Power division outlines plans to reduce electricity taxes, alter the solar metering system to provide relief to consumers amid rising tariffs

The Power Division officials in Islamabad briefed the visiting International Monetary Fund (IMF) mission on Tuesday about the potential changes in Pakistan’s solar energy policy and the associated impact on electricity tariffs. The officials highlighted that electricity consumers currently pay Rs800 billion annually through taxation on their electricity bills, contributing to an Rs8 per unit increase in tariffs. The officials proposed that eliminating these taxes could reduce tariffs by the same amount.

However, the complete removal of all taxation on electricity bills cannot be allowed. The officials suggested a reduction in taxation by Rs100-200 billion per annum, which would offer consumers relief of Rs1-2 per unit. They emphasized the need to expand the tax net, targeting sectors like retail, real estate, and agriculture.

The Federal Board of Revenue (FBR) cannot eliminate the 17% General Sales Tax (GST), which contributes Rs600 billion to government revenue from electricity bills. Other taxes amounting to Rs100-200 billion could be removed from electricity bills to provide some relief.

Power Division officials also informed Prime Minister Shehbaz Sharif about the heavy taxation burden on electricity consumers and its impact on tariffs. They highlighted the unsustainable nature of the current power sector and the need to explore options for making electricity affordable.

Electricity consumers currently pay various charges, including Electricity Duty (ED), GST, PTV license fees, and surcharges. ED ranges from 1% to 1.5% of Variable Charges, while GST is 17% of the electricity bill. Consumers also pay a PTV license fee of Rs35 for domestic consumers and Rs60 for commercial consumers. Additionally, there are surcharges such as a financing cost surcharge of Rs0.43 per kWh, extra tax for industrial and commercial consumers not registered in the active taxpayer list of FBR, and further tax for consumers without a Sales Tax Return Number (STRN).

Income tax is also charged at varying rates depending on the applicable tariff and electricity bill amount. The authorities are working on restructuring efforts to improve efficiency and reduce tariffs. They plan to convert power plants based on imported coal to use local coal from Thar.

The IMF was informed that approximately 1,938 MW of electricity has been added to the system through rooftop solar installations under net metering. However, this has resulted in a revenue loss of Rs100 billion, which has been passed on to consumers who do not have solar systems, increasing their tariffs by Rs1.90 per unit.

The government is considering introducing gross metering instead of net metering for solar panels. This change would reduce the buyback tariff for solar energy to Rs7.5-11 per unit, down from Rs21. Consumers with solar panels would still need to draw electricity from the national grid at Rs60 per unit during night or peak hours.

The IMF was briefed on the implications of providing service to rooftop solar consumers through the national grid. If consumers with rooftop solar systems detach from the national grid, they would need to install large batteries to store solar energy for night-time use, resulting in a per unit cost of 20 cents or Rs60.

Under the proposed gross metering system, consumers would receive a fixed feed-in tariff for the total units of solar energy generated and exported to the grid. They would pay the retail supply tariff for the power consumed from the grid. The total solar generation would be measured by a bi-directional meter, while total power import would be measured by a unidirectional meter.

These proposed changes aim to address the current challenges in the power sector and provide some relief to electricity consumers, while also ensuring the sustainability of the national grid and promoting the use of solar energy.

Analysis:

 The proposed changes to Pakistan’s solar energy policy highlight significant shifts in how the country manages its energy resources and taxation. The Power Division’s briefing to the IMF underscores the government’s attempt to balance fiscal responsibility with consumer relief in the face of rising electricity tariffs.

Economically, the reduction in electricity taxes aims to alleviate the financial burden on consumers, potentially lowering tariffs by Rs1-2 per unit. This move could stimulate economic activity by increasing disposable income for households and reducing operating costs for businesses. However, the government’s revenue from these taxes, particularly the 17% GST, remains crucial for public finances. The challenge lies in finding alternative revenue sources, such as expanding the tax net to under-taxed sectors like retail, real estate, and agriculture. This shift requires efficient tax administration and political will to implement.

Politically, the proposed changes reflect the government’s response to public discontent over high electricity costs. By addressing this issue, the government seeks to maintain its legitimacy and public support. Prime Minister Shehbaz Sharif’s involvement and the Power Division’s proactive measures signal a commitment to reform. However, the political implications of expanding the tax net to previously under-taxed sectors could provoke resistance from powerful interest groups, potentially complicating the implementation of these reforms.

Socially, the proposed reduction in electricity costs would benefit consumers, particularly low-income households who spend a significant portion of their income on energy. Lower electricity bills can improve living standards and reduce energy poverty. The introduction of gross metering for solar energy could also encourage more households to adopt solar technology, promoting sustainable energy practices and reducing dependence on the national grid.

From an environmental perspective, the shift to gross metering and the promotion of solar energy align with global efforts to combat climate change. Encouraging the use of renewable energy sources reduces greenhouse gas emissions and fosters a more sustainable energy infrastructure. The government’s plan to convert power plants from imported to local coal also has environmental implications, as local coal may have different environmental impacts compared to imported varieties.

Gender perspectives in energy policy are crucial as well. Women, often responsible for household energy management, would directly benefit from reduced electricity costs. Affordable energy can lead to better health outcomes and economic opportunities for women, especially in rural areas where energy access can be more limited. The promotion of solar energy can also create new employment opportunities in the renewable energy sector, potentially benefiting women entrepreneurs and workers.

Minority and marginalized communities often face greater energy access challenges. The proposed changes could improve energy equity by making electricity more affordable and accessible. The expansion of solar energy can provide decentralized energy solutions for remote and underserved areas, reducing reliance on the national grid and improving energy resilience.

In conclusion, the proposed changes to Pakistan’s solar energy policy and electricity taxation reflect a comprehensive approach to addressing economic, political, social, and environmental challenges. The government’s efforts to balance fiscal responsibility with consumer relief demonstrate a nuanced understanding of the complex dynamics at play. The success of these reforms will depend on effective implementation, stakeholder engagement, and continued commitment to sustainable energy practices.