The Power Generation And Distribution in Bangladesh-PDB-English-Report-Short Composition

The Power Generation And Distribution in Bangladesh

Abstract

Bangladesh is an energy hungry country. Power infrastructure of Bangladesh is small and in sufficient but the demand is rapidly increasing. The per capita power consumption in Bangladesh is about 136 kwh which is one of the lowest in the world by for huge population density our power sector in anonymous pressure. In the Bangladesh electricity is major source of power and most of the economical activities depend on the electricity. Natural Gas is the most important source of energy in our country as it accounts for about 75% of the total commercial energy of the country. At present, about 37% of natural gas production is used as fuel for electricity generation. Overdependence on the natural gas must be reduced as the present reserve is not sufficient enough to support the country for long term economic growth. Bangladesh, with a very low reserve of petroleum, has become a net petroleum import country. Because of the recent liquid oil based power plants, petroleum requirements have increased by 28% in 2011. Because of the unrest in Middle-East region, petroleum price is going up which will increase import bill of Bangladesh Petroleum Corporation (BPC). Aside from natural gas and petroleum, coal resource of the country is still underutilized because of lack of proper guideline. Coal policy, which will ensure proper guideline regarding the usage of this resource for the economic development of the country, is yet to be finalized. Lack of investment in power generation in the last decade has created electricity shortage. With a view to combat this, the Government of Bangladesh (GOB) has taken initiative to set up power plants so that the country has sufficient electricity within 2016. Successful implementation of this is highly dependable on the supply of fuel. Over dependency on gas for electricity generation must be reduced, while coal and renewable energy based power plants must be introduced for sustainable electricity generation. Overall, in long term, an intelligent mix of the different available energy sources can enable Bangladesh to ensure a sustainable economic growth of the country. Right conditions and framework at policy and regulatory level is a must.

Economy OF Bangladesh

Bangladesh has an estimated 161 million people,1 making it the ninth largest country in the world by population. By area, it is ranked 92nd globally, which means it is one of the most densely populated countries.2 although the growth rate of the population has slowed in recent years, the labor force is growing rapidly. Improving the labor force participation will be a key driver of economic growth into the future.  The Bangladeshi economy, identified by Goldman Sachs as one of the “Next Eleven” economies globally,3 reported a healthy Gross Domestic Product (GDP) growth rate of 6.3% from 2010-11 to 2014-15 – refer Figure 1.1. In 2014-15, GDP growth was 6.6%, and the Asian Development Bank (ADB) estimates that growth will accelerate to a very robust 6.7% in 2015-16 and 6.9% in 2016-17. The sustained economic expansion has resulted in increased demand for infrastructure to support continued growth in industry and in services such as telecommunications, transport and energy.  Bangladesh’s economy is transitioning away from its historic reliance on the agriculture sector, with the industrial sector set to grow at 9-10% annually while service sector growth is forecast at a still robust 6% annually. This increasing share of the economy by the Industrial sector has implications for the electricity sector, as the energy intensity of growth is likely to remain well above the rate of real GDP growth (we discuss the implications of this in Section 4.0). In terms of GDP per capita, the country is ranked 178th in the world.

Figure 1.1: Bangladesh: GDP Growth (FY2011-FY2017)

           

Source: Bangladesh Bureau of Statistics, Asian Development Bank

Bangladesh moved into a current account deficit in 2014-15, and the Asian Development Bank forecasts this deficit to widen into 2016/17. Increasing reliance on fossil fuel imports (oil, diesel, LNG and coal) over the forecast period would further undermine the current account and recent currency stability, particularly if foreign worker remittances weaken Over the past five years, Bangladesh has witnessed a stable currency regime, with the Bangladeshi Taka (Tk) depreciating 1.3% per annum against the U.S. dollar, notwithstanding inflation running at 5-6% annually. The government’s credit rating has remained stable, with Standard and Poor’s rating the country’s government debt at BB- with a stable outlook since April 2010.6 The favorable factors for the country are its relative political stability, its strong projected economic growth of 6% annually, and expectation for continuing strong garment export growth as Bangladesh continues to take market share from competing nations like Pakistan. However, high inflation, a high budget deficit, debts exceeding reserves, civil unrest over compulsory land acquisitions, access to fresh water and rising environmental damage from industrialization, plus rising competition in the international garment industry, are key risks to the fiscal stability of Bangladesh.

The country’s budget deficit increased to 4.7% of GDP in 2014-15, up from 4.0% in 2013-14 and 3.6% in 2012-13.8 If this budget deficit as a percentage of GDP increases further, it may lead to a stress in the government’s bond rating. As a result, the government may be forced to reduce its expenditures, like those that currently support electricity system losses. In 2012, the country faced a financial crunch due to a shortage of foreign exchange. The government’s excessive borrowing was one of the reasons for this issue.9

Current average government interest rates in the Bangladeshi financial system are 10.9%,10 private sector lending rates are 12-13%, with both rates reflecting consumer inflation rates of 7-8% annually over the past five years. Progressively building out renewable energy capacity would introduce a long-term deflationary benefit to help address this inflation issue (note Indian solar tariffs are fixed in nominal terms for the 25-year duration (declining ~5% annually in real terms).

