Lucrative government power plant and LNG terminal contracts that have dollar indexed capacity payments have become a major contributor to Bangladesh’s rapidly deteriorating economic reality accounting for over US$2 billion in annual outlays excluding fuel charges.
With an average contract duration of 15 years with 5% interest, this annual capacity payment outlay is equivalent to over US$25 billion in foreign floating rate debt obligation and must be considered so because the contracts are backed by Bangladesh Government’s sovereign guarantee and are subject to inflation adjustments.
Most of these contracts that were awarded under the Speedy Supply of Power and Energy (Special Provision) (Amendment) Act 2010 noncompetitively bypassing international tenders, obligates the government to pay fixed monthly payments in dollars whether government requires power or energy from the facilities.
Around 65 projects (and counting) in the power and energy sector have been approved under the law, according to the State Minister. On top of fixed capacity payments, private power companies enjoy variable operational and maintenance charges from the government, 9% surcharge on fuel imports (even after getting paid for fuel and freight from BPDB) and zero corporate taxes.
Power companies also receive both local and global inflation adjustments annually on capacity payments. Dollar alone has appreciated over 25% in the past one year benefitting the private power companies tremendously.
It’s about time these companies share some of the pains the people of Bangladesh are experiencing due to global macroeconomic meltdown that has severely impacted international energy markets.
The two LNG terminals alone cost Bangladesh around US$456,000 per day in capacity charges with a third one on the way despite utilization levels of around 30% of the existing ones.
Initially termed as quick rentals with contract durations of 3 to 5 years, government eventually started awarding Independent Power Plant contracts under the same provision for durations ranging from 15 to 22 years.
The Power, Energy and Mineral Resources Ministry, has opted toestablish imported fuel-based power plants, disregarding calls for developing Bangladesh’s own gas and coal reserves. For FY23, the government has earmarked Tk18,000 crore in subsidies for the power sector alone, the amount allocated for LNG imports has increased to Tk13,300 crore.
The total LC settlement value of petroleum and petroleum products stood at $6.67 billion in July-April period of FY22 escalating from $3.3 billion in the same period of FY21, according to Bangladesh Bank.
Several of the local power and energy companies have redomiciled as foreign entities allowing these to transfer government forex payments abroad from Bangladesh’s only major source of forex, our hard-earned migrant worker remittance earnings.
Most governments around the world have done away with power and energy capacity payments. India has a deregulated power sector with energy trading occurring on a digital platform called IEX with power trading at market prices. Bangladesh followed Pakistan in awarding contracts with capacity payments without international tenders. However, Pakistan also has renegotiated these contracts to save valuable foreign currency.
Subsidized energy is distorting pricing of our ultra-low margin exports in international markets. Capacity charges especially, distorts optimal energy dispatch request mechanisms to power stations leaving low-cost government plants underutilized. If we take into consideration actual cost of power production, it is hard to fathom how our exports can contribute to our forex reserves on a net basis.
Before it is too late, the Power, Energy and Mineral Resources Ministry should proactively renegotiate contracts with power plant and LNG terminal owners to establish lower uniform tariffs. It should also eliminate capacity charges in phases and move to a variable cost model. The government should also stop foreign currency indexation and inflation adjustments on capacity payments as debt taken don’t change after establishing projects.
Long-term, government can mobilize BAPEX to revive gas exploration, focus on local coal production and expedite completion of our upcoming nuclear power projects to reduce dependency on volatile and unpredictable international energy markets.
