ISLAMABAD: Government has decided to eliminate concept of 'capacity payments' for small hydropower projects, aiming to reduce financial burden on power consumers.

Currently, consumers are shouldering 70 percent of electricity costs due to these payments made to Independent Power Producers (IPPs), totalling around Rs2.2 trillion annually to those not producing single unit of electricity. During discussions on standard security agreements for small hydropower projects under Power Generation Policy 2015, Cabinet committee on energy was briefed that hydrological risk has now been parked on power producers, though policy provided that it would be borne by power purchasers. Additionally, existing two-part tariff regime, which separated capacity and energy payments, had been replaced with single-part tariff based on "Take-and-pay" system with "Must-run" arrangement. Changes stem from two main issues, mainly unreliable hydrological data measured by sponsors' team and location of small hydropower projects on minor streams and tributaries.

Consequently, hydrological risk cannot be placed on power purchaser. However, to ensure bankability of project, Nepra, while determining recent tariffs of SHPPs, has introduced "Take and pay" with "Must-run" concept which means whatever energy would be produced by project, purchaser will off-take such energy or pay for missed volume. Nepra stated that in recent cases, involving small hydropower projects, it had shifted to take-and-pay contract with must-run, while also transferring risk of hydrology to power producers to better serve consumers.