The nation aspires to become a middle-income country by 2021. To achieve this target, GDP growth will need to reach 7.5-8% p.a. along with increased public and private investment. Key challenges for the country include management of urban growth, industrialization, and climate-change adaptation. Unfunded and growing fossil fuel subsidies (across gas, diesel and electricity distribution) and infrastructure deficits will also need to be tackled.

Bangladesh has the potential to become an even greater exporter of labour-intensive manufacturing, filling in markets vacated by the maturing Chinese economy. Adopting a long-term, clear energy strategy to transition the electricity sector toward a significantly larger, more diverse, domestic-based and lower-emissions-profile generation capacity would build energy security, enhance the nation’s international reputation whilst serving to protect the environment and develop industries of the future. Renewable energy, smart grids and energy efficiency opportunities are increasingly cost competitive and deflationary.

Electricity Generation and Consumption Trends

Bangladesh has increased its electricity generation by 145% since 2004 to 60.5 Terawatt hours (TWh) in 2015 (refer Figure 2.1 below). Energy consumed has also increased, but at a slightly faster rate due to a trend of declining Transmission and Distribution (T&D) losses over the same period. Total installed and operating generation capacity has more than doubled in the six years to August 2016 to 12.8GW (including 600MW of electricity imports from India).

Electricity consumption has grown by an average 9.7% annually through 11 years to 2015, facilitating Bangladesh’s exceptional GDP growth of over 6% annually in recent years. Even with population growth of 1.2% annually, the economy has still seen a growth in per capita electricity consumption of 8.4% annually as rural electrification has continued to be a priority for the Bangladeshi government.

One key statistic from an electricity system planning perspective: energy intensity of economic growth. Electricity consumption has risen by 1.56 times the rate of GDP growth over this timeframe, reflective of ongoing industrialization, as discussed in Section 1.0. In IEEFA’s projections for the Bangladesh electricity sector, we model a moderation of this ratio to a still-challenging 1.2 times over the next decade (refer Section 4.0).

Figure 2.1 – Bangladesh Generation and Consumption Trends 2004-2015

      

Source: BP World Statistics 2016, World Bank Country Database, BPDB, IEEFA calculations.

Note 1: There is a material discrepancy between the electricity generation figures referenced from BP World Statistics relative to that published by Bangladesh Power Development Board (BPDB). BP World Statistics are 20% above the BPDB estimates of actual electricity generation. In the IEEFA Electricity Model for Bangladesh, we have chosen to base our figures on those cited by BPDB as the likely original data source.

Note 2: The World Bank country statistics11 include much lower rates of electricity T&D losses than the BPDB over the last decade. For instance, in 2004 the BPDB report distribution losses of 21% whilst the World Bank has a rate of 8% (the later includes both T&D losses). Since 2004 the World Bank has reported increasing losses whilst the BPDB has reported decreasing losses to the point that the two institutions estimates have largely converged to similar rates of loss by 2013. In Figure 2.1 we cite BPDB Annual Report 2014-15 estimates.

Transmission And Distribution Loss Trends

Historical distribution losses referenced in Figure 2.1 are sourced from the BPDB Annual Report 2014-15. Distribution loss rates have steadily declined from an unsustainably high 21.2% in 2004 to 11.2% in 2014/15. Note that these figures do not include transmission losses, which totalled 2.74% in 2014-15 (2.72% in 2013-14), taking total T&D losses to 13.9%.

Electricity Supply-Demand Mismatch

Bangladesh’s electricity sector has consistently been plagued by a mismatch between demand and supply, owing to gas-availability issues in a virtually single-fuel dependent electricity system (energy security is a key country risk exaggerated by this excessive dependence on subsidized domestic gas) as well as strong demand growth and a resulting insufficient investment in new generating capacity. The latter reflects the government’s inability to adhere to and successfully implement a commercially viable, clear, long-term electricity supply plan at a speed sufficient to match demand growth. As discussed in section 5.0, a disproportionate number of projects are announced with little subsequent implementation.

Despite having large gas reserves, Bangladesh has not been able to produce enough gas to meet demand. As per the government-owned Bangladesh Oil, Gas and Mineral Corp. (“Petrobangla”), demand for gas in 2015-16 is estimated to be 3,800 million cubic feet per day (mmcfd). By comparison, the production of gas stood at 2,330mmcfd in January 2014.12 This demand-supply gap has led to a situation in which power capacity totaling 603MW lacks fuel, resulting in frequent power cuts.13 A progressive move toward import price parity for gas would incentivize exploration and reduce LNG import needs.

