Drawing lessons from the ongoing power crisis

Despite having surplus electricity production capacity, Bangladesh has returned to load shedding. Unlike in the past, the root cause of power shortages is surplus capacity, not lack of capacity. On the other hand, value extraction from use appears to be low, no matter what power is consumed. Profitable electricity production and consumption therefore does not appear to be an option and requires subsidies. Load shedding was reinstated as increased subsidies to offset the difference between purchase and sale prices and the difference in capacity charges exhausted the country’s capacity to absorb losses. Rising energy prices exacerbated the situation and sooner or later revealed the weakness of the underlying system. As a result, ironically, the rapid expansion of power generation capacity has surfaced as a waste of investment rather than a driver of development. With its severe consequences and the potential for recurrence in development activities in other sectors, lessons must be drilled out to avoid wasted investment and focus on better utilization.

Beneficial consumption naturally does not exist: Electricity consumption per capita is one of the main development indicators. For example, his per capita electricity consumption in Bangladesh in 2014 was 320 Kwh, well below India’s 805 Kwh and Singapore’s 8845 Kwh (source: IEA statistics). Therefore, the development prescription may have been to continue improving this key metric. As a result, the Bangladesh government has set a target to expand power generation, transmission and distribution capacity. However, since there was no profitable demand, the government chose to consider it a public good and subsidize it. But as subsidies continued to grow, the need for direct economic benefit began to become paramount. Increased subsidy-driven consumption began to visibly put pressure on foreign exchange reserves, especially as both the capital and operating costs of electricity production caused an outflow of foreign currency. As a result, the government chose to cut consumption through load shedding in order to slow the rapid depletion of foreign exchange reserves. Increasing per capita electricity consumption therefore requires profitable electricity utilization. In particular, such consumption must earn or contribute to foreign currency earnings. Looking back, it doesn’t exist naturally.

Demand does not naturally follow idle capacity with extrapolation risk: Due to high subsidies and low penetration, electricity consumption demand initially showed an exponential growth pattern. For example, in Bangladesh, electricity consumption per capita increased 29-fold, from 11 Kwh in 1971 to 320 Kwh in 2014. Does that mean future demand will show similar growth? It depends on several key factors, including (i) access and availability, (ii) price paid, and (iii) value generated from consumption. In the case of Bangladesh, large-scale investments have been made in recent years to increase access and production capacity, and consumption has grown. However, the government was unable to maintain consumer-level prices as they exceeded subsidy limits. Thus, electricity prices rose tenfold in his ten years, with a cumulative impact of a 118% rise at the wholesale level and a 90% rise at the consumer level. In fact, such price increases had a negative impact on demand growth. As a result, Bangladesh’s total power generation capacity is 25,700 megawatts (MW), with peak demand at around 15,000 MW, and access to electricity reaching 97% of his population. The third is the value consumers get from their consumption. Assume that the economic value obtained from the use of each unit of power is much greater than the price paid. In that case, price increases do not have a proportionate negative impact on demand growth. Furthermore, if the economic value in the form of foreign currency from increased electricity consumption is greater than the foreign currency used to supply the electricity, the economy will be able to produce electricity by meeting consumption by importing fuel. can sustain an increase in Although there are no statistics, the recent increase in electricity consumption is likely due to the increased use of air conditioning in office buildings and residential facilities.

There appears to be a race in both the public and private sectors to build airtight glass buildings with central air conditioning, resulting in a significant increase in electricity consumption. Are we, sitting in energy-hungry buildings, contributing to much more foreign exchange earnings than before? If not, how does the economy keep these establishments cool? can you afford to continue using foreign currency?

Idle capacity costs risk becoming a barrier to progress: Likely extrapolated by estimates, capacity expansion was accelerated to meet the projected high demand. Whether the private or public sector installs power plants, there is capital investment, mostly met by imports. A capacity fee option was included to encourage private investment, as the government’s Power Development Board (PDB) is the sole purchaser at the wholesale level. Therefore, when no electricity is generated and delivered to consumers, the PDB must continue to pay capacity charges for idle power plants. Since capacity fees in many cases guarantee the profitability of capital, competition among private investors has started to set up power plants, resulting in surplus capacity and the impression that Bangladesh’s power sector has made remarkable progress. gave [Meanwhile, the government raised prices of all fuel oils on Friday with effect from midnight. Diesel price was raised by Tk 34 to Tk 114 per litre, octane by Tk 46 to Tk 135 and petrol by Tk 44 to Tk 130. The raised price of kerosene now stands at Tk 114. The  State Minister for Power, Energy and Mineral Resources Nasrul Hamid also hinted a further hike in the price of electricity.]

According to media reports, the PDB had to pay Tk 540 billion (about US$6 billion) in capacity charges for power plants that have not been operating for three years. Most of this fee drains foreign currency. This staggering amount of capacity fees has left a gaping hole in government subsidies for capacity to the sector, so the inevitable consequence is the choice of load shedding to save fuel costs. Because of this reality, apparent success becomes a liability and creates barriers to development. Therefore, due attention should be paid to the consequences of lazy or unproductive use of capital when pursuing development programs.

General load shedding seems to offer more lessons than sweat. It is not due to a shortage of supply as it once was. Ironically, it’s because of overcapacity. The risk of facing this reality seems likely to be seen in many other development efforts, such as special economic zones, roads, highways, bridges, fiber optic networks, education and tech parks.

The need for all these facilities is undeniable, but the challenge is to balance the demand and use of these facilities to generate economic benefits (preferably foreign currency) far greater than the required capital investment and operating costs. to synchronize. Moreover, the focus should be on increasing local value and finding alternatives that Bangladesh can buy sustainably to reduce import costs, both capital and operating costs.

To increase utilization of these facilities, we need to focus on generating far more economic value than we get from our workforce. We must create opportunities to create added value not only through labor but also through local production and local consumption of knowledge and ideas.

If we continue to focus solely on the labor trade, replacing fans with air conditioners will not add commensurate economic value. On the other hand, subsidized expansion and guarantees of profit opportunities for private capital point in the wrong direction and risk leading to wasted investment. It is therefore time to draw lessons from the expansion of Bangladesh’s power sector, delve into all other major development programs and consider restructuring if necessary. By pursuing development, we do not risk liability and prevent further progress.

M. Rokonuzzaman, Ph.D. is a scholar and researcher in technology, innovation, and policy.

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