Bangladesh's overdependence on imported coal and liquefied natural gas (LNG) for power plant additions will have major financial consequences, says a new study released by the Institute for Energy Economics and Financial Analysis (IEEFA) on Monday.
This misleading development will increase fiscal pressure on the Power Development Board (BPDB), which will lead the government to hike power tariffs for consumers, the study predicts.
The Covid-19 pandemic is currently lowering power demand significantly in the country, increasing financial stress on the BPDB by reducing revenue while capacity payments to idle plants have to be maintained.
Bangladesh already has excess power generation capacity with only 43 percent capacity utilisation of the existing power plants in the fiscal year 2018-19.
This pre-coronavirus low usage rate resulted in Tk90 billion (US$1.1bn) capacity payments to idle power plants, necessitating both government subsidies and hikes in electricity prices for consumers, the study finds.
Currently, Bangladesh has a capacity to generate 19,600 megawatts (MW) electricity, 57.37 percent of which is from gas based-plants.
However, the country has the ambition to achieve a capacity to produce 31,000MW electricity in 2030, and 57,000MW in 2041, as per the updated power sector master plan (PSMP-2016).
The government aims to increase the power generation from coal to 35 percent of the total capacity, which is only 2.76 percent at present.
Currently, 29 coal-based power plant projects are in progress. Whereas, there are four big LNG-based power projects, each of them having a capacity to generate 3,600MW of electricity.
The power and energy division authorities say the capacity building was projected on the basis of the economic growth of the country.
They claim the maximum utilisation of the capacity will be ensured once all economic zones established across the country come into full operation.
Asked about the logic behind building capacity with imported energy, Nasrul Hamid, state minister for power, energy, and mineral resources says they don't have any alternatives.
"Considering the cost and source of primary fuel, we are opting for gas and coal," he explains.
Meanwhile, the author of the IEEFA study Simon Nicholas, energy finance analyst with the institutions, says Covid-19's impact will mean long-term power demand will be lower than forecast.
"Based on current plans for coal-and LNG-fired power additions, we calculate that Bangladesh will have the capacity to generate 58 percent more power than the nation needs by 2030, based on our forecasts of power demand growth and taking into account the economic impact of Covid-19," says Nicholas.
Covid-19's impact will make the overcapacity by 2030 worse if the current plan for coal- and LNG-based power capacity additions is continued, he says.
Overcapacity is the situation in which a nation's power sector cannot sell as much as its plants are designed to produce.
"A long-term switch from cheap domestic gas towards more expensive imported coal and LNG, combined with the severe and long-term overcapacity, Bangladesh is on course for is likely to see subsidies continue to rise," says Simon Nicholas.
The study finds that power tariffs for consumers can also be expected to increase.
It argues that large fleets of big coal and LNG plants are increasingly less appropriate to meet lower-than-expected demand growth in developing nations. Egypt recently shelved a China-backed 6.6GW coal plant proposal due to concerns about overcapacity and a preference for renewable energy.
Lessons from Indonesia's experience
The report's co-author Sara Jane Ahmed highlights that there are important lessons for Bangladesh from the experience of Indonesia which is suffering the financial impacts of overreliance on coal power.
"PLN - Indonesian state-owned power utility – has seen its over-commitment to coal power lead to a rapid escalation in government subsidies which reached an enormous US$5bn in 2018," Ahmed says.
The study finds that Indonesia's power development plan includes an overestimated power demand growth forecast for 2019-2028.
Such misforecasts compound over time and are the basis for planning too much power capacity development, resulting in overcapacity, higher capacity payments, subsidies, and tariff hikes.
The study draws stunning similarities to the rapidly escalating financial crisis of the BPDB resulting from the existing overcapacity, which will go further up after completion of the Payra coal plant. Half the capacity of Payra will sit idle, forcing the BPDB to make additional payments of Tk160 crore (US$19m) per month.
"Bangladesh needs to heed these lessons if it is not to head down the same road towards power system financial crisis as Indonesia," Ahmed says.
The way forward
According to the study, it is now time for Bangladesh to consider more appropriate, modular renewable energy (without capacity payments) and grid investments to meet lower demand growth and reduce the overall system cost while improving domestic energy security and resilience.
The study finds that the amount of land suitable for renewables in Bangladesh is likely to be more than previously assumed. However, some tough choices over land use may have to be made if Bangladesh is to avoid entrenching a power system dominated by expensive, imported coal and LNG with higher power tariffs and government subsidies.
"The Covid-19 induced delay to coal power projects gives Bangladesh an opportunity to reset energy development policy and redirect resources to support economic fundamentals and energy price stability to enable the realisation of Vision-2041", according to the study.