Rose Murphy, Nuruddin Kamal and John Richards, PhD: Electricity for All, Center for Policy Research, IUBAT — International University of Business Agriculture and Technology, Dhaka, Bangladesh, (ISBN 984-861-000-6).
Executive Summary
At the time of partition of India in 1947, the total generating capacity of East Bengal was a mere 21 megawatts (MW), all of it privately owned. A half-century later, in 2001, total installed capacity was an estimated 4555 MW – more than a 200-fold increase. This is an impressive achievement. By international standards, however, per capita consumption of electricity in Bangladesh remains extremely low. Only about one in five Bangladeshis has access to power; among those in rural areas the ratio is probably about one in seven.
The Bangladesh power sector faces several key problems:
• Load shedding and voltage variation: The state-owned Bangladesh Power Development Board (BPDB), which controls nearly three-fourths of the total generation capacity in Bangladesh, has resorted to load shedding as a means to reconcile demand to the available capacity. Load shedding is a significant constraint on growth of the economy.
• Operating Inefficiency: The power sector does not fare well in terms of operating efficiency. For example, Bangladesh requires considerably more employees per customer served than is the case in many countries.
• System loss: System loss occurs both for technical reasons and for reasons of inefficiency and corruption in administration. Exact figures of loss are unknown but, at approximately 30 per cent, the net country-wide system loss is probably among the highest in the developing world. The losses incurred differ dramatically across the various utilities.
• Unadjusted tariff structures and ineffective billing procedures: Many countries have been unable to establish tariff structures and billing procedures that enable the power sector to be financially self-supporting. The resulting losses require subsidies from government or donor agencies that divert revenue away from other important programmes, such as education and public health. This problem has afflicted the Bangladesh power sector entities to varying degrees.
Why do power sector problems persist in Bangladesh? What can be done to solve them? This report assesses the barriers to accelerated electrification ¬– in particular the barriers to rural electrification – and puts forward practical recommendations.
In any discussion of rural electrification, the point of departure is 1977. In that year came creation of the Rural Electrification Board (REB). It has responsibility for distribution in rural Bangladesh, and provides to its customers a fourth of the country’s electricity. The REB arose from a recommendation by the National Rural Electric Cooperative Association (NRECA), an organisation of consumer-owned cooperatives in the United States. These cooperatives played a role in electrifying rural regions of the United States in early decades of the 20th century. Rural electric cooperatives – Palli Biddyut Samitees (PBSs) – are also key to the electrification strategy of the REB.
The PBSs operating under the supervision of the REB are a positive force within the power sector in Bangladesh. Their customers trust them, and support their efforts to supply electricity. Since the inception of the REB, 67 PBSs have been established covering almost 90 per cent of the area of Bangladesh. Over 34,000 of a total of about 64,000 villages have been electrified and almost 4 million connections have been made. The REB realises markedly lower system losses for distribution than either the BPDB or the Dhaka Electric Supply Authority (DESA), which is responsible for distribution in metropolitan Dhaka. The REB also exhibits superior performance in terms of bill collection.
Despite these impressive accomplishments, a great deal remains to be done. If Bangladesh is to prosper economically, an efficient power system with majority access is a necessary component of the country’s infrastructure. To reach this objective will require a rapid acceleration in the pace of rural electrification. Below are our recommendations for achieving meaningful progress in rural electrification.
Recommendation One
The REB should place a high priority on major expansion of power generation independent of the national transmission grid in off-grid areas.
One of the key factors slowing the rate of electrification in rural Bangladesh is the low quality of the electrical service supplied by the BPDB. The extent of load shedding and voltage irregularity complicates the task for PBSs in imposing tariff structures adequate for cost-recovery: customers strongly resist paying higher tariffs for an unreliable service. It also discourages applications for connections.
Starting with PBSs geographically close to the existing natural gas pipeline distribution system, the REB might launch a strategy of investment in a large number of small gas turbines. The electricity thereby generated would be locally distributed independently of the national grid. In due course, as more plants are built, more elaborate transmission facilities to more distant PBSs might be required.
