Based on qualitative research commissioned for this paper, we find that in spite of the subsidies, low‐ and lower‐middle income households in Pakistan struggle to afford their basic electricity needs. Some households reported being forced to reduce expenditure on food, health and childcare in order to afford electricity bills. Such coping mechanisms particularly affect women, who are the main consumers of electricity at the household level. Aside from affordability, residential electricity users are most concerned about the reliability of supply and quality of customer service. Electricity is central to the lives of modern Pakistani households, and their lives are disrupted by long hours of load shedding common in recent years. The stress of coping with the high cost and low reliability of electricity is taking a toll on family life, health, education, and economic activities. Low‐income households—in particular urban slum residents and beneficiaries of the country’s main welfare program—mentioned resorting to illegal electricity connections because they could not afford to pay their bills. In addition, the qualitative research revealed a general lack of trust in electricity service providers and a poor perception of governance in the sector.

Households need support to manage rising and volatile energy costs, but assistance can be designed in a way that is less distortionary to prices and incentives, and more effectively targeted to the poor than the existing price‐based subsidies. Pakistan has state‐of‐the‐art targeting and registration mechanisms available to deliver better targeted assistance. A national proxy means test (PMT) database developed for the Benazir Income Support Program could be used to target assistance to households based on their welfare. An alternative would be to use exclusion filters like land or vehicle ownership, or tax records. Targeting subsidies would help ensure that assistance goes to those households that most need it, while excluding the richest consumers would save considerable resources. Providing bill credits in place of price‐based subsidies would make billing simpler and provide equal assistance to all targeted households. Other forms of assistance can help encourage consumers to use the formal electricity supply, cutting down on non‐technical losses in the sector. The qualitative analysis, for instance, identified a need for more flexible payment options, and points to a waiver of late payment fees for the poorer households as a way of helping to keep them connected. Measures such as connection fee waivers and amnesty on _kunda_ users could also help attract more consumers back into the formal system.

Experience from subsidy reform episodes worldwide stresses the importance of developing an effective communication plan from the beginning (Clements et al. 2013a). The qualitative research findings revealed that many lower‐income households are unaware that there are electricity subsidies, and do not understand the need for tariffs to increase. There is a perception that prices are already ‘too high’, and this encourages the use of illegal connections. To ensure the reform is publicly accepted, it is crucial to develop a communication strategy to increase public awareness about subsidies, the planned reform, and measures to make electricity more affordable for those most in need. Consumers might be more convinced to pay higher prices for electricity if there are credible expectations of improvement in the reliability of the electricity supply in the medium term. The government should also address (and ideally mitigate) known governance and accountability issues in the sector in order to convince the public that the reform is worthwhile. For instance, grievance redress mechanisms related to connection and bill payment could be strengthened and better publicized.

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