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Finance Ministry Approves Rs 1.094 Trillion Subsidy for Power Sector Amid Tariff Hike

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Finance Ministry Approves Rs 1.094 Trillion Subsidy for Power Sector Amid Tariff Hike and Circular Debt Challenges

The Finance Ministry has sanctioned a subsidy of Rs 1.094 trillion for the power sector for the fiscal year 2024-25, falling short of the Power Division’s request of Rs 1.250 trillion. Of this subsidy, Rs 174 billion is allocated to K-Electric. The final details of the remaining allocations will be determined following the National Electric Power Regulatory Authority’s (NEPRA) approval of the proposed electricity tariff increase through re-basing. The government had previously allocated Rs 970 billion in subsidies for the power sector in 2023-24.

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Stakeholders are currently discussing the proposed tariff re-basing, expected to increase the tariff by up to Rs 5 per unit starting next fiscal year. The Power Division and NEPRA are finalizing these figures to avoid exacerbating the circular debt, which stands at approximately Rs 2.6 trillion. The debt is anticipated to decrease slightly after a federal government-approved subsidy of around Rs 125 billion is paid to Chinese Independent Power Producers (IPPs). Despite commitments to international financial institutions, the Power Division acknowledges challenges in reducing the circular debt to the targeted Rs 2.350 trillion.

The surge in solar power adoption has significantly reduced sales for Distribution Companies (Discos), complicating revenue assumptions. By April 30, 2024, solar capacity reached 2036 MW, a substantial increase from 963 MW in June 2023. This growth in solar installations, akin to adding a new IPP every month, has disrupted the power sector’s financial strategies. Consequently, Discos are adjusting their load shedding plans to provide relief during the summer heat, even with sufficient generation capacity. The generation plan faces further complications due to increased hydel generation and the need to operate must-run plants.

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