Combining Private and Public Resources: Captive Power Plants and Electricity Sector Development in Bangladesh

Abstract

ABSTRACT Developing economies need to efficiently utilize both public and private resources to develop their energy sectors. The opportunity cost of failing to do so is high. This article uses a Dynamic Stochastic General Equilibrium (DSGE) approach to assess the integration of the Captive Power Plants (CPPs) in the power sector of Bangladesh. We find that if Bangladesh shut down the CPPs, the long-run industrial output and GDP would fall by 1.5% and 1.2%, respectively. The Impulse Response Functions (IRFs) show that the Bangladesh economy would be more vulnerable to oil price shocks without CPPs. In order to minimize distortion in the energy markets, the government could instead consider alternative reforms such as promoting the use of efficient production technologies or the replacement of fossil fuels with renewable energy sources.