Analysis
Power and energy: How costs can be reduced at every stage of the supply chain
The ongoing crisis in the electricity and energy sectors did not develop overnight. Why did this crisis occur? Where were the mistakes and failures in policy-making? What is the way out of this crisis? Energy expert M Shamsul Alam analyses these issues along with proposed solutions to the crisis.
Private sector investment is necessary in the power and energy sectors. An investor will invest capital, take technological and market risks, and provide services efficiently—in return, they will receive a fair and reasonable profit. There is no reason for objection here. Problems arise when an investor's profit is guaranteed, but the risk of investment is borne by the state or the consumer. In other words, the profit is private, but the risk is public—such a system can never be justified.
A healthy investment system should have a logical relationship among risk, service quality, efficiency, and profit. If the actual costs and profits are abnormally high compared to necessary and efficient expenditures, the system inevitably becomes exploitative. Such expenses can be significantly reduced through competitive purchasing, efficient management, and effective control. However, if energy service pricing is determined merely on a 'cost + profit' basis, there is no effective pressure on the investor to reduce costs. The higher the expense, the greater the opportunity for profit. Ultimately, the burden of this increased cost falls on the people.
Bangladesh is facing this structural problem to a great extent
Over the last decade and a half, the cost of electricity and energy supply has increased unjustly and abnormally. Due to non-transparent and non-competitive contracts, disproportionate terms, and legal indemnities, a lack of accountability and efficiency has developed in this sector.
Consequently, high costs, inefficiency, irregularities, and corruption have increased. Even as a regulatory body, the Bangladesh Energy Regulatory Commission (BERC) has not been able to play an effective role.
This directly impacts electricity and energy prices, subsidies, and the government's financial management. Arrears are increasing, and the state's ability to repay loan installments is under pressure. At the same time, dependence on primary energy and electricity imports is increasing. As a result, the country's energy security is at risk, and the cost pressure on consumers is continuously rising.
While private sector investment is needed, it must not become a substitute for public interest, competition, transparency, and effective regulation. It is equally crucial to bring people involved in irregularities and corruption under accountability. It is not possible to reform any sector while continuing to offer advantages and protection to individuals involved in crimes and irregularities. Eventually, the burden of failure falls on the government and the people.
Larger crisis is one of capability rather than electricity
If Bangladesh's current energy crisis is viewed only as a shortage of electricity or fuel, the true nature of the problem will not be realised. This is simultaneously a financial and institutional crisis. When production systems are excessively costly compared to needs, inefficiency is prolonged, and this cost burden is imposed on the people through subsidies or price increases, the energy crisis ultimately turns into a 'capability crisis'.
When profits are almost assured in private sector investment, the balance of risk is also disrupted. The state and the people bear the risk of energy security, the risk of price inflation falls on the consumer, and utilities bear the risk of unused power generation capacity. Thus, investors are often protected from business risks. Without ensuring the fair distribution of risk in power purchase agreements and energy contracts, it will be challenging for the government to tackle this cost crisis. Consequently, both the government and the public's capability crisis will deepen.
Electricity and energy are essential infrastructures of the economy, as critical to human life and production as food, water, transportation, and communication. Therefore, the main goal of this sector should not be commercial profit. The state's responsibility should be to ensure reliable, affordable, and sustainable electricity and energy services for people through non-profit and efficient management. Investments in the private sector must also be driven by the objective of public interest.
Will costs decrease with increased production?
The government's five-year plan to tackle the electricity and energy crisis emphasises increasing production capacity and building new infrastructure. But the question is whether these initiatives will reduce the costs of electricity and energy or add new burdens of expense?
The plan includes spending 1. 5 to 1. 8 billion USD on developing additional electricity capacity. Annual electricity demand is expected to increase by 6 per cent. There are plans for two more LNG terminals in Khulna and Barishal, a 400 MW power plant in Bhola, and expanding coal-fired power plants in Matarbari and Payra. At the same time, there is a plan to increase 10,000 MW of solar power capacity with 20 per cen storage capability. The benchmark tariff for rooftop solar power is set at Tk 10. 50. Additionally, there are initiatives to introduce 4,000 MW of wind power, more nuclear power plants, and replace captive power with grid electricity.
However, increasing production capacity and ensuring reliable and affordable energy services are not the same thing. If the costs, usage, energy supply, and financing structures of the increased capacity are not considered, new investments could become future financial burdens.
