Captive power, which the industrial sector in Bangladesh leans on heavily, has been weakening the financial health of the Bangladesh Power Development Board (PDB) by costing it customers that pay the highest tariffs.
Currently, gas-fired captive plants — which industries use to generate power by themselves — produce more than 3,000 megawatts (MW) of power by using around 100 million cubic feet of gas a day.
If the PDB could shift half of the captive power users to the national grid, it would be able to earn Tk 3,414 crore a year, found the latest study by the Institute for Energy Economics and Financial Analysis (IEEFA).
The report, titled “Fixing Bangladesh’s Power Sector”, said the PDB can offset annual losses of $1.2 billion or Tk 13,800 crore, provided to the PDB in the form of government subsidies, through electricity sector reforms targeted at addressing core problems, including the reduction of captive power usage.
“In absence of reliable grid electricity, the tepid demand growth in the industrial sector [in grid] is largely because of its excessive dependence on captive power,” the report said, adding that load shedding and sudden grid power outages disrupt industrial production, making captive generators popular.
Despite a drastic 87.5 percent increase in gas tariffs in February 2023 and a modest increase of 2.5 percent in February 2024, industries continue to find electricity from captive systems more competitive than the grid, the report said.
Based on the efficiency of plants, captives can produce electricity at a cost of between Tk 1.3 per kilowatt-hour (kWh) and Tk 3.53 per kWh less than grid electricity prices.
“The strong economics make industries heavily dependent on captive systems, resulting in lacklustre demand growth in grid power,” the IEEFA said.
Currently, the national grid has a capacity of 27,086MW power generation capacity, boasting a 57.5 percent reserve margin compared to peak grid demand.
The IEEFA recommended reducing the reserve margin to a standard level of 20 percent in a bid to cut the burden of capacity charges — a charge that the PDB must pay power producers regardless of whether plants produce.
“The surplus is a principal factor in the PDB’s woes as it pays capacity charges to idle power plants, which increases average power generation cost,” it said.
In addition, the study identified the inefficient use of power plants, excessive usage of expensive fuel, high transmission-distribution losses and load-shedding due to weak financial health as the main reasons behind the PDB’s financial distress.
From July 2023 to May 2024, oil-fired plants contributed 10.9 percent to grid power generation while incurring 32 percent of the total fuel cost, the report said. Within the same period of time, Bangladesh experienced load-shedding on at least 23 days a month, it added.
In the past five fiscal years, the PDB’s total annual expenditure increased 2.6-fold against revenue growth of 1.8 times, prompting the government to allocate a combined subsidy of Tk 126,700 crore to ensure power supply and keep the economy afloat.
Yet, the PDB recorded a cumulative loss of Tk 23,642 crore in these years.
The IEEFA suggested Bangladesh fix a realistic power demand projection by factoring in energy efficiency gains and demand shift measures.
The IEEFA’s projection by factoring in such variables shows that the country’s peak power demand in 2030 is likely to be 25,834MW. Meanwhile, the Integrated Energy and Power Master Plan’s (IEPMP) forecast, made in July 2023, estimated it at between 27,138MW and 29,156MW.
The IEEFA roadmap also suggested halting investment in fossil fuel-based power and limiting the use of oil-fired plants to 5 percent of total power generation.
If these steps are taken along with the anticipated 4,500MW of fossil-fuel-based power plant retirements by 2030, it is expected that Bangladesh will have a system capacity of 35,239MW by that time, the report said.
“A system capacity of 35,239MW will help Bangladesh meet the peak demand of 25,834MW by 2030. It will bring the reserve margin down to 20 percent, which is comparable to countries like India and Vietnam,” said Shafiqul Alam, IEEFA’s lead energy analyst for Bangladesh and the author of the study.
“The window to make Bangladesh’s power sector sustainable is rapidly narrowing, but there is still time to get the sector back on track by following a suitable roadmap,” he added.