IMF allows Rs1/unit cut in power tariff

Suggests using gas levy revenues to cut electricity prices, industries take govt to court protesting higher costs

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ISLAMABAD:

The International Monetary Fund (IMF) said on Thursday that Pakistan can reduce electricity prices by Rs1 per unit using revenues from the Rs791 per unit levy imposed on gas used in-house for power generation by industries—the only measure the government has secured thus far.

This will lower electricity bills by 1.5%, but industries using gas to generate in-house power will have to pay 23% extra for gas to achieve this minimal reduction.

Revenues from captive power plant firms can be used to reduce electricity prices by Rs1 per kilowatt, said Mahir Binici, the Resident Representative of the IMF, in a brief statement on Thursday. Binici made the statement a day after Pakistan and the IMF reached a staff-level agreement on the completion of the first review talks. Binici stated that the price reduction would benefit all consumers. However, the Islamabad High Court has already suspended the off-grid gas levy for at least five weeks.

Pakistan and the IMF have reached a staff-level agreement for the $1 billion second loan tranche, but the timing of the IMF board meeting remains uncertain.

On March 7, the government notified a 23% increase in gas rates for industrial captive power plants (CPPs) by imposing a Rs791 per million British thermal unit (mmBtu) grid levy. The levy was introduced to discourage the use of gas for in-house electricity generation and push industries to shift to the national electricity grid. The Rs1 per unit reduction is negligible compared to the 23% additional burden placed on industries.

Pakistan's 20 major textile export companies and chemical firms have taken the government to court over its decision to impose the levy to generate funds for reducing electricity prices. "Submissions made by the Council are worth consideration. Let notices be issued to the respondents for 30-04-2025 at the expense of the petitioners. The notification of March 7 shall remain suspended till the next date of hearing," stated the Islamabad High Court's March 26 decision.

The Rs1 per unit reduction suggests that the government and the IMF anticipate generating about Rs110 billion to Rs120 billion in revenues from the off-grid gas levy.

The petitioners have urged the court to declare the off-grid levy notification illegal and to rule the 'Off the Grid Captive Power Plants Levy Ordinance 2025' unconstitutional. They argued that they are already paying sales tax on the supply of natural gas and that imposing a double tax violates the Constitution. They also questioned why the levy was introduced through a Presidential Ordinance rather than an Act of Parliament.

On the last day of talks, the Petroleum Division requested the IMF to reduce the new Rs791 per mmBtu grid levy by Rs250 to Rs300. The division proposed linking the levy to the average electricity price instead of peak-hour rates. However, the IMF rejected the government's request two weeks ago, insisting that higher rates were necessary to compel industries to abandon gas-fired in-house power generation and transition to the electricity grid.

Following the levy's imposition, total gas prices for captive power plants have risen to Rs4,291 per mmBtu, as the government had previously increased gas rates for this category by Rs500 a few months ago. Gas prices are now even higher than imported LNG prices, a policy designed to push industries toward the national power grid. However, businesses remain reluctant to shift due to the exorbitant cost of grid electricity, which is driven by inefficiencies in the energy sector and flawed policies.

According to the ordinance, the grid levy will increase by 10% in July 2025, followed by a 15% hike in February 2026 and another 20% by August 2026. This will bring the final price close to Rs6,000 per mmBtu, making gas usage even more costly and pushing industries toward the grid. However, with the matter now pending before the Islamabad High Court, complications may arise for both the IMF and the government. Prime Minister Shehbaz Sharif has long aimed to reduce electricity prices by at least Rs6 to Rs8 per unit.

However, the Power Division has yet to present a plan acceptable to the IMF that would result in a significant price cut. Pakistan has also been trying to convince the IMF to allow a reduction in electricity prices based on additional revenues from increased petroleum levies, reduced taxes, and downward revisions in fuel price adjustments and quarterly tariff adjustments. The IMF remains unwilling to lower taxes on electricity bills. It has also not yet communicated whether it will allow the government to use an additional Rs180 billion in revenues from the recent Rs10 per litre hike in the petroleum levy to reduce electricity prices. Fuel and quarterly tariff adjustments are regular occurrences and may not require any formal announcement by the prime minister.