Business Recorder
ISLAMABAD: The International Monetary Fund (IMF) has slashed the volume of power subsidy from 0.7 of GDP to 0.6 per cent of GDP for FY 2026-27 due to reduction in flow of Circular Debt, owing to ongoing improvements in operational efficiency and performance. According to the Fund’s third review under the Extended Fund Facility (EFF) and second review under the resilience and sustainability facility arrangement, continued timely intra-year tariff adjustments have kept the overall power tariff structure in line with costs, and it is critical that these adjustments continue in the context of global fuel price shocks, including to avoid a resurgence in CD flow. READ ALSO: FM Aurangzeb meets IMF mission for third EFF review 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 Fund urged. The FY27 CD flow target has been set at Rs 300 billion, Rs 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. The IMF’s Staff Report, about targeted budget allocations for power subsidies, said following the implementation of the CD stock reduction operation in FY26 and recognising 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 tube-wells; and (iv) CD stock payments to counterbalance anticipated CD flow, which continues to be targeted at a lower level following the CD stock operation. Discos’ privatisation is also being launched in parallel (preconditions for which are an end-December 2026 Structural Benchmark). The transmission network restructuring has been finalised and the first wholesale electricity auctions should start in mid-2026. 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 replacement of the existing electricity subsidy structure with a targeted framework for low-income consumers end-January 2027; it is critical that the authorities implement an effective nationwide communications campaign to prepare electricity consumers for the transition. Pakistani authorities revealed that settlement with several IPPs with whom penalty payments on arrears were to be waived as part of the broader CD stock reduction operation remains incomplete, with CD continuing to accumulate as a result adding that they will finalise arrangements with all IPPs by end-June 2026. Likewise, a resolving of a dispute with KE currently under litigation will be sought, which has resulted in significant non-payment and arrears, by the end of September 2026. Authorities further stated that timely electricity tariff adjustments were consistent with cost recovery that remains progressive, with a focus remaining on protecting vulnerable consumers. This includes Nepra’s continued timely automatic notifications of quarterly tariff adjustments (QTAs) and monthly fuel charges adjustments (FCAs), as well as the full implementation of the January 2027 annual rebasing (new January 15, 2027 SB), all of which will continue in the context of recent global energy market volatility. “We anticipate that these steps will minimise CD flow, allowing a lower end-FY27 gross CD flow target of Rs 300 billion, and remain committed to reducing gross CD flow to zero by FY31,” the IMF Staff Report cited Pakistani officials as saying. The Authorities pledged to continue to move forward with fundamental cost-reducing power sector reforms. Private sector participation in Disco management will improve performance, efficiency, and governance and address power sector CD drivers, helping to mitigate the need for higher tariffs. The first batch of privatization (IESCO, GEPCO, and FESCO) has been delayed following feedback from market sounding exercises; investor concerns have been addressed and they are moving forward, anticipating finalization by early 2027. In parallel authorities are moving forward with the private sector participation process for the second batch of Discos (HESCO and SEPCO), for which conditions are in line with World Bank recommendations and including outstanding subsidy claims; outstanding balances with the government, other Discos, and other entities; and other balance sheet issues that will be completed by the end of December 2026 (end-December 2026 SB). The authorities are also working with the remaining Discos in a similar fashion to prepare their balance sheets for private sector participation. The appointment of a CEO to the Independent System and Market Operator (ISMO) is under way, as are efforts to finalise staffing arrangements. The incorporation and legal formation of the Energy Infrastructure and Development Management Company (EIDMC) have been completed, and its leadership selection process has been completed. The National Grid Company (NGC) is operational and is undergoing a review of its processes in the context of its new role. Taken together, this restructuring of the transmission network management aims to improve the operations and maintenance, and ultimately the functioning, of Pakistan’s electricity transmission network via ongoing and anticipated new projects, with the support of the World Bank Group and Asian Development Bank. “We are working closely with the Privatisation Commission to assess the viability of privatising two targeted GENCOs (Nandipur and Guddu). In the event that privatisation does not prove feasible, we will work to bring relevant companies under one entity to reduce redundancies, make necessary improvements, and enhance operations,” said the authorities. Nepra issued wheeling auction framework guidelines in January 2026; this will enable auctions under the auspices of the Competitive Trading and Bilateral Contract Market (CTBCM). The first wheeling auction, for 200 MW, will take place by end-June 2026. Once operational, the new market will allow bulk power consumers greater choice over their electricity supplier. The Nepra-determined wheeling charge will be set such that up to 800MW will be allowed in the market until 2031 as a transition measure, with scope for adjustment based on market response, system conditions, and policy direction, to ensure that sufficient capacity remains on the grid. The publication of the revised 2025-35 Integrated System Plan, combining capacity (the former IGCEP) and transmission (TSEP) planning and aiming to reduce excess capacity and deliver significant savings, has been delayed as public hearings have been more extensive than expected. The Plan will be published by the end of May 2026. At the same time, the recently adopted net billing regulation to new consumers to better balance solar and grid demand, in line with international practice, will be applied. They athorities further stated that they have restructured the PPMC as a technical arm of the Power Division. It supports policy, regulatory, and tariff affairs; sector reforms; privatistion; CD management; and integrated power and energy planning. Further strengthening the human resources and securing a sustainable fee-based financing mechanism for PPMC to ensure its financial sustainability and resource adequacy so that it can effectively support the planning, monitoring, and reform implementation of the power sector and the energy sector more broadly, by end-December 2026 is underway. The financing mechanism will be developed and implemented consistent with the applicable legal and regulatory processes, including Nepra’s oversight on cost recovery. The authorities made significant progress in recent years in aligning domestic energy prices with cost recovery, with regular automatic tariff adjustments, in parallel, progress is continuing on structural reforms to improve efficiency and reliability and reduce cost pressures, it was assessed in the Staff Level Agreement. Copyright Business Recorder, 2026
Go to News Site