Why the next government must put power sector reform first

The power sector’s high reserve margin, capacity payment obligations, and reliance on imported fossil fuels have weakened the Bangladesh Power Development Board’s (BPDB) financial strength. In a bid to urgently address its distress, the interim government, after assuming office in August 2024, undertook some measures to reduce costs. Yet, the power sector registered a record revenue shortfall in FY2024-25, calling for long-term efforts to deliver results. With the general election scheduled for February 12, 2026, the next government will be well-placed to design and implement long-term reforms to steer the power sector towards sustainability, while ensuring that the country’s economic growth trajectory remains intact. 

These reforms must include a rational power demand projection to avoid future overcapacity and associated capacity payments, greater reliance on grid power, reduced use of costly oil-fired power plants, increased renewable energy, and reduced transmission and distribution (T&D) losses. 

It is worth recalling that Bangladesh’s power demand projection—relying on optimistic GDP growth rates—has created several challenges. The power sector faces a high reserve margin, resulting in capacity payments for idle plants and a greater annual subsidy burden. 

In FY2024-25, the power system’s reserve margin hovered around 61.3 percent, based on the maximum peak demand of 17,000MW against an installed capacity of 27,414MW. While reserve margins typically rise with an increasing share of variable renewable energy (VRE), the country’s on-grid VRE share remains low. The power system’s reserve margin, excluding the VRE capacity of 762MW registered on June 30, 2025, stood at 56.8 percent in FY2024-25, substantiating its high surplus capacity. With power plants of a combined capacity of 6,756MW—excluding renewable energy—expected to come online before 2030, concerns remain about the persistently high reserve margin (installed capacity as of January 14, 2026 is 28,909MW; derated capacity is 28,484MW). Accordingly, the next government should project a more rational power demand and refrain from adding new fossil fuel-based capacity to prudently manage the reserve margin, thereby reducing obligations for exorbitant capacity payments for fossil-fuel plants. 

Enhancing electrification and modernising the grid

Industries in Bangladesh use gas for both boilers and captive power generation, avoiding significant dependence on grid power. It is a double whammy for the power sector: the surplus power capacity adds to capacity payments and BPDB’s revenue shortfall mounts. 

On the other hand, with the deepening piped gas supply crisis, industries are turning to alternative fuels like compressed natural gas (CNG) and liquefied petroleum gas (LPG). This increases their operational costs, raising business concerns. As CNG stations also face gas supply shortages, CNG is unlikely to fix the problem. Similarly, the recent LPG supply shortage poses a serious challenge to industries.

The next government should consider a two-pronged strategy for electrification to address these concerns. It can encourage industries operating captive generators without waste heat recovery systems to shift to grid power. The cost of electricity produced in a captive power plant with 40 percent efficiency is about Tk 10.75 per kilowatt-hour (kWh), which is comparable to grid electricity tariffs (this cost is calculated based on a gas price of Tk 40 per cubic metre and operational expenses equal to five percent of fuel costs). Likewise, the government can push industries with inefficient gas boilers to switch to electric boilers, thereby driving demand for grid power. The additional electricity sales to high-paying industrial consumers will partially relieve the fiscal burden on the power sector. Higher power demand will also help the government increase the share of on-grid renewable energy.

The success of this electrification will hinge on transforming the national power grid to meet evolving demand and provide reliable electricity, requiring investment to make the grid flexible and modern.

Reducing losses

Despite the current government’s efforts, rising costs continue to dent the power sector’s sustainability. BPDB’s FY2024-25 annual report shows that the power sector’s year-on-year (YoY) expenses swelled by 13.94 percent as opposed to a nine percent rise in sales revenue. The sector’s overall revenue shortfall soared to Tk 55,660 crore ($4.55 billion), marking an 18.3 percent YoY increase. 

One of the key reasons behind the power sector’s dismal performance is its continued reliance on expensive oil-fired plants. Although the current government pledged to minimise the use of fuel oil in power generation, its share fell only marginally, from 11.83 percent in FY2023-24 to 10.73 percent in FY2024-25. At the same time, power purchases from independent power producers surged 25.61 percent while the contribution of BPDB’s economic plants declined. As a result, the government’s strategy fell short of delivering the intended results. 

Likewise, the T&D losses, after showing substantial improvement in recent years, increased marginally to 10.13 percent in FY2024-25 from 10.06 percent in the previous year. 

The new government should take stock of these challenges and devise concrete strategies to operate economical plants, based on merit order dispatch, and limit T&D losses. In addition to raising the share of BPDB’s economic plants in total power generation, the government should aim to initially bring down the use of oil-fired plants to five percent, supported by renewable energy. With the integration of battery energy storage systems, it should try to limit the use of oil-fired plants. Likewise, the government should first contain T&D losses to the global average level (less than eight percent) and then strive to bring it further down to the average of the advanced economies (just over six percent). 

Such interventions are financially compelling. For instance, reducing oil-fired power generation to five percent can help Bangladesh save Tk 8,990 crore ($0.73 billion), slashing the subsidy of Tk 38,640 crore ($3.2 billion) by 23.3 percent. This estimate is based on total power generation of 101,187 gigawatt-hours (GWh) in FY2024-25, an average oil-fired generation cost of around Tk 25/kWh ($0.2/kWh) and a weighted average solar tariff of Tk 9.5/kWh ($0.078/kWh) from recently approved projects totalling 918MW. In addition, a two percent reduction in T&D losses could save the country Tk 2,450 crore ($0.2 billion), thus reducing the subsidy burden by 6.34 percent (average power generation cost of the grid: Tk 12.1/kWh [$0.1/kWh]). 

The next government needs to strategically reboot Bangladesh’s power sector to address its persistent vulnerability, which would help contain fiscal pressures. Its efforts must focus on long-term reforms rather than quick fixes to gradually improve the sector’s sustainability.

Shafiqul Alam is lead energy analyst for Bangladesh at the Institute for Energy Economics and Financial Analysis (IEEFA).

Views expressed in this article are the author's own. 

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