A subsidy-neutral package that isn't quite neutral

Pakistan’s Incremental Consumption Package (ICP) was meant to encourage industrial and agricultural consumers to use more electricity from the national grid, improve utilization of otherwise idle generation capacity and recover the marginal cost of supplying additional units.

Instead, its first semi-annual review has exposed serious shortcomings at the Ministry of Energy (Power Division), with the regulator struggling to obtain basic cost information from the very ministry that designed and sponsored the scheme.

There is little disagreement over the objective. Bringing industrial consumption back to the grid is desirable, particularly when declining demand threatens the recovery of fixed costs and pushes tariffs higher for remaining consumers. But an incentive designed to be subsidy-neutral cannot become another mechanism for transferring costs to those who do not benefit from it. The government cannot sell a win-win proposition while leaving someone else to pick up the tab.

This is precisely the concern raised in the dissenting note accompanying Nepra’s November 6 decision. The disagreement is not with the policy objective, but with allowing the package to continue without establishing what it actually costs to serve the additional demand. On this point, the dissenting position is considerably more convincing.

Approved in December 2025, the package offered eligible industrial and private agricultural consumers an incremental rate of Rs22.98 per unit on consumption above their December 2023-November 2024 reference period. Designed to run for three years, the scheme was explicitly premised on cost-reflectivity: beneficiaries would pay the marginal cost of additional electricity, including a contingency margin, without shifting the burden to other consumers.

Semi-annual reviews were therefore central to the arrangement, not an administrative formality. Yet the first review, due following the initial six-month period ending May 2026, was badly delayed. The ministry submitted raw data on July 29 without a marginal cost assessment or supporting calculations. Nepra returned it as incomplete. Rather than furnishing the required analysis, the ministry subsequently asked the regulator to conduct the review itself.

The dissenting note records six letters from Nepra over approximately four months, besides emails and meetings, seeking the missing information. Even subsequent submissions failed to meet the regulator’s requirements. The chairman, despite voting for continuation, acknowledged the ministry’s inadequate responses and poor coordination among entities working under the Power Division.

This is more than bureaucratic lethargy. The ministry designed the package and was responsible for monitoring its financial sustainability. Yet it effectively left the regulator to do its homework. A flagship power-sector intervention that cannot produce its own cost workings after six months is hardly reassuring.

The numbers explain why this matters. Nepra estimates incremental consumption at 3,969 GWh between December 2025 and May 2026, comprising 3,420 GWh from XWDISCOs and 549 GWh from K-Electric. The estimated marginal generation cost was Rs117.7 billion, equivalent to Rs25.68 per unit at generation level and Rs29.65 at the consumer end.

The monthly consumer-end marginal cost ranged from Rs17.45 to Rs49.65, exceeding the approved Rs22.98 rate in three of the six months. The weighted average difference over the review period was Rs6.67 per unit. That is a sizeable gap for a scheme whose defining promise was that beneficiaries would pay for the additional electricity they consumed.

Importantly, Rs29.65 is not a final determination. Nepra’s initial estimate of Rs31.83 was revised after incorporating operational and must-purchase tags from the Independent System and Market Operator (ISMO). But significant gaps remain, including the treatment of RLNG generation under must-purchase obligations, subsequent RLNG price revisions, discrepancies with monthly FCA workings and the absence of PLEXOS modelling to isolate the actual cost attributable to incremental demand.

The ministry’s proposed solution was to retain the original assumed generation mix, update fuel prices and arrive at a revised rate of Rs25.30. This is hardly a substitute for a proper assessment of actual dispatch conditions. Updating fuel prices while retaining potentially outdated generation assumptions is not cost analysis; it is merely recalibrating an assumption. Even the dissenting members point out that the estimated Rs29.65 consumer-end cost exceeds the normal off-peak tariff, undermining the very rationale for the incentive.

The more consequential issue is who pays the difference. Under the package, positive FCAs apply to incremental consumption, while quarterly tariff adjustments, the debt service surcharge and negative FCAs do not. If actual marginal costs exceed the package rate, the shortfall is recovered through the FCA mechanism from the wider consumer base. Excluding incremental units from quarterly adjustments also increases the burden on consumers outside the scheme. In effect, a supposedly subsidy-neutral incentive risks becoming a cross-subsidy.

The majority nevertheless approved Rs25.30 per unit on an interim basis from the November 2026 billing month, pending a comprehensive review. The dissenting position favored temporary suspension until the ministry furnished a complete assessment and Nepra determined a genuinely cost-reflective rate. This would have been the more defensible response. Continuing the package without establishing its economics is akin to running a business without knowing its cost of sales and asking customers to settle the difference.

Other design questions remain. Stakeholders have challenged whether reference consumption, sanctioned-load and load-factor criteria allow consumers merely shifting from captive generation to qualify for the incentive. Captive-to-grid migration may improve utilization, but that alone does not establish genuinely incremental demand or justify every beneficiary’s eligibility. Nepra has also acknowledged difficulties identifying furnace-oil-based captive consumers in DISCO records.

The ministry has cited an annual contribution-margin impact of around Rs180 billion from declining grid demand, alongside an estimated tariff impact of just Rs0.65 per unit, or 1.95 percent, between January and August 2026. But the former reflects the broader cost of declining demand, not the net benefit attributable to ICP. Neither figure establishes that the package is delivering value for money.

Nepra has now sought PLEXOS modelling, actual dispatch and fuel availability data, plant-wise workings and FCA reconciliation for both review periods. The original provision requiring termination if an upward tariff adjustment is needed in two consecutive reviews also remains intact.

Pakistan needs productive electricity consumption, but it cannot afford incentives built on assumptions that are never tested against operating realities. High grid tariffs are already burdening consumers. Asking them to underwrite an inadequately assessed policy intervention only compounds the problem.

An incentive is not subsidy-neutral merely because the government calls it so. Its economics must be established, its beneficiaries properly identified and its costs transparently accounted for. The ministry has failed on these basic tests. Giving it another chance may keep the package alive, but it hardly vindicates the way it has been managed.