Fixing the power problem
Mamun Rashid suggests a prescription for what ails the power sector
Bangladesh's power sector has gone through much debacle and discussion since 2001, but no effective steps were taken for capacity addition. The concerned authority did not pay much heed to the development of this sector since 2001, although demand has persistently grown by about 10% per year. Mismanagement and shortsightedness have pushed the sector to dire straits.
Present power situation
Without going much into the debates, let us look at what we have to deal with now. The current peak demand for power is about 5,200 MW, against an available supply of about 3,500 MW. Of the total 97 power units about 30 are 20+ years old, resulting in lower production capacity. This means that the capacity of the public sector producers is diminishing day by day due to plant age, improper maintenance and unavailability of funds for capacity addition. While mismanagement is a common term oftentimes attributed to the public sector entities, in reality, there is only so much that the public sector entities can do in the absence of proper policy guidelines.
It is estimated that, despite the current level of production and assuming an uninterrupted gas supply, there will still be a deficit of more than 2,000 MW. Most of the deficit will be passed on to the residential sector since factories and commercial activities have to run to keep the economic wheel rolling. It is worth noting that more than 1,500 MW of electricity is consumed by the steel and related sectors, commercial billboards and shopping malls. Greater Dhaka alone consumes around half of the electricity, while the vast majority of the remaining consumption takes place in the east zone of the country.
We understand that the Power Division has devised a detailed plan to increase production of electricity over the next few years. As per plan, electricity production is expected to increase by 675 MW by June 2007, totaling to 958 MW by December. This incremental power is likely to be added from plants that are now undergoing overhaul, being constructed, in the process of being rented, or from captive power plants. While plant age remains a big challenge and unplanned plant shutdown may not be avoidable, load-shedding plan will be required to maintain a reasonable level supply across various consumer segments.
We believe that 2007 will be a milestone year, when the government will at least be able to put together an actionable plan and award a couple of projects through a credible and transparent process, and demonstrate that it is possible to add another 5,000 MW to the national grid in the next few years. History tells us that financing has never been a problem for competent entrepreneurs or entities anywhere in the world.
Backdrop of the power problem
Power crisis has always topped the list of priority agendas of every regime. Demand has gradually increased over time, and government had to facilitate addition of power to the national grid. Bangladesh Power Development Board (BPDB) was the sole producer of electricity since independence and, for the first time, in 1996 we saw the independent power producer (IPP) model coming up. In the first round, three barge-mounted power plants (BMPP) followed by two land based larger plants, and in the third round three 10 MW plants in the private sector and 460 MW capacity in the public sector were added. In total, an incremental 1,750 MW was added to the national grid during that period. Also, the country received one of the best bargains from Haripur and Meghnaghat power plants.
However, between 2001 to 2006, GOB has added only about 200 MW of new generation capacity, creating the prevailing huge demand supply gap. It is reported that there is captive generation capacity of about 1,500 MW, if not more, in the private sector. These plants have emerged due to insufficient supply from the national grid. These smaller plants oftentimes are not as efficient as larger plants, and have contributed to the import of fuel. One thing that must be highlighted is that Bangladesh has built up enough transmission lines over the past few years. Therefore, generation of power remains the major problem at this moment.
Impact on the economy and root causes
As the Bangladesh economy is fast growing, and the share of industrial activities is increasing in the GDP profile, demand for power has been growing continuously. Unfortunately, except for road communication, the ingredients for economic development, such as power, ports and infrastructures, were not developed in a timely fashion. This is due to lack of intellectual ability to comprehend and realize the need to develop the basic infrastructure in time. Also, another contributing factor is that the vested interest groups did not let any of the past regimes work independently. Therefore, power crisis is nothing new in Bangladesh, and we have become immune to it. That is on each of our personal counts, but do we know the amount of output loss the country incurs every year due to power outage -- the figure is a staggering $1 billion (more than 1.5% of GDP). The economy could easily achieve about 10% growth rate, if not higher, had there been no power shortage.
If we have to highlight one single cause for today's problems in the power sector, it will be corruption. Corruption at all levels, originating from the political front and then being disseminated into the operational levels. It is not just a single person's decision that has created this giant problem, but an accumulation of many factors over many years. We have succumbed to poor management, failure of strategic thinking and shortsighted plans. On top of these, we are unfortunate because we do not have sufficient technological know-how. Lack of commitment brings an additional dimension to it. While there are many engineers and professionals who are committed to their duties, several others take those a bit more politically and cannot serve purposes beyond their vested interests. The country saw one of the worst ever power crisis in October last year, reportedly the power generation came down to about 3,000 MW against a peak demand of about 5,000 MW. We did not have an effective plan to handle unforeseen events, something we refer to as "Continuity of Business (COB)" plan in business.
