What the power sector budget should look like during a pandemic

The budget for fiscal 2020-21 is said to be one of the most challenging financial bills in Bangladesh's recent history.

The severe fiscal constraints confronted by the government due to the pandemic would make it difficult to implement the budget as per target.

It is expected that each of the budget implementing agency will reprioritise their respective budget allocation and will rationalise their expenditure given the government's limited fiscal space.

Since the power sector is one of the most priority sectors in the national budget, it has a vital role to play in achieving the changing budget priorities.

Unlike the national budget for earlier years where allocative priorities are set for development of generation, transmission and distribution system of the power sector, this year's priority should be set for rationalisation of sectoral budget allocation and contribution towards revenue mobilisation.

The rationalisation of the power sector budget allocation has been further reinforced because of the growing financial burden on the power division owing to excess electricity generation capacity, which has increased further during the pandemic.

An analysis of the budget allocation for the power sector in fiscal 2020-21 will help to understand what kinds of reprioritisation of budget allocation and rationalisation of expenditure will be required during the year and beyond.

FINANCIAL CHALLENGES CONFRONTED BY THE POWER SECTOR

The growing financial burden is a major concern for the power division due to excess generation capacity (technically, it is reserve capacity) developed over the years.

For instance, on 16 June, the amount of overcapacity was 59 per cent (9,437 megawatts). As a result, a large number of power plants were sitting idle.

On 17 June, as many as 45 power plants were unutilised. Such underutilisation of power plants makes the Bangladesh Power Development Board (BPDB) pay a minimum capacity payment to individual power producers.

The capacity payment in fiscal 2017-18 was Tk 6,341 crore, which jumped to Tk 8,929 crore in fiscal 2018-19.

Within nine years, capacity payment has jumped as high as 398 per cent (it was only Tk 1,790 crore in fiscal 2009-10).

With the rise in capacity payment, the entire subsidy taken from the government was needed to spend on meeting that payment.

For example, during fiscal 2018-19, the amount of capacity payment was Tk 9,500 crore, which was almost equivalent to the amount of subsidy received by the power division in fiscal 2018-19.

A large share of BPDB's expenditure is associated with the purchase of electricity from independent power producers and quick rental power plants.

Purchase of coal is another major head of expenditure.

The financial burden has been increasing because of the huge amount of import of fossil fuel every year.

The import cost for petroleum has significantly increased in recent years, which was as high as $4.5 billion in fiscal 2017-18 and $4.1 billion in fiscal 2018-19.

However, during the pandemic, the prices of crude oil and petroleum products declined significantly, which would be a partial relief for the BPDB in lowering its import payments for primary energy.

Little effort is made to reduce dependence on fossil fuel-based power generation, which could significantly reduce import cost for primary energy.

POWER DIVISION'S ALLOCATION IN FISCAL 2020-21'S BUDGET

The budget for fiscal 2020-21 has allocated Tk 24,853 crore to the power division, which is 4.9 per cent higher than the revised budget for fiscal 2019-20.

More than 99 per cent of this budget is allocated for ADP projects to implement 88 projects.

The majority of these projects will be 'continuing' projects (40.6 per cent of the total allocated budget), followed by 'carry-over' projects (28.4 per cent) and 'concluding' projects (31 per cent).

Of these, only 18 projects will be completed/near to completion in fiscal 2020-21, where one-fifth of the total budget will be used.

The carry-over projects (27) would make better progress during fiscal 2020-21, though few of those projects would not be more than 60 per cent complete.

The highest number of projects to be 'completed' (10) will be 'concluding projects'.

As many as 25 'concluding projects' will not be completed on time, which accounts for 71.4 per cent of the total projects.

REPRIORITISING ALLOCATIVE PRIORITIES OF THE POWER SECTOR BUDGET

Given the surplus generation capacity, less priority should be given to fossil fuel-based power generation projects.

As high as 19 power generation projects will be implemented during fiscal 2020-21, where the significant allocation of the budget has been earmarked (Table 1).

