Iraqi residents are to receive their first 1,000 kilowatt-hours of electricity each month free of charge, the Ministry of Electricity said on Saturday, according to Reuters.
The move follows protests over poor electricity supply and basic services.
In the most recent demonstration, hundreds of people gathered in Baghdad on Friday to protest shoddy services and sporadic power, as turmoil rocks other parts of the Arab world.
Acting Electricity Minister, Hussain al-Shahristani, said the subsidy would apply to all Iraqis but was mainly aimed at helping around 8 million low-income Iraqis.
Consumers who use more than 1,000 KWH will pay for what they use over the exempted amount.
In an attempt to encourage consumers to economise and to help tackle crippling power shortages, in October the government doubled the price of electicity from 10 to 20 Iraqi dinars per KWH (less than $0.02) for the first 1,000 KWH.
Under the new pricing scheme, consumers will pay 50 dinars per KWH for between 1,000 and 2,000 KWH, 80 dinars for between 2,000 and 3,000 KWH, and higher tariffs for higher amounts.
"Iraq's current production is 7,000 megawatts, while actual demand is 12,000 megawatts, so we have a shortage of 5,000 megawatts," Shahristani told reporters.
Iraq has big plans to install turbines and capture gas at oilfields to ramp up electricity production, and needs to spend $77 billion to improve the power sector by 2030, according to the 'master plan'.
Shahristani said power imports from Iran will be increased from 500 MW to 800 MW, while talks are being held with Turkey and Syria to import about 300 MW more.
Rehabilitation and maintenance work on existing power stations will supply an additional 1,500 MW before this summer, Shahristani added.
"Despite all efforts, our production capacities will stay below required level needed for next summer", he said.