Another reason for interruptions in power supply: a large segment of Bangladesh’s installed capacity requires shutdowns for long-term maintenance (at any particular time, this runs at 10% of total installed system capacity), even though this situation has been eased recently by some newer capacity additions.

Power-supply issues aside, Bangladesh suffers from power transmission issues, owing to its fragile grid, struggling to both modernize and cope with the continued strong growth in demand for electricity, which reaches about 74% of the population.14 Bangladesh faced a major blackout due to grid failure in 2014.15 Since then, grid problems of lesser magnitude have persisted.16

Figure 2.7 details the predominance of gas-fired power generation in the Bangladesh electricity system alongside the rising reliance on expensive imported furnace oil and diesel fuels due to growing domestic gas shortages. The lack of diversification is clear, as is the absence of renewable energy. A key conclusion of this report is that Bangladesh’s energy security and economic growth prospects would be enhanced significantly by adding a diverse range of renewable energy and energy efficiency programs.

Figure – Maximum Demand, Peak Generation and Load Shedding

         

Source: Bangladesh Power Development Board 2015 annual report.

Tariff Structures

Under the Bangladesh Energy Regulation Act (2003), the price at which the BPDB sells electricity is meant to cover the expenses incurred by BPDB in operating its power plants and in purchasing power from independent and rental suppliers. The difference between the cost of these electricity purchases and the supply tariff at which BPDB sells is subsidized by the government via a direct budgetary transfer. In FY2014, the government transferred US$800m to BPDB (FY2013: US$584m).17

Under the Act, the price paid by distribution companies to the Power Grid Corporation of Bangladesh (PGCB), which manages transmission assets and end-user tariffs, are also set. End-user tariffs vary according to customer type, with incremental block tariffs for domestic users and a single rate for agricultural pumps and street lighting. Small industry and commercial users have flat off-peak and peak rates.

Tariffs are set such that low-use residential and agricultural customers are subsidized by commercial, industrial and high-use residential users. However, such cross-subsidies do not cover the losses incurred from selling electricity at prices below the cost of generation. In FY2014,the average retail tariff was 16.7% below the delivery cost, and while PGCB recorded an operating profit that year,18 BPDB’s losses increased.

Bangladesh’s Electricity System is Undermined by Losses and Subsidies

The electricity sector in Bangladesh has seen a steep increase in power generation costs in recent years. Average costs of electricity production have increased at an annualized rate of 17.8%, more than doubling from Tk2.6/kilowatt hour (kWh) (US3.3c/kWh) in 2009-10 to Tk5.9/kWh (US7.5c/kWh) in 2014-15.

Figure – Average Cost of Electricity Generation in Bangladesh has Increased Substantially

       

Source – Bangladesh Power Development Board Annual Reports

Figure – Bangladesh Power Development Board Plagued by Continuous Massive Losses

 

Source – Bangladesh Power Development Board Annual Reports

The rising cost of generation has put pressure on the already troubled Bangladeshi power system and led to the BPDB posting massive losses over 2008-2015. In 2007-08 BPDB lost Tk6.6bn (US$96m), or US$53.9 per customer. Those losses had increased 10-fold by 2014-15, when BPDB lost Tk72.8bn (US$937m), or US$297 on each customer.

These losses reveal how extensively Bangladesh electricity depends on subsidies at multiple levels. This was examined in 2014 by The International Institute for Sustainable Development (IISD):19

1. All electricity generation input fuels, i.e. gas, furnace oil, diesel and coal, are subsidized;

2. BPDB sells electricity to six distribution companies at lower-than-generation cost;

3. The Bangladesh government provides loans to the BPDB at lower-than-market-rate interest rates in exchange for BPDB selling electricity at lower-than-generation cost;

4. Electricity tariffs for certain consumer segments, especially residential consumers and farmers, are lower than production costs; and

5. Industrial and commercial segments pay higher tariffs to compensate for the losses incurred due to lower-than-cost tariffs paid by residential and agricultural sectors.

These subsidies amounted to nearly 0.9% of GDP in FY2012 as per IISD’s estimates. They especially benefit middle-income groups in Bangladesh but fail to benefit many of the poorest people in Bangladesh, who are off the grid entirely and unable to access the country’s richly-subsidized electricity. These subsidize, all in all, distort the free market and leave less government resources for development of other important areas of the economy. By artificially keeping retail electricity prices low, the subsidies also act as a barrier to the cost effectiveness of distributed rooftop solar and energy efficiency. The ongoing losses also act as a major obstacle to global financial investment inflows, given the unsustainable nature of the current electricity pricing structure and the inevitability of policy changes. They also create non-bankable counterparty risk.

