In a significant move aimed at easing the financial burden on electricity consumers, the government announced the elimination of ‘capacity payments’ for small hydropower projects. This decision is expected to alleviate the substantial costs currently borne by consumers, which amount to approximately Rs2.2 trillion annually due to payments to Independent Power Producers (IPPs) that do not generate any electricity.
The decision was made during a cabinet committee on energy (CCoE) meeting where the standard security agreements for small hydropower projects under the Power Generation Policy 2015 were discussed. The committee was informed that hydrological risks, previously assumed by power purchasers, are now being shifted to power producers. This adjustment comes in response to issues related to unreliable hydrological data and the location of small hydropower projects on minor streams and tributaries, making it impractical for power purchasers to bear this risk.
As part of the policy shift, the existing two-part tariff system, which differentiated between capacity and energy payments, has been replaced by a single-part tariff based on a “take-and-pay” system with a “must-run” arrangement. This means that the power purchaser will be required to buy whatever energy is produced by the project or compensate for the missed volume, ensuring the projects are bankable.
The National Electric Power Regulatory Authority (Nepra) supported this change, noting that it aligns with recent tariff determinations for small hydropower projects. Nepra affirmed that under the existing policies, it is permissible to include must-run conditions for these projects, which ensures they are paid based only on delivered energy without capacity payments for mere availability.
The Private Power and Infrastructure Board (PPIB) also played a role in facilitating this transition. In its 129th meeting, the PPIB approved the standard draft of the Implementation Agreement (IA) and the GOP guarantee for the payment obligations of the power purchaser, covering various agreements under the energy purchase framework.
This shift in policy required a comprehensive review and approval process. The Economic Coordination Committee (ECC) had previously directed the Power Division to place the matter before the CCoE for consideration. Following the CCoE’s directive, the Power Division aligned the standard security agreements with the principles of transitioning to a competitive market and eliminating must-run projects.
The approved changes are part of a broader strategy outlined in the Indicative Generation Capacity Expansion Plan (IGCEP) 2021-30, which emphasises least-cost procurement for future capacity additions. The PPIB will now focus on processing small hydropower projects listed as ‘Committed Projects’ in the IGCEP.
One such project, the Riali Hydro Power Project in Azad Jammu and Kashmir, with a capacity of 7.08 MW, received a Tripartite Letter of Support (LOS) after Nepra determined its tariff on a must-run basis. Although the LOS has since expired, the policy changes ensure that such projects, when operational, will not impose additional financial burdens on power purchasers due to defaults by IPPs.
The CCoE has approved the proposals submitted by the Power Division, marking a pivotal step towards a more sustainable and economically viable power sector.