Why Bangladesh pays billions to idle power plants

Bangladesh – a country that often suffers from blackouts – has capacity to produce electricity that far outpaces demand, and pays tens of millions of dollars monthly to power plants when they are idle, government officials say.

That’s because the government has spent more than U.S. $9 billion since 2009 to subsidize power firms using an overly upbeat forecast for economic growth – resulting in a bloated electricity capacity that the government has committed to paying for, government documents show.

“It’s like a wedding party where you expected 10,000 guests, but in the end, only half showed up,” said Khondaker Golam Moazzem, an industrial economist at the Center for Policy Dialogue, a prominent think-tank in Dhaka. “Since you already committed to paying the costs for hosting those guests, you will have to pay the money even if much of the venue remains unused.”

In September, Nasrul Hamid, state minister for power, energy, and mineral resources, told Parliament that the government had paid 7.5 trillion taka (about $7.5 billion) to 82 large private producers as a “capacity charge” and 2.8 trillion taka (about $2.8 billion) to smaller oil-fired power producers as rental payment over 14 years.

In Bangladesh, in this context, “capacity charge” and “rental payment” are understood as subsidies awarded to private power plants in the event that the government doesn’t need to buy electricity from them.

In a 2022 study, researchers at SOAS University of London and the BRAC Institute of Governance and Development (BIGD) who reviewed Bangladesh’s contracts with private power companies found that the subsidy is calculated at 60% of the revenue a plant would get for supplying its total capacity to the government, the only buyer of electricity in the country.

It was introduced more than a decade ago to encourage private companies to make what were considered at the time to be risky investments in the power sector.

The incentives worked – too well. The country currently has capacity to produce 28,000 megawatts daily – about 40% more than peak demand.

Yet, the country often suffers from blackouts, including in recent months, because the government is rationing U.S. dollars by limiting the import of fuel needed to generate electricity.

“Currently, our country faces a shortage of fuel resources like gas and coal. The Ukraine war has caused a rise in prices, hampering fuel supply. This is why we can’t produce and supply electricity as per demand,” Mohammad Hossain, a senior official at the Ministry of Power, Energy and Natural Resources, told BenarNews.

However, per agreements with some private producers, the government has kept paying subsidies for excess capacity that today has reached more than 40%.

“A country can at best have a 20-25% surplus capacity, but it should never be double what’s needed,” Professor Badrul Imam, an expert on energy and power in Bangladesh, told BenarNews. “We are forced to compensate for the excess capacity, yet we have not been able to escape the cycle of power blackouts.”

Overestimating needs

In 2009, when the Awami League returned to power in Bangladesh, the country was undergoing frequent and chronic power blackouts. At that time, the country could produce only 4,000 megawatts of electricity every day.

Earlier governments were severely criticized for failing to produce enough electricity to power the country’s increasing economic growth.

In its 2008 election manifesto, the Awami League pledged to use all means necessary to increase power production as it projected that the country would require 21,000 megawatts of electricity a day by 2021.

It was unclear how the party reached that conclusion at the time, but a subsequent government document finalized in 2013 and that reached a similar conclusion, explained the rationale by drawing equivalences from other countries.

“In a typical developing economy, a one percent increase in GDP leads to a 1.5 percent increase in electricity demand,” said the document, titled “National Sustainable Development Strategy.”

It forecasted that the demand for electricity would rise significantly in coming years because the economy would have an annual growth rate of 8% by 2015 and 10% by 2021.

But in reality, the country’s economy grew 6.4% in 2015 and 6.9% in 2021, according to the International Monetary Fund.

The government itself quietly acknowledged that its projections were overestimated.

In 2016, the government’s “master plan” for the power sector, a 137-page study funded by Japan, contradicted the hypothesis that Bangladesh’s electricity demands would keep rising at 1.5 times its GDP growth rate.

The document acknowledged that per capita energy consumption in Bangladesh was smaller than in peer economies of Thailand, Indonesia, and Vietnam, used to produce past projections.

It noted that “Bangladesh consumes a smaller amount of energy than the other three countries to create the same economic value, and that the economy in Bangladesh has grown with relatively small energy input.”

Moazzem, the industrial economist, said Bangladesh’s growth was mainly fueled by a boom in its service sector, as opposed to the industrial sector.

“Without an increase in the industrial sector’s share in the economy, the demand for electricity will not rise,” he added. “The service and agricultural sectors will not increase electricity demand.”

“How much electricity is needed for a beauty parlor?”

‘Collusive’ contracts

The subsidies to private power producers have long been the subject of controversy in Bangladesh – more so because the government has gone to great lengths to provide legal and regulatory protections to the companies.

In 2010, the government enacted a law to boost power production that shielded government employees and private producers from future legal liabilities and even barred courts from considering any challenge to the law’s validity.

The law also allowed the government to purchase electricity directly from companies without any competitive bidding, bypassing public procurement rules.

While these incentives are credited with helping the country meet rising electricity demands, the relaxed regulatory environment fostered profiteering, two research papers suggested.

A 2017 paper by researchers including Thomas Nikolakakis, who was with Columbia University and the World Bank at the time, found that Bangladesh purchased more electricity from expensive oil and diesel-fired plants than cheaper gas-run ones.

Even when accounting for the country’s limited gas supply, the paper found, the practice alone cost Bangladesh $1.4 billion in a single year.

The paper by the researchers at SOAS and BIGD published last year found that non-competitive “collusive contracts” cost Bangladesh an additional $1 billion a year.

In his budget speech in June, Bangladesh’s Finance Minister Mustafa Kamal promised to phase out the subsidies when existing contracts with private power companies expire.

He said that was because the government wanted to “reduce the cost of supply and strengthen stability in the power sector.”

But when addressing Parliament in September, Nasrul Hamid, the state minister for power and energy, pledged to increase the capacity to 40,000 megawatts by 2030 and 60,000 megawatts by 2041, by which time the country aspires to be a “developed nation.”

“The Department of Power always had the national data about demand and supplies,” Moazzem said. “Yet, they continued to increase power production capacity. The reason is to favor certain companies. Nothing else.”