Energy sector was hobbled by dollar crunch in 2023. Will 2024 be any different?

The severe US dollar crunch hurt the power sector in Bangladesh most in 2023 as demand outpaced generation owing to lower imports of liquified natural gas and coal, leaving households and factories without power for hours during many summer days.

The single state buyer -- Bangladesh Power Development Board – witnessed piling up of deferred payments of Tk 25,000 crore, putting private power producers in trouble since they could not import furnace oil to keep plants up and running.

Likewise, Bangladesh Petroleum Corporation, the lone national petroleum importer, faced difficulty in paying bills, while the country's largest coal-based power plant in Payra remained shut for weeks due to the shortage of the fuel after the supplier refused to deliver it without receiving payments.

The power plant in Rampal was also shut several times due to the shortage of coal.

Although the country bid farewell to 2023, the bad news is that the crisis in the energy sector is unlikely to disappear in the new year since the underlying factors behind the current scenario are still at play.

For example, Bangladesh's gross forex reserves tumbled to $21.82 billion on Sunday, which was $40.7 billion in August 2021, meaning imports will continue to be under pressure.

As a result, the US dollar supply is once again going to be the key for Bangladesh even when global agencies have forecast stability in energy prices this year.

Concerns remain high whether public and private sectors would get the greenback on time to clear import bills for the primary fuel to produce electricity, run factories, keep transports moving and even cook foods.

"We have no major issues other than the dollar shortage in the power sector," said Prof M Tamim, dean of the chemical and materials engineering department at the Bangladesh University of Engineering and Technology (Buet).

He said fuel demand decreased globally, which indicates that the prices will be more or less unchanged.

Bangladesh relies on imported primary fuels, including LNG, furnace oil, diesel and coal to meet domestic requirement.

It needs 75 lakh tonnes of petroleum products a year, of which 92 percent are imported. Of the fuel, 20 percent is needed for power generation.

Besides, the country produces around 850 billion cubic feet of gas a year and imports around 280 bcf LNG. The power sector consumes around 40 percent of the total gas usage.

Since natural gas supply is not widely available for households across the country, liquefied petroleum gas (LPG) is becoming a popular cooking fuel, with private operators meeting 95 percent of demand. Around 16 lakh tonnes of the fuel were imported last year, a 7-8 percent increase from a year earlier.

Currently, the country's total power production capacity stands at 25,951 megawatts, and another 5,480 MW is expected to be added to the national network this year.

The generation will be 17,800 MW in April, the first summer month. Only for irrigation, Bangladesh will need an additional 2,590MW, according to a government projection.

During the irrigation season from January to May, the government plans to ensure a supply of 1,760 million cubic feet of gas per day, 155,000 tonnes of furnace oil, and 15,600 tonnes of diesel.

Analysts say the country has enough power generation capacity. But the main problem lies in ensuring the primary energy supply for power plants.

In a report in December, S&P Global cut Bangladesh's imports of high sulfur fuel oil (HSFO), consumed by ships and power plants, pressured by a persistent scarcity of funds and substantial payments outstanding from the government to importers.

Citing Imran Karim, the immediate past president of the Bangladesh Independent Power Producers' Association (BIPPA), it said the nation is likely to import around 3.5 million tonnes of 180-cst HSFO in 2024, down about 9 percent from 2023.

The 180-cst fuel oil is often used as cutter stock to blend down heavyfuel oil grades to bunker specification fuel.

This week, BIPPA President Faisal Khan told The Daily Star that local commercial banks are unable to open required letters of credit for fuel imports owing to a shortage of dollars.

Banks are also struggling to settle LCs related to foreign loan repayments and spare parts procurement.

"The power sector requires support from the Bangladesh Bank to ensure uninterrupted power generation. We hope mechanisms will be in place to ensure fair pricing of the US dollar," he said.

In 2024, the government will need to introduce automatic fuel pricing in line with the conditions of the International Monetary Fund's $4.7 billion loan programme, moving away from the state-led price fixation.

The move is also aimed at reducing subsidies, estimated to be Tk 32,000 crore in the current fiscal year of 2023-24.

In 2022-23, the government allocated around Tk 23,000 crore subsidy for the sector but it soared to Tk 39,534 crore at the end due to the depreciation of the taka, gas price hike and higher electricity imports from India.

The automatic pricing may raise gas and electricity prices locally, leading to a spiral in inflation, which has already surged to record levels and shows no signs of cooling.

Prof AK Enamul Haque, dean of the faculty of business and economics at East West University, said the decision will have an inflationary impact, so the government needs to deal with it carefully.

"If we adjust prices regularly on shorter intervals, volatility will increase and the government may lose control of the situation."

He calls the sharp decline in the forex reserves as a dangerous sign.

"The government is apparently in trouble, which will intensify if they don't change their major policies."

Prof Haque said if the government increases electricity and gas prices to reduce the subsidy burden, it might create trouble for sectors such as garments since they might see an erosion in competitiveness in the global market.

One of the main problems in the power sector of Bangladesh is overcapacity stemming from higher generation facilities amid lower-than-expected demand.

According to Prof Haque: "If we increase prices without retiring idle power plants, the burden will only increase."

Ijaz Hossain, a former dean of the engineering faculty at BUET, doesn't think that the forex situation will improve overnight.

He said the government has pushed back hiking energy prices until after the election.

"The government must hike the prices but the decision will have an impact on the economy, which will be challenging to tackle. So, it requires to take some radical decisions."

"Our first priority should be stabilising the dollar rate."

The taka has lost its value by about 28 percent against the US dollar in the past two years, central bank data showed.

Jakaria Jalal, head of strategy and planning at Bashundhara LP Gas Ltd, the market leader, said LPG importers struggled to manage dollars over the last year.

"We were unable to open LCs despite giving the required cash margin. Some companies were unable to purchase LPG from the international market and need support from other companies to this effect."

The LPG sector posted a 7-8 percent year-on-year growth in 2023, he said.

He said the auto-gas segment of LPG used in vehicles as an alternate fuel is becoming popular. "But there are some bureaucratic problems in setting up re-fuelling stations."

In 2024, LPG use in industries may increase as the government is drawing up regulations to make that happen amid the persisting gas crisis, he added.