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Heavy burden of power subsidies 

Published : Sunday, 26 January, 2025 at 12:00 AM  Count : 433
The government's decision to nearly double the power subsidy allocation to Tk 700 billion in fiscal year 2024-25 highlights a growing fiscal challenge. While addressing the accumulated arrears to private-sector power producers is necessary, the scale of the payout raises serious concerns about the sustainability of this approach.

Bangladesh has long faced pressure from the costs of purchasing electricity from independent power producers (IPPs) and rental plants, which charge significantly more than the rates consumers pay. This imbalance has led to rising subsidies, putting a strain on the national budget and overshadowing other critical areas of government spending.

The government's current strategy is to clear these arrears by increasing subsidies to Tk 700 billion, which may provide short-term relief and ensure continuous power supply. However, this move also underscores deep structural issues in the power sector. By relying on such massive subsidies, the government is supporting an unsustainable pricing model that burdens taxpayers.

A key problem lies in the high cost of electricity from private-sector plants, many of which are fueled by expensive Heavy Fuel Oil (HFO) or diesel. The government purchases electricity from these plants at rates ranging from Tk 14 to Tk 26 per kilowatt-hour (kWh), far above the Tk 8.95 per unit charged to consumers. This pricing gap must be covered by subsidies, deepening the financial strain.

In FY 2023 alone, the government paid Tk 280 billion in capacity charges, and total payments to IPPs and rental plants since 2018 reached Tk 783.7 billion. This situation is increasingly unsustainable, particularly as the country's foreign-exchange reserves have dropped from over $48 billion two years ago to just $20 billion today. 

The burden of foreign payments to international energy companies further complicates the issue, as Bangladesh's banks struggle to provide the necessary foreign currency.

To meet immediate financial obligations, the government plans to divert funds from the development budget, particularly from large infrastructure projects, into the power-subsidy fund. While this may address short-term needs, it raises concerns about the long-term viability of the country's development plans. Reducing spending on key projects could hinder economic growth and leave critical infrastructure development stalled.

Looking ahead, the government aims to reduce subsidies starting in FY2026. However, this will require significant reform of the energy sector, including reducing dependence on expensive IPPs and transitioning to more sustainable, affordable energy sources. Renewable energy offers a potential solution, but the shift will demand considerable investment in infrastructure, technology, and policy reforms.

Ultimately, the government must act decisively to reform the power sector, reduce reliance on costly private plants, and align energy pricing with economic realities. While short-term subsidies are necessary, a sustainable energy strategy is crucial to avoid exacerbating fiscal challenges. Comprehensive reform is needed to ensure energy production both affordable and reliable for all citizens. 

The time for reform is now.



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