In considering such a strategy, there is probably no single financial model to adopt. The REB could invest in some additional turbines – thereby retaining ownership – and operate them as pilot projects to discover and resolve implementation problems. Alternatively, groups of PBSs may come together to finance pilot projects.
If this strategy is to have a major impact in increasing the proportion of rural Bangladeshis with access to electricity, there is a need for significant private investment by independent power producers (IPPs). Ideally, private firms will invest in build-own-operate plants that in turn sell power to the REB at reasonable rates on the basis of long-term contracts.
Power generation by the REB will indirectly aid the BPDB by lowering the demand by REB customers on BPDB generating capacity. Another benefit from any major expansion of the REB into power generation is that this will relieve pressure on the Government of Bangladesh from oil and gas companies to undertake gas exports. Such exports are not in the best long run economic interest of Bangladeshis and are politically unpopular among the majority. Besides other considerations, institutional reform of the power sector is a must to counter the arguments for export.
Recommendation Two
Establish a regulatory regime capable of assuring appropriate tariffs throughout the REB/PBS network.
The critical point in expanding rural electrification hinges on the ability and willingness of customers to pay.
Across the PBS system, the average tariff per kilowatt hour (kWh) falls short of the cost of providing service. This situation persists despite subsidised electricity rates from the BPDB. Electricity consumption in the higher industrial and commercial rate categories is insufficient to balance out consumption in the lower domestic and agricultural categories. The current state of affairs is not sustainable.
Widespread expansion of independent power generation, as described in Recommendation One, will be difficult under the current tariff structure. Significant private investment may not be forthcoming unless the REB can credibly assure investors that they will be able to recover their costs over the lifetime of the projects. If the PBSs substitute power generated by IPPs for power previously purchased from the BPDB at preferential rates, average tariffs charged may need to be adjusted. Raising tariffs will not be easy, but it is important that individual PBSs realise financial self-sufficiency in the long-run.
Recommendation Three
Initiate a more sophisticated relationship between the REB and the PBSs: allow those PBSs that are competent more autonomy and take under temporary trusteeship those with particularly poor financial records.
Given current energy sector trends and advances in generation technology over the past two decades that have allowed smaller generation plants to become economic, it may well be that further decentralisation – in the sense of the REB yielding more financial and managerial power to the mature PBSs – is now required and desirable.
Admittedly, some aspects of central control are necessary to the success of the programme. The REB sets guidelines that act as a foundation for maintaining standards and ensuring consistency in terms of the engineering, financial, human resources, and commercial aspects of PBS management. Nor can the REB delegate its responsibility for competent transparent auditing. Many PBSs do not currently have the managerial strength to undertake complex negotiations – such as are required to negotiate with IPPs.
The REB has been reluctant to give autonomy to PBSs for fear that they mismanage it. Among some PBSs that fear may be valid; among others it is not. The financially healthy PBSs with positive margins are a valuable source of managerial competence in the Bangladesh power sector. Their role could be expanded. They should be granted greater financial autonomy, and encouraged to undertake more ambitious projects, such as contracting with IPPs, redesigning their tariff structures so as to increase connections, and improving service quality for customer-members.
Recommendation Four
Extend micro-credit to households for the financing of investments in electrical access.
Although the costs of securing a residential connection are low, they may present a substantial barrier for those living at a near-subsistence level. However, low income does not mean an unwillingness to pay for electrical service, particularly if the service is reliable. On the contrary, if they currently have no access to electricity, poor families may stand to gain large benefits from incremental consumption, and would therefore be prepared to pay according to the cost of service.
If the rural poor are willing and able to pay electricity tariffs, but are held back by an inability to finance a connection, this represents a policy failure. Either the REB or an existing micro-credit organisation (such as the Grameen Bank or BRAC) should extend credit, with appropriate loan guarantees.
Recommendation Five
Consider various forms of distributed generation alongside grid extension when electrifying a new area.
Given that the REB has followed a policy of connecting the most economically attractive areas first, further expansion of service will be to increasingly remote areas with weak loads. Decentralised alternatives such as diesel, biomass, solar and wind may be cheaper than grid extension in these areas, and should be considered as part of the planning process.
