ISLAMABAD: The government of Prime Minister, Shehbaz Sharif has made several new commitments with the International Monetary Fund (IMF) with respect to the energy sector (power and gas) including timely increase in tariff, shifting of circular debt stock to CPPA-G and complete ban on introduction of any subsidy for electricity or gas in the country. This strategy has been negotiated with the IMF after discussions held with the mission from February 24 to March 14, 2025, and virtually thereafter.
Sharing exclusive details with Newzshewz, sources in Finance Ministry said that fundamental cost-reducing reforms in the energy sector is the only sustainable way to sectoral viability and lower tariffs. Pakistan’s energy sector strategy aims to stem Circular Debt (CD) flow while addressing the structural impediments to a viable energy sector and protecting vulnerable consumers from elevated tariffs. This strategy for over performed in FY25H1 by around Rs 450 billion, reflecting lower financing costs and our early success on recoveries. The stock of power CD stood at Rs 2,444 billion (2.1 percent of GDP) at end-January 2025, while the stock of gas CD stood at PRs 2,294 billion (2.2 percent of GDP) at end-June 2024.
The Authorities have assured IMF that they remain committed to keeping energy tariffs in line with costs while implementing fundamental energy sector reforms to reduce our fiscal risks, ensure viability of the sector and debt sustainability, build a business environment conducive to dynamic growth, and ease price pressures. They are also on track to achieve net zero CD flow for FY25 and will strive for the same in FY26, through a combination of timely tariff increases, targeted subsidies, and cost-reducing reforms.
This strategy will be detailed in Pakistan’s FY26 CD Plan (CDMP), to be adopted by Cabinet by end-July 2025. Key elements include:
A:- timely electricity tariff increases consistent with cost with cost recovery. NEPRA will continue with timely automatic notifications of regular quarterly tariff adjustments (QTAs) and monthly fuel cost adjustments (FCAs) to capture any gaps between the base tariff and actual revenue requirements that arise during the year, to prevent CD flow. We will ensure the full implementation of the July 2025 annual rebasing (new SB, July 1, 2025), QTRs, and FCAs going forward. All provinces agree not to introduce any subsidy for electricity or gas.
B- Reducing the financial burden on the power sector by converting the existing CD stock to CPPA debt. Power sector’ s existing CD stock is of Rs 2.4 trillion (2.1 percent of GDP) will be cleared, by end-FY25, Rs 348 billion via renegotiation of arrears with IPPs (Rs 127 billion of which will be via already-budgeted subsidy for CD stock clearance and Rs 221 billion via CPPA cash flow; Rs 387 billion via waived interest fees; and Rs 254 billion via additional already-budgeted subsidy for CD stock clearance; Rs 224 billion in non-interest-bearing liabilities will not be cleared. The remaining Rs 1,252 billion will be borrowed from banks to repay all PHL loans (Rs 683 billion) and to clear the remaining stock of interest-bearing arrears to power producers ( Rs 569 billion). The loan will be taken on at a rate favorable to that currently paid on the CD stock (a major driver of CD flow and accumulation) and annual payments will be financed through Debt Service Surcharge (DSS) revenues over six years. The DSS will be set at 10 percent of the NEPRA-determined revenue requirement, adjusted each year at the time of annual rebasing, per current practice. In the event that DSS revenues fall short of the annual payment requirement, the DSS will be increased to make up for the shortfall and calibrated per any anticipated future shortfalls in the succeeding year. To facilitate this, the government will adopt legislation to remove the 10 percent DSS cap by end-June 2025 (new end-June 2025 SB). There will be no fiscalization of any revenue shortfall. The government will prepare a plan to retire, in a timely way, the interest- bearing CD stock anticipated at the end of FY25 (expected to be no greater than Rs 337 billion, a result of gross flows this year), alongside the FY26 budget process, which will not utilize subsidy resources. With one of the primary drivers of CD flow-interest charges on delayed payments to IPPs significantly reduced, CD targets have been set lower. These targets will continue to decline to zero by FY31, the end of the operation.
