Hits and Misses: Expert opinion on the guidelines for promoting PSPs

The Ministry of Power (MoP) has finally released the much-anticipated guidelines for pro­moting pumped storage projects (PSPs). This policy is in line with the finance minister’s budget speech in February 2023, which mentioned the creation of a separate framework for developing PSPs in the country and the issuance of guidelines for executing these projects. The proposed guidelines suggest market reforms to incentivise ancillary services provided by PSPs, exempt PSPs from free power obligations and rationalise environmental clearances for PSPs, among other measures. Industry experts share their thoughts on the strengths and weaknesses of the MoP’s latest guidelines, as well as the potential impact and outlook for the sector…

What are the key hits and misses of the power ministry’s recent guidelines aimed at promoting the development of PSPs? What is their expected impact on the sector?

Dr Ammu Susanna Jacob

India plans to meet 50 per cent of its energy requirement from renewables by 2030. To deal with the variable and intermittent nature of renewables, as well as the seasonality of energy dema­nd, we require energy storage like pum­ped hydro. Owing to their ability to deliver reliable and cost-effective energy storage without using any critical or polluting raw materials, PSPs have an important role to play in fulfilling India’s growing electricity demand and reducing the country’s dependency on fossil fuels.

While India has an on-river pumped hydro potential of 103 GW, the growth of PSPs in the country has been tepid. We currently have only 4.74 GW of operational PSPs. This is mainly due to their high initial investment and long gestation period.

Policy initiatives for boosting the growth of PSPs have been long overdue. The­re­fore, the release of the draft guidelines for promoting the development of PSPs is a welcome move. The guidelines aim to ensure that the sustainable develop­me­nt of PSPs in the country takes into account the demands of all stakeholders including local communities and the environment.

Key hits

The draft guidelines cover most aspects of vitalising the sector by offering relevant directions. According to the guidelines, PSP sites will be allotted (by the sta­te government) to PSUs as well as to private players. For hydro PSUs (both central and state), the sites will be allotted through nomination, which will be based on their financial soundness. Pri­va­te players may be allotted sites through a two-stage competitive bidding. The first stage involves fulfilling the eligibility/pre-qualification criteria determined by fi­n­ancial strength, experience, past reco­rd of accomplishment and ability to meet performance guarantees. The second sta­ge involves meeting quantifiable para­me­­ters specified by the government. PSPs can also be allotted through tariff-based competitive bidding when the PSP developer arranges the input po­wer. The guidelines require developers to begin construction within two years, otherwise the allotment of the project site will be cancelled. Only projects that fall within the benchmark levellised cost will be ta­ken up for development to ensure the via­bility of PSPs. These provisions will inc­rease the installation and commissioning of PSPs in the near future.

The guidelines also aim to bring in market reforms that allow monetisation of various use cases of pumped hydro such as ancillary services, spinning reserves, reactive support, black start, peaking supply, tertiary and ramping support, and the other services it can provide to the grid. This is expected to be beneficial for PSP developers as it will generate pr­ofit to help them recover their fixed cost. Further, the guidelines include ins­tr­uc­tions regarding reimbursement of state GST on hydropower project compone­nts, avoidance of double taxation (since PSPs buy and sell power), and exemption from free power obligation.

The use of exhausted mines and government land at a concessional rate by deve­lopers on an annual lease basis also finds a place in the guidelines. This provision will reduce the investment cost, and if the expense distribution model is followed, it will help reduce the risks associated with initial high investment and provide a stable cash flow. Also, the guidelines exempt off-river PSPs from environmental im­pact assessment, there­­by re­ducing the time frame for obtaining environment clearances and expediting the execution of these projects.

Key misses

The guidelines could have been impro­v­ed by including suggestions or directions on generation-based incentives to sustain the operation of PSPs and promote competition in the sector. Also, the market reforms mentioned in the guidelines need to be detailed out more clearly to outline the profit margins and attract additional investors to the sector. To increase the flow of funds to PSPs, the government should approve FDIs as it has been done for the renewable energy sector. Extending viability gap funding (VGF) to PSPs can enhance their financial viability further.

Despite the misses, I believe these draft gui­delines have immense potential to en­courage investment in PSPs in the years to come.

