Gas pricing for captive power
Energy experts and analysts have long been talking about good management in the energy sector. The principal element of good energy management is sound pricing. The importance of pricing has never been fully appreciated in Bangladesh.
Wrong pricing -- over-pricing or under-pricing -- can have many negative consequences, most important of which is excessive use of the cheapest fuel. Energy economists and analysts from Buet, BIDS and CPD have written extensively on fuel substitution, and have talked about the undesirable consequences of severely under-pricing fuel.
The most undeserving beneficiaries of such under pricing are gas based captive power producers resulting from the complete distortion and anomaly in the comparative cost of their power against industries that use grid power. The problem is best illustrated by the data below:
The dramatic increase in the difference between grid electricity and gas based captive electricity is clearly evident. Taking into account all expenses (depreciation, O&M and gas) the cost to an industry that produces its own electricity using gas was Tk. 2.30 in 2009, which has remained static because gas price has remained unchanged. In 2009, the difference between grid electricity and captive power was Tk. 1.55 (a barely tolerable level); because of repeated price increases of grid electricity, in 2014 the difference stands at Tk. 4.90 (an intolerable level). Additionally, it must be remembered that grid power, especially in peri-urban and rural areas, where many industries are situated, tends to be unreliable, sometimes facing long hours of load shedding. Diesel generators have to be used, thus further increasing the total energy cost.
Energy is the prime mover of industry and growth. All industrial units using grid power have suffered from steep increase in power costs. To understand the full impact of this pricing anomaly one needs to look at energy intensive industries. One example is the steel industry. Steel mills require large quantities of electricity to melt scrap steel to produce steel billets. Distortion in the power cost of these two groups -- grid power users versus captive power producers -- has created a difference of Tk. 4,000 in the cost of production of per ton of steel. Other industries using grid power face similar situations of uneven competition. Unless the government takes immediate steps to rebalance costs for all power users, majority of industries will become sick and may eventually face closure.
In a perfect energy market, industries using grid electricity would simply shift to gas based captive power as an alternative to closure. The irony is that this not an option at all, since there is no gas. Therefore, captive power based industries act like a cartel and manipulate the market.
The government itself suffers huge revenue losses by supplying under-priced gas for captive power. Assuming 1,000 MW power is produced from gas based captive generation (excluding fertiliser factories), subsidised gas sales are causing the government to lose over Tk. 10 crores per day when compared to what it could earn from producing and selling power to customers. That is Tk. 3,500 crores per year.
With serious gas shortage in the country, the government had rightly stopped giving new gas connections for captive power but, inexplicably, some new connections have recently been allowed. With a Tk. 4.90/kWh difference in power cost, how can any industry, whose competitors have captive power, be set up? This is an issue government planners have to take extremely seriously. This will certainly dampen new investments in industry. Is this what the government wants and will this help in achieving our goal of becoming a middle income country?
Since the government cannot ensure gas for captive power to industries, the logical course of action would be to rationalise the price of gas for captive power so that a level playing field is created between those that have captive power and those that have to use grid electricity.
Many examples of pricing anomalies that have created problems can be cited. Furnace oil was priced at Tk. 20 per liter for a long time because this was a by- product of Eastern Refinery, and also large quantities of it were available as bunker oil from the ships brought in to be broken down for scraps. In 2009, when the government decided to go for large scale deployment of liquid based power plants, they were forced to increase the price from Tk. 26 to Tk. 60 per liter to cut subsidy. The need to import high grade furnace oil for power plants thus disturbed the equilibrium. As a result, several hundred industries in the western region of the country closed down because they could no longer compete with gas based industries in the region.
Another example is the introduction of CNG at an absurdly low price against the competing fuel (octane), which lured even those with expensive cars to shift en masse to CNG. If the allocated gas for CNG and captive power was supplied to BPDB they could run power plants having thermal efficiencies of 55% and more. The generated electricity would have benefited all industries and not just a handful of fortunate ones.
The government has achieved great success in power generation, and we are near self sufficiency in meeting our current power requirements. Huge new investments are in the pipeline for setting up large power plants. The time has come for the government to seriously rethink whether captive power generation, with heavily subsidised gas price, can be allowed to continue? While it evaluates its long term strategy on captive power, it must adopt some immediate measures:
* Rationalise and rebalance gas price for captive generation to bring parity in power prices with grid power users;
* Establish the principle of linking future rises in grid power costs with matching rises in gas tariff for captive generation to maintain parity;
* Stop providing new connections for gas based captive power generation.
After all, why should the government give away Tk. 3,500 crores per year to a limited few and severely weaken and damage the industrial base of the country?
The writer is Professor, Department of Chemical Engineering, Bangladesh University of Engineering and Technology.