C:- Necessary budget allocations for power subsidies. With signs of energy sector reforms already having some initial impact in terms of reducing electricity costs, the FY26 budget will include lower subsidies than in FY25. This reflects the impact of the aforementioned CD stock operation (which lowers the need for CD stock payments) and the ongoing impact of our energy sector reform strategy. Nonetheless, the government has decided from March 17, 2025, to introduce a limited subsidy, financed by a Rs 10 per liter PDL increase, which will expire on June 30, 2026, at an annualized amount of Rs 182 billion. These revenues will finance a subsidy to be applied to all non-lifeline consumer categories, resulting in an average electricity tariff reduction of PRs 1.7/kwh. The government has also begun to receive flows from the captive power plant (CPP) transition levy, the revenue from which will allow for additional tariff reduction (through this financed subsidy) for all grid consumers: The government has estimated the impact to be PRS 0.90/kWh at the start, anticipating further reductions as the CPP levy is increased at regular intervals already in law through 2026. These subsidies will allow front loading of our reforms’ benefits to be felt by grid consumers while e the longer-term structural cost reduction impact of the reform process, including from the CPP transition, gradually takes effect. The subsidy will be limited to at most 0.8 percent of GDP and will cover (i) PDL-derived revenues of Rs 182 billion noted above to provide further temporary tariff relief; (ii) the projected tariff differential; arrears payments of FATA and KE; (iv) agricultural tubewells; and (v) O stock payments to compensate for the any CD flow, which will be targeted to be much lower following the CD conversion operation.
D- Moving forward, in parallel, with fundamental cost-reducing reforms. Islamabad has recognized the need to continue and accelerate cost-side reforms to address the sector’s fundamental challenges and are moving forward, with the assistance of the World Bank, ADB, and other development partners, with our agenda that includes: (i) improving distribution efficiencies. We have taken the necessary policy and financial prerequisite steps, with the support of the World Bank, to privatize three DISCOs (IESCO, GEPCO, and FESCO) (end-January 2025 SB), and hired a financial advisor in February, which will help improve performance, efficiency, and governance, addressing significant drivers of power sector CD accumulation (and thus the need for higher tariffs .Due diligence is now being carried out and we will begin the first bidding for these three DISCOS by end-December 2025. Power Division is also moving ahead with the process to privatize three additional DISCOs, and to seek concessions for the private management of three additional DISCOs, which we expect to proceed through 2026 ;(ii) Shifting captive power to the electricity grid. To further encourage CPPs to move to the electricity grid the government has e finalized and shared with all CPPs a service level agreement which sets a performance standard, as prescribed by NEPRA, of uninterrupted electricity supply for CPPs that connect to the grid, including penalties for DISCOS that are not able to meet this standard ;(iii) Improving the transmission system: Power Division has made strong progress in restructuring the National Transmission and Dispatch Company (NTDC) into three entities, which will allow for more efficient power transmission, boosting sector viability: the Independent System Operator and Market Operator (ISMO), which will assume the NTDC’s system operator function; the Energy Infrastructure Development Management Company (EIDMC), which will be responsible for projects and development, will be operational by end-August 2025; and the National Grid Company (NGC), which will take over responsibility from NTDC for operating and maintaining the grid and transmission lines, including further restructuring, will be complete by end-December 2025 ;(iv) Privatizing inefficient generation companies (GENCOs): Power Division is moving forward with plans to improve generation efficiency and performance by privatizing at least two GENCOs (Nandipur and Guddu 747). It is expecting that necessary prior actions will be completed by end-April 2025 to enable the start of the process to hire a financial advisor by end-May 2025, with bidding for Nandipur targeted for January 2026 ;(v) Complete the transition to a competitive electricity market : The government is approaching the operationalization of the Competitive Trading and Bilateral Contract Market (CTBCM), which will enable bulk power consumers to purchase electricity from DISCOs or a competitive supplier of their choice, with the ultimate aim of lowering wholesale market prices for consumers. NEPRA is considering licensing requests, transfer agreements, and service level agreements with relevant power sector bodies and the government is determining costing, including the wheeling charge. At the outset, 800 MW will be allowed in the market until 2031, in line with IGCEP capacity planning; this and the level at which the wheeling charge is set will ensure sufficient capacity remains on the grid. The transition will be carried out in and responsible manner to minimize the impact on consumers and the budget; (vi) Accelerate the move to renewable energy : A key step in this process will be to build upon the IGCEP and TSEP (2024-34), including a recent update, to mandate an increased share of cheaper renewable energy in the generation mix. Projects following from this effort will be on a least cost basis; we envision the elimination of a significant a significant portion of surplus, unused capacity through this effort. Private sector investments will help to facilitate achieve this goal ;(vii) Expansion of capacity : Given the excessive cost pressure caused by the capacity payments required on existing generation plants when not in use, and consistent with government’s efforts to revisit PPAs, Power Division will carefully review whether there is need for any additional capacity in the near term, and will not enter into any further capacity commitments without a prior commitment for new transmission infrastructure and once that line and existing capacity is fully utilized at peak time ; and (viii) the government will continue to refrain from netting out cross-arrears they are independently audited); using “non-cash” settlements (e.g., payables against the reimbursement of on-lent loans to DISCOs); and issuing government guarantees except where there is a need to substitute an existing guarantee on maturity. Ends
