Independent Power Producers (IPPs) are facing a financial storm. The Bangladesh Power Development Board (BPDB), which is the sole procurer of power in the country, owes Bangladesh Independent Power Producers' Association (BIPPA) around US$2.5 billion in outstanding payments. At the same time, BIPPA members are unable to procure fuel from international markets due to dollar crunch and also due to the fact that some of its members have become bank defaulters.
This is a unique situation as the recent timeline gives a clear picture of the composition of power producers in the country. Bangladesh's dependence on imported fuel has been on the rise in the face of steady depletion of domestic gas production. Indeed, the percentage of imported fuel in the fuel mix rose from 22 per cent in 2018 to more than 50 per cent in 2023. This was a conscious decision by the government to forgo greater exploration of domestic sources of natural fuel like gas and opt for an import-dependent energy policy.
Today, the financial state of the country is in crisis. A series of global shocks was experienced over which no one had any control. First came the Covid pandemic, and then the lingering Russo-Ukrainian war. Every nation (that is dependent on imported energy sources) around the globe has been picking up the pieces of volatile prices in the international energy markets and Bangladesh is no exception. Now that the energy sector is heavily dependent on foreign fuel, the IPPs, like other import-dependent parties of the energy sector have built up a multi-billion-dollar backlog in payment. The State is unable to pay for the power produced.
In this desperate situation, BIPPA has appealed to the Finance Division stating that IPPs are facing impossible challenges to meet demand for producing power where outstanding bills have now reached approximately $2.5 billion. The association has sought intervention from the Finance Division to have IPPs categorised differently in the banking system because their default on payments is due to have cash flow problems caused by non-payment of IPPs' bills by the state body. Financial institutions, such as banks will treat the IPPs as regular clients and declare power producers as defaulters because they do not belong to any special group or classification. Furthermore, banks are under immense pressure themselves to get tough with defaulters in general as per instructions from the Bangladesh Bank.
It is now impossible for the policymakers to ignore the situation any further. These nagging financial problems will continue to grow and what is amply clear from news published in the newspaper, the State has been regularly defaulting on payments to both producers of power and suppliers of imported energy. The exact figure of payment owed by the State to all these parties has been kept opaque but unofficial estimates put it around $5.0 billion. As per a recent World Bank report, Bangladesh can't expect an increase in the inward remittance and this amount will remain static for the 2024 financial year. There is no good news about the readymade apparels (RMG) sector either because exports won't magically increase.
So where is the money coming from to pay these outstanding bills? The IPPs supply 38 per cent of the total power demand of the country. Given the fact that BPDB is being unable to stand up to its financial commitments when it comes to paying foreign heavyweight companies like Adani (India) and Chevron (USA), is it any surprise that IPPs are also facing the music? Till now, IPPs were getting paid from a fund that the Bangladesh Energy Regulatory Commission (BERC) had created which served as a contingency reserve for the power sector under the directive of the Prime Minister. Obviously, that fund has reached its limits given the overall fiscal situation.
For IPPs the current impasse translates into massive losses. These companies cannot pay for the imported furnace oil. Then there is the question of opening Letters of Credit (LCs) where multiple problems have arisen, one of which is the devaluation of local currency against the dollar and the other issue being unable to clear what is owed to banks for LCs opened. Hence, IPPs are being penalised by banks as defaulting companies and are at risk of being blacklisted.
What is going to happen if IPPs reach a point where they can no longer produce power? Can the country afford to lose 40 per cent of its power? The situation is unthinkable for the policymakers. Regardless of what decision is arrived at, it is obvious that producers and suppliers of energy will not be able to continue supplying the State free of cost while they count losses in the billions of dollars. How the State will resolve the situation is its problem.
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