• Friday, Nov 22, 2019
  • Last Update : 10:37 am

Transforming the power sector of Bangladesh

  • Published at 10:53 pm June 21st, 2019
Building a future with power
Building a future with power / BIGSTOCK

A closer look at the master plan

Whether by bolstering million-dollar infrastructure projects or improving the living standard of the individual household, the power sector is the lifeblood of any economy. Over the past decade, Bangladesh’s economy has grown at an annual rate of more than 6%, which supersedes the growth rate of many other Asian economies. 

To sustain its economic growth, Bangladesh will need to address certain power-related barriers -- including low access to reliable and affordable power, limited availability of serviced land, rapid urbanization, and vulnerability to climate change and natural disasters.  

Current scenario of power sector

Bangladesh’s power sector is one of the fastest growing in South Asia. The growth in terms of capacity addition has been remarkable -- increasing from 5% to 28% from 2012 to 2018 according to the World Bank and the Bangladesh Power Development Board. 

Electricity consumption has increased in line with the rise in capacity. Domestic and industrial sectors are the key power demand drivers in the country. The industrial sector has witnessed impressive growth in the last six to seven years, with a growth of 12.06% in FY17. Key industries driving growth in the country are RMG manufacturing, infrastructure development, and pharmaceutical. 

We can expect electric power consumption per capita in Bangladesh to increase significantly as demand is expected to increase in line with GDP growth and the government’s master plan to generate 24,000MW of electricity by 2021, 40,000 MW by 2030, and 60,000 MW by 2041. Bangladesh has continuously added power capacity at an impressive growth rate in the last five years.

Global mega-trends and their impact 

The transformation of our power sector is being driven by the interaction between five global mega-trends, and is amplified by a set of shifts taking place within the sector. The five mega-trends include: Demographic and social change; technological breakthroughs; climate change and resource scarcity; a shift in global economic power; and rapid urbanization. 

For Bangladesh, growing populations imply a gap in the supply of electricity compared to demand despite investments by the GoB. Furthermore, Bangladesh’s rapid urbanization indicates that the demand for power utilities will likely see substantial increases. As per World Bank data, around 25% of Bangladesh’s current population live in urban areas. The power utilities need to be lead players in the city’s future infrastructure, as the government strives to establish Digital Bangladesh, with the objective of converting all major cities to smart cities. 

Global economic dynamics also hold implications for Bangladesh. For example, Chinese state-owned power and utilities companies have been active in their search for suitable international power utility and grid investment opportunities. FDI inflow to Bangladesh has been rising, and the power sector accounts for around 14% of total FDI.  

In Bangladesh, various technological initiatives, including pre-paid metering, enterprise resource planning (ERP), supervisory control, and data acquisition (SCADA), and upgrade of geographic information system (GIS) have been undertaken. The energy sector is on the frontline of concerns about climate change. 

The sector as a whole accounts for more than two-thirds of global greenhouse-gas emissions, with just over 40% of this stemming from power generation. Resource scarcity and the associated geopolitics and economics of gas, oil, and coal supply are key factors shaping the power market policy. The master plan of Bangladesh’s power sector envisages that around 35% of the country’s power generation will be from renewable energy sources or clean power imports by 2041, from the current level of 3%. 

Key challenges faced by the power sector 

The power sector in Bangladesh is faced with multiple challenges, which must be overcome to achieve growth. 

Poor financial health of power generating companies: The government mandates the maximum tariff for electricity purchase in the country. As a result, public generating companies are hardly able to cover their costs incurred to supply electricity to the end-user. Low financial soundness also prevents the public from making maintenances in advance and to purchase spare parts.

Natural gas shortage: Domestic gas reserves in Bangladesh are depleting, and won’t be enough in the future to meet the growing demand of the country. As a result, the country must expedite efforts to conduct new gas exploration. Also, it must diversify the fuel-source for power generation, while simultaneously obtaining gas through imports from other countries. However, imported gas would lead to a price increase, which will also be a challenge for the government.

Power plant inefficiency and low plant load factor: Power plants in the country are always pressed for demand, and hence, cannot stop. However, plants need to stop for proper maintenance and remain efficient. Additionally, multiple plants in the country have outdated technology, and suffer along with low power generation capability. 

Improper demand-supply analysis: Despite many of the power plants remaining out of operation, the BPDB has been making capacity payments to them, as they are ready to supply electricity. The capacity payment is a sort of penalty, which the BPDB is bound to pay to the power plant owners, if the government fails to purchase a certain portion of the electricity readily available. 

Limited renewable energy potential: Bangladesh has very limited potential for renewable energy due to limited land availability and the meteorological conditions of the land not being suitable for hydro electricity generation. It is estimated that Bangladesh has a maximum renewable energy potential of up to 3,700MW.

Lack of expertise: Skills related to latest technologies that are currently used to operate power plants could be improved in Bangladesh. As a result, extensive training and exposure is required to build-up suitable manpower in the country.

Exploring alternative financing options

Owing to the limited financial capacity of power generating companies, alternative means of financing might be necessary to explore. By 2041, it is envisaged that Bangladesh will require investment of about $35 billion in the power sector. Bangladesh may face challenges to fund such investment requirements. 

There are inadequate domestic funding options, and corporate bonds in the power sector lend for short time-spans and are only privately placed. The private equity industry in Bangladesh is largely at a nascent stage as well. The poor financial performance of some public power utilities, including BPDB, makes it difficult to raise funds. 

There are multiple financing options that Bangladesh can explore in the global financial market instead. Local currency denominated bonds can be issued in the overseas market. Here, issuers are shielded from currency risk, and the risk is instead transferred to people buying these bonds. 

Green funds can also be considered, as they finance activities in developing countries that target to reduce greenhouse gas emissions and support resilience to climate change. Listing of profitable public power utilities in overseas markets can be explored as a means of equity financing. 

In addition to enlarging and diversifying the equity base of the companies, listing would also lead to good corporate governance practices and transparency because of the various disclosure requirements. Formation of specialized financial institutions can cater to the power sector’s specific need for competitive finance with a robust mechanism, guidelines, and adequate capacity. Such institutions can play a crucial role in the development of the power sector.

Facilitating renewable energy development

Given our depleting reserves, diversifying our energy sources is of utmost importance. Facilitating renewable energy development will require the involvement of the government, the utilities, and the industry. The government will need to set targets for renewable energy deployment consistent with the national energy strategies. Mandates that make renewable energy generation an obligation to power producers and utilities can be introduced. The government must also address existing or potential barriers to deployment. 

Utilities may develop wide-area transmission plans, which support inter-connection and can link regional power markets ensuring security of supply. Technical rules and guidelines for renewable energy integration and grid management can also be developed. 

To examine costs and benefits of renewable energy, grid studies could be carried out. Improving renewable energy output forecasting and integrating more technology to their systems and procedures can make renewable energy deployment more efficient. 

The industry as a whole could improve efficiency and performance ratios, and robustness of renewable energy systems whilst lowering costs. Training local resources in areas such as system designing, installation, and project management would prove beneficial as well. It is important to build business models that are sustainable and innovative to ensure risk minimization and return-maximization. 

Technology and efficiency

Information technology (IT) solutions are key enablers for improving the efficiency of the power sector. Considering the requirements of Bangladesh, we foresee that information and operational technologies shall play a critical role in Bangladesh’s power sector. With ongoing plans for the implementation of enterprise resource planning (ERP) systems, geographical information system (GIS), and other systems, the utilities in Bangladesh are well placed to keep pace with the global trends. 

To prepare for the future, the focus should also shift to providing good consumer-centric services and not merely fulfilling demand requirements. Some of the main issues Bangladesh utilities need to address are the preparedness for the connected, informed, and mobile customer. Utilities need to determine which products and services are to be offered and determine how to innovate, manage, and build a portfolio of services. 

Another significant technological innovation is smart grid technologies, which would result in a seismic transformation of the industry. Smart grid technologies are grids of tomorrow, where the supply chain will become networked and non-linear -- both physically (with power flowing bi-directionally) and commercially (with new market participants and new commercial arrangements between participants). 

The smart grid will play a key role in ensuring that demand and supply are balanced through smart systems that merge consideration of grid technical constraints with customer preference, and activity while allowing industry participants to manage risk and make a fair return.

Thus, new technologies and ways of working will be required. New players will enter the industry and the industry’s relationships with their customers will be changed. 

Capacity-building of the workforce

To harness technological advances, capacity-building is important. This is especially the case with frequent disruptive technologies in industries -- including utilities which create demand for wider skill sets. Utilities’ existing workforces can benefit from the wider use of mobile and digital technology for greater efficiencies, and improved safety. 

As power and utility business models expand into other areas such as energy efficiency products and services, energy storage, and distributed power, they will need talent to drive their new business endeavours. Hiring is not the only avenue to capture new skill sets. Joint ventures, acquisitions, and alliances too are paths utilities could also use to narrow the talent gap. Others are forging relationships with colleges and technical schools to develop curricula.

Role of policy-makers

Our policy-makers have demonstrated initiatives to keep pace with the rising energy supply gap. The government has set up a designated department -- the power cell -- to facilitate private sector investment in the power industry in Bangladesh. The government has also formulated detailed supportive policies for the introduction of private players in the Bangladesh power generation sector. 

There are, however, improvements that can be made. The policies introduced to propel power generation using alternative energy sources act more as guidelines and do not highlight concrete steps that can be taken in this direction. Similarly, the energy efficiency policy introduced by the government only provides guidelines and lacks concrete laws that will be necessary to improve the power generation efficiency of the sector.

In order to create a secure supply of power, the government needs to build a deregulated and competitive power market. Some of the steps the government can take to encourage competition include the formation of an independent system operator, allowing open access in T&D systems, and enabling power trading. 

This will introduce competition on the supply side, resulting in an efficiency-driven decrease in electricity prices and pass-through gains to the consumer. Subsidy reform can be considered by the government to target low income households. Specifically, Direct Benefit Transfer (DBT) can be implemented where the government provides subsidies directly to customers for the use of electricity. This makes corruption via “subsidy leakage” less likely. Direct cash payments reduce overheads and corruption. 

We see that the Bangladesh power sector is in a transformative phase, being shaped by global mega-trends and our economic prosperity. Despite challenges, the necessary growth can be attained by facilitating renewable energy development, improving technology, using alternative means of finance, and building the capacities of our workforce.

Mamun Rashid is a partner at PwC Bangladesh. This is an excerpt of a paper presented at the BDI conference 2019 at Yale University, USA.