End power sector’s capacity charge, repeal indemnity law: Monitoring body

Infographic: TBS

The power sector in the country is experiencing substantial financial losses, creating a significant subsidy burden on the government because of the model of capacity charge and the indemnity law among other worrisome ailments.

This was observed in a recent report by the Implementation, Monitoring and Evaluation Division (IMED), a planning ministry body, which referred to the capacity charge as a "model for looting" and recommended steps to reform the sector.

The recommendations include ending capacity charges, closing down energy-unfriendly captive power plants and scrapping the Speedy Supply of Power and Energy (Special Provisions) Act 2010.

An eye-watering Tk90,000 crore was paid as capacity charges to private power plants over the past 14 years, all of which had to be in dollars, according to the report. 

Capacity charge is the payment made by the Bangladesh Power Development Board (PDB) to the power plants in return for the rights to utilise their power generation capacity. 

Under the current agreements, the PDB is bound to pay the charge to the plant owners whether or not it uses their electricity.

This model is causing drainage of huge sums every year piling up subsidies. It is also not true that without the existence of capacity charges, investments in the sector would decline, according to the monitoring body.

While calling for a comprehensive plan to break the cycle of subsidies, the report characterises the capacity charge system as unsustainable. 

It recommends implementing the "overhauling" as a viable alternative. This charge would account for the downtime during which a plant cannot maintain production, typically capped at a maximum of 20%.

The report proposes that private generators should be permitted to sell electricity at a 25%-50% increased price, depending on the location, while ensuring that the government commits to purchasing half of the electricity generated.

The Indemnity law 

As per the Speedy Supply of Power and Energy (Special Provisions) Act, no question regarding the validity of acts performed, actions taken, orders issued, or directives given under this act shall be raised in any court.

The per unit price of electricity and expenditure model cannot be questioned because of this indemnity. 

Based on the calculation of the capacity charge of the idle power plants, it was found that the average per unit price of electricity in some independent power plants was Tk100 or more. As the payment is made in dollars, PDB's losses are unstoppable, read the report. 

The PDB incurred a loss of Tk105,419 crore over the past 12 years. It was projected to face a loss of approximately Tk113,000 crore in the just-concluded and upcoming fiscal years, it added.

Calling for the end of this "criminalisation" in the power sector, IMED criticised the government for extending the tenure of the indemnity law multiple times till 2026.

According to energy expert Professor M Shamsul Alam, the main purpose of the Act was to make investments in the power sector uncompetitive, as a result of which investment expenditure has become uncontrolled. 

"The deficit, subsidies and the price of electricity -- all of them are rising because of this."

This law is the fundamental reason for the destruction of the power sector and it should have been repealed long ago, said the professor. "The sooner the law is repealed, the sooner the power sector will get a chance to turn around."

The IMED also recommended implementing an industrial development plan to ensure a sustainable and stable power sector, reducing system losses and setting up a green electricity roadmap.

The report further highlights that the Independent Power Producers (IPP) agreements, which require payments in dollars, are a significant drain for the power sector. It recommends making the payments in taka instead of dollars.

It also insisted that the challenges faced by the power and energy sector cannot be resolved without addressing several key factors. 

These include putting an end to high prices per unit, ensuring fair pricing for fuel and land, revising policies related to easy bank loans, and reevaluating the provision of duty-free import facilities.

Captive and inefficient power plants

Medium to large industries have resorted to captive power generation due to high cost of industrial electricity and uncertainty in power supply. 

Industrialists argue that producing their own electricity costs only one-third of the government price.

However, the IMED report highlights that captive power generation burns more fuel to produce less energy and emphasises industry-supportive cost-effective billing policies in order to permanently eliminate the reliance on captive power.

It reveals that a significant number of power plants exhibit an energy efficiency of less than 30%, consequently increasing the dependence on imported fuel supply.

Out of the 38 closed and 98 partially active power plants that have good thermal efficiency, the government and private sector still need a plan to keep them active.

The IMED said energy wastage in power generation could be reduced by preferring plants with energy efficiency above 40% and plant factor above 60%.

44% of the power plants unutilised

Around 44% of power plants' capacity remains unutilised due to shortages of coal and dollars, according to the report. 

The insufficient coal and diesel supply results in only 56% of the total capacity of the power plants getting utilised across the country.

The report highlights that plants relying on diesel and coal as fuel have high electricity generation costs per unit. 

Consequently, the government is required to provide substantial subsidies to purchase electricity at inflated prices and deliver it to consumers.

System loss

Any system loss exceeding 3% is regarded as electricity theft, according to the IMED. 

However, at the end of FY20, the power system loss reached 8.73%.

The report highlights a lack of adequate planning to combat theft and vandalism, which would contribute to energy conservation.

It suggests the implementation of incentives and tariff concessions to encourage the use of energy-efficient appliances in industries.

The IMED prepared this report after analysing the ongoing power projects and power plants in operations to highlight the necessary steps for the improvement of the sector.

"The Implementation Monitoring and Evaluation Division's role is to monitor development projects. It identifies delays in implementation and assesses the impact or outcomes of the projects," said the division's secretary, Abul Kashem Md Mohiuddin.

As part of this, IMED has researched all the ongoing projects of the power sector and provided a report, he said. 

The report and some recommendations have been sent to the authorities concerned as per the rules, the secretary said. 

"The relevant ministry will take action in this regard. Monitoring of the implementation of recommendations will continue." 

Planning Minister MA Mannan said the division can only highlight the problems and the relevant ministry will take action. 

Regardless of whether any action is taken or not, IMED's report will create public opinion in the media, the minister opined. 

The minister further said the IMED presented its review of the indemnity law. "The government will decide whether the law needs to be repealed."