An analysis of the distributional impacts of imf power subsidy reforms

Summary

The NEPRA tariff rationalization in February 2026 introduces IMF-supported reforms to the cross-subsidy (CS) regime resulting in significant changes to consumer tariffs, with a further reversal of the Tariff Differential Subsidy (TDS) over the next year, to be replaced with targeted cash transfers through the Benazir Income Support Program (BISP)

The CS removal results in the following:

• A capacity-based fixed charge replacing the flat consumer charge for high usage (301+ units), now set at Rs.200-675/kW/Month based on sanctioned load.

• Fixed charges applied to all non-lifeline slabs for the first time, with protected consumers facing Rs.200-300/kW/Month.

• Variable rate reductions for 301+ units, with rates decreasing by Rs.0.49-1.53/kWh for high consumers and Rs.4.75/kWh for ToU off-peak users.

• No variable rate relief for those consuming below 301 units, where fixed charges are the only new cost mechanism.

The current austerity driven reforms are out of joint with the existing status quo of Pakistan’s energy landscape and are attached strictly to the principle of ‘fiscal sustainability.‘

Through mathematical modeling, this study reveals that one can reasonably conclude the IMF driven subsidy reform measures will only lead to:

• A poverty trap for protected consumers where 20.2 million protected households now pay Rs.200-300/kW/Month, regardless of consumption.

• Greater incentives for regressive overconsumption through the variable rate cut, and raising lifeline bills by over 800% and protected consumer bills by 150-250%.

Note: Certain words have dotted underlines. Hover over them to see more information.

The imf and subsidy removal: a reform landscape

Reform Area 5: Aligning Energy Sector Reforms with National Climate Mitigation Commitments.

Reforms to power subsidies and improvements in energy efficiency will reduce regressive overconsumption, losses, and wastage. Pakistan’s energy subsidies are poorly targeted, resulting in over-consumption in upper income quintiles. The RSF will support transferring power subsidies from the budget and tariff structure to budget financed, targeted subsidies delivered through BISP. This will support the poorest forty percent of energy consumers while wealthier consumers will face higher tariffs, providing an incentive to conserve energy.

IMF (2025)

Under Pakistan’s Resilience and Sustainability Fund (amounting to $1.4 million) of May 2025, the IMF aims to phase out ‘wasteful’ consumption through its Reform Area 5 and RM 12, which concludes its mission statement through the claim of promoting energy savings and “spur(ring) efforts for similar efficiency adoption in the private sector.” 

Let’s look at the facts they use to back up their claim:

• According to the Fund, a total domestic electricity subsidy of Rs 521  billion is fiscally unsustainable given its emphasis on primary balance consolidation. TDS costs Rs 249 billion per year.

• According to the Fund, the Rs 272 billion annual cross-subsidy from 301+ unit consumers to lower slabs distorts systemic price signals. It claims that the cross-subsidy burden is the main reason for high industrial tariffs that render Pakistani industry uncompetitive relative to regional peers.

• 73% of Pakistan's power sector costs are fixed (capacity payments, debt service, transmission). Under the pre-reform structure, only ~7% of revenue was recovered via fixed charges, creating a mismatch between cost structure and tariff design, for the Fund’s purposes. The KW-based fixed charge moves the system toward cost-reflective recovery.

• The protected consumer class grew from 28% of all domestic consumers in 2022 to 59% in 2026, as a direct result of deliberate demand management through solar usage and metering adjustment. Hence, as per the Fund’s requirements, the subsidy provided to this consumer class is no longer addressing energy poor households, making it highly regressive and requiring corrective measures.

Below is a timeline of the phases in which the IMF plans on implementing Pakistan’s tariff rationalization plan:

Phase	Years	Key Actions

A brief history of the imf’s involvement in the energy sector

In the early 90s, as a direct result of IMF and World Bank enforced debt conditionalities, Pakistan brought out its 1994 Power Policy, calling for the unbundling and restructuring of its energy regime (which at the time was a single, consolidated public service provider: WAPDA). 

The IMF’s decision to usher in productive capital inflows into Pakistan through Independent Power Producers (IPPs) came at a huge cost to ordinary grid consumers. For the ordinary consumer, this involved servicing extractive contracts in their energy bills which included:

• Capacity payments, even in the case of non-performance.

