IMF flags regressive solar subsidy, urges power tariff reforms

ISLAMABAD: International Monetary Fund (IMF) has said that exemption of existing solar consumers from the new model retains a significant, and likely regressive, near-term cross subsidy from electricity grid to solar consumers.
According to IMF Staff Report a large tariff reduction for industrial consumers in February maintained system cost-recovery by unwinding industrial consumers’ cross-subsidy to residential consumers, which was balanced out by increasing or introducing fixed charges on residential consumers, including some protected consumers. Any further tariff adjustments should preserve the progressive nature of the power tariff structure, alongside greater progress on power subsidy reform ), to enable better targeting of vulnerable electricity consumers.
The FY27 CD flow target has been set at PRs 300 billion, PRs 100 billion lower than FY26, reflecting continued improvement in operational performance. However, non-operational CD flow pressures remain, with greater progress needed on the delayed settlement of penalty payment arrears with remaining IPPs as part of the FY25-26 CD stock reduction plan. Lower expected CD flow will allow for a lower planned FY27 power subsidy, from 0.7 percent of GDP to 0.6 percent of GDP.
IMF’s Staff Report further stated that targeted budget allocations for power subsidies. Following the implementation of the CD stock reduction operation in FY26 and recognizing ongoing improvements in operational efficiency and performance, the FY27 budget will include a subsidy limited to, at most, Rs 830 billion, or 0.6 percent of GDP. The subsidy will cover (i) the projected tariff differential for DISCOs and KE; (ii) current and arrears payments of FATA; (iii) agricultural tubewells; and (iv) CD stock payments to counterbalance anticipated CD flow, which continues to be targeted at a lower level following the CD stock operation.
NEPRA’s recently introduced reform to shift solar consumers from a net metering to a net billing model, more in line with international practice, would allow for a greater balance between solar and grid consumption. However, the exemption of existing solar consumers from the new model retains a significant, and likely regressive, near-term cross subsidy from electricity grid to solar consumers.
The strong uptake of solar energy in recent years, driven by increasing electricity tariffs, low solar panel costs, and very generous export rates to the grid, has been a strong factor behind recent years’ weak electricity consumption and associated power sector financial strains.
Some progress has been made on work to replace the existing electricity subsidy structure with a targeted framework for low-income consumers (RM12, end-January 2027); it is critical that the authorities implement an effective nationwide communications campaign to prepare electricity consumers for the transition. Ends