Unlocking PSP Potential: MoP issues guidelines to promote pumped storage projects

Pumped storage is the least expensive large-scale storage technology that can balance intermittent wind and solar energy sources. It is a mature technology with unique features such as quick start and ramping capability, black start, and frequency regulation. How­ever, the development of pumped storage projects (PSPs) in the country has been marred by a number of challenges such as delays in obtaining forest and environmental clearances, land acquisition issues, and a lack of differential tariff for peaking generation.

The Ministry of Power (MoP) recently re­le­ased the long-awaited guidelines for the promotion of PSPs in the country. The policy followed the finance minister’s budget speech in February 2023, which mentioned the creation of a separate framework for the development of PSPs in India and the issuance of guidelines for project execution. The draft gui­delines propose market reforms to in­cen­tivise ancillary services provided by PSPs, exempt PSPs from free power ob­ligations and rationalise environmental clearances for PSPs.

MoP’s draft guidelines to promote development of PSPs

Allotment of project sites: The draft guidelines stipulate three modes of allotment for hydro PSP sites to developers. First, for early development of HEPs, the states may award projects di­rectly to hy­dro central PSUs or state PSUs on a nomination basis, with consideration given to their experience and financial strength. Second, PSPs may be aw­ar­ded to private developers through a two-stage competitive bidding process. Third, PSPs may be awarded to developers through the tariff-based competitive bidding route based on either the composite tariff (including the cost of input power) if the developer arranges input power, or tariff for conversion of power from off-peak to peak if the procurer of the storage capacity arranges the input power.

Charges to be paid by the developer: De­­­velopers will begin construction wi­th­­­in a period of two years from the date of allotment of the project, failing whi­ch, allotment of the project site will be cancelled. The states will ensure that no upfront premium is charged for project allocation.

Market reforms: The comparison of PSPs with other conventional and variable re­ne­wable energy sources purely based on fi­nancial aspects undervalues and de-emphasises its economic benefits. The monetisation of ancillary services provided by PSPs will give a much-needed im­petus to the sector. The draft guidelines propose the following market reforms:

  • The appropriate commission will en­su­re that services such as spinning rese­r­ves, reactive support, black start, pea­king supply, tertiary and ramping support, faster start-up and shutdown are suitably monetised.
  • The appropriate commission shall notify peak and off-peak tariffs for ge­neration to provide appropriate pricing signals.
  • PSPs and other storage projects will be allowed to participate in the high-price segment of the day-ahead market.
  • If the contracted capacity is not being fully utilised by the contracting agen­cy, the developer will be free to transfer the capacity to other interested en­tities so that the resources do not re­ma­in idle.

Taxes and duties: The state governments will consider a reimbursement of state goods and service tax on hydropower pro­j­ect components. Government land, if available, may be provided at a conce­ssional rate to the developers on an annual lease rent basis. Since storage is an intermediary system where energy is stored and released later, in line with the principles of double taxation avoidance, power from PSPs may be suitably considered to avoid double taxation.

Exemption from free power obligation: PSPs are energy storage schemes. They do not produce energy and are net consumers of energy. Therefore, PSPs should be exempt from free power liabilities.

Local area development fund: PSPs have a minimal environmental impact and no rehabilitation and resettlement is­s­ues. Therefore, there will be no re­qu­i­rement for the creation of a local area development fund.

Some of the measures in the guidelines th­at concern other ministries are:

  • Utilisation of exhausted mines to de­ve­lop PSPs: Discarded mines (in­clu­d­ing coal mines) could be used to build PSPs.
  • Rationalisation of environmental cl­earances for off-river PSPs: The off-river PSPs, located away from the river course, may be treated differently for gr­ant of environmental clearances. PSPs, where both reservoirs are built off-river or where one reservoir is built off-river and the existing on-river reservoir undergoes minor structural chan­ges, may be exempted from environmental impact assessment and public hearing and be re­quired to prepare an environment management plan.
  • Green finance: In order to accelerate the pace of establishment of PSPs, they can be supported through concessional climate finance and sovereign green bonds.

Current scenario

As per the Central Electricity Au­thority (CEA), India has eight PSPs with a total capacity of 4,745.6 MW. These are installed in various locations across the co­untry including Telangana (two), Ma­harashtra (two), Tamil Nadu (one), West Bengal (one) and Guj­a­rat (two). However, only six plants with an installed capacity of 3,305.6 MW are working in pum­ped mode. The remaining 1,440 MW of capacity across two sites in Gujarat is currently not operating in pumped mode due to delays in construction of the tail reservoir and vibration-related issues in the system.

Three PSPs with a total capacity of 2,700 MW are under construction – THDC Limited’s 1,000 MW Tehri Stage II project in Uttarakhand; Tamil Nadu Ge­ne­ration and Distribution Corporation Limited’s 500 MW Kundah PSP and Gr­ee­n­ko’s 1,200 MW Pinnapuram Integrated Rene­wable Energy Project (IREP) in An­dhra Pradesh. Notably, the Pinna­puram IREP is a first-of-its-kind integrated renewable energy project in India, conceived as a gigawatt-integrated project with solar, wind and pumped storage components. The project features an off-stream closed loop standalone storage system and will have a cycle efficiency of 75 per cent.

With regard to survey and investigation, as of October 2022, a total of 23 projects aggregating 25,630 MW are under survey and investigation. There has been inc­reased interest among private players in the development of pumped storage projects. Various private sector players have announced PSP projects in recent ti­mes. In October 2022, JSW Energy Limited signed an agreement with the Mahara­shtra government to set up a 960 MW PSP project in Raigarh district. In April 2022, JSW expressed interest in developing the 1,000 MW Hasdev Bango PSP in Chha­t­tisgarh and the 1,500 MW Komoram Bhe­em PSP in Telangana. Mo­re recently, in January 2023, the Gre­enko Group anno­un­ced the setting up of a PSP project in Neemuch, Madh­ya Pradesh, while Adani announced plans to set up a PSP in Madhya Pradesh. Further, in Dec­ember 2022, Adani Green Energy Limited re­cei­ved approval to set up 1,600 MW of PSPs in Andhra Pradesh.

Future outlook

As per the CEA’s draft National Elec­tricity Plan, 18,826 MW of pumped storage capacity will be required to meet the peak electricity demand and energy requirement up to 2031-32.  While PSP capacity of 6.81 GW will be required to meet the projected peak electricity demand and energy requirement in 2026-27, an additional PSP capacity of 12.02 GW (along with a five-hour BESS capacity of 51.56 GW) will be required to meet the peak electricity demand and energy requirement in 2031-32. On the financing front, the CEA has estimated a fund requirement of Rs 430.99 billion from 2022-23 to 2026-27 and Rs 355.32 billion during 2027-28 to 2031-32 for the development of the projected PSP capacity.

To conclude, there is a huge potential for the development of pumped storage capacity in the country and the recently anno­u­n­ced draft guidelines to promote PSPs are expected to give a mu­ch-needed fillip to the segme­nt by providing the right incenti­ves, expediting the pro­cess of ap­p­roval and clearances, and att­ra­cting investor interest in the segment. Overall, the de­velopment of PSPs is essential to achieve the country’s goal of increasing the share of renewable energy generation and providing 24×7 reliable and quality power supply.