Prabhakar Chandrabhan Kale

India’s integrated power grid is one of the largest synchronous power grids in the world. In view of the sustainable de­velopment goals, India’s power generation mix is rapidly shifting towards a more significant share of renewable energy.

The country’s vision is to achieve net zero emissions by 2070. Some of its sho­rt-term targets are increasing renewables capacity to 500 GW by 2030, meeting 50 per cent of energy requirements from renewables, reducing cumulative emissions by one billion tonnes by 2030, and reducing emissions intensity of India’s GDP by 45 per cent by 2030.

With the high penetration of renewable energy, particularly from intermittent sources such as solar and wind, there is a need to manage concerns related to ba­­lancing India’s power grid and its security and stability. For this, PSPs are paramount for providing greater inertia and balancing power to the grid. These can store a large amount of energy and provide frequent starts/stops and faster ramp-ups/ramp-downs.

The draft National Electricity Plan published by the Central Electricity Autho­rity (CEA) indicates that 18.8 GW of PSPs and 51.5 GW of battery energy storage systems (BESS) (five hours) are re­q­uired to integrate the planned renewable en­ergy capacity addition till 2032. The PSP ca­pacity requirement may further inc­rea­se if the cost of BESSs does not de­crease as expected.

As per CEA estimates, India has a potential to deploy 63 PSPs with a total capacity of roughly 97 GW across different parts of the country. However, till date, only eight PSPs have been installed in the country with a total capacity of 4,746 MW. Of this, only 3,306 MW is operational and the remaining capacity is con­strained due to delays in the cons­truction of the tail reservoir or due to vi­bration-related issues in the system. Thus, there is a significant untapped po­tential in the Indian PSP space.

The government is proposing to allot sites for development in three ways – on a nomination basis to CPSUs and state PSUs, competitive bidding and tariff based competitive bidding (TBCB). It is also suggesting that developers pay no upfront premium for project allocation, but that construction must take place within two years of the date of allotment, or the government has the right to cancel.

The Government of India has released draft guidelines to promote the development of PSPs in the country. The guidelines discuss the measures taken to promote development, such as utilisation of financial and project execution capabilities, implementation of energy storage obligation, waiver of interstate transmission system (ISTS) charges and budgetary support for enabling infrastructure.

Key hits

• No upfront premium for project allocation
• Several market reforms for the monetisation of ancillary services provided by PSPs (like spinning reserves, inertia support, reactive support, black start, peaking supply, tertiary and ramping support, and faster start-up and shutdown)
• Concessional climate finance and utilisation of sovereign green bonds
• No requirement to create a local area development fund
• Exemption from environmental impa­ct assessment and public hearings, with only an environment management plan needed.

Misses and suggestions

• Regarding the allocation of projects, the state governments can directly aw­ard PSPs on a nomination basis to public sector companies. Otherwise, proj­ects can be allocated through two-stage competitive bidding to private developers or public sector companies. It is suggested that the Swiss Ch­a­ll­enge method may be adopted to allow private players to submit coun­ter proposals. For the sites identified by private de­­velopers, the projects should be all­otted to them on a nomination basis. The competitive bidding route should be adopted only for those identified sit­es where the following have been ob­ta­in­ed/done and made part of the bid documents to mitigate geological and other surprises:
• Pre-feasibility report
• Geological survey
• Approvals from the Ministry of En­vi­ro­nment, Forest and Climate Change
• Application made to the CEA for techno-economic clearance
• PSPs may also be awarded on a TBCB basis to developers
• VGF-based bidding against a feed-in tariff (FiT)/benchmark tariff, as was adopted in the initial stages for solar capacity, can be explored. This VGF would be over and above the budgetary support for hydro plants for enabling infrastructure like roads and bridges.
• Most of the hydro projects get delayed due to delays in various cl­earances required for the project. There is a need for time-bound single window appro­vals/clearances for the projects, which will ensure timely clearances for hydroelectric projects. This will help to start the projects on schedule without any time/cost overruns. A special task force at the state secretariat level can be for­med by the state government for dealing with new hydro projects to ensure timely approvals. Further, it is suggested that the process of clearance may be done through a centralised mechanism similar to the renewable energy open access portal.
• GST on major components of hydro pro­jects should be waived to bring parity with solar modules/renewable energy project components for which lower GST is applicable.
• Performance linked incentive (PLI) su­pp­ort is being provided for other rene­wable energy components. The same should be extended for hydro as well.
• PSPs should be treated as a grid asset. Since PSPs will be providing ancillary services to the grid, if we treat them as a grid asset and recover fixed cost fr­om all beneficiaries, more developers will come forward to install PSPs. Also, the­re will not be much burden on a single di­scom, thus making PSPs a viable op­tion.
• It is suggested that for PSPs the loan te­nure may be extended to 30 years to arrive at a rational tariff. The RBI may be requested to issue guidelines to le­n­ders for providing loans for 30 years, specifically for PSPs.

