No ‘capacity payment’ for small Hydel units

Islamabad:

The government has decided to abolish the concept of ‘capacity payments’ for small hydropower projects, with the aim of reducing the financial burden on energy consumers.

Currently, consumers bear 70% of the cost of electricity due to these payments made to Independent Power Producers (IPPs), totaling around Rs 2.2 trillion annually to those who do not generate a single unit of electricity.

During discussions on standard security arrangements for small hydro projects under the Electricity Generation Policy 2015, the cabinet committee on energy (CCoE) was informed that hydrological risk is now parked with electricity producers, although the policy predicted that it would be borne by electricity buyers.

In addition, the existing two-part tariff regime, which separated capacity and energy payments, had been replaced with a one-part tariff based on a ‘take-and-pay’ system with a ‘must-run’ regulation.

The changes arise from two main issues, mainly unreliable hydrological data measured by the donor team and the location of small hydro projects on small streams and tributaries. Consequently, the hydrological risk cannot be placed on the electricity buyer.

However, to ensure the project’s financeability, Nepra, while fixing the recent tariffs of SHPPs, introduced a “take and pay” with a “must-run” concept meaning that whatever power would be generated by the project, the buyer will leave. -take such action or pay for lost volume.

Thus, the standard security package documents have been drafted in complete harmony and compliance with the policy, while keeping in mind the trend of recent tariff determinations by Nepra for SHPPs. These changes were aimed at ensuring that MFIPs were only paid with delivered energy tariffs, and there was no concept of capacity payments based on mere availability.

In this context, the Power Division sought views and comments from Nepra. The regulator’s response confirmed that existing CCI-approved policies did not prevent Nepra from allowing mandatory operating conditions for small hydro projects.

Nepra further stated that in recent cases, involving small hydro projects, it had switched to take-and-pay contract with must-run, also transferring hydrology risk to power producers to better serve consumers.

PPIB Board, in its 129th meeting on 4th January 2021, approved the standard draft Implementation Agreement (IA) along with GOP guarantee (Schedule 3 in IA) for the payment obligations of power buyer, AJK/provinces as per and pursuant to the Energy Purchase Agreement (EPA), AJK IA, and Water Use Agreement (WUA) (where applicable).

It was pointed out that the standard draft safety package documents had been prepared using earlier ECC approved safety package documents for hydel projects processed under the Power Generation Projects Policy 2002.

Earlier, a summary had been submitted to the Greek Cypriot Council with some proposals. The GOPIA Standard (along with the GOP Guarantee in Appendix 3) and the EPA Standard for SHPPs were requested to be approved.

In addition, the contractual obligations of AJK and the provincial governments arising out of and under the AJK IA and WUA executed under the AJK IA and WUA were requested to be offset and guaranteed by the GOF under the GOP IA and GOP guarantee, respectively. .

It was further proposed that the boards of PPIB, CPPAG and the AJK and Provincial Governments be empowered to make and approve any project specific amendments to the respective agreements required during the final negotiations subject to the commitments or obligations of GOP based on GOP IA and Warranty not increased.

In addition, PPIB, CPPAG Boards and AJK and Provincial Governments should be empowered to make and approve any amendments to GOPIA, EPA, AJ&K IA and WUA as required to comply with tariff setting and approval/license of Nepra for specific projects.

The Department of Electricity informed that the ECC by decision of 7 October 2021 had asked it to first place the matter before the CCoE for consideration and then to the ECC. The CCoE, in a decision dated 29 October 2021, directed the Department of Electricity to review the standard security agreements for small hydro projects under the Electricity Generation Policy 2015 in consultation with relevant stakeholders to align the recommendations with those approved by the cabinet fundamental principles of “transition to a competitive market” and “no projects should be carried out” and submit them for consideration to the CCoE.

The Energy Directorate informed that the assumptions of the Indicative Generation Capacity Expansion Plan (IGCEP) had been approved by the CCI, after which Nepra approved the IGCEP 2021-30. The National Electricity Policy 2021 stipulated that all future capacity additions would be made on a minimum cost basis. In this context, PPIB would process only those SHPPs that were ‘Committed Projects’ in IGCEP.

Riali Hydro Power Project (HPP) is a 7.08 MW project located in AJK. The PPIB issued a Tripartite Letter of Support (LOS) after Nepra fixed the tariff for the project on a mandatory execution basis, as under the existing regulatory framework, hydropower and renewable energy projects were dispatched without financial value.

Furthermore, the LOS issued by the PPIB Board has expired. Conversely, when these projects are terminated due to default by the IPPs, the power buyer is not required to pay. The CCoE considered the brief submitted by the Electricity Directorate on “Standard Security Agreements for Small Hydro Projects under the Power Generation Policy 2015” and approved the proposals.