CPD seeks adjustment in capacity charges instead of raising power tariff to reduce subsidy

Centre for Policy Dialogue (CPD), a think-tank, has advised the government to come out of the burden of capacity charges by making adjustments to reduce the subsidy instead of raising the power tariff repeatedly.

It also observed that the government is trying to shift the onus of the wrong policies and strategies on the shoulders of the consumers.

The wrong policies and strategies have resulted in the current burdens of capacity charges, it said at a press conference in the city on Wednesday.

CPD research director Khondaker Golam Moazzem made the keynote presentation titled: “Recent Electricity Tariff Hike: Isn’t there a better alternative for subsidy adjustment?”

The study team member Preoty, research associates Helen Mashiyat and Mashfiq Ahasan Hridoy and programme associate Faisal Quaiyyum were present on the occasion.

The CPD said that the government has made an upward adjustment to the electricity tariff as part of rationalising subsidies in the power sector.

The decision aligns with the International Monetary Fund’s (IMF) conditions linked to a $4.7 billion loan, including the implementation of an automated pricing formula for petroleum and raising electricity and gas prices to reduce subsidies in the power sector.

“Through such an adjustment, the burden has fully passed through the consumers of electricity in households, agriculture, industry, businesses, services, and other economic sectors.”

It said the tariff hikes, especially in gas and electricity, are expected to elevate production costs significantly leading to higher prices for consumer goods.

The government claims that the tariff adjustment is not a hike but a necessary step to align with the increased production costs and global energy pricing practices. At the same time, by-passing the Bangladesh Energy Regulatory Commission (BERC) and the lack of public consultation raised concerns over transparency of the process and the impact on consumers.

Golam Moazzem said the rising subsidy for the power sector over the years is directly related with the substantial amount of capacity payment provided for unutilised generation capacity of different power plants, which is a reflection of faulty planning for power generation in the earlier years.

He said the loss of Bangladesh Power Development Board  (BPDB) incurred a loss of Tk 435.39 billion in fiscal 2022-23 necessitating a subsidy of Tk 395.34 billion.

The BPDB’s loss is mainly driven by the cost of electricity purchase from IPPs, rentals and quick rental power plants.

He noted that despite increasing the electricity tariff for the 4th time in the last one year, the subsidy burden is still persistently hovering over the government.

According to the state minister, the tariff hike will reduce the amount of subsidy by Tk 30 billion and about Tk 363.63 billion of subsidy will have to be paid.

The CPD research director said the new amendment of BERC ordinance has weakened the institutional framework of electricity pricing by eliminating the process of public hearing and involvement in the price revision process.

“Such amendment has questioned the transparency and accountability of the regulatory process. As a result, the whole burden has been passed on to the consumers’ shoulders which is neither expected nor appreciated”, he said.

The CPD proposed a blend approach to reduce the subsidised amount paid to the BPDB without significantly increasing electricity prices or shifting the financial burden onto consumers.

This approach includes phasing out fossil fuel-based power plants on time and implementing a “No Electricity, No Payment” policy.

According to CPD’s calculations, it could eliminate subsidies by 2028 and create a positive surplus for the BPDB and limit the electricity price increase to only 6.8 per cent over five years to reach a zero-subsidy scenario, in contrast to the IMF’s estimation of a 12 per cent price increase over five years.

“This strategy will significantly reduce the fiscal burden while it is important to initiate competitive bidding process in power purchase agreement (PPA) for which abolishment of ‘emergency power and energy supply act’ is required.

“This will significantly reduce the purchase price of electricity and 40 per cent of renewable energy-based power generation needs to be ensured.”