The inefficient linkage between project plans and financing plans multiplies the problem. The authorities cannot simply say that they have issued licenses for smaller power plants, but the sponsors could not implement the projects. The sponsors can be taken to task, but this will not solve the problem because the problem originated at the authority's end. How attractive is the small power plant business model from a financier's perspective? Have we ever analyzed it? Tariff is not indexed to foreign currency, a plant's operation does not follow economies of scale due to small size, and most of the sponsors do not have an understanding of the power business. Hence, we have not seen much of activity in the small power plants initiatives. The plants are okay if used for captive consumption. The captive operators had to raise their existing balance sheet to find lenders, however luck did not favour the sponsors who wanted to have a smaller power plant solely for business purposes. The situation is somewhat similar to what happened in the private PSTN (Public Switch Telephone Network), or land-phone, initiative in the telecom sector.
Looking into the future for solution
According to the Power System Master Plan (PSMP), the base load demand for electricity will be about 7,000 MW by 2011, and by that time about 600 MW of present generation capacity may become unusable. It is estimated that an additional 5,000 MW needs to be added, but the process has to start right now because it takes a minimum of about 2 years for a plant to go into commercial operation from the time of bidding.
We are already in a deficit situation, and demand for power will continue to rise. Since it takes about 2 years to get an IPP into operation we need to plan for about 5,000 MW of generation capacity, and this should be added to the grid within the next 2-3 years. We understand that the government is working toward a roadmap for adding 2,000 MW capacity over the next few years, however it may not be enough. The government has to fast- track the process for speedy execution in the near future. Several project sites have been identified, and it is time to start the process of bidding without any delay. The present government has a far greater challenge to handle than the earlier political governments, because of the public expectations that have been generated in the meantime.
The task of adding 5,000 MW is not impossible. Bangladesh has a robust IPP model in place, and sufficient feedstock backed by demand for power. However, just a word of caution -- while we would like to bring ourselves upto the standard of Malaysia, Thailand, or Hong Kong, we must not do that by giving up control over our own natural resources. Even if it is done in a small way, it must be done with total transparency, keeping the country's long-term interest and capacity planning in perspective. For exploiting the potential in the power sector, we need a long-term plan for gas sector development also, most of our existing and pipeline plants being gas driven.
A human resources plan has to be in place. The public and private sector universities have to produce adequate numbers of engineers, financial analysts, managers and specialists. The environment should promote development of people and their skills. Power plants are complex engineering systems that have electrical, mechanical, chemical and civil engineering components. The October shutdown of power plants shows that the responsible people lack expertise, and proved the fact that only negligible technical know-how transfer has taken place in the power sector.
We must look for renewable energy sources. Infrastructure Development Company Limited (IDCOL) has done a fantastic job by providing 100,000 solar home systems in the rural areas through NGOs. IDCOL provides both grant and loans to the NGOs for the purpose. This is a success story that can be replicated in other parts of the country.
The government is currently examining the possibility of producing power in Myanmar and bringing it to Bangladesh. Myanmar would require Bangladesh to supply 30% of the generated power to the consumers of Myanmar, which will leave 70% for Bangladesh. This will require cross-border transmission lines, and the whole process will take several years to complete. Political risks of such initiatives should be closely examined. Some of the risks can be mitigated by making stronger countries, such as United States and China, co-financiers in the project thereby having them as stakeholders, or by purchasing political risk insurance from multilateral agencies such as MIGA. A regional power grid to transmit power from surplus segments to deficit segments should be actively explored, including an access to regional power trade. We must look forward and try to plan for the next 25 years. Short-term crisis management is important, but without a long-term plan we will again fall into the same trap.
An important task is to convert the public sector entities into limited companies, and to allow them to live on their own. The process of tariff setting should not be politicized. There should be a mechanism in place, not just political impulse. Power tariff was last raised in September 2003. The PDB sells per unit of electricity at Tk 2.17, while its production cost is Tk 2.42. It is said that the actual cost of taking electricity to the consumer is much higher. The new tariff that comes into effect from March 1 should reduce the losses incurred by the related entities. The government should consider the increased cost of all products and services while increasing the power tariff(especially for the commercial power), as well as the trickle down effect of increased cost of production on the overall economy and the people.
Bangladesh has a sufficient amount of gas, good amount of high quality coal and some amount of hydro capability that can be diverted into production of electricity. The hydropower source that we have got has certain limitations; however the potential of coal is yet to be fully explored. The major commercial energy resource that supports power generation in the country is natural gas. About 70% of power generation is dependent on it. As per the forecast of Petrobangla, the total remaining gas reserve (July 2005) of 13.75 Tcf can meet the country's projected energy demand up to 2015. After that, each year there will be short supply of gas, and this would increase to 4,421 mmcfd by 2025. This means that, to support the projected energy demand, 8.35 Tcf of additional gas would be required. This shortfall in gas will have to be managed either by discovery of additional gas fields, or alternative sources of fuel. Coal discoveries in the northwestern part of the country may help to combat the shortage of gas, with total estimated mineable reserves of 1400 million mt representing approximately 37 Tcf of natural gas in terms of heat value. But to supplement the huge shortage of gas based power only underground mining would not be enough, as coal production from an underground mine is limited and cannot be quickly increased. The only alternative, therefore, is to go for large scale opencast mine with high annual outputs.
