Power plants: Capacity charge rises to Tk 420bn

The Ministry of Power, Energy and Mineral Resources under the caretaker government had emphasised cost-cutting and efficiency in the power and energy sector.

They managed to achieve some savings in certain areas. Yet, within a year, the power generation cost per unit has risen by nearly 8 per cent. In just one year, the rent for power plants alone increased by Tk 10 billion.

Power Development Board (PDB) officials attribute the rise in production costs to three factors. They say the supply of gas, known as a relatively cheap fuel, has declined. As a result, power generation from gas has decreased. Although global fuel oil prices have fallen, the Bangladesh Petroleum Corporation (BPC) charged PDB a higher price. These factors prevented production costs from being reduced. The rise in the dollar has added further expenses.

Under contracts, PDB purchases power from all government and private power plants. As per the contract a capacity charge must be paid to each plant even if the plants do not generate any power.

PDB sources say that in the 2022–23 fiscal year, power generation capacity was 24,911 megawatts. The capacity charge that year was Tk 250 billion. In 2023–24, generation capacity increased to 28,098 megawatts, with a capacity charge of Tk 320 billion. Due to the non-renewal of contracts for 10 power plants, generation capacity fell to 27,414 megawatts in 2024–25. This year, the capacity charge rose to Tk 420 billion, an increase of Tk 100 billion in just one year.

Currently, there are 135 power plants, of which 68 are private. A reliable PDB source says that although payments are made in taka, the bills for all private power plants are calculated in dollars. For more than 90 per cent of private sector plants, the entire bill is settled in dollars. For solar power plants, all calculations are also in dollars. In addition, around 2,500 megawatts of power are imported daily from India, and these bills must be paid in dollars. Moreover, instalments for foreign loans of certain power plants are also paid in dollars. Compared with last year, the dollar rate has risen by Tk 10–12, increasing PDB’s costs.

Bangladesh Bank figures shows that at the start of the 2023–24 fiscal year, the dollar rate was Tk 109. In May of the same fiscal year, it was Tk 110. In the last two months, it rose to Tk 118. In comparison, at the start of the previous fiscal year, the price per dollar was Tk 118, reaching Tk 122 by the end of the year.

Muhammad Fouzul Kabir Khan, adviser for power, energy, and mineral resources, told Prothom Alo that additional power was supplied last summer compared to the previous year to avoid load-shedding. Gas could not be supplied as per the demand, which reduced power generation from gas. As a result, more power had to be generated using oil and coal, increasing costs.

During the previous Awami League government, several power plants were set up consecutively without tender. Allegations exist that contracts were arranged with higher capacity charges to benefit a particular group. After the change of government, the interim administration set up a committee on 5 September 2024 to review these power contracts.

The power contracts were reviewed and the report was published by the committee on 25 January. It noted that the country has created an excess or idle power generation capacity of nearly 7,700 to 9,500 megawatts. Maintaining this idle capacity requires paying a capacity charge of USD 90 million to USD 150 million (equivalent to 11 to 18 billion taka) annually.

The National Review Committee identified the abnormal rise and misuse of capacity charges as one of the main causes of the financial crisis in Bangladesh’s power sector. Over the past two decades, payments to power plants have increased 11 times, while capacity charges have risen nearly 20 times. The largest portion of payments to power generation companies now goes to capacity charges. Typically, a project’s loan is repaid within 12 years, but under these contracts, capacity charges must be paid at extremely high rates for 13 to 22 years.

Comparing capacity charges with actual power generation, the report shows that in many cases, capacity charges continue to rise even when generation remains the same or falls. In some specific projects, this discrepancy is extremely high. The review committee recommends urgently renegotiating with private companies to reduce these high capacity charges and directly canceling contracts where evidence of corruption is found.

Power plant owners compare a power plant to a rented house, saying that rent does not depend on how much the house is used. Even if no one lives in the house, rent must be paid regularly. Similarly, a capacity charge must be paid even if the power plant does not generate any power. The country faces a fuel shortage, so power plants have been built using a mix of different fuels. When there is a gas shortage, fuel oil- or coal-based plants can be used. This has led to an increase in capacity.