• Sovereign guarantees.

• Dollar-indexation, worsening the troubles of a devaluing currency.

Consumers have effectively been continuing to pay a hefty, bundled tariff  in an ‘unbundled’ regime.

Pakistan is no standalone: shifting universal subsidies to targeted support for the more vulnerable has been a consistent IMF austerity measure throughout its country programs.The Fund fails to foresee its own role in systemically inflating electricity prices to such an extent that even an average consumer could qualify as ‘vulnerable’ given blanket subsidy removals. 

Subsidy reforms are part of the broader energy sector reform package of IMF-backed liberalization, which includes privatization of energy distributors (DISCOs), the introduction of Competitive Bilateral Trading Markets for bulk energy consumers, and reintegrating captive power onto the grid. All these reforms are being pushed for the sake of greater productivity and gains for an energy regime that is under negotiation for full term privatization.

State of play: the tariff paradox

At tariffs reaching Rs 28–47/kWh for un-protected consumers, rooftop solar economics became compelling: Payback periods of 2.4–4 years for 5–25 kW systems were found under the previous net metering regime.

Net-metered rooftop solar capacity reached 4.9GW by March 2025 and 6.1GW by June 2025, up from approximately 1.3GW in June 2023 — a nearly fivefold increase in two years driven by electricity tariffs that more than doubled between 2021 and under the previous net-metering regime.

The government's response has been to punish exit rather than address the conditions that make exit rational. 

Via the FY 2025-26 budget, the government imposed a 10% tax on imported solar panels — brought down from an initially proposed 18% - also an IMF imposed reform measure. Simultaneously, the net metering buyback rate was slashed in December 2025 from Rs 25.98/unit to Rs 11/unit, extending estimated payback periods for new installations from 3–5 years to 10–12 years. Consumers facing Rs 28–47/kWh grid rates are being taxed for finding a cheaper alternative while the system that made the alternative necessary goes unreformed.

Grid electricity demand contracted by 3.6% in FY2024–25, attributed to high energy prices, increased reliance on off-grid solar, and reduced industrial activity. The contraction is not evenly distributed: industrial consumption fell 11% year-on-year in FY2024 alone, from 31 TWh to 28 TWh, while agricultural consumption fell by 18% between FY2022–23 and FY2024–25 as farmers shifted to solar irrigation.

The structural inefficiencies of the grid impose a much higher burden on the tariff of Rs. 17.52 per unit, which is more than 4 times the “the relief” that has been granted to industries.

In 2025, Pakistan's 1,180 captive plants represented an estimated 3,000 MW of demand shortfall for the national grid. The IMF's Stand By Arrangement (SBA) and subsequent Extended Fund Facility (EFF)  recommended the phasing out of captive power as a structural benchmark, on the grounds that captive plants reduce grid demand, force electricity tariffs higher to cover unused capacity, and exacerbate liquidity pressures in the power sector. 

Pakistan committed to gas disconnections for captive power plants by January 2025, with the IMF demanding that gas supply be disincentivized to eliminate the cost advantage captive plants hold over grid electricity — effectively requiring industry to either shift to the grid or pay its equivalent price. Following this, the government enacted the Off-the-Grid (Captive Power Plants) Levy Act 2025, imposing a levy of Rs 238/MMBtu on gas supplied to captive plants during the transition period.

The Rs 4.04 per unit relief to the industrial sector merely represents a rearrangement of who pays the cross-subsidy, not a reduction in the underlying cost. In the fiscal year 2024-25, the power sector burdened electricity consumers by a Rs 14.3 per unit capacity payment price which makes more than 50% of the new tariff of Rs 25.29, adding to this a Rs 3.23 per unit debt service surcharge, 69.6% of the tariff is composed of combined structural inefficiencies of the grid. 

Industrial “relief” from the power sector coming at the cost of welfare loss from lower-and-middle income households is representative of the misplaced priorities of both the IMF and the GoP.

Subsidy reform, particularly when it comes to energy, cannot be implemented without an acute insight into the welfare impacts onto the average household, and the same holds true in the case of targeted subsidy cash transfers to help ‘offset’ the loss.

The IMF’s cross-subsidy reforms are reactionary, not precautionary: the addition of fixed charges is significantly burdening vulnerable consumers.