Overall, the development of PSPs is es­sential to increase the share of renewable energy generation and provide 24×7 reliable and quality power supply. The proposed guidelines may help expedite the growth of PSPs in India and remove the bottlenecks in the sector.

M.M. Madan

• PSPs should not be treated at par with hydro projects, so the forest and environment clearance process should not be as stringent as for hydro projects.
• Since PSPs act like battery systems, th­ey should be promoted to supply pea­king power at special peaking rates. While pumping, they can consume surplus power from daytime generation that would otherwise go to waste. It also helps in stabilising the grid.
• GST should be lower since PSPs produce less power than they consume.
• PSP power obligation should be a separate trajectory like wind renewable po­wer obligation.
• Waiver of ISTS charges and budgetary support are good measures to promote PSPs.
• Since there is a shortage of good and experienced contractors in the hydro sector, players in the infrastructure sector who have a good track record shou­ld be encouraged to develop PSPs.
• No upfront premium and free power should be imposed on PSP developers and the central government should is­s­ue a notification in this regard to convince the state governments.

Bhagyathej Reddy

At the outset, the guidelines aim to add­ress the issues surrounding project development and enhance their revenue streams. A quick run-through of the im­pact of the proposed guidelines for promoting PSP development:

Viability related: The notification of principles for peak and off-peak tariffs for generation can aid in providing pricing signals to peak and baseload generating plants. This can also help in demand-side response to avoid momentary peaks during the day.  PSPs are connected to state transmission utilities and the central transmission utility, and enabling them to participate in the proposed high price segment of the day-ahead market can im­prove grid stability. The opening of ancillary markets for wider participation can enable PSPs to participate in tertiary reserves. The use of PSPs and hydro projects for black start ability is well known. Therefore, they need to be appropriately valued or incentivised for the service.

The purpose of the project and the associated payment mechanism including capacity charges (for reserving the facility) and energy charges (for supplying energy during peak periods) need to be decided, along with tariffs. Further, the discoms/load despatch centres need to have a resource plan to prepare for these long-gestation projects, along with periodic monitoring and calibration. Having such a plan can help states in opting for right of first refusal (ROFR) on “up to 40 per cent of capacities” with tariffs determined based on state electricity regulatory commission regulations. It is a welcome move to remove free power as PSPs are a passive asset.

The waiver of ISTS charges till mid-2025 could help a few advanced PSPs. How­ever, to reach the CEA’s target of 18.8 GW by 2032, the waiver for energy utilised through PSPs may be extended as PSPs have a long gestation period and transmission charges are significant (around Re 1 per kWh). Also, it needs to be seen if the energy storage obligations would co­mplement the deviation settlement me­chanism (DSM) charges levied on the discoms in financial year 2024. A provision to periodically relook at the energy purchase obligation could well be utilised to promote PSPs.

The avoidance of double taxation, especially, where state electricity duties are 15 per cent of energy charges, simplifies the tariff structure. Similar clarity on indirect taxation on the use of PSPs as an intermediary system may be provided.

Development related: While encouraging central PSUs with hydro experience to execute the identified 73 GW of ca­pa­city is a move in the right direction, they will require significant capital support (about 0.9x to 4.5x their net worth, ex­cluding NTPC). Notably, state gencos (except Karnataka Power Corporation Limited) are absent from this initiative despite their experience in owning, ope­rating and developing PSPs. The in­terest in PSPs from private players through independent power producers (IPPs) is a logical extension to their wind and solar portfolio as PSPs will mitigate their in­termittent nature and offer a round-the-clock (RTC)/despatchable renewable energy solution.