However, experts say that if someone needs one house but rents three, questions will naturally arise about the total rent. Power generation capacity is like the salt in a dish—you cannot just move it around excessively. The reserve margin or extra capacity for power generation should be 15 to 20 per cent. For a country like Bangladesh, a maximum of 25 per cent is acceptable. Currently, the country has more than 50 per cent, and the higher this excess capacity, the more the costs will rise. Payments must be made even for idle capacity.

Following the recommendations of the contract review committee, another committee was formed on 21 January last year to review power plant tariffs (power prices). This committee is currently working.

Regarding the reduction of capacity charges, the power adviser said discussions are underway. Measures are being taken based on the report of the contract review committee.

The International Monetary Fund (IMF) has been pressing to reduce subsidies in the power sector. Over the past one and a half decades, the previous government increased power prices 12 times at the wholesale level and 14 times at the retail level. After the change of government, the interim administration focused on reducing power generation costs without raising tariffs. Expenditure on imported fuel oil has been cut, and coal costs reduced. Some power plant contracts were not renewed. However, the full benefits of these measures were not realised in the last fiscal year. Power generation costs may fall in the current fiscal year.

PDB data shows that in the 2022–23 fiscal year, the power generation cost per unit was Tk 11.54. This fell by Tk 0.10 to Tk 11.44 per unit in 2023–24, a decrease of nearly 1 per cent. In the most recent 2024–25 fiscal year, the cost rose to Tk 12.34 per unit, an increase of Tk 0.9. The government did not raise power tariffs over the past one and a half years, which increased subsidies and losses for PDB.

The power division said that reducing the service charge on fuel oil imports by private power plants by 4 per cent will save Tk 47 billion. Increasing oil imports per ship from 15,000 tonnes to 20,000 tonnes will save Tk 3.54 billion. Setting the per-unit price of the Matarbari power plant at Tk 8.45 will save around Tk 25 billion annually. Initiatives have also been taken to reduce tariffs at other power plants. Reducing tariffs at government-owned power plants is expected to save Tk 26.3 billion. Additionally, revenue targets of Tk 92.1 billion have been set through measures such as facility rent, late fees, and other collections.

Power generation rose by 8.5 per cent in the 2023–24 fiscal year compared to the previous year. And in the last fiscal year, power generation increased by approximately 5.5 per cent. Gas remains the most cost-effective means of generating power. Last year, power generation from gas-powered plants stood at 44 per cent. The previous year, this figure was 48 per cent. However, out from high-cost oil-powered (furnace and diesel) power plants has been reduced. Generation from coal-based plants has increased. In the previous year, coal-based plants accounted for 20 per cent of power generation. Last year, this rose to nearly 27 per cent. Coal is twice as expensive as gas per unit of power produced. As a result, power generation costs have climbed.

For electricity generation, PDB buys fuel oil from BPCL, while private power plants import oil themselves. The last price of furnace oil was set by BPCL on 2 August 2024. Since then, although global oil prices have fallen over the past one and a half years, no adjustment has been made locally. As a result, PDB has been paying Tk 86 per litre for furnace oil, whereas private power plants are buying it at Tk 70 per litre, increasing PDB’s costs. A proposal to adjust BPCL’s price is currently with the BERC, with a public hearing scheduled for this month.

PDB’s annual report says that in the last fiscal year, Bangladesh PDB’s expenses for electricity generation and purchase increased by nearly 14 per cent. The cost amounted to Tk 1.21 trillion, compared to Tk 1.06 trillion the previous year. The increase was mainly due to purchasing electricity from the private sector. The cost of buying electricity from independent power producers (IPPs) in the private sector rose by 25.61 per cent. This sector alone accounted for Tk 720 billion in expenses. The price per unit (kilowatt-hour) of IPP electricity was Tk 14.56, up from Tk 13.16 the previous year.

Although it costs more than Tk 12 to produce each unit of electricity, PDB sells it at Tk 7.04 per unit. Each year, PDB’s financial crisis worsens, requiring massive subsidies from the government. In the last fiscal year, the electricity sector received Tk 590 billion in subsidies.

M Shamsul Alam, energy adviser to the consumer rights organisation Consumers Association of Bangladesh (CAB), told Prothom Alo that the previous government increased electricity generation costs through wasteful expenditure.

Although CAB proposed ways to reduce costs, the government did not follow that path. Even after repealing the indemnity law, all contracts have been maintained as before. The government continues to operate the electricity sector under the previous administration’s approach.