True energy security means more than sufficient electricity production; it means freeing both the state and consumers from capability crises. Therefore, the first task should be reducing unjust, irrational, and exploitative expenses. Simultaneously, it is essential to reduce import dependency, enhance financial and energy efficiency, expand the use of affordable renewable energy, strengthen regulatory bodies, and ensure consumer rights.
Isolated policy initiatives will not resolve this crisis. Costs must be reduced at every stage of the electricity and energy supply. Each problem's structural cause must be identified and linked to specific reforms to address it.
CAB's proposal:
The Consumers Association of Bangladesh (CAB) has submitted several proposals for a five-year plan to tackle this capability crisis.
First, by refraining from profiting, the government should make public electricity and energy services profit and exploitation-free. This could save about Tk 450 billion annually. With this, it is possible to free the electricity sector from subsidies, protect consumers from price hikes, and increase the government's capacity to pay off arrears and loan installments.
Second, limit LNG imports to no more than 1,100 MMCFD according to existing capacity; extract an estimated 1 TCF of gas from the Chhatak (East) gas field through BAPEX with funds from the gas development fund, and increase production by renovating old wells.
Third, urgently connect to the grid the electricity from the Rooppur Nuclear Power Plant at a tariff of Tk 6 per unit.
Fourth, gradually shut down oil-based power plants to save at least Tk 300 billion annually.
Fifth, increase coal imports to increase coal-based electricity production at nearly Tk 7.5 tariff at more than 90 per cent plant factor, replacing oil-based electricity.
Sixth, increase solar power capacity by 10,000 MW to reduce grid electricity demand by 20 per cent. This will manage average annual electricity demand growth of 5 per cent while proportionately reducing energy import expenses.
Seventh, expand rooftop solar power production by 5,500 MW with a benchmark tariff of no more than Tk 6.
Eighth, in addition to merchant power plants, add another 4,500 MW of solar power production at utility scale, with a benchmark tariff of no more than Tk 6. 48.
Ninth, use Electricity Development Fund money, formed with consumer funds, to increase low-cost 400 MW gas-based power production in PDB's ownership in Bhola.
Tenth, reduce electricity demand by 15 per cent by increasing energy efficiency and conservation. This could save an average of Tk 190 billion annually.
Eleventh, adjust revenue exemptions to align Bangladesh's rooftop solar power tariffs with those of India within the next two years. Currently, the levelised production cost of rooftop solar power in Bangladesh is Tk 3.89. At Tk 123 per USD, it is Tk 3.88 in India and Tk 3.92 in Pakistan. In this case, BERC needs to increase the capability of entrepreneurs.
Twelfth, based on the recommendations of Justice Moinul Islam Chowdhury's committee, reduce Adani's coal-based electricity tariffs to align with government-level coal-based electricity imports from India. If not feasible, consider terminating the contract.
The main aim of CAB's plan is to bring the average production cost of electricity down to about Tk 7.50. This could create an opportunity to save about Tk 520 billion annually. At the same time, it is possible to play an effective role in tackling the people's capability crisis by reducing subsidies, price increases, import dependency, and financial pressure on the government.
Structural reform needed
To overcome the crisis in the energy-power sector, our mindset needs to change. Simply considering the construction of new power plants or increasing production capacity as a measure of success will not suffice. It is essential to evaluate how much it costs to produce electricity, who bears the cost, who takes the investment risk, and at what price consumers receive the service.
The main foundation of reforming this sector should be eliminating energy-related crimes, enhancing efficiency and transparency, developing national capabilities, reducing unnecessary import-dependency, and cutting costs at every stage of supply. Simultaneously, the sector must be free from the influence of vested interests and operated on the basis of public interest, accountability, and long-term national energy security.
In this regard, the role of members of the national parliament is extremely crucial. It is necessary to establish electricity and energy in parliamentary politics as an important public interest issue. Parliament should play an effective role in prosecuting irregularities and crimes in the energy sector, ensuring accountability of government spending and contracts, and reforming necessary policies and laws to protect consumer interests.
The future of the electricity and energy sectors does not depend solely on how many megawatts are produced. It will depend on how economically, efficiently, and in whose interest that electricity and energy are supplied. Therefore, the mantra for tackling the crisis should be—not new expenses, but rather stopping the waste and plundering of existing costs first. Reducing costs at every stage of supply could be the most effective way to address the people's capability crisis.
#M Shamsul Alam is an energy advisor for the Consumers Association of Bangladesh (CAB).
*Opinions expressed here are the author’s own.
#This article, originally published in Prothom Alo print and online editions, has been rewritten in English by Rabiul Islam