The following section portrays the already existing effects of the cross-subsidy (CS) removal and discusses the potential impacts of the planned tariff differential subsidy removal (TDS).

Findings: the continued regressive structure

Consumer Category	Rep. Units	Old Bill (Rs/M)	New Bill (Rs/M)	CS Δ Rs/M	CS Δ %	Verdict	Key Observation
LIFELINE (≤100 units, sanctioned load < 5 kW) — Fully subsidised; no CS reform impact
Up to 50u — Life Line	40u	Rs 158	Rs 158	Rs 0	0%	NO CHANGE	No impact from CS reform. Catastrophic TDS exposure
51–100u — Life Line	80u	Rs 619	Rs 619	Rs 0	0%	NO CHANGE	No impact from CS reform. Bill would exceed Rs 2,900 at full CoS.
PROTECTED (≤200 units every month) — New fixed charge Rs 200–300/kW/M now applies for the first time
0–100u (Protected)	80u	Rs 843	Rs 1,043	+Rs 200	+23.7%	LOSER	Fixed charge Rs 200/kW/M = Rs 200 sunk cost. Cannot reduce by conservation.
101–200u (Protected)	160u	Rs 2,082	Rs 2,382	+Rs 300	+14.4%	LOSER	Fixed charge Rs 300/kW/M = Rs 300 sunk cost. Bill rises regardless of behaviour.
UN-PROTECTED (exceeded 200 units at least once) — Full variable rate plus new fixed charge
0–100u (Un-Protected)	80u	Rs 1,795	Rs 2,070	+Rs 275	+15.3%	LOSER	Paying un-protected variable rate. New fixed charge additional sunk cost.
101–200u (Un-Protected)	160u	Rs 4,626	Rs 4,926	+Rs 300	+6.5%	LOSER	Solar exit candidate Rs 300 sunk cost on top of high variable rate.
201–300u	250u	Rs 8,275	Rs 8,625	+Rs 350	+4.2%	LOSER	Near cost-of-service. Fixed Rs 350 sunk. No marginal incentive to cut.
301–400u	350u	Rs 13,497	Rs 13,161	-Rs 336	-2.5%	GAINER	Variable fell Rs 1.53/kWh. Breakeven ~261 units. Incentive to CONSUME MORE.
401–500u	450u	Rs 18,490	Rs 18,028	-Rs 463	-2.5%	GAINER	Variable fell Rs 1.25/kWh. Below breakeven at ~320 units. Consume more signal.
501–600u	550u	Rs 23,491	Rs 22,746	-Rs 745	-3.2%	GAINER	Variable fell Rs 1.40/kWh. Old Rs 600 cons charge gone. Net bill decrease.
601–700u	650u	Rs 28,694	Rs 27,878	-Rs 816	-2.8%	GAINER	Old Rs 800 cons charge -> Rs 675/kW/M. Net gainer at 1 kW load.
Above 700u	800u	Rs 39,152	Rs 32,460	-Rs 6,692	-17.1%	GAINER	Old Rs 1,000 cons charge gone. Variable fell Rs 0.49/kWh. Biggest CS gainer.
ToU	Peak: 200u Off-peak: 300u	Rs 22,922	Rs 22,184.50	-Rs 737.7	-3.2%	GAINER	Fixed charges have increased, but the lower off-peak variable rate compensate for it.

Key takeaway: The new reforms lower the marginal cost of electricty for households consuming more than 300 units, thereby introducing a regime where the poor suffer higher energy costs and the rich are encouraged to partake in regressive and inefficient overconsumption

Although the reform was meant to correct the previously regressive disbursement of power sector subsidies, the cross-subsidy reform makes the same mistakes as its predecessor. The top three consuming slabs (above 500 units, comprising approximately 4% of consumers) receive the largest absolute and percentage bill reductions. The bottom 70% of consumers — those consuming 300 units or fewer — receive no variable rate reduction but are subject to new sunk fixed charges. This is a structural transfer of fiscal relief from poor to affluent.

