The Financial Express

Drawing lessons from on-going electricity crisis

| Updated: August 15, 2022 21:04:34

Drawing lessons from on-going electricity crisis

Despite having surplus electrical power production capacity, Bangladesh has returned to load-shedding. Unlike in the past, instead of lack of capacity, the underlying cause of power shortage is surplus capacity. On the other hand, whatever power is consumed, value extraction out of usage appears to be low. Hence, profitable power production and consumption do not appear to be an option, demanding subsidies. As growing subsidies for offsetting the difference between purchase and sale price and capacity fees have eaten up the country's capacity to absorb the loss, load-shedding has returned. The situation has worsened due to the growing energy price, making the underlying systematic weakness visible sooner than later. As a result, ironically, the rapid expansion of power production capacity has surfaced as a wasteful investment instead of becoming a development driver. Due to its grave consequence and likelihood of reoccurrence in development activities in other sectors, we need to dig down and draw a lesson for avoiding wasteful investment and focus on better utilisation.    

PROFITABLE CONSUMPTION DOES NOT NATURALLY EXIST: Per capita electrical power consumption is one of the key development indicators. For example, in 2014, Bangladesh's per capita power consumption was 320 Kwh, far lower than India's 805 Kwh and Singapore's 8845 Kwh (source: IEA Statistics). Hence, the development prescription could have been to keep improving this vital indicator. Consequently, the government in Bangladesh targeted the expansion of power production, transmission and distribution capacity. But due to a lack of profitable demand, the government looked upon it as a public good and opted to the option of giving subsidies.  But as subsidies kept growing, the necessity of direct economic benefit started becoming paramount. Notably, as both capital and operating costs of power production incurred drainage of foreign currency, growing subsidy-driven consumption started showing visible strain on foreign currency reserve. Consequently, to slow down the rapid depletion of foreign currency reserves, the government has opted for lowering consumption through load-shedding. Hence, per capita power consumption growth demands profitable utilisation of power. In particular, such consumption should either earn foreign currency or contribute to doing so. In retrospect, it does not naturally exist.    

DEMAND DOES NOT NATURALLY FOLLOW EXTRAPOLATION-RISKING IDLE CAPACITY: Due to high subsidies and low penetration, the demand for power consumption showed an exponential growth pattern in the beginning. For example, in Bangladesh, per capita power consumption grew from 11 Kwh in 1971 to   320 Kwh in 2014-a 29 times increase. Does it mean that future demand would show similar growth? It depends on a few significant factors such as (i) access and availability, (ii) price to be paid, and (iii) value to be generated out of the consumption. In the case of Bangladesh, massive investments have been made in the recent past to increase access and production capacity, resulting in consumption growth. But the government could not keep consumer level prices unchanged, as it crossed the subsidy-given limit. Hence, the price of power went up ten times over a period of 10 years, having a cumulative effect of 118 per cent increase at the wholesale level and a 90 per cent upward move at the consumer level. Indeed, such price increases caused negative implications on the demand growth. As a result, Bangladesh has ended up with total power generation capacity of 25,700 megawatts (MW), against peak demand of about 15,000 MW-while access to power has reached as high as 97 per cent of the population. The third item is the value consumers derive from consumption. Suppose economic value derived from the utilisation of each unit of power is far more than the price paid. In that case, the price increase does not have a proportionate negative impact on demand growth. Furthermore, if economic value, in the form of foreign currency, derived from growing power consumption is more than the foreign currency used in delivering power, the economy can sustain increasing power production in meeting consumption by importing fuel. Although statistics are not available, recent power consumption growth appears to be due to the growing use of air conditioners in office buildings and residential facilities.

In both public and private sectors, there seems to be a race to build centrally air-conditioned air-tight glass buildings-resulting in high power consumption growth. Sitting in those energy-hungry buildings, are we contributing to earning far more foreign currency than before? If not, how will the economy afford to keep spending foreign currency to keep those establishments cool?           

COST OF IDLE CAPACITY RUNS THE RISK OF BEING BARRIER TO PROGRESSION: To meet projected high demand, likely estimated through extrapolation, led to the accelerated expansion of production capacity. Whether the private or public sector sets up power plants, there is capital expenditure, mostly met through imports. As the government's power development board (PDB) is the sole buyer at the wholesale level, the capacity fee option was included to encourage private investment. Hence, if no power is produced and delivered to consumers, PDB must keep paying capacity fees for idle power plants. In many cases, as the capacity fee guaranteed a profitable return on the capital, competition among private investors started to set up power plants-resulting in surplus capacity, creating the impression of spectacular advancement of Bangladesh's power sector. [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 the media report, PDB had to pay Tk 540 billion (roughly US$6 billion) as a capacity fee for the idle power plants over three years. The lion's share of this fee drains foreign currency. As this staggering amount of capacity fees has made a significant hole in government's subsidy given capacity to the sector, the inevitable consequence has been to opt for load-shedding to save fuel bills. Due to this reality, apparent success has become a liability-creating a barrier to development. Hence, in driving development programmes, the consequence of idle or non-productive use of capital should draw adequate attention.   

The prevailing load-shedding appears to offer us more lessons than the sweat. Unlike in the past, it is not caused due to the scarcity in supply capacity. Ironically, it has been caused due to overcapacity. The risk of meeting such a reality appears to be likely in many other development endeavours, including special economic zones, roads, highways, bridges, fibre optics networks, education, and high-tech parks.

There is no denying that all these facilities are needed, but the challenge is to have synchronisation with the demand and utilisation of those facilities in creating far more economic benefit (preferably in foreign currency) than the capital and operating expenditure we need to incur. Furthermore, to reduce import bills for both Capex and Opex, the focus should be on adding increasing local value, and finding alternatives which Bangladesh can sustainably afford.

To increase the return on the utilisation of those facilities, we should focus on creating far more economic value than we have been deriving out of labour. In addition to labour, we should create the opportunity of adding value through the local production of knowledge and ideas. 

If we keep focusing on only the labour trade, replacing the fan with air-conditioner does not add proportionate economic value. On the other hand, subsidy-based expansion and offering guaranteed profit-making opportunities to private capital run the risk of giving misleading direction-resulting in wasteful investment. Hence, it's time to draw a lesson from Bangladesh's power sector expansion, dig down all other major development programmes, and figure out restructuring, if needed, so by pursuing development, we do not risk creating liability, blocking further progression. 


M. Rokonuzzaman, Ph.D is an academic and researcher on technology, innovation, and policy.

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