The first part of a two-part series titled Adequate power generation fuels economic growth
Shortage of power supply can be a binding constraint to economic growth: Bangladesh came face to face with this grim reality at the turn of this century. It took a decade to launch a robust programme aimed at curbing power shortage. It began to make headway under the present government that came to power in 2009.
Since then till 2017, Bangladesh has made commendable progress in power generation. According to Bangladesh Power Development Board (PDB), installed generation capacity, including captive power, as of December 2017 amounted to (13,846+2,200) = 16,046 MW. This is three times greater than the volume eight years back. Around 90 per cent households now have access to electricity compared with less than 50 per cent in 2009.
Despite this impressive progress, the power sector in Bangladesh still faces numerous challenges for the long term. The per-capita electricity generation, amounting to 433 kWh, is the lowest among all other South Asian countries and thus fails to facilitate sufficient economic growth. On an average, there is a daily power demand of 10,000MW against a daily power generation of 8,000MW (as of May 2018). With load-shedding problem becoming acute over the past few years, Bangladesh is definitely suffering from energy deficiencies.
Power shortage discourages investors who fear about increasing cost of doing business. Nevertheless, the country's current rate of growth is above 7.0 per cent per annum. This indicates that Bangladesh maybe a unique case among developing countries.
COMPARISON WITH OTHER EMERGING NATIONS: Bangladesh suffers from serious seasonal and intermittent shortages in power during the months of summer. It is the least per-capita electricity consuming economy among many other emerging nations. It is on its way towards graduation from Least Developed Country (LDC) status. It also aspires to become an upper middle-income country by 2031 and a high-income country by 2041. But achieving such growth target with the current rate of electricity consumption will be extremely difficult. In 2017, per-capita electricity consumption in Singapore was 17 times and in Malaysia and China 10 times higher than Bangladesh. The Bangladesh economy needs to increase its electricity consumption.
The global demand for electricity is increasing rapidly. This increase in demand is expected to be driven mostly by the emerging South Asian economies. According to the International Energy Agency (IEA), the overall power demand in Asia is projected to increase by 64 per cent between 2010 and 2035. Managing the energy and electricity demand in Asia is thus an important factor for achieving sustainable economic growth for the world at large.
Bangladesh exceeds in generating electricity when compared to Bhutan, but falls far behind India and Pakistan. However, with considerably high density of population the country's peak demand (among the population having access to electricity, i.e. approx. 90 per cent in 2018) is also high. Nevertheless, higher power generation does not result in surplus generation. Bhutan produced a surplus of 1,387 MW of electricity from 1,749 MW of maximum power supply during 2017. But Bangladesh ended up with a deficit of 689 MW from 9,011 MW of power generated in the same year. On the contrary, India and Pakistan generated significantly higher amount when compared with Bangladesh, but their shortage was also high. If the deficit to generation ratio is compared, it will be revealed that the figure was much larger for Bangladesh than India in 2017. Thus, Bangladesh seems to suffer more from power deficiency than its Asian counterparts.
Power production per billion dollars of gross domestic product (GDP) is also lower in Bangladesh (56 MW) when compared to Bhutan (783 MW). Although the Bangladesh economy shows signs of progress by surpassing Sri Lanka and Nepal, it is yet to reach the level of India and Pakistan.
WHY IS BANGLADESH FALLING BEHIND? The country's growth and development are at stake due to shortage of electricity. There is a significant discrepancy between installed capacity and maximum generation, and the situation is deteriorating. However, capacity expansion is not the only solution when poor generation, transmission and distribution networks result in frequent load-shedding across the country. Despite having sufficient generation capacity, Bangladesh is unable to serve the actual demand due to transmission and distribution bottlenecks. These losses were, however, reduced from 17 per cent to 12.2 per cent between 2009 and 2017. More investments are required in the transmission and distribution channels to curtail power leakages and ensure uninterrupted power supply to all.
The country's over-reliance on gas-fired power station is another major challenge. Due to the dependence on natural gas, this non-renewable source of energy is gradually depleting. Moreover, the gap between the average cost of electricity production and average selling price remains large causing huge supply constraints in electricity. Bangladesh's average household electricity tariff is at present US cents 9.84 (Tk. 8.14) per unit (1 kilowatt-hour), which is US cents 12.5 in India, US cents 15.48 in Nepal, US cents 17.36 per unit and US cents 11.05 per unit in Sri Lanka and Pakistan. The household electricity tariff is lowest in Bangladesh. This is because the power sector in Bangladesh is highly subsidised. Electricity pricing and subsidy continue to pose substantial policy challenges for the government.
POWER DEMAND FORECAST: If Bangladesh aspires to reach the goal set by the government in its Perspective Plan to achieve the upper middle-income status by 2031, its economy must keep growing at a rate higher than 7.0 per cent. Also, by FY2031 it has to achieve 9.0 per cent growth as per the projection of the Perspective Plan of the government. Achieving such growth consistently requires a massive surge in production, which in turn requires higher generation of electricity. Based on the goals set in the Perspective Plan, the peak-power demand using the GDP-elasticity method was estimated.
The term "elasticity" is most commonly referred to as sensitivity or responsiveness. It is generally used to quantify the response in one variable when another variable changes. For developing economies, one per cent increase in gross national income (GNI)/GDP leads to 1.1-1.5 percentage point increase in electricity demand. Whereas, in high income developed countries it is lower than 1.0. This is because in a rapidly developing country like Bangladesh, it is expected to achieve a large increase in income of the households in the next decades. The income elasticity for Bangladesh is 1.5, which is high. As for services like electricity, higher disposable income is expected to increase the consumption through greater productivity and purchases of electricity-using appliances in both the short and long run. This suggests that even to keep up with the current average real growth rate of 7.0 per cent, electricity supply needs to grow at more than 11 per cent per annum. In the event Bangladesh achieves the targeted growth rates of 9.0 per cent or more as envisaged in the Perspective Plan, the supply of electricity has to grow above 11 per cent until FY20 and it must keep on growing at 9.5 per cent on an average until FY31.
The maximum power demand during FY2017 is considered as the baseline for forecast. The peak power demand in 2017 was 9,700 MW and the subsequent years' demand is projected accordingly. As the country gradually transforms from low to middle-income country, the income-elasticity for power demand steadily falls from 1.5 to 1.0. The forecasted peak power demand would reach 36,794 MW with the GDP growth rate of 9.0 per cent in FY2031. That is nearly four times the current peak demand.
Noor A Ahsan and Nuzat Tasnim Dristy are senior research associates at the Policy Research Institute of Bangladesh (PRI)
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