When we buy rice, lentils, clothes, or furniture from the market, the math is straightforward—we pay for what we take. Even if the manufacturer stores unsold goods in a warehouse, the buyer bears no responsibility. However, a national power system or power grid cannot operate this way. Electricity cannot be stored in a container or warehouse like physical goods. Although battery technology continues to advance, on the massive scale of a national grid, electricity must reach the point of consumption at the exact moment it is generated.

This hyper-sensitive synchronization between generation and consumption makes the economic rules of the power sector fundamentally different from everyday shopping. To keep lights on around the clock and factories running, power plants must be kept ready every single second. The international economic mechanism designed to cover this fixed and unavoidable cost of maintaining readiness is known as a Capacity Charge.

In local political arenas and across social media, a claim is often echoed loudly: that power plant owners are allegedly being paid thousands of crores “for doing nothing” while their plants remain shut. While this sounds sensational, understanding how much of this is reality and how much is political misinformation requires looking closely at the power market, bank loans, and the underlying economics of power projects.

Power Purchase Agreements and the Two-Part Tariff System

The core foundation of this PPA is a Two-Part Tariff structure, where the bill generated by a power plant is split into two distinct components:

1. Capacity Charge (Fixed Cost): Whether the power plant is running or shut down, if it remains ready to generate electricity the moment it receives an order from the national grid, the state must pay this fixed charge as per the agreement. Simply put, this covers the power plant’s fixed costs.
2. Energy Charge (Variable Cost): When the power plant actually starts producing electricity, this charge covers the fuel consumed (coal, gas, furnace oil, or diesel). This is known as the variable cost. If a power plant remains closed for an entire month due to a lack of demand on the national grid, the state does not pay a single penny in energy charges.

This concept can be understood through a familiar real-life analogy. Suppose you rent a car for a month on the condition that the car and driver will be ready at your doorstep 24/7. Whether you drive 300 kilometers every day or keep the car parked in the garage for the entire month, you still have to pay the agreed monthly rental fee to the owner. This is because the driver has reserved his time and vehicle specifically for you instead of renting it out elsewhere. This rental fee represents the Capacity Charge. Meanwhile, the liters of petrol needed to drive the car out of the garage represent the Energy Charge. If you do not drive, you save money on petrol, but the agreed monthly rent cannot be waived just because the car remained in the garage.Thus, the mathematical calculation for total electricity cost is:

Where Does the Capacity Charge Money Actually Go?

Constructing a large power plant is an extraordinarily expensive venture. Setting up a modern 500 MW or 1000 MW power plant requires thousands of crores of taka—or hundreds of millions of dollars. No company can fund such a facility entirely out of pocket. Consequently, 70% to 80% of this budget comes as loans from international or domestic banks.

1. Bank Loan and Interest Installments: The largest portion of the capacity charge goes directly to banks to service the principal and interest installments of foreign and domestic loans taken during construction. Whether the plant’s turbines spin or not, banks do not allow loan due dates to pass unpaid.
2. Staff Salaries and Fixed Maintenance: Even when a plant is idle, regular salaries must be paid to engineers, technicians, security guards, and administrative staff. Furthermore, routine technical maintenance must be conducted continuously to prevent massive turbines, boilers, and sensitive electronic components from rusting or degrading.
3. Return on Equity: Investors commit vast amounts of capital to these long-term projects at significant risk. After servicing bank debt, a reasonable rate of return on invested equity must be guaranteed. Without this guaranteed return, no international or domestic investor would commit capital to build power plants.
4. International Insurance and Statutory Fees: To hedge against potential fires, earthquakes, or major mechanical accidents, mega plants must purchase international insurance coverage. Additionally, annual approval fees and taxes must be paid to various government authorities.

How is the Capacity Charge Mathematically Calculated?

A Capacity Charge is neither an estimated nor an arbitrary figure. It is determined by an equation grounded in international engineering and finance, where the key parameter is the Plant Availability Factor.

The strictest condition in a PPA contract is ‘availability.’ If a power plant claims to be ready, but when ordered by the National Load Despatch Center (NLDC) it fails to start due to mechanical faults, it is not considered ready. A plant can claim capacity charges only when all its equipment is fully operational and capable of feeding power into the grid immediately upon instruction.

The payment is calculated based on the ratio of operational readiness during a given month:

Capacity Payment = Contracted Capacity (MW) × Fixed Monthly Rate (Currency/MW) × Actual Availability Index

Simple Mathematical Analysis of Three Real-Life Scenarios

• Contracted Capacity: 400 MW
• Fixed Monthly Capacity Rate per MW: 50 Lakh BDT
• Maximum Possible Monthly Capacity Charge: 400 MW × 50 Lakh BDT = 20 Crore BDT

The plant remained operational for the entire 30 days (100% of the time) and generated continuous electricity based on national demand.

Scenario 2: Plant was ready, but the national grid did not draw electricity.

Outcome: Because the plant fulfilled its obligation by keeping itself fully ready, it receives the full 20 Crore BDT capacity charge under contractual terms. However, since it did not produce a single unit or burn any fuel, the state pays zero in ‘Energy Charges.’

Out of 30 days, the plant’s generator developed a fault, forcing it offline for 10 days.