Extending budgetary support for ena­bling infrastructure beyond hy­dro projects to PSPs is a positive step as it supports local road and bridge developme­nt. While this policy for hydro projects was notified in March 2021, the actual level of support provided is unclear. Nonetheless, the power ministry was provided Rs 100 million of budgetary support in 2023-24 as against the Rs 900 million sought by it.

The criteria for award of project sites by state governments give preference to PSUs, provided the project execution fol­lows a competitive bidding process. While identifying firms for construction packages may not be a challenge due to a strong EPC/developer ecosystem, av­oi­ding overruns typical of large projects could be a challenge. The parliamentary committee on energy noted that 12 out of 13 hydro projects (>25 MW) are de­layed, with a cumulative time overrun of almost 1,205 months, resulting in huge cost overruns.

A two-step process to award PSP sites through tariff-based bidding can weed out inexperienced companies, but a tariff mechanism that aligns with the project’s purpose and end-user requireme­nt needs to be established. Finally, as­signing B-2 category to off-river PSPs can reduce the time for development by 12-15 months, enhancing their viability by reducing data collection needed for eco/biological studies.

Overall, the guidelines appear to be in the right direction and a few clarifications (on preference for Section 62 vs 63; process for conversion of existing hydro projects into PSPs) and nudges (alignment of projects with resource planning exercises) would have helped.

What is the future outlook for the development of PSPs in the country?

Dr Ammu Susanna Jacob

As per the National Electricity Plan, th­ere will be 18 GW of PSPs in India by 2030. With such an enormous pumped hydro potential, these draft guidelines can give the much-needed impetus to the sector. They certainly brighten the outlook for PSPs.

Prabhakar Chandrabhan Kale

As per the generation planning studies for 2022, a PSP-based storage capacity of about 6.81 GW with 46.65 GWh of storage is required by the year 2026-27 to fulfil the storage requirements of the grid. The storage capacity requirement increases to 70.38 GW (18.82 GW from PSPs and 51.56 GW from BESSs) with a storage of 392.78 GWh (135 GWh from PSPs and 257.78 GWh from BESSs) by the year 2031-32. However, the requirement of only 18.82 GW PSP capacity see­ms to be very conservative. As per our assessment, India needs about 45 GW PSP capacity by 2032.

As per the CEA PSP’s status report, India has around 4.7 GW of installed PSP capacity, of which 3.3 GW is operational, 2.7 GW under construction and 25.6 GW under survey and investigation. Also, many developers are working on pre-feasibility report/detailed project report of schemes totalling about 12 GW.

Considering an investment of Rs 50 million per MW and the addition of 37.5 GW of PSPs, the total investment required for PSPs will be around Rs 1,875 billion over the next 10 years. Private sector participation will be crucial for ensuring this investment.

M.M. Madan

• The future of pumped storage is bright, especially hybrid (solar/wind based) PSPs as compared to PSPs that are de­pendent on thermal/hydropower.
• Off-river PSPs, existing reservoir-ba­sed PSPs and close loop reservoir PSPs are preferred since they do not  in­volve resettlement and rehabilitation and environment issues.
• PSUs have already been allotted 73,240 MW of capacity. The central and state governments should monitor the timely development of these projects strictly so that new contractors are developed and it should be ensured that the works are awarded to new incumbents.
• State governments have also taken up PSPs to a large extent and many private developers have shown their in­terest.

Bhagyathej Reddy

Need for storage: As renewable generation increases, the gap between supply and demand is likely to widen as India pursues its climate change commitme­nts. Currently, renewable generators are given a leeway in DSM, transmission charge waivers and reduced banking charges. So, the responsibility to address the supply-side intermittency is on load despatch centres (LDCs)/discoms. This has led to stand-alone bids for storage by Solar Energy Corporation of India, NTPC Limited, Power Company of Kar­na­taka Limited (PCKL) and Kerala State Electricity Board Limited in the past one year. While RTC and despatchable re­ne­wable energy requirements are becoming common (from utilities and end-users), the volumes in stand-alone storage bids are far higher for providing the demand required for this segment. Whi­le PSPs and BESS are supply-side assets that help reduce intermittent generation and address the imbalance,  demand-side flexibility is still untapped in our country due to fixed time-of-use incentives/disincentives.

