Who should bear the cost of power?

The increase in electricity tariffs is arriving at a difficult moment. Households and businesses are under pressure from years of high inflation and declining real incomes. Higher electricity prices feed directly into the cost of living, with estimates suggesting that a tariff hike of this magnitude could add around one percentage point to inflation over the course of a year as its effects ripple through the economy.

Yet the fiscal reality behind the proposal is equally difficult to ignore.

Current tariffs cover only part of the cost of supplying electricity. Annual power subsidies have exceeded Tk40,000 crore in recent years and could rise further if current trends continue. The gap between high power purchase costs and relatively low retail tariffs remains the principal source of BPDB's financial deficit. Delayed payments to suppliers and other losses are often absorbed elsewhere in the public system, obscuring the full scale of the burden.

Even with the increase, the subsidy burden will remain substantial. The tariff adjustment may narrow the gap between costs and revenues, but it is unlikely to eliminate the need for significant budgetary support. The sector will remain exposed to fuel prices and exchange-rate movements. The tariff hike slows the bleeding; it does not stop it.

This naturally raises a question many consumers are asking: why should they pay more at all if part of today's high costs reflects years of procurement inefficiencies, expensive contracts, and governance failures?

The concern is legitimate. The power sector should continue pursuing contract renegotiation where feasible, improve dispatch decisions, reduce system losses, and strengthen accountability. Consumers are more likely to accept adjustment if they see evidence that avoidable costs are being reduced.

But it is also important to distinguish between historical inefficiencies and the current cost environment.

Most contracts are long-term commitments with legal and financial constraints. Similarly, improvements in dispatch planning, reductions in reliance on expensive liquid-fuel generation, and lower distribution losses can all reduce costs at the margin. BPDB's system loss rate has reportedly risen above internationally accepted benchmarks, suggesting room for improvement. But these gains, while important, are incremental rather than transformative. They cannot erase a subsidy burden measured in tens of thousands of crores overnight.

A growing share of today's pressure reflects a different reality: higher global fuel prices and the rising cost of imported energy. These costs are likely to persist rather than reverse quickly. They do not disappear if tariffs are frozen. They simply reappear elsewhere in the system.

Viewed from that perspective, the tariff increase reflects a durable shift in energy costs rather than a temporary price spike. Some degree of pass-through therefore becomes necessary to preserve fiscal sustainability and signal the true scarcity of energy resources.

The concern about industrial competitiveness deserves similar nuance. Higher electricity prices can reduce margins and weaken competitiveness, particularly for energy-intensive industries. But suppressing tariffs does not eliminate those costs – it shifts them elsewhere, through larger subsidies, delayed payments, financial stress within the energy system, or reduced public investment. Someone still pays.

Moreover, much of the current cost pressure reflects global energy markets rather than country-specific factors. Bangladesh's competitors are facing similar increases in energy costs, which moderates – though does not eliminate – the competitiveness impact of higher domestic tariffs.

The consequences of avoiding adjustment are already visible.

The interim government reportedly had to clear more than Tk60,000 crore in arrears accumulated under the previous administration simply to prevent disruptions in power supply. Independent power producers have argued that outages were driven not only by technical failures but also by fuel shortages resulting from delayed payments. This cycle of underpricing, losses, arrears, and supply disruption illustrates how financial indiscipline eventually becomes an economic cost. When power producers are not paid on time, fuel supplies are disrupted, generation falls, and load shedding increases – undermining productivity and competitiveness across the economy.

A harsh fiscal reality constrains compensation schemes. The government is relying largely on the Family Card program to cushion the poorest households. The room for additional support remains limited without more borrowing or cuts elsewhere.

Many lower-income and lower-middle-income households consume more than the current 50 kWh lifeline threshold and remain vulnerable to higher electricity bills. Expanding the lifeline slab could provide relief, but at the cost of higher subsidies or higher tariffs elsewhere. The question is not whether these households need support, but whether electricity pricing is the most effective way to provide it.

The real challenge is not simply to raise tariffs but to improve the performance of the system itself. The power sector must demonstrate visible progress in reducing avoidable costs, improving operational efficiency, and strengthening accountability. If consumers are being asked to pay more, they deserve evidence that the system is also demanding more of itself.

Only then can a necessary – but painful – adjustment be seen as both economically justified and politically legitimate.

Zahid Hussain is a former lead economist of The World Bank, Dhaka Office