Capacity Payment Due = 400 MW × 50 Lakh BDT × 66.67% ≈ 13.33 Crore BDT.

Clear Distinction Between Fixed and Variable Costs

Fixed Costs (Covered by Capacity Charge):

• Repayment of bank loan principal and interest installments.
• Permanent salaries for engineers/staff and operational camp expenses.
• International insurance premiums and statutory licensing fees.
• Routine maintenance to prevent degradation during idle periods.
• Defined dividend or return on invested equity.

• Cost of consumed fuel (coal, gas, furnace oil, or uranium).
• Water treatment, chemicals, engine oil, and lubricants.
• Waste/ash disposal and environmental compliance costs.
• Startup fuel costs incurred during the first few hours of restarting an idle plant.

Why Are Capacity Charges Indispensable?

While appealing in theory, this approach is impossible in power economics for the following reasons:

1. Sharing Massive Capital Risk: When sales drop at a garment or shoe factory, the owner can reduce production or lay off workers. In contrast, setting up a power plant requires spending thousands of crores upfront. If an investor is told, “We will pay only if we buy power, and zero if we don’t,” the investor will face bankruptcy if the state halts purchases. Facing such uncertainty, no private entity globally would invest in power generation.
2. Strict Bank Financing Conditions: International banks funding power projects operate under strict ‘Project Finance’ rules. Their primary condition requires an assured revenue stream (Debt Service Coverage Ratio) in the contract to guarantee debt servicing. Banks release loan capital specifically because of the legal guarantees provided by capacity charges in IPP contracts. Without this, financing stalls completely.
3. Peak Demand and Safety Reserve Margins: A country’s power demand fluctuates throughout the year and across different times of day. For example, in a warm country, nighttime demand in winter might be 8,000 MW, but during peak summer heatwaves, running air conditioners and irrigation pumps pushes demand up to 16,000 MW.

To meet this extra 8,000 MW summer demand, the state must build and maintain power plants in advance. These plants may sit idle for four to five months during winter. Without capacity charges, these backup plants would go bankrupt and permanently close due to lack of revenue. Consequently, when summer arrived, the country would face severe load-shedding. The cost of maintaining extra power plants to keep the grid stable during peak periods is inherently built into capacity charges.

Can a Power System Function Without Capacity Charges?

Energy-Only Market (Free Spot Market):

The prime example of this model is Texas, USA. During the 2021 winter storm, severe power shortages in the Texas ERCOT grid caused individual household electricity bills to surge to thousands of dollars in a single week, bankrupting many families. Furthermore, the risk of unassured fixed income deters new power plant construction—a phenomenon known in economics as the Missing Money Problem.

Developing economies lack the mature financial markets, open spot markets, or parallel transmission networks required for competitive spot pricing. In these countries, the state acts as the single buyer. Consequently, to attract massive domestic and foreign capital and ensure uninterrupted supply, two-part tariffs and capacity charges remain indispensable.

Misinformation vs. Real Problems Regarding Capacity Charges in Bangladesh

Quick Rental Power Plants and Crisis History:

Around 2009, Bangladesh suffered 8 to 10 hours of daily load-shedding, crippling households and industries alike. Building large, long-term coal or nuclear plants takes 5 to 8 years. To revive the economy urgently, the government contracted short-term (3 to 5 year) ‘Quick Rental’ furnace oil and diesel power plants. Due to the high investment risks at the time, investors would not have entered the market without capacity charge guarantees in their PPAs. It was an emergency solution to a dire crisis.

When critics or politicians claim that “hundreds of crores are being paid while plants sit idle,” they present a half-truth.

Legally and economically, if a power plant is ready, the state is obligated to pay its capacity charge. If the state chooses not to draw power or fails to supply fuel, it must still cover the fixed costs per contract. This is not a favor or undue concession to plant owners; it is a legally enforceable right designed to service bank debt internationally.

If the government forcibly stopped these payments, investors would file claims in international arbitration courts in London or Singapore. The state would face heavy penalties with interest, and its global credit rating would collapse—preventing international agencies from investing further in the country.

The capacity charge rule itself is not flawed. The real flaw arises when a massive gap develops between projected demand (Demand Forecasting) and actual demand.

For example, if a country’s peak electricity demand is 16,000 MW, maintaining a total capacity of 20,000 MW is logical for grid safety and backup (a 20-25% reserve margin). However, if aggressive industrial growth forecasts fail to materialize due to global recessions or other factors, leaving actual demand stuck at 16,000 MW while generation capacity is built up to 27,000 MW, the surplus 11,000 MW of power plants must sit idle year-round.

Shift in Capacity Charges with Mega Projects:

Recently, Bangladesh has commissioned large base-load power plants such as the 1220 MW Payra coal plant, Rampal, Matarbari, and the Rooppur Nuclear Power Plant.

• Older small oil plants had lower construction costs but extremely high fuel expenses, making every generated unit very expensive.
• New mega projects involve immense upfront capital and construction costs, making their capacity charge figures appear large on paper. However, their fuel costs (energy charges) are exceptionally low.

What Lessons Should We Learn?

A capacity charge is not an unscientific or harmful practice; it is the fundamental economic foundation of modern power systems. Without it, power infrastructure on this scale would never have been built.