Explained: How Adani Power's supply cut hit Bangladesh and its economy

Bangladesh has expedited the payment of unpaid dues of $846 million to Adani Power just days of the November 7 deadline reportedly set by the Indian conglomerate for the same.

“Last month, we cleared $96 million, and this month, a letter of credit has been opened for an additional $170 million,” Muhammad Fouzul Kabir Khan, the power and energy adviser in the interim Bangladesh government, told Reuters.

Adani Power Jharkhand Limited (APJL), a wholly-owned subsidiary of Adani Power, had slashed electricity exports to Bangladesh by half because of outstanding bills. The Adani firm wrote to the power secretary asking the Bangladesh Power Development Board (PDB) to clear its outstanding dues by October 30.

The letter, dated October 27, said that if the bills are not paid, the company shall be constrained to take remedial action under the Power Purchase Agreement (PPA) by suspending the power supply on October 31.

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What has been the impact of power supply reduction on Bangladesh?

The reduction in electricity supply, which began on Thursday (October 31) night, has led to a power shortfall exceeding 1,600 megawatts (MW) in Bangladesh, with the 1,496 MW Adani plant now operating at half the capacity, producing just 700 MW.

The Gautam Adani-owned company reduced the power supply to Bangladesh this month to 700-800 MW from around 1,400 MW, a senior official at the Bangladesh Power Development Board told news agency Reuters.

The curtailment in power supply couldn’t have come at a worse time for Bangladesh which faces a growing energy demand due to rapid urbanisation and industrial expansion amid an economic downturn.

The country heavily relies on imported energy resources to cater to its swelling demand, but high global energy prices have made imports increasingly costly, straining Bangladesh’s foreign currency reserves.

With Adani Power slashing its supply to almost half in view of unpaid dues, power deficit has deepened in Bangladesh, causing blackouts that disrupt industries, businesses, and households.

The country’s Power Development Board (PDB) has been making efforts to partially settle its dues, but rising costs have complicated the process. Citing its Power Purchase Agreement (PPA) with the PDB, Adani Power reinstated its original coal pricing method after a temporary price reduction expired.

Significantly, sources familiar with the matter told Reuters last month that Bangladesh was scrutinising its contract with Adani Power, as it was charging them a rate nearly 27% higher than those of India’s other private producers.

It may be noted that the original pricing ties coal costs to the Indonesian and Australian Newcastle indices, both of which have been rising, leading to higher energy costs for the PDB.

Why Bangladesh has been grappling to clear Adani Power dues?

In the aftermath of the ouster of the Sheikh Hasina regime, Bangladesh is struggling with significant financial strain due to inflation, currency devaluation, and a foreign exchange crisis that are impacting daily life and economic stability.

Bangladesh has been facing a serious shortage of dollars since 2022 due to high crude oil prices after the Russian attack on Ukraine. The situation aggravated after the political turmoil in the country, which led to the ouster of former Prime Minister Sheikh Hasina on August 5 this year. Bangladesh’s forex reserves have fallen to less than $20 billion at the end of September 2024.

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Consequently, the dollar shortage is impacting the PDB’s ability to fulfill its financial commitments. Though the Bangladesh Krishi Bank had agreed to issue a $170.03 million letter of credit to Adani Power, it has been unable to do so due to limited dollar availability.

With weekly payments from the PDB falling short of Adani’s increased charges, the dues have escalated, pushing the power company to reduce its output.

The dollar shortage also hampers Bangladesh’s broader ability to secure critical imports like fuel and food. As foreign reserves dwindle, the country faces rising inflation, making everyday essentials more expensive.

What prompted Adani Power to set a deadline for payment of power dues for Bangladesh?

The company has attributed its move to the challenges it is facing in importing coal necessary for power generation.

As per sources, Adani Power immediately needs money to procure coal from Australia for its ultra-supercritical power project at Godda in Jharkhand that supplies electricity to Bangladesh. Since the Godda power project is ultra-supercritical, coal for the same is not available in India, and Adani Power needs to import the coal either from Australia or Indonesia, said the sources.

In November 2017, Bangladesh Power Development Board (BPDB) executed a long-term Power Purchase Agreement (PPA) with APL’s wholly-owned subsidiary Adani Power Jharkhand Limited (APJL) to procure 1,496 MW net capacity power from 2X800 MW ultra-supercritical power project at Godda.

Adani has been pressing the interim government to pay the dues since they took charge after the ouster of then Prime Minister Sheikh Hasina.

An interim government led by Nobel Laureate Professor Muhammad Yunus was installed in Bangladesh on August 8.

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How Adani Power’s move has taken a toll on Bangladesh’s economy?

In a country where steady electricity supply is vital for economic growth and social stability, the Adani Power supply cut could aggravate the challenges Bangladesh faces in maintaining energy security amid financial hardship.

It may have serious repercussions for exports, a crucial revenue source for Bangladesh, as power crunch may affect the production in industries dependent on consistent electricity, such as manufacturing and textile production.

As Bangladesh is making all the effort to break this stalemate, questions loom about the long-term stability of its energy agreements. Adani’s insistence on recovering capacity payments during the supply suspension — allowed under the PPA — highlights potential financial risks that may arise if other energy providers follow suit.

Bangladesh is urgently seeking $5 billion in financial aid from international lenders to stabilise its dwindling foreign exchange reserves and its central bank has raised key interest rates to tame soaring inflation. Last year, it sought a $4.7 billion bailout from the International Monetary Fund (IMF).