System loss and theft currently stand between 20-25%. This should be further lowered to increase revenue for the government. Active monitoring and reducing the opportunities for corruption among officials would help bring it down.
South Asia's commercial energy mix is 44 percent coal, 35 percent petroleum, 13 percent natural gas, 6 percent hydroelectricity, 1 percent nuclear, and 0.3 percent "other." There are significant variations within the region. Bangladesh's energy mix, for example, is dominated by natural gas (70 percent), while India relies heavily on coal (52 percent). Sri Lanka and the Maldives are overwhelmingly dependent on petroleum (84 percent and 100 percent, respectively); Pakistan is diversified among petroleum (38 percent), natural gas (41 percent), and hydroelectricity (14 percent). The Himalayan countries of Bhutan and Nepal have the highest shares of hydroelectric power in their energy consumption mix at 82 percent and 37 percent, respectively.
India is the world's sixth largest energy consumer, consuming about 3% of the world's total energy per year. In the face of growing demand, India's electricity sector faces problems of capacity, poor reliability, and frequent blackouts. However, in India, the top authority tracks the implementation of power policy very seriously. The political parties have come to a consensus regarding the approach to be taken and on the need for urgency. India has taken up seven ultra-mega power projects (UMPPs), which will provide a large portion of the 67 GW additional capacity planned by 2012. The UMPP project has generated adequate interest among the domestic investors. However, for the foreign investors Dabhol remains a precedence to examine. Bangladesh does not have a Dabhol, and all the IPPs are successfully operating without any issues with the government till date.
Malaysia is in the process of completing new PPAs by mid-2007 that may include lower capacity payments for IPPs in return for longer tenures. Domestic gas provides a strong fuel base at subsidized pricing. Strong domestic players dominate the market, despite having the typical requirements to attract foreign investment. Several Malaysian companies are investing outside the country, focusing on Southeast Asia and Middle East.
Vietnam has generated enormous global interest. China's Southern Power Grid Company announced an agreement to build up to 3,000 MW of coal-fired capacity. Thailand has a successful IPP track record, and several new projects are now under consideration. Due to the consistent track record of the economy, business, and the government's commitment, lenders are comfortable with off-taker risk and regulatory environment. Thailand is also looking for alternate and renewable sources of energy to secure its future needs.
There is strong interest in the Asian power sector among both equity and debt providers across the world. Investors are increasingly finding themselves comfortable with the political risk in Asia. Equipment suppliers and export credit agencies are keen to support projects.
There are several issues that a financier would look at. Size of plant, off-taker risk, fuel sources, transmission and distribution, sponsors, construction, as well as political risk. The size of a plant is an important component of the decision-making process because size brings scale. Off-taker risk is the primary concern of lenders. There are several power projects which have proven their strategic and economic importance, but could not get financing because lenders were not comfortable with the off-taker and the political risks. If we look at the issues that concern the lenders most, we believe that Bangladesh will be able to manage them adequately. The government of Bangladesh signs an Implementation Agreement (IA) with the producers that guarantees the effectiveness of power purchase agreement (PPA), gas supply agreement (GSA) and land lease agreement (LLA) -- this model of financing is very robust. If we have the right intention, financing is not an issue.
There are several alternate financing sources that can be availed, such as commercial banks, multilateral, bilateral and export credit agencies, private placement of equity and long-term debt, public offering of shares in both the local and the international capital markets. Each of these financing sources has its own merits and challenges, but a good financial advisor can devise the best possible structure and sources for project financing.
Learning from experience and studying the track record of those countries which have successfully developed their power sector, Bangladesh should also fast-track the process of capacity generation and achieving economic excellence in South Asia. Furthermore, Bangladesh's latent power demand would likely be substantially higher that what the projections say, because improvement in the standard of living of people is associated with an upward movement in per-capita power consumption. This is evident in the fact that Bangladesh's neighbouring countries have much higher per-capita power consumption pattern e.g. Bangladesh 110kWh, India 473kWh, Pakistan 431kWh and Sri Lanka 336kWh. Bangladesh should not be far behind in this consumption pattern in the foreseeable future, if she wants to be in the same league. But, without a concrete action plan the country may be in "darkness," with nowhere to go. It is high time that we move forward with precision for power solutions.
Mamum Rashid is a banker.
Photos: Amirul Rajiv