Phase out quick rental plants

The World Bank has recommended phasing out the quick rental power plants and stopping payment to firms out of production to ease the government's subsidy burden as it has started renewing the contracts with the firms.
“To date some contracts have been renewed on a 'no power no payment' basis, while some rental prices have come down, more should be done to reduce the cost of rental power and eventually phase it out,” said the bank in its latest Bangladesh Development Update released earlier this month.

It also suggested hiking the prices of gas, electricity and petroleum products to cut the huge amount of subsidy, which was 0.1 percent of the GDP in the fiscal year 2009, compared to 1.7 percent in FY 2013.
Bangladesh has made good progress in addressing electricity shortage, said the global development cooperative. “The policy priorities are to boost new base-load supply, promote efficiency across the value chain, diversify fuel mix to enhance energy security, and reduce the fiscal burden through better alignment of retail prices with unit costs,” it added.
The government, said the report, went for quick rental solution to the power crunch in the country a few years ago, which had threatened to derail economic growth.
To provide electricity on an emergency basis, the government had signed 3-5 year contracts with private suppliers for 2,300 MW of generation capacity in diesel or furnace-oil fired rental plants. While these plants came on-line rapidly, they are less fuel-efficient than large coal or gas fired plants. Moreover, since the contracts signed were quite generous, the power they supply is expensive, according to the WB study.
It found that the change in the generation fuel mix over 2010-2013, with liquid fuel moving up from 5 percent to 28 percent of peak generation, has significantly increased the average cost of electricity.
In FY 2009, the average production cost of electricity was Tk 2.55 per kilowatt, which rose to Tk 6.7 in FY 2013.
According to government data, the subsidy on power and fuel was more than Tk 20,000 crore in the last fiscal, which was Tk 2,100 crore in the FY 2010.
Though the subsidy on the rental power plants has been huge, the government has decided to extend their tenures by five more years.
A Power Division official said as per the Power System Master Plan 2010, the country's demand for power in 2021 would be 24,000 MW.
The government will have to wait until 2018 to implement any coal-based base load power plant. For this reason, the government has decided to extend the tenures of the quick rental power plants.
At present, there are around 22 diesel and furnace oil-based rental power plants in the private sector. In the last six months, five of them have got contract extensions from the government for five more years each. The contracts of the other producers are still on.
The terms and conditions in the new contracts have remained unchanged, except for slightly lowering the purchase price of electricity from those plants. Three of the new deals have seen around 8 percent cut in purchase prices on an average.
The Power Division has introduced “no power, no payment” clause in its renewal contract with the British power producer Aggreko, but this clause would not be applicable for all.
Zahid Hussain, lead economist in the Dhaka office of World Bank, said as the rental power plants do not have any capital cost now,  the “no power, no payment” provision should be introduced.
Presently, if any rental power unit remains closed for any reason, the government has to pay the firm for 60 percent power it could have produced during that period.
On hiking energy prices, Zahid said as there is energy crunch in the country, the prices should be raised to ensure its optimum use. The loss to economy caused by this can be recovered through ensuring a better macro-economic management, he added.
Two meetings of the fiscal coordination and resource committees in last month decided in principle to bring down subsidies on power and fuel gradually, said a finance ministry official.
In the current FY, the allocation for subsidy on power and energy was more than Tk 13,000 crore. However, it will be slashed to Tk 11,900 crore in the revised budget.
The government plans to bring it down to Tk 10,800 crore in the next FY.
The subsidy on petroleum will come down this fiscal year due to political unrest in the country, which seriously disrupted transportation leading to low use of petroleum.
The ministry official said no decision has been made yet about how the prices of power and fuel would be adjusted to cut the subsidy. Other than price adjustment, the government will take several measures to cut back on subsidy.