Such allocation will help to complete several fossil-fuel projects during the fiscal year, which need to be deferred.

These projects include the construction of Bibiana-3 400 megawatt (MW) combined-cycle power plants (CCPP) and emergency assistance projects for Bangladesh Rural Electrification Board.

This 400 MW CCPP will be completed with an allocation of Tk 535 crore, of which Tk 40 crore will be financed from domestic sources.

Besides, one coal-fired and one furnace oil-based power plant projects will receive a significant amount of allocation.

Both of these projects could be deferred, and resources could be saved for using alternate purposes.

A total of Tk 147 crore has been allocated from the revenue budget to conduct a feasibility study for the establishment of a coal-fired power plant.

This project should be cancelled, and resources could be used for alternate purposes.

Allocation of Tk 124 crore could be saved from the revenue budget if setting up a power generation plant could be deferred.

Similarly, Tk 578 crore of the revenue budget could be saved if the implementation of a coal-fired power plant could be deferred, which will be jointly implemented with project support of Tk 3,092 crore in fiscal 2020-21.

The government should rethink its earlier decision of financing coal-fired power plants as well as seeking funds from development partners for establishing coal-fired power plants.

An allocation of Tk 250 crore has been made for land acquisition and land development for a coal-fired power plant, which could be cancelled.

Similarly, the investments made for land acquisition (Tk 160 crore) for a coal-fired power plant and for conducting for a feasibility study (Tk 5 crore) for another coal-fired power plant should be cancelled.

The decision to defer and cancel selected generation projects would release about Tk 914 crore from the revenue budget and Tk 2,507 crore from foreign aid in fiscal 2020-21.

Allocative priorities should be given to transmission and distribution related projects to upgrade the related infrastructure.

Among 26 transmission projects to be implemented this year, only five projects get sufficient allocation for completion in fiscal 2020-21.

However, another six are 'carry-over projects', and six are 'concluding projects', which would be completed in full if an additional allocation is made for these projects.

Similarly, out of 39 distribution-related projects, only nine projects received an allocation for completion this fiscal year.

Another nine 'carry-over projects' and 12 'concluding projects' could be completed at the earliest if sufficient allocation has been made. 

A mechanism needs to be developed to reduce the excess installed capacity beyond the officially declared level of reserve capacity (25 per cent).

The estimated excess capacity is amounted to be 6,893 MW. Gradual retirement of quick rental power plants (1,920 MW) would be the first step to reduce the over-generation capacity.

Besides, power plants operate with a very low level of efficiency could be retired and the burden of overcapacity could be reduced accordingly.

In this connection, 6,159 MW worth of power generation plants currently at different levels of implementation needs to be deferred or cancelled.

A fresh outlook is needed for renewable energy-based power sector development in Bangladesh.

At present, four solar and one hydropower projects generate 300 MW worth of electricity.

Similarly, a limited number of renewable energy-based power plants are in the pipeline.

Under the public sector, only three projects are currently in the pipeline with a combined capacity of 162.5 MW.

Under the private sector, the renewable energy projects would add a generation capacity of 2,024 MW.

Another 927 MW worth of renewable energy projects has received the LOI/NOA/completed tender process.

The government should take the initiative to popularise the net metering system and increased use of rooftop solar power system. 

More investment is needed for technological improvements for developing longer duration power storage battery.

In this connection, incentivising renewable energy-based projects at the private sector could help popularise its use even at a small scale (e.g. rooftop, school, and so on).

The government should renegotiate with development partners or the private sector regarding redirecting project aid from implementing generation-related projects to clean-energy, efficiency-enhancing, and transmission and distribution-related projects.

Specific negotiation needs to be launched with those development partners and foreign direct investment-led initiatives that are funding coal-fired or fossil fuel-based power plants to redirect their investment towards clean-energy based power plants.

Khondaker Golam Moazzem is the research director and ASM Shamim Alam Shibly is a programme associate of the Centre for Policy Dialogue