The variable rate cut for 301+ unit consumers creates a counterintuitive but economically unambiguous incentive to consume more electricity. At 350 units, a household pays Rs 36.46/kWh on each marginal unit — Rs 1.53/kWh less than before the reform. The fixed charge (Rs 400/kW at 1 kW load = Rs 400/month) is already paid and cannot be recovered through reducing consumption. The breakeven unit threshold, where the new bill equals the old bill (at 2 kW load) is:

• 301–400u: ~392 units
• 401–500u: ~480 units
• 501–600u: ~536 units
• 601–700u: ~604 units
• Above 700u: ~714 units

Above these levels, every unit costs less than the old tariff.

The rational response from higher consuming households would be to increase consumption until the average cost falls to its minimum. This goes against the proposed policy rationale to increase demand efficiency. 

INTENDED TDS REMOVAL: PREDICTIVE MODELLING The TDS rollback scenarios are modelled using the effective tariff method:

• Effective Rate = Bill ÷ Units consumed
• Subsidy Gap = CoS − Effective Rate
• Scenario Bill = Current Bill + (Units × Gap × TDS rollback %)

Calculations assume sanctioned loads as per NEPRA averages.

Consumer Category	illustrative units	CS Only (0% TDS) Δ %	CS +20% TDS Δ %	CS +40% TDS Δ %	CS +60% TDS Δ %	CS +80% TDS Δ %	CS +100% TDS (Full CoS) Δ %
Up to 50 Units — Life Line	40	0.0%	162.9%	325.9%	488.8%	651.7%	814.7%
51–100 Units — Life Line	80	0.0%	73.4%	146.7%	220.1%	293.4%	366.8%
0–100 Units (Protected)	80	23.7%	67.5%	111.3%	155.2%	199.0%	242.8%
101–200 Units (Protected)	160	14.4%	47.1%	79.7%	112.4%	145.0%	177.7%
0–100 Units (Un-Protected)	80	15.3%	24.5%	33.6%	42.7%	51.9%	61.0%
101–200 Units (Un-Protected)	160	6.5%	10.2%	13.9%	17.6%	21.3%	25.0%
201–300 Units	250	4.2%	5.2%	6.2%	7.2%	8.2%	9.2%
301–400 Units	350	-2.5%	-3.7%	-4.9%	-6.1%	-7.3%	-8.5%
401–500 Units	450	-2.5%	-4.8%	-7.1%	-9.5%	-11.8%	-14.1%
501–600 Units	550	-3.0%	-5.8%	-8.7%	-11.6%	-14.5%	-17.4%
601–700 Units	650	-2.5%	-6.0%	-9.4%	-12.9%	-16.3%	-19.8%
Above 700 Units	800	-1.8%	-7.0%	-12.3%	-17.5%	-22.7%	-27.9%
ToU — Off-Peak	600	-7.0%	-9.4%	-11.7%	-14.1%	-16.5%	-18.9%

The Cost of Service (CoS) is the NEPRA-determined cost of supplying electricity, used as the benchmark for full cost-recovery: Rs 36.13/kWh for ≤300 unit consumers, lifeline, and protected categories; Rs 35.29/kWh for ≥301 unit consumers and ToU users.11 The method is bidirectional: consumers whose effective tariff already exceeds CoS (notably some 301+ slabs) see a bill decrease under TDS 'removal' (they were already over-contributing). The formula produces the correct result in both directions.

Key Takeaways:

Lifeline ≤50 units: Under full TDS removal, effective per-unit cost rises from Rs 3.95/kWh to Rs 36.13/kWh — a 9.1× increase. 

Protected 0–100 units (combined CS+TDS at 100%): Effective rate rises from Rs 10.54/kWh to Rs 36.13/kWh (+243%). Bill increases from Rs 843 to Rs 2,890/month on 80 representative units. 

201–300u (combined CS+TDS at 100%): Bill rises only 9%, this segment is already near CoS

301+ units (combined CS+TDS): These consumers already pay above or near CoS. The reform produces a net bill decrease of 8–28% for this segment.

Fiscal feasibility of TDS Removal

“A package class that is fiscally manageable is one that leaves most of the welfare loss uncompensated.”

The previous regime subsidised 63% of residential consumers - the programme’s intention is to remove this subsidy and redirect the fiscal space towards BISP expansion. The underlying logic is that currently the subsidies are targeted towards high-income households that have used solar utilisation and meter manipulation to keep their grid consumption low enough to receive subsidisation, and the BISP targeting would ensure that the fiscal space goes only to those truly deserving. 

