Small hydropower projects in India struggle despite policy push, potential

Despite vast untapped capacity, India's small hydropower sector faces stagnation due to high costs, policy hurdles, delays in clearances and weak financial viability, even as the government rolls out

India's renewable energy (RE) sector has witnessed significant growth over the past decade, led primarily by solar and wind energy. However, while these sources of power are essential for achieving non-fossil fuel capacity targets, energy sources such as small hydropower plants (SHPs) are also critical for rural electrification. Yet, SHPs account for a meagre 1 per cent share of India's total RE output. In the past decade, SHPs' installed capacity has barely grown, from 4,273 megawatts (MW) in FY16 to 5,171 MW as of February 2026, with 854 operational SHP units, according to NITI Aayog data.

What exactly are small hydropower projects?

The fall in annual capacity addition has also been precipitous — about 70 MW in FY25, down from over 490 MW in FY11, despite potential for 21,000 MW capacity that can be harnessed at 7,133 sites across states.

 

“India’s SHP sector is in a state of prolonged slowdown,” said Sumeet Mazumdar, chief executive officer, Federation of Indian Small Hydropower (FISH), a policy advocacy body representing SHP associations, manufacturers, consultants, and contractors that serves as a unified platform to engage with central and state governments.

 

SHPs are projects of up to 25 MW capacity which are run-of-the-river projects, so named because the water is diverted through a small structure with no large dam or storage reservoir. They do not alter river hydrology and hence are categorised as 'white category' industries by the Central Pollution Control Board (CPCB). Since they do not cause ecological disturbance and involve minimal submergence, full-scale Environmental Impact Assessment studies are not mandated for SHPs.

What role can SHPs play in rural electrification?

Unlike wind and solar, SHPs can maintain grid stability and fulfil energy requirements in rural areas by providing quality power. “It is not feasible to feed power generated by large hydro projects to remote locations especially in hilly regions. Transmission lines over long distances result in voltage drops. This problem is easily overcome by small hydro projects located on small streams,” said Neeraj Kanwar, managing director, Chevron Hydel.

 

The government has seemed to have realised the potential for rural electrification using SHPs. The Union Cabinet recently approved a Rs 2,584.6 crore Small Hydro Power Development Scheme for FY26–31, targeting 1,500 MW of new capacity. The scheme will cover a portion of project costs and aims to attract a total investment of Rs 15,000 crore. It will provide financial assistance of Rs 30 crore for each project in north-eastern states and districts with international borders, capped at Rs 3.6 crore per MW, or 30 per cent of the project cost, whichever is lower. For other states, the Centre will provide financial assistance of Rs 20 crore per project, capped at Rs 2.4 crore per MW, or 20 per cent of the project cost, whichever is lower.

 

The proposed scheme will also support states and central agencies to prepare detailed reports for nearly 200 projects, for which an amount of Rs 30 crore has been allocated. Mazumdar said: “It will help rebuild confidence among SHP developers, provide comfort to financial institutions and facilitate better tariff conditions,” adding that it will expedite approvals as proactive states that process clearances more efficiently will benefit the most, as projects can be developed faster and avail subsidies at an earlier stage.

What challenges are holding back SHP projects?

Since 2017, when the earlier Central Financial Assistance scheme was discontinued, there has been a perceptible lack of progress in the implementation of SHP projects in India. “State governments have also not provided sufficient impetus; on the contrary, some states have introduced additional charges such as water cess and annual fees on project land, while failing to streamline or improve their clearance processes,” Mazumdar pointed out.

 

The sector today faces myriad issues, including high upfront costs, approval delays, clearance bottlenecks and unviable tariffs. SHP projects generally cost about Rs 12–13 crore per MW, with costs increasing in north-eastern states due to higher transportation costs. For comparison, solar power costs Rs 4.5 crore per MW, according to an SHP project developer who has licences in the north-east.

 

Moreover, forest and other clearances take a long time. “The forest clearances are taking four to eight years. Theoretically, everything is online but due to the reporting system being dependent on different levels of field staff and working conditions, it is taking months and years to resolve the queries emerged from online meetings and one simple solution to end this will be that a fixed timeline is given to the responding staff," this developer said, declining to be named given the nature of the issue. 

 

Additionally, the inflation projected over 40 years in tariff determination is far below actual inflationary trends. “Unwanted land cess and water cess on the running projects eat away the return on investment as they cannot be recovered fast. Wages and insurance costs have quadrupled over 15 years. Maintenance of machines and replacement costs have also gone up but tariffs are fixed at Rs 2.50 per unit for a period of 40 years,” said Kanwar.

 

There should be a mechanism for tariffs to be revised every 5–10 years to account for increased expenses so that the sector remains sustainable, