Tackling Bangladesh's Energy Inflation Woes

(MENAFN- Asia Times)

Over the past two decades, Bangladesh has steadily improved its citizens' access to electricity, with rural electrification accounting for a sizable portion of that improvement. Although gas still makes up the majority of the energy used to produce electricity, the nation has taken long strides toward switching to renewable energy sources like solar, wind and hydropower.

As of 2020, 96.2% of the population had access to electricity, up from 32% in 2000, while 7.3 million rural residents had access to clean and renewable energy, and 60% of the beneficiaries of these rural electrification projects are women.

Figure 1: Total Energy Supply by Source in Bangladesh (1990-2019)

Source: international energy agency

Despite the fact that the capacity for producing electricity increased by almost 80% from 5 gigawatts in 2009 to 25.5GW in 2022, the plant load factor (PLF), a measure of the ratio of power produced to maximum capacity, decreased to an all-time low of 0.8% because of recent fuel and gas shortages.

In order to generate electricity temporarily, the government developed quick rental power plants (QRPPs) in 2009; over the past decade, these plants have significantly boosted electricity production. However, certain clauses in the contracts with the QRPPs and independent power producers (IPPs) mandate paying capacity charges to them even if no power is produced.

Early last year, the Bangladesh Petroleum Corporation (BPC) reported daily losses of 190 million taka (US$1.83 million) resulting from idle power plants as the Russia-Ukraine conflict increased supply-side disruptions, driving the price of petroleum in global markets to a new record high of us$100 per barrel .

As the government scrambled to raise subsidies by a staggering 58.3% , corresponding tremors of these soaring prices translated to losses for the Bangladesh Power Developmental Board (BPDB). This has further disincentivised many power plants from developing existing infrastructure that could potentially aid sustainable transitions to electricity generation.

Another area of contention has been the construction of a sizable chunk of Bangladesh's private gas-fired power plants. In the past, a considerable number of the nation's private plants were established despite numerous warnings by PetroBangla (Bangladesh Oil, Gas & Mineral Corporation); as a consequence, the nation's power plants now struggle with insufficient gas supplies to power their operations.

The depleting coffers of the Bangladesh Petroleum Exploration and Production Company (BAPEX) have only compounded the severity of this issue. Adding to its woes, the Japanese government delivered bad news when it rescinded the financing of its projects in the country in 2021 and '22 in response to the Bangladeshi government's decision to switch to coal-based power plants.

In light of the calamitous Russia-Ukraine war, Bangladesh's overwhelming reliance on imports and failure to transition quickly to renewable energy sources have exacerbated its energy problems. Unlike Myanmar and India, the nation has made virtually no progress in offshore gas development.

To counter this, it would be better off by addressing the supply-side concerns as opposed to lowering domestic demand, which would negatively affect living standards in a rapidly urbanizing country like Bangladesh.

Additionally, adequate governance standards and openness would aid in minimizing instances of unauthorized gas and electricity connections, which is an immediate result of increasing corruption among gas-sector authorities.

The government is currently implementing austerity measures in response to the rising cost of fuel and subsidies. To level the pricing with other Asian nations including China, India and Nepal, it increased domestic prices of diesel, kerosene, octane and gasoline in August 2022. The complicated rationale behind these hasty moves can be explained as follows.

First, instead of adopting India's staggered approach in raising domestic fuel prices even amid extremely volatile global energy markets in the past two years, Bangladesh relied on subsidies to stabilize costs.

Second, the coincidence of the increase in domestic fuel prices and the request of a loan from the International Monetary Fund had the potential to augment Bangladesh's attempt to arbitrate a deal with the IMF in recognition of the fuel-subsidy issue that the country now faces.

Finally, with import restrictions, rising subsidies, and a severe shortage of Bangladesh's forex reserves, there was little choice but to increase local fuel costs as the price of oil skyrocketed in the international markets, particularly after the Russia-Ukraine crisis.

The increase in fuel prices will undoubtedly have significant long-term effects on input costs and consequently on the prices of a wide range of imported and domestic goods.

The Bangladeshi taka's continued devaluation and cost-push inflation threaten the minimum quality of living of the economy's most vulnerable entities.

While the major contributors to non-food inflation are goods related to transportation, communication, clothing and footwear, the contribution of oils and fats has increased as a result of supply shortages from major economies that export edible oils, accelerating food inflation to 8.38% in June 2022. Inevitably, this has also driven up the price of agricultural products.

Bangladesh's inflation rate, which was at a modest 5.86% in January 2022, soared to 9.1% in the latter part of the same year, making it the highest rate in nine years.

While the Covid-19 epidemic and the increase in demand-pull inflation that followed the pandemic's stabilization are to blame for some of this inflation, the Russia-Ukraine war has not boded well for global inflation either, especially for the rising costs of necessities like food and gasoline.

Figure 2: Inflation Rate in Bangladesh (2021-2022)

Source: Author's own, data from bangladesh bank

It is imperative that Bangladesh make enduring structural changes in the domestic economy, notwithstanding the perverse cycle of macroeconomic forces that fortifies developing economies, particularly when they are faced with massive exogenous shocks such as a pandemic, war or armed conflict.

With demand-side issues plaguing the energy sector, the nation would benefit from accelerating exploration endeavors of its untapped gas reserves through partnerships with other countries as well as improving research and development to expand its renewable and non-renewable energy reserves.


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