Flash Report /
Bangladesh

Bangladesh: Regulator increases electricity tariff to reduce fiscal subsidy

  • Power sector fiscal subsidy to reduce by c23%

  • Positive for Power Grid (electricity transmission) and United Power (electricity generation)

  • Adverse for DESCO (electricity distribution); most cement, steel and textile companies

IDLC Securities
27 February 2020
Published byIDLC Securities

The Bangladesh Energy Regulatory Commission (BERC) announced the increase of bulk and retail electricity prices in a press release today. The new rates will be applicable from 20 March 2020. The main purpose of this price hike is to reduce the amount of subsidy the government pays to the power sector. In FY 19, the government paid USD1.08bn subsidy to the power sector, which should reduce to USD0.83bn (c23% decline) after this tariff hike. Please note that the previous tariff hike took place in November 2017. 

According to the press release, per unit (kilowatt-hour) price of the bulk tariff has been increased to BDT5.17 from BDT4.77 on an average, implying 8.4% growth. Also, the wheeling charge has been increased by BDT0.0147 per unit, implying a 5.3% increase from BDT0.278. This wheeling charge is the main source of revenue for the listed power transmission company Power Grid Company of Bangladesh (POWERGRID). The change in wheeling charge is expected to increase its earnings by c19%.

Subsequently, the regulator also increased the retail tariff by BDT0.36 per unit (+5.3% increase from BDT6.77 per unit) on an average to pass on the costs to the end customers. However, the rise in retail tariff (BDT0.36 per unit) is lower than the total increase in bulk tariff plus wheeling charge (BDT0.4147 per unit) in total. Therefore, the change in tariff rates is supposed to have an adverse effect on the distribution companies. We estimate that the only listed power distribution company, Dhaka Electric Supply Company Limited (DESCO) may experience a c22% decrease over its LTM earnings.

The power generation companies in Bangladesh are mostly unaffected from the change in electricity tariff since their capacity payment is fixed in nature and they do not have pricing power of their own. The only exception to this policy is United Power Generation and Distribution Company Limited (UPGDCL), which can increase the tariff of its own when there is a change in the retail tariff structure. We estimate that UPGDCL may experience c6% increase over its LTM earnings due to this change in tariff. 

Cement, steel, textiles and ready-made garments (RMG) industries require heavy electricity consumption for their production process. Therefore, most of the companies (except a few with their own captive power plant) belonging to these industries will see a significant increase in production costs. We think that the companies in these industries will find it difficult to pass on the costs to the customers due to heavy competition (cement and steel industries) and pricing pressure (textiles and RMG industries). Therefore, the overall profitability of these industries is likely to be lower.