On February 12, 2025, the federal government notified Nepra’s decision on tariff rationalisation through an SRO. This decision provided relief to industrial consumers by eliminating a cross-subsidy of Rs4-4.57 per unit. However, it also raised concerns about irrational adjustments of this amount across residential categories by imposing fixed charges based on sanctioned load.
Data discrepancies (as highlighted in print media) regarding the number of domestic consumers apart, the number of protected consumers has increased significantly over the last four years. As per the SRO, the number of protected and lifeline consumers has increased from 9.4 million to 21.5 million. Government sources say the primary driver of this increase is the adoption of behind-the-meter (BTM) solar energy systems.
Going by this logic (also confirmed by other sources), applying fixed charges based on the sanctioned load does make sense, especially for those with solar. But what about the genuine poor consumers without solar? Should the two categories be treated the same? Why not differentiate between them? Utilities can easily detect solar (BTM or net-metered) using a mix of data analytics, advanced metering technology, and field validation.
On the other hand, the unprotected consumers who consume over 300 units and were already subsidizing others by 20 per cent will now also face fixed charges ranging from Rs400 to Rs675 per sanctioned load; for a sanctioned load of 5kW, these fixed charges will range from Rs2,000 to Rs3,375. This domestic group is already contributing to fixed capacity charges through the variable electricity component, meaning they will now face a double burden of capacity charges, which is unfair. Although the variable charges for these consumers are reduced from Rs1.53 per kWh to Rs0.49 per kWh, they will still be cross-subsidising other domestic consumers.
The current tariff design is faulty and distortionary, no doubt about it. The slab-based approach, meant to help lower-income households, has often unfairly benefited higher-income households, creating a conflict between efficiency and equity. But this tariff rationalisation is also faulty and unfair, creating affordability and equity issues.
A challenge is created by the solar (BTM or net-metered), increasing the capacity payment burden for the remaining consumers. Tariffs approved by NEPRA currently combine energy costs (fuel), capacity payments, and network costs into a single charge. It is necessary to implement a two-part tariff system that clearly separates fixed charges (including capacity payments and network costs) from energy costs (which vary with kWh usage). This change would allow for fair distribution of fixed costs, enabling solar consumers to reduce their energy costs more effectively.
If the tariff design is not changed, DISCO revenue will continue to erode, capacity payments will be unfairly distributed, higher tariffs for non-solar users will result, grid instability will occur and an accelerated ‘utility death spiral’ will unfold. Right now, most distortions come from how tariffs are structured, not from solar itself.
Returning to industrial tariffs, there is no doubt that industrial consumers were penalised for many years. Significant cross-subsidies, particularly for domestic and agricultural consumers, along with a heavy tax burden, have driven large consumers to adopt Captive Power Plants (CPPs) over the years. However, the implementation of the IMF-mandated ‘grid levy’ on CPPs and high gas/RLNG prices has made them uncompetitive, leading to increased deindustrialisation. Although many industries are investing in alternative fuels such as solar, biomass, and bagasse to meet their high electricity demand, they still need a competitive grid electricity rate.
Industrial consumers use more electricity at higher voltages, making the supply more efficient and cost-effective. As a result, their retail electricity prices are usually close to wholesale prices. The tariff methodology averages costs, potentially leading to discrimination and unfair charges across customer groups, such as industrial consumers paying for unrelated expenses. Electricity tariffs should reflect the true cost of supply for every consumer category. When the industry overpays to subsidize others, it distorts demand and harms competitiveness.
Numerous countries have effectively eliminated cross-subsidies in industrial tariffs. These reforms are usually part of broader efforts to liberalize power markets. For example, the UK’s post-1990s reforms resulted in cost-reflective industrial tariffs and the removal of explicit cross-subsidies from industry to households. Vulnerable consumers received support through targeted, tax-funded subsidies, resulting in competitive industrial electricity prices and a transparent cost-recovery framework.
Chile’s liberalisation of its electricity market allowed industries to pay market prices through bilateral contracts, avoiding cross-subsidies in tariffs. Social protection was provided through targeted subsidies outside the tariff system. Likewise, Australia shifted to cost-reflective network pricing; the industry no longer cross-subsidises other categories.
The current tariff rationalisation exercise has reduced unjustified cross-subsidies in the industrial sector; however, simply shifting the burden from industry to residential consumers is also unjustifiable if it merely redistributes the distortion without correcting it. Without addressing the underlying cost structure or subsidy mechanism, changing who bears the burden does not eliminate the distortion. This transfer of burden will negatively impact grid economics by encouraging more consumers to switch to solar power. It may also lead to increased non-technical losses and affect recovery rates.
Managing electricity for large industrial and commercial consumers in Pakistan requires a blend of technical optimisation (by the industry), tariff strategy, and active market participation. The Competitive Trading Bilateral Contract Market (CTBCM) aims to enhance efficiency by moving away from the single-buyer model, enabling bulk consumers to purchase electricity directly from generators, thereby encouraging competition and better price discovery. CTBCM is technically ready but still awaiting commercial activation. Fully implementing market-based tariff reforms is necessary to remove tariff-induced distortions.
Eliminate cross-subsidies from tariffs. Instead of charging one group more to support another, governments should fund subsidies through the budget and direct them to vulnerable consumers. This way, social support is maintained while ensuring fair and efficient electricity pricing. Some media reports say that the government, under IMF pressure, is thinking on these lines. The sooner it is done, the better it will be for the power sector. Cost-reflective tariffs are essential not only for equity but also for the financial sustainability of the grid.
It is also essential to consider reducing non-energy costs (taxes) embedded in consumer bills. While this issue falls outside the scope of the Power Division, it must be addressed for the viability of the power sector. With over 41,000MW of installed capacity, more than half of this capacity remains idle for over four to five months each year, increasing capacity payment burdens. Decision-makers have three options: pass capacity payment burdens to grid-dependent consumers, add to arrears or lower consumer bills and promote the productive use of existing capacity while ensuring fair recovery of costs.
We have solutions; we need better coordination and political support, based on consensus and the acceptance of change.
The writer is an economist and researcher with expertise in the energy sector.
