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The Chicken and the Egg Ought to Come Together

Zahid Hussain's picture

The power supply situation in Bangladesh remains as precarious as ever; with power outages becoming more erratic and load shedding persistently higher than the corresponding months in the previous year (see Figure). Bangladesh is currently experiencing unprecedented levels of load shedding nationally. Brought about by a shortage of generation supply capacity, load shedding is a last resort measure to prevent a collapse of the national electricity supply system. The risk of load shedding will remain high until at least 2013 if further actions are not taken to ameliorate the situation. Specific and immediate interventions were needed to minimize the risk of load shedding until the new peaking plant and base load electricity generating capacity being built comes online.

The government has taken initiatives to increase the generation capacity to 7,000 MW by 2013 through various technologies (fossil fuel and renewable) with both private and public sector participation. A large portion of this plan relies on quick rental power based on imported liquid fuels which are expensive, more than three times the cost per unit of electricity at which power is currently produced by large power plants.

Is it worth the money? The answer is overwhelmingly affirmative. If the rental contractors succeed in delivering power to the national grid, a major binding constraint on economic growth will be eased, yielding immediate dividends. There are other social and private benefits from more power—children can study and eat better at home, patients can be treated well in hospitals, particularly those in the Intensive Care Units, electricity based appliances will last longer, home entertainment will be more available and enjoyable and so on. However, there is consensus among those who have studied the power crisis in Bangladesh (the most important being the business community), that growth dividend alone justifies the expensive rental power. Expanding generation to close the power gap will help avert the two percentage point of annual GDP growth loss, thus making it worth more than the cost.

Success is not free. Rental power providers will have to be paid as they start supplying power to the national grid. Successful power provision will come with additional cost that will, at least initially, be borne by the government. Otherwise, the public intermediary – the Bangladesh Power Development Board -- will face financial insolvency. The current power tariff at the retail level is below the Long Term Average Cost of producing electricity, let alone the cost of purchasing it from rental sources. Electricity tariffs need to be aligned with the long term cost to be cost-reflective. This is also needed to ensure that electricity is used more efficiently and to discourage wasteful consumption. There are ways of protecting the poor from the adverse impact of tariff adjustment. The question essentially is about sharing the financial burden arising from the emergency response to mitigate the even costlier power deficit.

Life is never simple for the policy makers. There is one dilemma that will somehow need to be tackled to make price adjustment acceptable to all. The dilemma is akin to the classic chicken and egg problem. Which should come first - reliable power supply or price adjustment? End users say they will be willing to pay a higher price if the providers can guarantee reliable supply while the providers are unable to ensure reliable supply if they do not have sustainable financing. This is a deadlock situation where we cannot provide either because one lacks the other.

There is light at the end of the tunnel, after all. Take a little time out to think about how to solve the classical chicken-egg problem. Those who have thought about it suggest trying to understand the question first. They ask, what is meant by the “egg”? An obvious assumption is it is a “chicken egg” because the problem implies a link between the two. They ask further, what is meant by chicken egg? Another obvious answer is it is one from which a chicken can hatch a chicken. Using this definition, if we can find an animal that is not a chicken to lay the egg from which chicken can be hatched, we could say the egg came first. If on the other hand we define a chicken egg as one a chicken lays and find a chicken that already exists to lay an egg, we could say the chicken came first. There is a third option as well. If we can find a chicken and an egg that already exist, we could say the debate misses the point: they came together!

Yes, the point is to be open to all possibilities. In the context of the current power policy dilemma in Bangladesh, if the government can afford the financing to demonstrate, before making the public pay more, that it can indeed provide reliable power, we could say reliable power should come first. If it cannot find enough money then the option is to raise it from the end users or else we will not be able to sustain the provision of power from the short-term costly sources in particular and from any source in general for too long. However, it seems that we need to find both a chicken and an egg because we cannot depend on an animal that is not a chicken (money from other sources all the time) nor do we have a chicken that already exists (reliable power). The egg also has to be part of the solution. Foregoing the consumption of egg is part of the cost we incur for more chicken.

Bottom line: Reliable increase in the provision of power and cost-sharing must go hand-in-hand.

Comments

This is not my area of expertise but while reading the very worrying blog post it occurred to me that one of the solutions could be import of power from India -- particularly from the North Eastern Part of India even at a very high price. It is my understanding that evacuating power from that part of the country has been challenging for India in any case and there may be willingness to export this power at a price acceptable to both nations, at least in the short-run. I wonder also if conversations with power producers such as CESC (Calcutta Electric Supply Company) would be useful at all.

Thank you for commenting. An agreement with India for supplying 250 MW has already been signed. ADB is financing the grid interconnector needed to implement this agreement. Power import from India is expected by end 2011.

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