Hydropower is a vital component of India’s energy landscape, offering a renewable and dependable source of electricity. According to the Central Electricity Authority’s (CEA) Report on Optimal Generation Mix for 2029-30, India’s total power capacity is projected to reach 777 GW, with hydropower contributing 53,860 MW, accounting for 6.9 per cent of the energy mix.
Financial viability and competitiveness with other energy sources are important for enhancing the attractiveness of hydropower projects. Over the years, while conventional power projects have seen capital cost increases on account of time and cost overruns, pumped storage projects (PSPs) have emerged as more economically viable solution, offering a lower cost per kWh of stored energy, particularly when considering long-term operations and their value to the grid. The recent introduction of tariff-based competitive bidding guidelines by the Ministry of Power (MoP) for PSPs is expected to provide a fillip to the segment.
A look at the key trends in the cost and tariffs of hydropower projects, as well as state and central government initiatives aimed at improving segment economics…
Cost and tariffs
The cost of hydropower projects in India varies significantly depending on factors such as location, project size, geological conditions, environmental regulations and financing mechanisms. The capital costs of hydropower projects are considerably high, as they involve extensive civil construction, the installation of electromechanical equipment and land acquisition. The cost of developing large hydro projects in the country could range from Rs 70 million to Rs 200 million per MW, making it a capital-intensive energy source.
Operations and maintenance (O&M) expenses for hydropower projects are relatively low compared to thermal power plants (TPPs). Annual O&M costs generally account for 1-2 per cent of the initial capital investment. However, factors such as sedimentation, turbine maintenance and reservoir management add to overall operational expenses.
Since hydropower projects have long gestation periods, typically ranging from five to ten years, financing costs also play a significant role in determining the total project expenditure. High interest rates on loans and the long payback periods contribute to the overall financial burden on project developers.
Apart from direct construction and financing costs, hydropower projects incur environmental and rehabilitation costs. Large hydro projects often lead to the displacement of local communities and ecological disruptions, necessitating compensation, resettlement and environmental mitigation measures. These additional costs can further escalate the overall project expenditure.
Another important factor influencing hydropower costs is transmission and distribution infrastructure. Since hydro projects are generally located in remote mountainous regions, significant investment is required to integrate the generated electricity into the national grid, adding to the overall financial burden.
The tariff structure for hydroelectric power projects follows a cost-plus approach, ensuring reasonable returns for developers while keeping consumer tariffs affordable. It includes both fixed and variable components. Fixed charges primarily account for capital recovery, depreciation and fixed O&M expenses, while variable charges cover operational variability due to seasonal water flow and maintenance requirements.
Unlike TPPs, hydropower projects do not have fuel costs, which gives them an advantage in terms of long-term operational sustainability. However, due to high initial investments, the tariff for newly developed hydro projects is relatively higher in the initial years. Discoms have been reluctant to sign power purchase agreements (PPAs) for conventional hydropower due to the higher upfront tariffs and prolonged delays, leading to cost and time overruns and increased costs for flood moderation and enabling infrastructure.
As per industry estimates, the average levellised tariff for new hydropower projects in India is Rs 4 to Rs 6 per kWh, depending on project-specific factors. Over time, as the capital cost is recovered, tariffs are expected to decrease, making hydroelectricity more affordable.
Focus on PSPs
India has a significant pumped storage potential of 183 GW, yet only a small fraction is currently being utilised. At present, the country has 4,745.6 MW of installed pumped storage capacity. Additionally, 7,970 MW of PSPs are under implementation, as per the CEA (as of January 2025). PSPs with a total capacity of 4,100 MW have been concurred by the CEA but are yet to be taken up for construction. The total on-river potential stands at 61,975.6 MW, while off-river potential is estimated at 121,355 MW. As per the CEA, the capacity addition plan for PSPs till 2031-32 is 50,760 MW.
Developers are adopting both merchant models and long-term PPAs for their upcoming PSPs. Many are integrating PSPs into their renewable energy portfolios, viewing them as long-duration storage solutions that compete with battery storage. Additionally, peak power arbitrage is emerging as a key revenue stream for these projects.
PSPs offer several advantages, including low storage costs, minimal environmental and resettlement concerns, shorter gestation periods, non-consumptive water usage, and long lifespans – 40 years for equipment and up to 100 years for civil structures.
