streaming are not well connected. This short-sighted planning with no clear orientation continually wastes government resources and taxpayers' money while the public bears the burden of high power tariff.  

Tariff hike may appear as an easy and straightforward solution. But increasing the energy bill in an already contracting fiscal space would not be the wise thing to do. In the short run, a hike in bulk power tariff will impact retail electricity prices and eventually, prices of commodities that need electricity for production, consequently raising the cost of living of the masses.

On top of that, BPDB has to pay out large sums of money in capacity payments. According to the power purchase agreement, power plants take their rental payment (capacity charge) even if they do not generate electricity. Moreover, running plants with low inefficiency also increases the cost of production. The soaring import cost of fuel only adds to BPDB's cost burden.

In the long run, the weakness in the power sector needs to be assessed holistically for the best interest of all stakeholders.

There are also questions regarding the role of BERC in regulating power tariffs. Although it is supposed to foster a balanced power sector development and protect the interests of the consumers, it often fails to fulfil its duty.

Then what should be the ideal way forward?

Firstly, only energy charge should be taken into consideration while determining bulk tariffs, not other operational costs. And cutting transmission and systems loss should be a priority of the power producers.

Tariffs on fuel and other raw materials should also be brought to a tolerable level. Furthermore, no further extension of quick rental plants should be considered as it slims down our foreign currency reserve.

Power sector development fund should be utilised with accountability to rationalise the cost implication of tariff hike on the masses. For fuel import, diverse sourcing countries need to be contacted to reduce sourcing risks.

The government has to increase the efficiency of the power transmission and distribution network. Strong and fact-based assessment is needed for the efficient sourcing of local and cross-border power plants. Cross-country learning on cost-efficient utility practices can be useful to follow.

The power plants must follow the Merit Order List and report to BERC on a monthly basis to check the production efficiency of power plants.

To reduce the cost of power generation, the Power Purchase Agreement (PPA) should be amended and the concept of "No Production, No Payment" must be followed in the case of an Independent Power Producer (IPP).

Furthermore, capacity payments can be made in the local currency to reduce pressure on foreign exchange reserves and non-renewal of contracts with gas-based power plants. This will safeguard the businesses from unusual price hikes and create some market intelligence for precautions and business plans.

Foreign investors prefer Bangladesh as a lucrative investment hub for higher profit margin and energy cost escalation may hurt this investment potential. The Bangladesh economy is already burdened with various challenges including the Covid-19 pandemic, inflationary stress and LDC graduation.

This price hike is likely to hold back the current revival and transitional pace. The cost of doing business may become unbridled to a large extent, disappointing all businesses across the board.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.