After the election, the current government had promised not to raise electricity prices for at least two years. During the previous Awami League regime, repeated hikes in electricity prices had created crises in people's lives. Perhaps considering this, the government had suggested finding a solution to the crisis without increasing prices.
In the context of rising fuel prices due to the Middle East conflict, is the government stepping back from that commitment? On 9 April, the government formed a high-level cabinet committee, led by the finance minister, to reconsider electricity prices.
Additionally, the Power Division has prepared a proposal to increase both wholesale and retail electricity rates. The proposal suggests an increase in household electricity prices ranging from 7.8 per cent to 20.11 per cent, depending on usage. Three alternative proposals for raising wholesale electricity prices have also been prepared.
The rationale behind these price hike initiatives is to reduce the subsidy burden on the power and energy sector and fulfill IMF conditions. However, raising prices is not the only way to reduce subsidies; production costs can also be lowered to achieve this. Moreover, there's a need to address questions about where the subsidy money is going and how justified it is.
To reduce subsidies, we should first understand why subsidies are necessary. Subsidies are needed because the Power Development Board (PDB) has to purchase electricity at high prices from privately-owned, import-dependent, and costly fuel-based power plants (IPPs). This issue existed even before the Middle East crisis, and the war has only increased the subsidy pressure.
A significant portion of subsidy money is spent on capacity charges. Due to the energy crisis, much of the electricity production capacity remains unused throughout the year.
However, as the single buyer of power, PDB must pay capacity charges to power plants even if no electricity is purchased. As private sector electricity production capacity has increased every year, so has the amount required for capacity charges, along with PDB's losses.
To reduce these losses, during the past Awami League government, electricity prices were raised 12 times at the wholesale level and 14 times at the retail level over 15 years, but the losses and subsidies did not decrease. Instead, the pressure to increase electricity prices continued to resurface.
Therefore, raising electricity prices is not a sustainable way to reduce subsidies. To find a sustainable solution, production costs must be reduced.
In the short term, to lower production costs, the unequal contracts for purchasing electricity from the private sector must be revised to reduce the burden of capacity charges. Pakistan can be cited as an example in this context.
Pakistan's electricity and energy sector was burdened with high capacity charges and costly imported fuel issues. Recently, the country has made significant progress in solving these problems by implementing several initiatives.
Among the measures taken by the Pakistani government were the cancellation and revision of contracts with IPPs: the government canceled contracts with six private power-producing IPPs, revised contracts with 16 IPPs to switch to a take-and-pay model, and reduced capacity charges.
The purchase price of electricity was converted from dollars to rupees by revising various power plant purchase agreements. Reducing return on equity: The rate of return on equity, or income against investment, for state-owned power plants has been reduced from 30 per cent to 13 per cent.
For this, the Pakistani government told IPP power plants to agree to the revision of electricity purchase agreements; otherwise, the contracts would be completely canceled, or a forensic audit would be conducted. This strategy worked. By revising contracts with just 14 IPPs, 1,400 billion rupees were saved.
Additionally, the country rapidly increased solar power production capacity to reduce energy import costs. Especially with the reduction in solar panel import costs and government incentives for rooftop solar, the use of renewable energy in the country increased rapidly.
Between January 2022 and December 2025, Pakistan developed solar power capacity equivalent to nearly one-fifth of its total electricity generation, significantly reducing LNG usage for electricity production, saving approximately $12 billion in fuel imports so far.
In Bangladesh too, it is possible to significantly reduce electricity production costs by canceling and revising contracts with IPPs, converting contracts to a take-and-pay model in lieu of capacity charges, setting electricity prices in local currency instead of dollars, and increasing renewable energy capacity.
However, the previous interim government failed to implement such measures. During the previous Awami League government, a committee was formed to review power contracts executed under special legislation. The committee submitted its final report toward the end of the interim government’s tenure.
The committee's report highlighted problems such as purchasing electricity at inflated prices from privately-owned power plants through irregularities and corruption and paying capacity charges while the plants remained idle.
According to the committee, these contracts allowed for purchasing power from furnace oil-based plants at 40-50 per cent higher than market rates and from gas-based plants at 45 per cent higher rates. According to the committee, excess capacity is resulting in additional annual expenditure of between $900 million and $1.15 billion in capacity charges.
To address the issue, the committee recommended that any contracts where evidence of corruption is found, in line with international standards, should be cancelled immediately. At the same time, high-cost and unequal power purchase agreements should be renegotiated in a targeted manner and revised accordingly.
After taking office, it was expected that the current BNP government would take initiatives to reduce electricity production costs by canceling or revising corruption-laden contracts. In light of the Middle East war, taking such cost-reduction initiatives has become even more urgent. Forming a cabinet committee or task force for this purpose would have been natural. Instead, the decision to form a committee on price hikes was not appropriate.
The load-shedding has already disrupted public life. Even though the government claims adequate fuel reserves, in reality it is unable to supply power plants with fuel in line with demand. There are long lines at petrol pumps, and farmers are crying out for the diesel needed for irrigation.
The government has already increased the prices of diesel, octane, petrol, and kerosene. In this situation, raising electricity prices is like kicking someone when they're already down. Alongside fuel, the increased electricity prices will have multifaceted impacts across the entire economy, further fueling inflation.
Therefore, the government must now decide whether to take the simple yet economically disastrous decision of raising electricity prices to reduce subsidies or to choose the comparatively difficult but sustainable path of reducing production costs.
#Kallol Mustafa is a writer & researcher, executive editor at Sarbajanakotha.
*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.