The maths does not support this logic:

A fiscal model was run across 2,304 scenarios varying six parameters: the share of TDS For this exercise a TDS total of Rs 374 billion was assumed (Rs 249 billion for XW-Discos and Rs 174 billion for KE, these figures have been taken from the Budget Brief 2025-26 actually realised as fiscal savings (20–100%), recovery rate deterioration (0–7 percentage points), BISP coverage expansion (25–40% of population), per-household electricity compensation (Rs 1,000–2,500/month), and administrative cost (3.3–7%). Only 312 scenarios — 13.5% of the total — produce a net positive fiscal outcome. The median result across the full scenario space is a net fiscal loss of Rs 184.65 billion.

The worst case is a loss of Rs 658 billion.  The cost of compensation is the binding constraint. 

Expanding BISP to cover 30% of the population with a Rs 1,000/month electricity top-up (a figure that would not fully compensate for the increase in electricity bill as a result of TDS removal and result in major welfare losses) costs an incremental Rs 141 billion,  more than half the Rs 249 billion TDS budget, before accounting for collection shortfalls.

At Rs 2,000/month compensation with 40% coverage, the incremental BISP cost rises to Rs 384 billion, producing a net fiscal loss of Rs 284 billion even before any recovery deterioration is applied. 

Rs 2,000/month is itself inadequate compensation: full TDS removal raises the lifeline ≤50 unit bill by Rs 1,287/month and the protected 0–100 unit bill by Rs 2,047/month. A compensation package sufficient to actually protect the poorest consumers is one that is fiscally ruinous. 

A package that is fiscally manageable is one that leaves most of the welfare loss uncompensated. 

The scenarios that do produce a positive fiscal outcome share a specific and demanding profile: realised TDS savings above 80%, recovery rate deterioration below 1 percentage point, BISP coverage held to 30% rather than the 40% poverty headcount, compensation at the floor of Rs 1,000/month, and administrative costs at 3.3%. Under these conditions the net fiscal gain is Rs 115.7 billion — roughly 46% of the gross TDS saving.

This requires that nearly the full TDS saving materialises as fiscal space (implying no demand destruction, no solar exit, no collection deterioration), and that compensation is set below the level required to prevent welfare loss.  The reform creates a direct and unresolvable tradeoff: the conditions necessary for fiscal viability are the conditions that maximise welfare loss. High TDS realisation means tariff increases land fully on the poorest consumers. Low BISP expansion means most of them go uncompensated. Low compensation means those who are reached are still paying more than they were before.

The inadequacy of bisp as a compensatory mechanism for electricity tariff reform

Fiscal Inadequacy: The proposed compensation mechanism is structurally under-resourced relative to the burden it is designed to offset. Rising fixed-charges and tariff re-structuring will increase electricity expenditure across a broad category of households—not merely those at the bottom of the distribution. For households already allocating approximately 13.8% of income to electricity, any upward tariff shock produces an immediate and non-discretionary welfare loss. The scale of fiscal transfer required to neutralise this impact across the affected population—including the near-poor above BISP’s eligibility threshold—far exceeds what BISP, in its current form and coverage, is resourced or designed to deliver.

Targeting Failures and Exclusion Errors: BISP's Proxy Means Test (PMT) methodology is ill-suited to the task of identifying households made newly vulnerable by an energy price shock. The World Bank's own assessment predicted exclusion errors of up to 88% for the poorest decile under this methodology . Empirically, inclusion errors have reached 73.6% and exclusion errors 52.3%, meaning the programme simultaneously transfers resources to non-poor households and fails to reach a majority of those it targets. The near-poor, households consuming between 200 and 400 units per month, fall into a gap that BISP cannot reach. These households sit above the PMT score threshold of 32 required for Kafaalat inclusion, yet lack the income buffers or capital access to absorb sustained tariff increases. They are ineligible for relief, yet are among those most exposed to welfare loss. . Quarterly Disbursement and Consumption Smoothing The temporal mismatch between the electricity price burden and BISP's disbursement cycle creates another structural issue with the proposed reform.

