Cost Efficiency Evaluation of Thermal Power Plants in Bangladesh Using a Two-Stage DEA Model

Abstract

Electricity production in Bangladesh is based primarily on fossil fuels, which leads to one of the highest levels of subsidies in the world. These subsidies arise from the supply of subsidized fuels to the plants, but also to support plants which operate at a loss from selling electricity at a tariff lower than the cost of production. The cost of production depends on the fuel cost, the fixed costs and the variable O&M costs. The loss occurs more frequently in peaking power plants, which do not operate at high plant factors, but must be given capacity payments in order to compensate the plant owners for their capital investments. This inefficiency became particularly evident during the Covid 19 pandemic, where subsidy payments to the power sector broke all records, while electricity demand plummeted. Capacity payments for idle plants take up a third of the budget allocated to the entire power and energy sector. Bangladesh is planning to implement an energy transition plan, by cutting down inefficiency in the power sector, while increasing the share of renewable energy in electricity production. However, the cost of renewable electricity is not perceived to be competitive with the average cost of fossil fuel electricity, and this point is highlighted by the traditional fossil fuel industry to downplay the potential of renewable electricity solutions. In this research we aim to highlight how the average cost of fossil fuel electricity does not represent the wide variation in the profitability of individual fossil fuel plants, and that many such plants have generation costs that far exceed the current cost of solar PV even combined with storage. We take the annual generation and cost data of the thermal power plant fleet of Bangladesh, including 30 baseload plants and 91 peaking plants, for the financial year 2019-2020. Using a two stage approach of Data Envelopment Analysis and Tobit regression, the study aims to investigate and compare the pattern of cost efficiencies among the thermal power plants of Bangladesh, and identify the main causes of loss, which make subsidization necessary. It takes into account the three main cost components of plants, and analyzes which costs are responsible for the cost inefficincies.