The Bangladesh grid T&D loss rate was 14% in 2014-15.20 This high rate of loss in T&D puts significant added financial pressure on any electricity system planning utility scale projects, again highlighting the overall merits of distributed generation alternatives (refer Section 5.0).

Distribution

In Bangladesh, government owned five entities are involved in the electricity distribution business. DPDC and DESCO are responsible for distribution business in capital city Dhaka. BPDB and WZPDC are responsible for distribution of urban areas other than Dhaka. Rural Electrification Board (REB) is responsible for distribution in rural areas through 70 PBSs. Following chart depicts the share of electricity distribution business in Bangladesh at present:

Total about 326,000 km line (33 kV, 11 kV and 0.4 kV)of distribution network facilities are dedicated for transporting electricity from grid sub-stations (interfacing point between transmission and distribution) to the receiving end i.e. up to retail customer’s premises. To provide access to electricity to all, distribution network need to expand rapidly especially in the rural areas. At present, number of villages getting electricity from the grid network is about 60,000.

Residential and Industrial sectors consume most of the electricity produced in the grid. With rapid expansion of rural electrification, share of residential customer’s consumption increased to about 52 % of total electricity consumption in FY 2015. The chart below depicts customer category wise electricity consumption in Bangladesh

Figure 7: Customer Category Wise Electricity Consumption

 

Source: BPDB Annual Report 2014-2015

Distribution Loss

Distribution loss in Bangladesh has come down significantly to 11.28 % in FY 2015 from 15.52 % in FY 2007. This is a success story of Bangladesh’s power sector. Distribution entities achieved this success due to mainly curbing non-technical (i.e. pilferage, theft, meter manipulation etc.) losses. The figure below depicted gradual reduction of distribution losses.

Figure 8: Distribution Losses (National)

Source: System Planning, BPDB

Distribution losses in DESCO and DPDC are 8.37 % and 8.91 % respectively in FY 2015, which are below 10 %, as because these entities are operating in capital city Dhaka where consumer mix is better and customer density is much higher than semi-urban and rural areas. Distribution losses in WZPDB, BPDB and REB are 10.28 %, 11.17 % and 12.98 %respectively. These entities operate mainly in urban, semi urban and rural areas. For example REB operates mainly in rural areas where consumer density (consumer per km of distribution line) is low and long distribution line at lower voltage level causes high distribution losses. But still there is a scope to further reduction of distribution loss to 9.0 % by taking measures to curb non-technical loss and strengthening distribution network with introducing smart grid.

References

Ø  Power System Mast-er Plan 2010; Power Division, Ministry of Power, Energy and Mineral Resources (MPEMR); February 2011.

Ø  Power System Master Plan 2016 (DFR); Power Division, Ministry of Power, Energy and Mineral Resources (MPEMR); (Draft Final Report submitted on June 2016)

Ø  7th Five Year Plan FY 2016 – FY 2020; General Economic Division (GED), Planning Commission, Government of the Peoples’ Republic of Bangladesh.

Ø  Vision Statement; Power Division, Ministry of Power, Energy and Mineral Resources (MPEMR); January 2000.

Ø  Private Sector Power Generation Policy of Bangladesh; Ministry of Energy and Mineral Resources (MEMR); October1996 (Revised on November 2004).

Ø  Renewable Energy Policy of Bangladesh; Power Division, Ministry of Power, Energy and Mineral Resources (MPEMR); 18 December 2008.

Ø  The Project for Development of Energy Efficiency & Conservation Master Plan; Japan International Cooperation Agency (JICA) & Electric Power Development Co. Ltd.

Ø  Annual Report FY 2014-2015; Power Division, Ministry of Power, Energy and Mineral Resources (MPEMR); 18 December 2008.

Ø  Annual Report 2014-2015; Bangladesh Power Development Board (BPDB)

Ø  Bangladesh Energy Regulatory Commission (BERC) Act 2003;

Ø  Feasibility of New Interconnection between Two Electrical Grids of India and Bangladesh; Joint Technical Team (JTT); March 2014

Ø  Power Pricing Framework, January 2004

Ø  Transforming Our World: The 2030 Agenda for Sustainable Development; UN, 2015

Conclusion

Bangladesh can look forward to a continued period of strong economic growth and development. The electricity sector should play a critically important role underpinning sustainable development. IEEFA’s electricity system model shows that a cost-effective long-term investment program that prioritizes renewable energy, grid and energy efficiency, and increased electricity imports from India and Bhutan would best serve the country in terms of energy security in comparison to heavy reliance on fossil fuel imports, and would deliver a significantly larger, long-term cost-competitive energy supply. A robust government endorsement of a transformational US$15-20bn investment program in renewables, smart grid and energy efficiency by 2024/25 is likely to find strong international financial system support to develop long-term deflationary energy supply.

End