This paper evaluates the effect of converter and generator losses on the maximum power point (MPP) of variable speed micro-hydropower energy conversion systems. As a case study, a semi-Kaplan micro-hydropower turbine with a permanent magnet (PM) generator and a back-to-back full converter is considered. Using the analytical model, different loss terms, such as converter losses, PM generator losses and mechanical losses are calculated at different shaft speeds. Then, the curves of turbine power and injected power to the grid are extracted as a function of turbine speed. It is shown that the maximum attainable power of the variable-speed hydropower system does not correspond to the MPP of hydraulic turbine. In other words, to get the maximum power from the whole hydropower system, it is necessary to consider power losses of the electric generator and power electronic interface between the turbine and the grid. These power losses can change the power-speed characteristics or MPP location of the hydropower system. According to this fact, the conventional MPP tracking (MPPT) algorithms which try to track the MPP of hydraulic turbines fail to extract the maximum power. Hence, a modified perturb and observe (P&O) MPP tracking algorithm is proposed for the variable speed hydropower systems to increase their efficiency. The modified tracking algorithm finds the “optimum MPP” automatically and without the extra calculations. Also, the injected power to the grid is increased 3.7% when the modified algorithm is applied to the studied case study. Finally, the validity of theoretical claims is verified by experimental tests on a 5 kW hardware prototype.