slab’s upper bound, and the unit rate on the subsequent slab for the remainder. For example, a household consuming 350 kWh/month pays the 200‐300 kWh slab tariff rate for the first 300 kWh used and the 301‐700 kWh tariff for the remaining 50 kWh used. Given an average cost of supply of around Rs 12 in 2015‐16, the top two slabs are no longer subsidized, but due to the 201‐300 slab subsidy some households consuming over 300 kWh/month still get a small subsidy.

Despite the recent tariff adjustments, electricity subsidies remain poorly targeted and provide limited support to vulnerable households. In a previous World Bank study, it was illustrated that electricity consumption is weakly related to overall welfare in Pakistan, and therefore richer households still benefit disproportionately from subsidies (Walker et. al. 2014). Meanwhile, poor households struggle to afford higher electricity costs and resort to coping mechanisms that negatively impact their overall well‐being. Around one‐third of households, the majority of which are poor or living in remote areas, remain unconnected to the grid and instead use more expensive or less efficient energy sources. Since energy subsidies are poorly targeted, it is natural to ask whether there might be more efficient and equitable means of making energy affordable. In doing so, however, one must consider the direct and indirect impacts on household welfare, through higher prices for electricity, alternative energy, and indirectly on other goods and services. International experience with energy subsidy reforms emphasizes the importance of compensation to protect poorer households against adverse impacts of subsidy reforms, and raise public acceptance of reforms. The choice of compensation method depends on the country’s economic and political circumstances. When undertaking such reforms, it is important to consider the availability of existing social programs, administrative capacity, fiscal soundness of the budgets, as well as the political context (Yemtsov et al., forthcoming). Such compensatory measures should be tailored to the likely impact of the reform on a variety of different groups.

**Box 1: Indonesia’s subsidy reform experience**

Indonesia is one of the flagship examples of successful subsidy reform. In 2005, the increase in international oil prices gave way to ambitious subsidy reforms, which proceeded in two stages (Clements et. al., 2013). In March 2005, the government raised gasoline and diesel prices by 33 and 27 percent respectively. Kerosene, being the least regressive of the subsidized goods, was initially left unchanged. In the second round of reform later that year, all fuel prices were increased, and kerosene prices almost doubled as a result. Had there not been a proper compensation plan, it is estimated that these price hikes (particularly of kerosene) would have caused the poverty headcount index to rise by 5.6 percentage points (Yemtsov et al., forthcoming). To mitigate such drastic impacts on the poor and near‐poor households, the government introduced a two‐pronged compensation package, reallocating a significant share of the savings from the subsidy reform towards social protection. A temporary (two‐year) unconditional cash transfer introduced in conjunction with the reforms, _Subsidi Langsung Tunai,_ was provided to the poorest 35 percent of the population (well above the 16 percent poverty line), in order to protect the near‐poor and minimize political unrest (Beaton and Lontoh, 2010). What was then the world’s largest UCT program proved to be largely successful in reaching the poor; the poorest quintile received 21 percent of the benefits, while the second, third and fourth quintiles received a total of 40 percent. The compensation package also included education, health and rural infrastructure programs for the poor (which were introduced later).

Cash transfers are often introduced or augmented as a means of replacing or at least temporarily mitigating the adverse effects of subsidy reform. Untargeted cash transfers are 5