Inability to pay, not instability, behind India's power export rule amendment: Summit reviewing cross border deals between Bangladesh and India

Special Report :

On August 14, 2024, Reuters, a global news agency with its headquarters in London, reported on an amendment to India’s power export rules, granting Indian power exporters the flexibility to reroute their output to domestic grids in cases of payment delays or off take issues from partner countries.

This amendment has sparked discussions about its potential link to the political dynamics in Bangladesh, especially considering the longstanding energy ties between the two countries.

However, contrary to some interpretations, this policy shift is not directly influenced by the current political scenario in Bangladesh.

Instead, it is a broader strategic move by India to safeguard its energy sector from financial risks, particularly in response to payment issues with foreign partners like Bangladesh.

The new rule allows Indian power producers who export electricity to sell domestically if there are persistent payment delays from foreign partners.

This change is designed to protect Indian companies from economic and political uncertainties in neighboring countries, ensuring they have access to a reliable market in case of disruptions abroad.

A key driver behind this policy shift is the ongoing payment issues faced by Indian power exporters, particularly Adani Power’s Godda plant in Jharkhand, which exports 100% of its electricity to Bangladesh under a 25-year Power Purchase Agreement (PPA) with the Bangladesh Power Development Board (BPDB). According to reliable sources at BPDB, the board has accumulated significant arrears in payments to multiple power plants, including Godda. Adani Power reportedly has over USD 800 million in outstanding payments, primarily related to capacity charges and fuel payments.

Bangladesh’s financial collapse in the power sector can be traced back to the dubious awarding of power contracts through the now-repealed Emergency Act and staged international tenders, which benefited Awami League MPs and oligarchs with close ties to Prime Minister Sheikh Hasina’s family.

This preferential treatment in awarding power projects led to the rapid expansion of the country’s power generation capacity, with little regard for actual demand.

As a result, Bangladesh now faces a surplus power generation capacity of over 40%, with 29 additional projects in the pipeline that will add another 10,881 MW to the grid.

This has resulted in exorbitant capacity payments to independent power producers (IPPs), even for electricity that is not needed.

An example of this dubious tendering process is the rejection of two 115 MW Heavy Fuel Oil (HFO)-based IPP projects in the Shantahar and Bagerhat regions.

These projects, which were won through international tenders by Excel Infrastructure Ltd, (owned by Energis Power Corporation ltd.) as the lowest qualified bidder, were recommended by BPDB for the issuance of a Letter of Intent (LOI) and contract signing.

Despite these recommendations, the Hasina government rejected the projects, raising questions about the fairness of the tendering process and the influence of political connections on decision-making in the power sector.

The overcapacity issue has created a financial crisis for BPDB, as the board is obligated to make capacity payments to IPPs even when their plants are idle.

These payments have ballooned from Tk 5,376 crore in FY2017 to an estimated Tk 28,000 crore in FY2023, according to the Centre for Policy Dialogue (CPD).

The burden of these capacity payments, coupled with a severe dollar shortage, has led to a backlog of approximately $4 billion in the power sector’s outstanding bills.

The rule change has also impacted Bangladesh’s Summit Group, which is now reviewing its cross-border power deals with Indian partners.

Summit Group had signed preliminary agreements with Indian companies, including Tata Power Renewable Energy Ltd, to import renewable energy and construct 1,000 megawatts (MW) of renewable projects.

However, the recent policy change in India has caused concern within Summit Group.

Aziz Khan, Chairman of Summit Group, has expressed that Indian partners might now be more inclined to sell electricity within India due to the new rules.

This shift increases the risks for Summit Group, which plans to invest in transmission infrastructure in Bangladesh.

Summit is considering renegotiating financial terms or delaying investments until there is more policy clarity.

The company is also reviewing its plans to import clean electricity from hydro power plants it planned to build in Bhutan and Nepal, as part of a $3 billion regional clean power investment plan.

Khan also pointed to the new Bangladesh government’s decision to suspend the Emergency Act, which previously allowed power supply contracts to be awarded without tenders.

This has further complicated the landscape for Summit Group’s planned projects and contributed to its decision to review cross-border investments.

Despite the financial challenges and the policy change, Adani Power has reiterated its commitment to fulfilling its agreement with Bangladesh.

The company clarified that the new rule provides an option to sell power domestically but does not necessitate a shift away from the existing contract with Bangladesh.

This shows that the amendment is not intended to sever or disrupt existing energy ties with Bangladesh, even in the face of significant payment challenges.