IN ENERGY contracts, a ‘take-or-pay’ clause is widely regarded as one of the most consequential financial obligations a government can assume. It guarantees that the buyer must pay regardless of whether the energy is actually consumed, effectively insulating investors from market risk while transferring that burden to the public. At first glance, the Rampal Power Plant appears to avoid this rigid structure, as its Power Purchase Agreement does not impose strict coal offtake obligations. However, a closer examination reveals a functionally equivalent mechanism embedded within its capacity payment framework. By obligating the Bangladesh Power Development Board to pay for the plant’s availability rather than its output, the contract creates a de facto take-or-pay structure that prioritises investor certainty while exposing the national treasury to persistent financial strain.
Unlike conventional take-or-pay arrangements tied directly to fuel procurement, Rampal’s contractual structure separates the obligation to purchase coal from the obligation to pay for generation capacity. Coal is procured through international tenders and short-term commercial arrangements rather than inflexible long-term supply contracts, which in theory allows operational flexibility during periods of foreign exchange constraints or logistical disruption. Yet this apparent flexibility offers little fiscal relief. Even when the plant remains idle due to coal shortages or reduced demand, capacity payments continue. The government is therefore not paying for electricity produced, but for the plant’s readiness to produce electricity, regardless of whether that capacity is utilised.
This distinction has profound economic implications. Capacity payments effectively transfer demand risk entirely to the public sector, ensuring steady returns for plant operators even in periods of underutilisation. Recent scrutiny of the Rampal PPA suggests that these fixed payments constitute a substantial portion of the plant’s revenue. In the 2023–24 fiscal year, approximately 64 per cent of Rampal’s total revenue derived from capacity charges alone. In practical terms, this means that billions of taka were paid for a facility that was either operating below capacity or not generating power at all. While the contract may not impose explicit coal take-or-pay penalties, the economic outcome is strikingly similar: the state remains financially obligated regardless of actual electricity generation.
Further concerns arise from the contract’s financial parameters, particularly the return on equity and heat rate provisions. In most comparable international joint ventures, return on equity typically falls within a range of 6 to 8 per cent, reflecting a balance between investor incentive and public affordability. However, the Rampal PPA reportedly guarantees a significantly higher RoE, estimated between 12 and 15 per cent. This elevated return effectively locks in excessive profit margins at public expense. Similarly, the contractual heat rate — which determines the amount of coal required per unit of electricity generated — appears to exceed the plant’s actual operational performance. This discrepancy allows operators to bill for greater fuel consumption than technically necessary, thereby increasing fuel-related payments without corresponding increases in output. Aligning the billing heat rate with actual performance could yield substantial savings for the government.
The financial imbalance becomes even clearer when compared to newer power projects within Bangladesh itself. The Matarbari Ultra Super Critical Coal Power Plant has established a significantly lower tariff benchmark, with electricity priced at approximately Tk 8.45 per unit, compared with Rampal’s Tk 13.57 per unit. This nearly 60 per cent cost difference cannot be easily justified, particularly given that both facilities employ comparable ultra-supercritical technology within the same national regulatory and economic environment. The Matarbari tariff demonstrates that lower-cost generation is achievable without compromising technological standards or investor participation. It therefore provides the government with a credible reference point for renegotiating legacy contracts such as Rampal’s. Officials estimate that aligning Rampal’s financial terms with these more efficient benchmarks could save the state over Tk 2,600 crore annually.
These structural disparities highlight a broader issue within Bangladesh’s power sector: the long-term fiscal consequences of capacity-based payment models that prioritise investor risk protection over systemic efficiency. While capacity payments are not inherently problematic and are widely used to ensure generation reliability, their design must reflect reasonable returns, transparent cost assumptions and equitable risk distribution. When poorly calibrated, such mechanisms can impose substantial financial burdens without delivering commensurate public benefit.
Meaningful reform of the Rampal PPA is therefore both economically and institutionally necessary. Adjusting the return on equity to internationally comparable levels would help restore balance between investor returns and public affordability. Revising heat rate assumptions to reflect actual operational performance would eliminate unjustified fuel costs. Greater transparency in coal pricing mechanisms, through index-based benchmarks linked to international markets, would further ensure that procurement costs remain fair and verifiable. Most importantly, revisiting the structure of capacity payments to better align compensation with actual electricity generation would reduce the fiscal burden associated with idle capacity.
Beyond its financial implications, the Rampal project also carries broader environmental and ecological concerns due to its proximity to the Sundarbans, one of the world’s most fragile mangrove ecosystems. Continued coal transport and combustion in this region amplify both environmental risk and economic inefficiency, reinforcing the urgency of reassessing the plant’s long-term role within Bangladesh’s evolving energy strategy.
Ultimately, the Rampal agreement reflects a contractual approach shaped by a period when attracting private investment was prioritised above long-term fiscal sustainability. While such incentives may have been considered necessary at the time, current market benchmarks and domestic experience demonstrate that more balanced arrangements are achievable. Reforming the contract would not undermine investor confidence; rather, it would strengthen institutional credibility by ensuring that public resources are managed transparently, efficiently and in the national interest. As Bangladesh continues to modernise its power sector, addressing legacy contractual imbalances such as Rampal’s will be essential to securing both financial stability and energy sovereignty.
Md Ikbal Faruk is head of research and implementation at Waterkeepers Bangladesh.