Monthly Consumption: BISP transfers are disbursed quarterly. For low-income households with negligible savings and high marginal propensity to consume—where income is largely spent in the period it is received—a three-month disbursement lag provides no meaningful protection against monthly billing shocks. Households cannot smooth consumption across a quarterly cycle when they have no liquidity buffer to draw on. The result is predictable: bill arrears, informal borrowing, or forced reduction in other essential expenditures, including food, health, and education.  Institutional Integrity Beyond structural design, BISP faces well-documented operational deficiencies. Survey training has been inadequate and inconsistent; eligibility criteria are susceptible to manipulation; CNIC-based registration errors persist; and awareness campaigns have been demonstrably weak.

Path A: A shift to solar—who can afford to exit?

Rooftop solar carries significant upfront costs, Rs 110,000–120,000 for 1 kW, Rs 215,000–220,000 for 2 kW, and Rs 445,000–450,000 for 5 kW. Without accessible financing, these costs are prohibitive for lifeline, protected, and lower-income consumers (under 100–200 units), whose monthly savings would be insufficient to justify or service the investment. This cohort is structurally grid-captive. Middle- and higher-income households (200+ units), by contrast, face a credible exit option that strengthens as tariffs rise. As wealthier consumers defect to solar, fixed grid costs must be recovered across a shrinking, lower-income base, transferring an increasing cost burden onto those least able to bear it.

path b: inelastic demand and increased consumption—who will consume more?

The reduction in variable tariffs for upper consumption slabs, combined with fixed charges, weakens conservation signals precisely where consumption is highest. Lower-income households (0–200 units) have no meaningful flexibility to adjust in either direction. Mid-tier consumers (301–500 units) face incentives to increase consumption as their marginal rate falls. At 501+ units, the net bill reduction eliminates any conservation incentive entirely. Off-peak ToU discounts (~Rs 4.75/kWh) further encourage expansion of usage.

CONSUMER PROFILES

For the purposes of this section, electricity consumption deciles are assumed to correspond to income deciles. While this simplifying assumption may introduce inclusion errors—particularly where higher-income households exhibit relatively low electricity consumption—the objective of this exercise is to capture broad welfare impacts on lower- and middle-income households, who are unlikely to be excluded under this approximation

Category	Profile	CS Reform Impact	Full TDS Removal Impact	Behavioural Path	BISP / Conclusion
Fully Subsidised Lifeline (<100u)	Income < Rs 20,000; peri-urban/rural; minimal electricity; <100 units/month; BISP-eligible	Bill stays the same	Bill increases by 73.4%–81.4% depending on rollback	Cannot exit to solar; cannot reduce consumption further; absorbs shock via reduced essential spending or non-payment/debt	BISP transfer of Rs 1,500–2,500/month can offset increase
Subsidised, Protected (~100–200 u)	Income Rs 20,000–60,000; peri-urban/rural; basic appliances; ~200 units/month; many fall in near-poor cliff	Bill rises Rs 843 → Rs 1,043 (+23.7%) from fixed charge	Bill rises to Rs 2,890 (+242%); increase of Rs 2,047/month	Cannot exit to solar; cannot reduce consumption; absorbs via reduced essential spending or arrears	Grid-captive; Rs 2,000–3,000/month BISP needed to compensate
Partially Subsidised, Unprotected (<200u)	Income Rs 60,000–100,000; urban; 3–4 rooms; seasonal AC; ~160 units/month	Bill rises Rs 4,626 → Rs 4,926 (+6.5%); fixed charge Rs 300	Bill rises 25–61%	(A) Solar exit viable (2 kW ~Rs 215k–220k) (B) Incentive to increase consumption to lower marginal cost	Most at risk of solar exit (~2.4m households); 20% exit → significant DISCO revenue loss
Above Cost-of-Service (>300u)	Income Rs 150,000–250,000; urban; multiple ACs/appliances; former cross-subsidy contributors	Bill falls (if sanctioned load <1 kW); variable rate ↓ Rs 1.53/kWh	Bill falls further 8.5–15%	Marginal cost lower → incentive to increase consumption; solar less attractive where grid cheaper	Embodies perverse incentive: gains fiscally while increasing demand

Partially subsidised, unprotected <200 Units

Most at risk for solar exist considering the tradeoffs — approximately 2.4 million households. If 20% exit, annual DISCO revenue loss will be considerable.

Above Cost-of-Service consumer >300 units

This household is the most direct embodiment of the reform's perverse incentive structure. It receives fiscal relief while generating increased system demand. The reform redistributes from the poor to the comfortable and creates demand incentives that are anti-efficiency.