PSP as a solution for storage needs: PSPs account for around 95 per cent of global energy storage capacity and can add to the variety of options at the disposal of discoms/LDCs to address the consumption-generation imbalance. The CEA projects a PSP requirement of 19 GW by 2032 although it has identified 95 GW of sites (of which 39 GW are in the Western Ghat states of Maharashtra, Karnataka and Kerala). With more green hydro projects being announced, the need for storage is also likely to go up. Given the lack of “peaker” plants (due to the unavailability of gas) or de­pth in power exchange (in terms of volumes and products), PSPs can provide that huge “on-demand” buffer needed in the system.

The successful commissioning of ongoing projects such as the Pinnapuram PSP and Kundah PSP will have an impact on the pipeline, especially in terms of regulatory and financing treatment. Global utilities (especially European) and global equity backed renewable IPPs are keen to tap into this opportunity, exhi­biting confidence in the regulatory re­gi­me and the project execution.

PSP development can be made uncomplicated by addressing some of the barriers such as:

• Water utilisation
• The central government can help in clearing taxation ambiguity (on duties and GST) and provide a faster/standardised process for environmental clearances.
• New tenders require long storage hours (around 6 GWh of live opportunities with a four- to six-hour requirement), giving PSP an edge over BESSs. However, there is a mismatch between the power purchase agreement tenure (25 years) and PSPs’ expected project life (40-60 years), resulting in tail risk in contracting, which was addressed in PCKL’s recently closed tender.

Alternatives to PSPs like electrochemical batteries could pose a challenge owing to a possible drop in prices (bucking last year’s trend) and/or in taxes or the need for lower temporal shift (two to four hours). When compared to a BESS, with a price of Rs 10 per kWh, the pricing is favourable for PSPs at Rs 4-Rs 5 per kWh.  This is largely due to the longer asset life of PSPs, which allows for amortisation.

PSPs need to coexist along with other grid management measures such as demand response and the need for behind-the-meter and distributed storage through electrochemical batteries. This can be achieved by issuing tenders that target multiple technologies, similar to equal encouragement given to so­lar thermal and solar PV in the National Solar Mission Phase 1, where 500 MW was awarded to both technologies. How­­ever, solar PV exhibited wider ad­option while limited capital was dep­loy­ed in solar thermal. The purpose of the tender and the consequent payme­nt mechanism, whether capacity char­ges (for reserving the facility) or energy charges (for supplying energy during peak periods) need to be decided, along with tariffs.

The way forward

Global capital has aided growth in renewables and to replicate the same, policy and regulatory certainty is needed. The longer gestation of PSPs (in comparison to renewables) makes it necessary to forecast the supply-dema­nd imbalance over a 5-10-year period to achieve policy and regulatory certainty, in addition to ensuring on-time execution. Given the growth in energy de­mand and the focus on decarbonisation, especially from the industrial and transport sectors, these forecasts need to be periodically calibrated or a permissi­ble leeway in tariffs should be granted to make PSP invest­ments stress-free. The principles from build–operate– trans­fer (BOT) road projects could provide guidance in this regard.

State/Region-specific studies must be conducted periodically to assess the re­quirement of charging cycles as renewable energy penetration increases. While PSPs are suitable for two cycles in a day and/or more than four hours of disch­arge, electrochemical (Li-ion BESS) is mo­re suitable for less than four hours of storage and single-cycle use cases.

Tender conditions are also expected to mature along with better planning from discoms on demand manage­ment. ­Va­ri­ous state departments must concur on these projects. Usually, the energy depa­rt­ment takes the lead and co-opts other departments such as water reso­ur­ces and industries in the pre-developmental stage.

Operational assets are unable to operate in pump mode due to various issues such as electromechanical problems in turbines, poor monsoons and water usage priorities, and delays in tail pond construction. It is necessary to understand that upcoming projects, especially those under Section 62 or with bilateral contracts, will mitigate the challenges faced by existing PSPs.

To conclude, while storage and PSP re­quirement are still evolving, the award process has gained momentum, and developmental risks are being addressed by ministries and utilities. However, the successful implementation of under-construction projects, coupled with the identification of their purpose and consequent payment mechanism would determine the growth of PSPs in the medium term.