How Bangladesh's Power Sector Crisis Was Engineered: A Financial Disaster in the Making
Bangladesh's power sector has embarked on an ambitious journey, aiming to accelerate growth, construct large-scale infrastructure, and silence the age-old jokes about load-shedding. While it has achieved the former, the latter two remain elusive. The country now finds itself grappling with a financial crisis so severe that even the most creative accounting cannot obscure its magnitude.
A comprehensive review by the government's National Review Committee (NRC) reveals that the crisis stems not from unavoidable market shocks or temporary crises, but from deep-seated governance and contractual failures. This revelation is particularly significant as it comes at a time when the costs of these failures are becoming increasingly impossible to ignore.
The Power Sector's Financial Spiral
The Bangladesh Power Development Board (BPDB) stands at the epicenter of this crisis, acting as the conduit through which it permeates the national budget and the broader economy. Its annual losses have skyrocketed from Tk5,468 crore in FY15 to Tk50,565 crore in FY25, a nearly tenfold increase over a decade. Concurrently, government subsidies have risen from Tk8,978 crore to Tk59,600 crore during the same period. These figures are not indicative of a sector merely struggling; they signal a sector that has lost its financial footing.
The crux of the problem is starkly simple: BPDB purchases electricity at prices far surpassing what it sells it for. Bulk supply costs have soared to Tk12.35 per kilowatt-hour, while the weighted average bulk tariff hovers at Tk6.63. To bridge this gap, tariffs would need to surge by approximately 86%, merely to enable BPDB to break even.
Such an increase would catapult Bangladesh's industrial electricity prices to levels surpassing those of Vietnam, China, India, and Pakistan by 80–90%. In a world where competitiveness is measured in cents per kilowatt-hour, this shock would not merely harm industry; it would risk pushing manufacturing to other locations. Electricity would remain available, but its affordability would diminish for the very sectors expected to drive growth.
Excess Capacity: A Technical and Fiscal Burden
The irony lies in the fact that Bangladesh did not reach this juncture due to a lack of capacity. Instead, it arrived here because it constructed an excessive amount of the wrong kind of capacity, at the wrong price, under the wrong contracts.
Between 2009 and FY24, installed generation capacity increased more than fivefold. Yet, system-wide utilization has remained stagnant at around 40–50% in recent years. This translates to roughly half the system operating at idleness on a typical day.
As of FY24, installed capacity surpasses system requirements by 5,600–6,700 megawatts, even after accounting for prudent reserve margins. Under conservative assumptions, excess capacity still exceeds 3,000 megawatts. When the 2,100–2,800 megawatts that cannot be dispatched due to fuel shortages, grid constraints, or logistical failures are added, the total idle capacity escalates to 7,700–9,500 megawatts.
This idle capacity is not merely a technical inefficiency; it is a fiscal liability. The annual carrying cost of stranded capacity, measured through capacity payments alone, is estimated at $0.9–1.5 billion. This figure excludes fuel pass-throughs, foreign-exchange adjustments, late-payment surcharges, and contingent liabilities. The true cost is even higher.
Bangladesh has constructed a power system where bills arrive even when electricity is not available, a characteristic it shares with gas.
Premium Pricing: A Costly Conundrum
If overcapacity constitutes one half of the crisis, overpricing constitutes the other. A decade of contracts awarded without competition, due diligence, and alignment to fuel availability has engendered a cost structure that is fundamentally unsustainable.
Across various technologies, premiums are consistently and unusually high. Solar power purchase agreements exhibit premiums of 70–80%, heavy fuel oil plants display premiums of 40–50%, unsolicited gas projects showcase premiums of around 45%. The Adani Godda import contract exemplifies cross-border generosity, paying approximately 50% more for the privilege of importing electricity that could have been generated domestically.
In aggregate, Bangladesh has achieved the extraordinary feat of a power system where tariffs are inflated, and the confidence with which Power Purchase Agreements (PPAs) were signed is even more so.
For a nation still ascending the lower-middle-income ladder, this represents a remarkable achievement in one domain, mirroring the behavior of a petrostate without the petro. While citizens grapple with rising living costs, the nation has quietly emerged as a global pioneer in a novel development model, committing to pay nearly $1–1.5 billion annually for electricity it does not even utilize.
These are not isolated mistakes made in good faith. They reflect a system that rewarded overpricing, encouraged unsolicited proposals, and normalized contracts that shifted risk to the public while guaranteeing profits to private parties.
The Scale of Rent: A Deliberate Endeavor?
Viewed through this lens, Bangladesh's experience begins to resemble something more deliberate.
Bangladesh may still be a lower-middle-income country, but it embraced a first-world hobby under the past regime: overpaying for everything. And that, in its own absurd way, is a form of economic miracle. Payments to power producers have surged eleven-fold since FY11, while actual electricity generation has risen only four-fold. Capacity payments alone have increased nearly twenty-fold.
The NRC's findings collectively point to a conclusion that is uncomfortable precisely because it is so orderly. The fiscal strain now evident in BPDB's accounts is not the result of miscalculation or bad luck. It is the cumulative outcome of repeated decisions that prioritized contractual certainty for investors over affordability, efficiency, or system coherence. Once locked into long-term agreements, these costs became automatic, renewed each month, indifferent to demand, fuel availability, or economic context.
At that juncture, overpayment ceased to be an anomaly and became a feature. What began as emergency accommodation evolved into routine practice, and routine practice hardened into a model.
The Rent Extraction Machine: Institutional Incentives
The now-repealed Quick Enhancement of Electricity and Energy Supply (Special Provisions) Act enabled such contracts without competitive bidding. However, the deeper issue lies in the institutional framework, a political economy that incentivized rent extraction.
This conclusion follows from basic institutional logic rather than speculation about individual intent. The contracts in question were repeatedly approved over many years, across multiple projects, technologies, and sponsors, despite consistently producing fiscally damaging, commercially unbalanced, and benchmark-defying outcomes. Occasional mistakes are possible in any system. The persistent replication of one-sided features, high guaranteed returns, weak risk sharing, limited competition, and insulation from downside risk, points to incentives embedded in the decision-making environment.
In such settings, rational actors respond predictably. Where large, durable rents are created through contract design, and where discretion is normalized and oversight weak, those rents tend to be contested, allocated, and shared through political financing, influence, revolving-door relationships, or informal patronage. The alternative explanation, that successive officials repeatedly approved contracts misaligned with the public interest without learning or correction, would require assuming a level of sustained institutional irrationality that strains credibility.
The more parsimonious explanation, consistent with the NRC's findings and BPDB's balance sheet, is that the system evolved to reward decisions that generated excess profits, and that these profits did not remain confined to the formal contract holders.
The NRC report makes this visible. What transpires next will determine whether BPDB's losses continue to spill into the national budget and the broader economy, or whether this accounting clarity becomes the starting point for unwinding a system that has become too expensive for the country to afford.
Zahid Hussain is a former chief economist of The World Bank, Dhaka Office
