The guidelines released by the Ministry of Power (MoP) in April 2023 can be a shot in the arm for pumped hydro energy storage (PHES) projects, and kickstart ~5GW of capacity addition over the next five fiscals. Rising capacity share of renewable energy produced during non-peak hours is making investments in storage infrastructure an imperative.

For instance, solar, which at present forms half of renewable generation (solar + wind), is produced during the daytime, while peak power requirement is during evenings (5-8 PM). The disparity will rise with the proportion of solar power in the overall renewable energy mix expected to increase to ~58% over the next two fiscals. Absence of storage limits the capability of solar power to meet peak-demand requirement.

Energy storage systems (ESS) address this issue by charging when electricity is generated and discharging into the grid as and when required. There are two ESS options: PHES, and battery energy storage system (BESS). The MoP guidelines focus on PHES projects given their advantages over BESS, such as long project life of ~50 years without significant maintenance costs, low residual waste generation, and long storage duration without significant discharging.

To be sure, PHES projects have their challenges. This is reflected in negligible capacity addition since March 2017¹, largely on account of limitations in identification of suitable sites, relatively complex implementation, long gestation period and high capital cost that make viability a major issue. Then there is the lengthy process of approvals, such as land acquisition, and forest, wildlife and environmental clearances.

Says Ankit Hakhu, Director, CRISIL Ratings, “The MoP guidelines could speed up environmental clearances for off-river PHES projects as these are being offered under a separate window. Further the guidelines provide for the government to provide land at concessional rates on annual lease rental basis. They also enable utilisation of exhausted mines for PHES projects and provide a relaxation of one year for projects where construction is delayed due to pending forest and environmental clearance. This should help mitigate implementation challenges and increase the pool of available sites at attractive cost.”

Of the ~5 GW of PHES capacity likely to be commissioned over the next five fiscals, 2.8 GW is under construction and the rest may come up at potential sites, cumulating to 29.9 GW marked by the Ministry of New and Renewable Energy.

To improve viability, the guidelines provide for budgetary support (capped at Rs 1.5 crore per MW for projects up to 200 MW and Rs 1 crore per MW for projects above 200 MW) for setting up enabling infrastructure such as road connectivity and transmission lines to project site. The guidelines pave way for PHES projects to increase revenue streams by offering ancillary services such as reactive support and peak hour shaving², which have the potential to bump up cash flow by ~5% annually.

Says Varun Marwaha, Associate Director, CRISIL Ratings, “If the measures are implemented well, PHES projects with ability to store electricity (and discharge later) for over 6 hours could provide power at a levelised tariff of Rs 6-7 per unit³ — including budgetary benefit of ~Rs 0.3 per unit — depending on location (as this has a bearing on project cost). While the tariff may be higher compared with the average procurement price for discoms, this power could help discoms improve the share of green energy in their overall power mix and comply with MoP-stipulated renewable and storage purchase obligations.”

That said, traction in PHES will depend on steps to make tariffs attractive to discoms and mitigate implementation risk to fuel private sector participation.

¹ As per MoP circular on draft guidelines dated February 15, 2023, PHES has installed operational capacity of ~5 GW. These are largely set up by central and state governments and their entities and have a mixture of both standalone reservoirs and linkage to dams
² Balancing grid by charging when there is excess power and vice versa. These services help in voltage and frequency regulation and power flow control in the grid
³ PHES projects, which can be set up at Rs 7-8 crore per MW, are viable at a levelised tariff of Rs 6-7 per unit, assuming input power is available at Rs 2.5-3 per unit, at 75-80% cycle efficiency, debt to equity ratio of 70:30 and interest cost of 8-9%. However, the tariffs could vary depending on the location, which could impact capital cost