Conclusion

1. The Cross-Subsidy reform is regressive. The 301+ unit consumer slabs, comprising the top 12% of consumers by consumption, receive bill reductions through variable rate cuts, while the bottom 70% face new fixed charges they cannot reduce through any conservation behavior. The wealthiest residential bracket (above 700 units) receives the largest absolute bill reduction: approximately Rs 6,700–10,900/month. 

2. The fixed charge creates a poverty trap for protected consumers. 20.2 million protected households now pay Rs 200–300/kW/month regardless of consumption, destroying the incentive to conserve electricity and rendering their careful consumption management economically worthless. The reform punishes exactly the behaviour it was designed to reward.

 3. The reform creates perverse incentives for affluent consumers to consume more. The variable rate cut for 301+ unit consumers makes each additional unit of electricity cheaper than before, incentivising higher consumption.

 4. TDS removal without compensation is catastrophically regressive. Full TDS removal raises lifeline bills by over 800% and protected consumer bills by 150–250%. BISP compensation of Rs. 1500-2500 would be needed to offset the welfare losses from the increase in bills, considering the existing problems in BISP disbursement, the IMF suggestion is structurally implausible as a solution to the problem it has created and continues to create. 

 5. The grid death spiral is real and underway. Solar exit by the 101–200 unit un-protected middle class is economically rational and will accelerate with each tariff increase. The suppression response (solar duties, net metering revision) does not address the root cause: a tariff structure that over-charges the segment with the highest ability to invest in grid alternatives. 

6. Fiscal savings from TDS removal are real but overstated. Behavioural responses, such as the solar exits reducing DISCO revenue and affluent consumption increases raising generation costs, will erode gross savings. Moreover, the government can not meaningfully compensate welfare losses caused by increased electricity bills through BISP transfers without massively eroding fiscal space

Glossary

Cross Subsidy: One consumer category pays above cost, funding subsidised rates for another. Historically, the industrial sector has been subsidising lower residential slabs.

Tariff Differential Subsidy (TDS): Government cash payments to DISCOs covering the gap between consumer tariffs and the actual cost of supply; Rs 249 billion budgeted for CY 2026 for DISCOs.

Maximum Demand Indicator (MDI): The peak power level (kW) recorded on a ToU consumer's meter in any interval during the billing period; determines the fixed charge for high-load connections.

Sanctioned Load: The maximum power (kW) a DISCO has authorised a consumer to draw; below 5 kW = standard fixed-slab billing, above 5 kW = Time-of-Use billing with peak/off-peak variable rates.

Tariff Rationalization: Restructuring tariffs to reflect actual cost structure, shifting recovery toward fixed demand charges, and reducing cross-subsidies between consumer categories.

Fixed Cost: Costs independent of electricity consumed (mainly generator capacity payments and network maintenance), approximately 73% of total power sector costs.

Variable Cost: Costs that scale with electricity generated, primarily fuel, approximately 27% of total costs, recovered through the Rs/kWh tariff component.

Cost of Service (CoS): NEPRA's full cost-recovery benchmark: Rs 36.13/kWh for ≤300 unit consumers and Rs 35.29/kWh for 301+ and ToU consumers; tariffs below CoS imply subsidy, above CoS imply cross-subsidisation.

Effective Tariff: Total bill (fixed + variable) divided by units consumed, the true per-unit cost, unique to each household based on their load and consumption.

Net Metering: The mechanism of allowing solar owners to offset exported units against grid units drawn, reducing their variable charge while still using the grid as backup, shifting fixed-cost recovery onto non-solar consumers.

Lifeline: Lowest residential tier (≤1 kW sanctioned load, ≤100 units/month consistently for at least 12 months); charged Rs 3.95–7.74/kWh with no fixed charge; government covers up to 89% of the cost of service.

Protected: Consumers who have not exceeded 200 units in any month of the preceding 6 months.

Un-Protected: Consumers who exceeded 200 units in at least one month of the preceding year. 

Time-of-Use (ToU): Tariff structure with higher rates during peak hours and lower rates off-peak, applied to connections above 5 kW sanctioned load, designed to shift demand away from peak system stress periods.

To gain more insights into our methodology, click here.