[ALOCHONA] Economic Analysis: Where has all the electricity gone?

Economic Analysis: Where has all the electricity gone?

M. A. Taslim

There is something very puzzling about the electricity situation in the country. The government claims to have tremendously improved the situation during the last three years. But the severity of load shedding with the onset of summer conditions and the unprecedented decision to cut electricity supply to the nation's industries for 12 hours a day suggest otherwise.

Electricity shortages had reached a crisis proportion at the beginning of the tenure of this government. In order to solve the crisis quickly, the government adopted what appeared at the time to be a very convenient strategy, viz. private rental power plants. However, when implemented it turned out to be a very expensive and injudicious one which worsened the crisis. What was only an electricity crisis has now snowballed into a full blown budgetary crisis affecting the entire economy.

In order to make the rental plants sufficiently lucrative to the private players, the government had to provide sovereign guarantees regarding prices at which fuel oil would be supplied to the plant operators, and electricity would be purchased by the government. Since very large gaps have emerged between the guaranteed prices and the prices paid or received by the government, the rental plants have to be provided with enormous amounts in subsidies. It is estimated that during the current fiscal year subsidy payments to the rental power plants might exceed Tk320 billion, i.e. about one-third of the total tax revenue of the government. This enormous subsidy requirement has put the government finances in a quandary, which has been further intensified by the drying up of expected foreign funds due to difficulties on the foreign policy front. The government was forced to take the unprecedented step to shift part of the current subsidy to the next budget. This may open up a new door to further mismanagement of the economy.



The evolution of electricity supply over the last two decades is shown in the table below. The installed capacity (derated) of the country increased by fits and starts during 1990-91 and 2005-06 from 2398 megawatts to 5275 megawatts - an average annual growth of 5.8 per cent. During the same period peak hour generation of electricity increased from 1672 to 3812 megawatts. The average annual growth rate of peak hour generation was 6.1 percent suggesting a slight improvement in the efficiency with which installed capacity was converted into peak generation. No addition was made to the installed capacity during the following two years when the country was under a caretaker government, but peak hour generation increased by about 8 per cent during these two years suggesting further improvement in the efficiency of generation.

A breakdown of the increments in capacity by periods is also shown in the table below. The growth rate of installed capacity was 4.4 per cent during 1990-91 to 1995-96. The rate increased to 6.6 per cent during the five year period 1995-96 to 2000-01, but fell to 5.7 per cent during the next five year period 2000-01 to 2005-06. During the first 38 months of the current regime the installed capacity took a quantum leap - it increased by an annual average of 11.4 per cent. Actually most of the increase was achieved in one single year, i.e. 2010-11 when quick rental power plants made appearance.

The peak generation increased by 5.7 per cent during the first period and 7.8 per cent during the second period above. It fell to 4.7 per cent during the next five-year period. The remarkable thing is that during the current regime it increased by only 5.0 per cent. In other words, the quantum leap in installed capacity did not show up in the actual supply of electricity to the consumers.

To date the ground reality is that the advent of the quick rental power plants did not improve electricity generation. The rate of increase of peak generation during the current regime is actually lower than what it was during the first two periods mentioned above when electricity was generated the normal way at normal cost.

So where did all the electricity installed during the current regime disappear?

The answer probably lies in the marked drop in the efficiency of electricity generation, which declined from 77 percent in 2009-10 to only 63.6 per cent in fiscal year (FY) 2010-11. But why was there a sudden drop in efficiency? From various news reports it transpires that the reasons are: (1) there has been a reduction in the output of the older (mostly public) power plants, (2) power plants in general are operating below potential because of shortages of fuel or other reasons, and (3) the peak generation of the quick rental plants is less than their stated capacity.

According to Bangladesh Power Development Board (BPDB) website, the peak generation of PDB has dropped from more than 2555 MW on April 30, 2010 to only 1506 MW on February 29, 2012, i.e. a reduction of 41 per cent

There seems to be little doubt that the advent of the rental power plants has taken a heavy toll on the public generation capacity. Private generation has discouraged the government from maintaining or augmenting public generation of electricity.

The reduction in the amount of electricity generation due to shortages of fuel at the power plants was 282 MW toward the end of April 2010, but rose to 1103 MW by the end of February 2012. It is obvious that some of the plants were not operating at their peak capacity due to inadequate supply of fuel. The government was not able to arrange adequate fuel to all plants. Apparently it did not fully appreciate the financing and logistics problems associated with the doubling of fuel demand in a single year due to the setting up of the fuel-guzzling rental power plants.

Economic management is widely believed to be the weakest link of the government. However, the ineptness with which the electricity issue has been handled is simply mind-boggling. The government seemed to have embarked on the rental plant road without a clear idea about its finances, logistics and consequences. For example, the government now claims that the blowout in subsidy is due to unforeseen increases in the prices of petroleum products and not due to policy lapses. It seems absurd that the government could have planned (in 2009 let us say) on the basis of current prices, which were clearly very low in the aftermath of the most severe worldwide recession since the Great Depression. Even a cursory glance at the time series of the monthly crude oil price would have revealed a clear upward trend since the beginning of the millennium such that the future price increases should have been anticipated and hedged against. 

The government also claims that despite its 'praise-worthy success' in electricity generation, the situation has been made worse by the rising pace of electricity demand because of the rising prosperity of the people made possible by its policies. This certainly has an element of truth. The demand for every normal good and service, including electricity, rises with income. A good economic manager builds this into his forecast in order to ensure that future supply meets the increased demand. The above claim seems to suggest that either the government was unaware of this implication or it failed to accommodate the increased demand because of real resource constraints. If the latter is true one must question how the same government could have set the growth target at 7.0 per cent and above when it is unable to meet the energy demand at even 6.0 per cent plus growth rate.
Much hope was pinned on the government's resolve to quickly overcome power shortages. However, within three years the hopes have transmuted into frustration. In attempting to solve a nagging problem, the government seems to have created several more. The hapless people will be forced to bear the consequences of the blunder of their government; they have reasons to be angry.

 [A note on semantics: Most of the new capacity has been installed by private companies, and not by the government. Indeed the capacity of the government power plants has declined. Of course, it is to the credit of the government that it has allowed greater space to the private sector.  It should be borne in mind that when
the contracts expire the rental plant capacity will disappear, unless the government has something else in mind.]

(The writer is Professor and Chairman, Department of Economics, University of Dhaka. E-mail: m_a_taslim@yahoo.com)

http://www.thefinancialexpress-bd.com/more.php?news_id=125664&date=2012-04-05

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