Capacity payment will lead to bankruptcy

Whether policymakers want to admit it or not, the default on payments to producers of energy and electricity alike--- to go by a report published in this newspaper recently--- has grown to stupendous amounts. The root of all these problems lies in an unreasonable agreement of 'capacity payment'. To put it in simple terms, contracts between the government and energy producers, particularly power plants have this built-in clause. Capacity payment is a sort of penalty for the lone buyer of electricity from power plants --- BPDB which is bound by deals to pay to plant owners in the event of failure to buy a certain portion of power readily available with them.

Let's look at some data. Dues owed to Adani Power Jharkand Ltd. (APIL) stood at US$300 million in September, 2023 has now doubled to $600 million over the course of six months. Since Bangladesh is in the middle of a dollar crunch, the Bangladesh Power Development Board (BPDB) can only pay nominal amounts on its dues, and this is compounding the problems. The same situation exists with independent power plants (IPP) and the failure to clear dues is merely increasing the debt. Recently introduced government bonds (totalling a little over $1.0 billion) has helped defray some of the debts owed to power producers, but that hasn't helped APIL, so the problem of dues remains.

Capacity payments remain for a large portion of the power generated to the tune of a little more than 11,000 megawatts (or nearly half the total power generating capacity in the country) and this is dragging down the economy and its foreign exchange reserve. The Quick Enhancement of Electricity and Energy Supply (Special Provision) Act, 2010 was formulated to specifically bypass comprehensive tenders. That landed Bangladesh in murky waters where deals were struck keeping details of provisions for payments owed to winning companies for power to be supplied to the national grid. What had been a piece of legislation enacted to mitigate a short-term problem turned into the national energy policy of the country spanning the last one and a half decades.

Despite public pronouncements at policy level about rescinding the clause in new contracts, facts contradict this. There are instances of renewal of power plants' contracts keeping the capacity clause intact despite a general economic downturn since the pandemic. Why? Because the Special Act remains in place. That Act, with its no questions asked clause, allows for policymakers to continue with the provision. As there is no transparency or accountability to parliament or to the various stakeholders (consumers of electricity), the practice continues to the detriment of the national interest and the national exchequer.

Today, 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. This is unsustainable from a financial point of view. The government has spent Tk 1.05 trillion in capacity payments to power plants owners until August last. As pointed out by Professor Tamim, a leading energy expert in the country, "some vested interest-groups invent inflated power demand to mint money." That sums up the process of squandering public money.

What is alarming to note here is that capacity payment has been extended to cover LNG-fired power plants too. This is rubbing salt in the wound. The IPPs are going to get squeezed further. Before they were getting some payments, now the pot of payments just got squeezed further. The first LNG-fired power plant went into operation a few months ago, "but the plant has been kept idle for most of the days over the past two months since its commercial operation date (COD) was registered" according to a senior power official. Since the BPDB hasn't purchased electricity from this power plant, capacity payment has kicked in and the debt is mounting. As things stand now, the government is bound to keep paying the capacity charge to IPPs, rental, quick rental (oil-fired) and coal-fired power plants.

It is amazing to see policymakers continuing to shoot themselves in the foot, despite knowing that this cannot continue indefinitely. The government is bound by its commitment to the IMF-bailout package to maintain a threshold on its foreign exchange reserve. That is non-negotiable. Yet, it continues to add more power generation capacity (where there is no need), renew contracts with existing power plants and basically hope for some miracle to happen whereby a large gas reserve discovery will happen soon. Consumers at every level --- industry, agriculture, residential ---continue to suffer due to the meaningless upward revisions of power as cost of production of energy has become unsustainable. The current policy will end up in bankruptcy.

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