- Plan ends the system where companies subsidized household bills.
- This measure could trigger an increase of 1.1 percentage points in inflation for the year.
- Industry groups say high prices erode export competitiveness.
The federal government’s new energy price proposals will increase inflation and pass on subsidy cuts demanded by the International Monetary Fund (IMF) to middle-class households, while easing the pain of industries, analysts say.
The plan, which ends a system in which companies subsidize households’ energy bills, could lead to a 1.1 percentage point rise in inflation over 12 months, Optimus Capital Management said.
Analysts say the plan, which only needs formal approval to take effect, will cause industrial prices to fall by 13% to 15% and eliminate 102 billion rupees ($365 million) in subsidies.
That means middle-class households will have to pay about 50% more for energy, analysts estimated.
Inflation Backdrop
The country suffered one of Asia’s highest inflation spikes in 2023, close to 40%, driven by the weakening rupee, rising fuel costs and price increases linked to IMF-backed reforms.
Although inflation has since slowed to 5.8%, analysts warn that changes in energy prices could add inflationary pressure.
The Energy Ministry and the IMF did not respond to a request for comment.
Ahtasam Ahmad, Energy Finance Program Leader at consultancy Renewables First, said that because the purchasing power of the average household had decreased significantly, the change “adds to the compounding effect of inflation we have experienced after 2022”.
The pricing reform underscores tensions within Pakistan’s IMF program, which has ordered sharp increases in utility prices from 2023 to support struggling state-owned power companies.
Industry groups say high prices erode the competitiveness of textile and manufacturing exports.
Consumers using between 100 and 300 units of power monthly – representing the majority of paying residential users – will face tariff increases of up to 76% due to new fixed charges under the price review, according to Arzachel, a Karachi-based energy consultancy.
Lower-income households using between 1 and 100 units monthly will see fixed charges rise from zero to Rs 400, the National Electric Power Regulatory Authority (NEPRA) said on Monday.
The price of solar energy in question
The regulator also reduced the rate paid to rooftop solar users who export power to the grid, replacing a system that previously valued supplied and purchased electricity equally.
A record surge in solar installations has reduced emissions and bills for some households, but reduced revenue for debt-laden utilities as demand for energy from the grid declines.
Prime Minister Shehbaz Sharif on Wednesday ordered a review of NEPRA’s solar changes, directing officials to prevent a cost shift from 466,000 solar users to 37.6 million grid consumers.
“Excessively high fixed rates risk leading consumers to complete grid defection, undermining the long-term stability of the system,” Arzachel said in a note on Tuesday.
