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ISLAMABAD: The government is likely to introduce a three-phase subsidy mechanism for electricity consumers from June 1, 2021 aimed at protecting the vulnerable and re-target the burden on consumers using 301-701 units monthly.

Official sources told Business Recorder that this was decided in a meeting chaired by the PM on September 16, 2020; however, details of the targeted subsidy for electricity consumers will be worked out by Power Division in consultation with Ehsaas and Finance Divisions.

Subsequently, in a meeting on February 10, 2021, a two-phased subsidy reform proposal was presented to the Prime Minister and was approved in principle.

A summary for retargeting electricity subsidy was presented to Economic Coordination Committee (ECC) of the Cabinet on March 10, 2021. The ECC approved the proposals of the summary including the essential principles of subsidy reform and directed Power Division to submit specific proposals on thresholds and rates.

On the basis of the directions of the Prime Minister and a detailed analysis, Power Division argues that any subsidy reform must be based on the following principles: (i) electricity billing (base tariffs plus quarterly adjustments) should never be below cost recovery (power generation costs including Nepra allowed losses minus budgeted subsidies); (ii) only vulnerable groups among domestic users should be eligible for government subsidies; (iii) in the long term, the subsidies to the vulnerable groups should be delivered in cash, based on identification done through Ehsaas; (iv) in the short to medium term, subsidies can be delivered based on electricity consumption, and only to consumption categories (slabs) identified as vulnerable based on evidence (HIES); (v) existing net subsidies for unprotected groups should be phased out over the next 5 years; and (vi) all policy driven subsidies (except subsidies to the vulnerable group) should be compensated by cross-subsidization.

On cross-subsidies, Power Division maintains that it should be simplified to show direct linkages: (i) unprotected domestic user slabs may have a sliding scale to encourage energy efficiency but should have zero net subsidies; and (ii) subsidies for industrial or agricultural users should only be applied with proven economic benefits. All non-domestic user categories should have zero net subsidies.

Power Division has prepared a three-phased proposal for subsidy reform. The first phase would comprise adjustment of the tariff structure to ensure that the most vulnerable residential consumers are identified through electricity consumption and are fully or partially protected from future price increases.

On the basis of this analysis, the following proposals have been submitted for consideration and approval of ECC of the Cabinet as the first phase of electricity subsidy reforms. On behalf of Discos, the regulator may be requested for following modifications in the Discos tariff determinations/motion decision of February 12, 2021: (i) expanded definition of the lifeline consumers to include residential non Time of Use (ToU) consumers having a maximum in the last twelve months and current month's consumption of 100 units; two rates for 50 and 100 units will continue; (ii) create a new category of protected customers (those consuming 200 kWh in the billing month and consistently 200 kWh for past six months as per mechanism); (iii) break the 301-700 slab into four slabs-301-400, 401-500, 501-600 & 601-700 with the same marginal tariff; and (iv) each of these slabs would continue to get the previous slab benefit of 300 kWh slab as today.

Copyright Business Recorder, 2021