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CPD Suggests Four Strategies To Reduce Electricity Subsidy

13 March, 2024:

The Center for Policy Dialogue (CPD), a non-governmental research organisation, has chalked out four key strategies, with special emphasis on transparent pricing policies, for the government to adopt in order to mitigate the impact of escalating electricity expenses beyond 2029.

The strategies include ensuring the phased shutdown of power plants targeted by the government; avoiding any new capacity charges; imposing ‘no electricity, no payment’ conditions for electricity purchases, and competitive initiatives to procure electricity through open tenders.

CPD also made a call to boost the use of renewable energy sources while charging consumers a minimal fraction to counter price inflation, during a media briefing titled “Recent Electricity Price Increase: Are There Alternative Options for Affordability?” held at the CPD office in Dhaka today (13 March).

Speaking at the briefing, CPD Research Director Dr Khondaker Golam Moazzem said, “The increase in capacity has outpaced the growth in electricity consumption significantly. While capacity has surged by double digits, consumption has only seen single-digit growth. This disparity has been widening since 2018, posing a significant challenge with capacity payments becoming a major concern for the government.”

The think tank highlighted that, despite substantial subsidies, the power generation sector continues to incur losses due to procedural and policy weaknesses.

The losses stem from procuring electricity at high costs, with prices determined by the fuel type used in generation. Using LNG, furnace oil, and diesel for electricity production has led to price hikes, fueled further by the elevated international fuel prices, thereby escalating electricity costs domestically.

Dr Moazzem blamed the absence of competition in electricity purchase for the soaring prices.

“Procurement of power in our country doesn’t involve any tender process; pricing here is negotiated,” he said, adding that transitioning to competitive tendering promptly could lead to cost reduction.

He further stated that in the 2022-23 fiscal year, the government provided Tk39,500 crore in subsidies for electricity. During this time, capacity payments were nearly equal.

In November 2023, CPD conducted a survey on one thousand households, with low-income households being the majority. According to their data, as the government increases electricity prices, the average household’s electricity-related expenses will increase by 9.50% each time.

Households that paid Tk1,200 for electricity bills in 2023 will now have to pay Tk1,315 at the new rates. Bills for households are increasing from Tk106 to Tk118 on average.

Furthermore, due to the new rates, SMEs will see an increase of 9.12%, businesses by 9.7%, and industries by 10%.

Despite irrigation typically incurring lower electricity bills, the agricultural sector bears the brunt of the highest rate hike at 11%. This surge is poised to elevate the expenses associated with agricultural production.

At the briefing, Dr Moazzem warned that with every degree rise in Celsius temperature, the demand for an additional 80 megawatts of electricity is created in Dhaka city alone, leading to increased electricity consumption costs for individuals.

According to CPD, industries with higher electricity consumption will have to bear additional costs. Sectors like metal, mineral, furniture, paper, and pulp are expected to experience higher price hikes.

CPD believes this pressure on consumers is unjustified and should be addressed by the government or producers.

Noting that the government does not have a coherent subsidy coordination plan, Dr Moazzem said, “The International Monetary Fund has suggested a price adjustment. According to the IMF, the price per kilowatt hour will be Tk12.11.”

CPD anticipates that with the current trajectory of price increments by the government, the price may reach Tk16.40 per kilowatt in the third phase.

Dr Moazzem urged the government to unveil its subsidy coordination plan and refrain from imposing additional burdens on consumers.

Explaining the additional power capacity, the CPD director said, “Heavy industry expansion has been minimal, while the expansion of the service sector hasn’t significantly spurred electricity demand. Additionally, economic zones have failed to generate the expected demand. These factors have collectively contributed to the government’s additional capacity.”

CPD opined that the Bangladesh Energy Regulatory Commission (BERC) losing its autonomy in adjusting prices resulted in a lack of transparency in the process of increasing electricity and fuel prices.

The organization thus recommended transferring the responsibility of overseeing the price increase process to BERC.

“When prices increase through administrative orders, the public remains unaware of the process. While there may be logic behind it, it lacks clarity,” Dr Moazzem remarked.

TBS Report

 

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