As per industry estimates, PSP capital cost is approximately Rs 45-Rs 60 million per MW for a four- to six-hour storage, making it one of the cheapest sources of energy storage presently. The energy cost is in the range of Rs 4.40 and Rs 5.25 per unit for a single cycle and between Rs 3 and Rs 4 per kWh for 1.5 cycles.
Central and state initiatives
The government has introduced several policies and financial mechanisms to address cost-related challenges. To promote the development of PSPs, the criteria for availing the complete waiver of interstate transmission system (ISTS) charges for PSPs has now been linked to the date of project award rather than project commissioning.
Recently, in February 2025, the MoP notified the tariff-based competitive bidding guidelines for PSPs with the aim to address regulatory gaps regarding PSP procurement. The framework, under Section 63 of the Electricity Act, 2003, ensures transparency and fair risk-sharing for developers, procurers and end-users. It covers existing, under-construction and new PSPs, with two bidding models: Mode 1, where the procurer prepares the site, and Mode 2, where developers identify and develop sites independently. The minimum bid capacity is 50 MW for interstate projects. The financial provisions for bidders include an earnest money deposit of 2 per cent and a performance guarantee of 5 per cent of project costs.
Earlier, the MoP released the budgetary support guidelines for enabling infrastructure, such as roads and bridges, and is available for CEA-approved projects that commence construction after March 2019. The support is provided at the rate of Rs 15 million per MW for projects up to 200 MW and Rs 10 million per MW for projects exceeding 200 MW.
The government has also notified the trajectory of the energy storage obligation for discoms to ensure adequate capacities for “storage as a grid element”. The CEA has also reduced the timelines for the preparation and concurrence of detailed project reports for PSPs. Financial incentives such as reduced GST on hydropower equipment and concessional loans have also been introduced to ease the financial burden on developers. Tariff rationalisation measures include providing flexibility to developers in determining tariffs by backloading tariffs after increasing the project life to 40 years, increasing the debt repayment period to 18 years, and introducing a tariff escalation by 2 per cent
per annum.
Additionally, the MoP has introduced a scheme to provide central financial assistance (CFA) to the north-eastern states for equity participation in hydroelectric projects developed through joint ventures with central PSUs. Under this scheme, the CFA will cover up to 24 per cent of the equity for each project, with a maximum limit of Rs 7.5 billion per project.
Several states have also introduced incentive policies. For instance, Maharashtra, in December 2023, waived upfront premiums, free power obligations, local area development funds and ISTS charges for PSPs developed under the public-private partnership mode.
Chhattisgarh, in November 2024, abolished the Green Energy Development Fee for the first five years and removed the provision for subsequent fee hikes. Tamil Nadu, in September 2024, offered a 50 per cent concession on stamp duty and registration fees, a 10-year exemption from electricity taxes on in-state consumption and waived water cess for PSP operations.
Uttarakhand, in September 2023, introduced a pumped storage policy, exempting developers from intra-state transmission charges (up to 50 per cent for the first five years), local area development funds and the requirement to pay free royalty power to the state government. The state has also expedited land clearances, introduced a water tax only on net water entry, and prioritised developers with existing hydropower projects for new PSP allocations.
Arunachal Pradesh, in January 2025, approved state GST reimbursement concessions for two hydropower projects, a 700 MW and a 1,720 MW project, to enhance their financial viability.
Meanwhile, Meghalaya’s Power Policy, 2024 offers financial assistance for hydropower projects with 7.5 per cent of the capital cost for projects up to 25 MW, 5 per cent for projects between 25 MW and 100 MW, and 2.5 per cent for projects above 100 MW.
Challenges and future outlook
As per the National Electricity Plan, by 2031-32, 73.2 GW of energy storage is required to successfully integrate variable renewable energy into the grid, with PSPs emerging as a promising option. According to experts, more measures would be needed to support the segment, such as the creation of a single-window clearance mechanism to simplify and fast-track environmental and forest clearance processes. Other recommendations include the use of advanced geological surveying technologies to mitigate risks from geological uncertainties, strengthening indigenous capacity in tunnel boring machines and automated monitoring systems, and engineer training and local workforce development to enhance expertise in hydropower construction and O&M.
The cost and tariff structure of hydropower in India reflects both its capital-intensive nature and long-term economic benefits. Although initial costs are high, the long operational lifespan and low variable costs make hydropower a reliable and sustainable energy source. With continued government support, policy reforms and technological advancements, hydropower is expected to play a critical role in India’s journey towards a cleaner and more stable energy future.
Aastha Sharma