Forrest Cookson, PhD
1.Problem: The manufacturing sector and in particular its largest component, the RMG (Readymade Garment) component, has grown over the years using two basic energy systems: (1) Taking electricity from the national grid; or (2) taking gas and generating the electricity for a particular factory. In both cases the enterprise establishs a standby system for periods when the basic system fails. This is typically generators using diesel oil as fuel. The frequency of outages has been so high that the costs of running the standby system has become significant.
The growth of the Bangladesh economy depends critically on an expanding volume of exports. Export growth will come largely from manufacturing. There is limited scope for exports of agricultural products other than shrimp nor non-IT services. To achieve this outcome the available energy supply must be efficient, stable, and good quality. This is one of the key problems that needs to be solved. It is unrealistic to expect Government services providing gas and power to significantly increase performance in the next five years. Government enterprises do not have a commitment to making profits resulting in poor performance. Nowhere is this more evident than in the energy sector.
This article focusses on one way to tackle the problem. There is much anguish over the difficulties of providing stable electricity supply to manufacturing. To so requires capital, proper experienced management, and a corruption free environment. These are not available.
- Situation: There are a significant number of power outages or periods of low gas pressure. These arise from: (1) the lack of foreign exchange to purchase fuel by the companies responsible for generating electricity from the failure of the Government to pay the providers of electricity or fuel. The shortage of skilled manpower due to misuse of the funding available for training mid-level officers. (3) The unwillingness to collect accurate data on losses. There are two short run problems: Availability of foreign exchange to pay for the fuel and providing sufficient capacity to unload LNG. As a consequence, despite adequate generating capacity inadequate fuel supply leads to outages. These shortages in gas and electricity result in reduced production or higher costs in the manufacturing sector.
There is a basic shortage of gas, the country’s favorite fuel. Chevron is essentially producing at the maximum rate consistent with good reservoir management but their gas fields will be finished in the early 2030s. The Government owned fields have been poorly managed and little increase in reserves has been achieved through drilling new wells. In addition, there are substantial losses from leakage in the transmission and distribution systems of gas and electricity.
The transmission system has been unable to provide electricity with steady frequency and voltage. This results in equipment loss or increased maintenance costs raising the cost of production.
The Government apparently decided to step away from serious exploration for natural gas. Many exploration opportunities were rejected and there was an unwillingness to raise gas prices to encourage exploration, forcing the economy to develop infrastructure for import of LNG. A limited amount of such infrastructure has been constructed and the import of LNG started. Changing the long run strategy for fueling the electricity system has not been seriously considered. Instead, the planners stayed with the status quo despite the recognition this would not work. This foolish, short-sighted policy is why we are in the mess of today.
It is unlikely that there will a sustainable resolution of the problems of the power system until there is an increase in exports providing foreign exchange. But exports cannot increase until the power system improves.
- Different approach: A new transmission-distribution company should be established that serves manufacturing organizations, particularly the RMG sector. This new transmission and distribution system would be separate from the existing one. Due to the geographical concentration of the RMG factories in a few areas much of the industry can be covered with a limited transmission system. Over time this new transmission system can be extended to Economic Zones when there is sufficient demand from a zone. Other major factories may be included.
This RMG focused transmission-distribution system should be privately owned and operated. Through international bidding an experienced company can be found. Perhaps with discussion with major garment buyers a short list can be established as the basis of the biding. As a loan will probably be required, a guarantee or actual equity participation might be obtained from an international financial institution.
The RMG companies should probably not be allowed to participate in the ownership of this company. This new company would construct a transmission-distribution system connected to the factories and Economic Zones and selected power generating companies. The Power Purchase Agreements would be between selected Power Generating companies and this new transmission-distribution company.
The price of electricity to the RMG factory, the Economic Zone or other allowed manufacturing sectors would be established from the actual costs. [purchase cost of the electricity plus the actual cost of the company and a reasonable target return on capital]. The Government should reserve the right to subsidize electricity sale price so RMG factories that produce garments using a particular type of fabric. This might take place as part of an industrial policy to promote a particular line of manufacturing. Subsidies can be introduced according to Government policy. Of course, one wants to avoid subsidies but this method at least is clearly controlled.
The new company would contract with several generating companies to purchase electricity according to agreed prices. As most customers will be exporters, an agreement will insure that sufficient foreign exchange is available from the export earnings to make the foreign exchange payments necessary. One can examine use of an L/C issued by this transmission institution in parallel with the export document where the power costs are excluded from the sales contract, the buyer being responsible for both.
The new transmission system will enable improvement of electricity to manufacturing industries as follows:
a. less variation in frequency
b. less variation in voltage
c. fewer power outages
- Conclusion
This note proposes a special transmission-distribution system for manufacturing industries. It would not necessarily cover the entire industry but over time the manufacturing facilities should be largely covered. Using a private company, probably foreign owned, to finance and operate this new system would provide a reliable, quality product.
One can be confident that the delivered power cost will be lower. The real advantage is the factories will be confident that they will receive quality electricity. In the early days of the new economy that emerged after 1990 there were developments in gas and power expansion through IPP and PSC contracts executed with foreigners. Complaints that the foreign investors would result in higher cost projects proved wrong. These early energy project provided Bangladesh with very cheap energy. But after 2000 the Government abandoned this approach. Costs rose.
One can expect considerable interest in such a project by foreign companies if there is international bidding. The TOR is readily prepared. To move forward with this project maps must be prepared of the areas where there is a concentration of RMG and other large industrial establishments. The gas and electricity requirements for each factory is established by asking the enterprise and by checking the billing records of purchases. Engineers should then be able to design the transmission-distribution network. This becomes a feasibility study prepared for contracting for consultants. On the basis of the consultants’ report an international tender is put out for a company to construct and operate this new transmission-distribution system.
When completed this system of power delivery will ensure good quality electricity to the manufacturing sector. We believe that the price of electricity will be lower yet will cover the costs. The system can also be extended to Economic Zones or Export Processing Zones when there is sufficient demand in a zone. The project as outlined does not deal with the delivery of natural gas to the factories.
