Bangladesh's power and energy sector is caught in a financial squeeze as it is grappling with massive debts, and unpaid domestic as well as foreign bills.

On one hand, the Bangladesh Power Development Board (BPDB) is struggling to settle electricity bills worth Tk 250 billion with private power plants that are already operational.

On the other hand, the ongoing dollar crisis is forcing the PDB to prioritize foreign debts. This includes a Tk 80 billion gas bill owed to Petrobangla, a USD 500 million (Tk 55 billion) debt to Adani of India, and a USD 200 million (Tk 22 billion) payment due to Chevron, a US gas extraction company.

The situation is further complicated by outstanding dues owed to other sectors by the power and energy sector.

This debt burden is eroding the trust of energy suppliers. With mounting outstanding dues, they are hesitant to enter into long-term fuel supply agreements, leading to delays in deliveries.

Additionally, contractual fines for late payments and increased bank fees for opening new import credit lines (LCs) further strain the sector's finances.

This situation coincides with the beginning of summer, a time when Bangladesh experiences scorching heatwaves and requires more fuel to operate power plants. Increased imports of gas, coal, and fuel oil are crucial, but the dollar and taka crunch raises concerns about securing sufficient supplies to avoid power outages like those experienced last summer.

Despite acknowledging the challenges, State Minister for Power, Energy and Mineral Resources Nasrul Hamid assures the public of ongoing efforts to resolve the crisis.

He points to recent dollar inflows and ongoing payments of outstanding dues. The government is also exploring options like issuing bonds to settle debts with private power plants, while foreign debts will require securing dollar reserves.

How has the debt crisis deepened?

Compounding the financial woes, the government sells electricity below production costs. The Ministry of Finance bridges this gap by providing subsidies. However, due to insufficient revenue collection, these subsidies are often delayed.

The situation is further exacerbated by rising subsidy costs. This is partly due to "capacity charges" – fixed payments made to power plants even when they are idle.  The finance ministry is unhappy with this rising expense, with capacity charges for public and private plants reaching Tk 260 billion in fiscal year 2022-23.

Limited dollar reserves pose another significant challenge. Bangladesh's reserves have dwindled from over USD 48 billion to USD 19.8 billion, falling short of even the recommended minimum of USD 20 billion according to the International Monetary Fund (IMF).

According to the December estimate of Bangladesh's Power Development Board (BPDB), they owe private power plants a staggering Tk 250 billion. This debt has accumulated as the Ministry of Finance, facing its own financial constraints, has been unable to provide the necessary subsidies.

It's important to note that Bangladesh's power sector is a mix of public and private power plants, with the BPDB responsible for purchasing all the electricity generated.

In an attempt to address the situation, the government has begun issuing bonds, essentially financial instruments similar to savings certificates. These bonds, totaling Tk 120 billion, aim to clear outstanding dues in the power and fertilizer sectors.

However, the rollout has been slow, with only Tk 20 billion distributed to power plants so far. Imran Karim, former president of the Bangladesh Independent Power Producers Association, emphasizes the urgency of releasing the remaining funds, as delays could jeopardize power plant operations during the potentially extended summer season.

Further complicating matters, the BPDB is struggling to secure the necessary dollars for importing coal and fuel oil, crucial for power generation. By the end of last year, they had already spent USD 3.73 billion for the first half of the fiscal year (2023-24), with projections indicating an even higher demand in the coming months.

Unfortunately, dollar shortages are hindering the BPDB's ability to pay for these essential imports, leading to further disruptions in power generation.

The problem with capacity charge

Experts point to the country's heavy reliance on imported fuels as a root cause of the crisis. They argue that the government should prioritize domestic gas exploration instead of solely focusing on imports.

Currently, 83 power plants are running in the private sector with a capacity of 10,750MW. At least 44 of them are run on diesel and furnace oil with a capacity to produce 4,694MW of electricity.

As many as 28 plants in the private sector are gas-based and able to produce 4,019MW of power. While the power demand is high, almost half of these plants are not using their entire production capacity.

In total, all the power plants have the potential to produce 26,000MW of electricity, but currently only generate around 14,500MW. This falls short of the national demand, which ranges from 15,000MW to 17,000MW, resulting in an average deficit of 1,500MW.

Besides, transmission line issues further complicate matters by hindering balanced electricity distribution across the country.

Bangladesh's electricity dilemma can be attributed to a financial squeeze, according to Mohammad Hossain, Director General of Power Cell.

“The root of the problem lies in the gap between electricity's selling price and its production cost for the Power Development Board (PDB). This has resulted in a growing financial deficit, currently standing at Tk 410 billion,” he told Bangla Outlook.

“Previously, government subsidies bridged this gap. However, due to global economic challenges impacting Bangladesh, the government has implemented austerity measures, limiting subsidies,” he added.

Prof Shamsul Alam, energy advisor of the Consumer Association of Bangladesh (CAB) told Bangla Outlook that whether policymakers want to admit it or not, the default on payments to producers of energy and electricity alike has grown to stupendous amounts because of huge 'capacity payment'.

Alam said Bangladesh is in an unenviable position of having too many power plants with too many contracts to produce power, which it doesn't need. “But thanks to the guarantee of 'capacity payment', IPPs and other producers of energy continue to enjoy government largesse,” he said adding that the government has spent Tk 1.05 trillion in capacity payments to power plants owners until August last

“We have to keep in mind that a substantial portion of generated power (over 11,000 megawatts, nearly half the national capacity) falls under these capacity payments. This drains financial resources and puts a strain on Bangladesh's foreign exchange reserves,” he added.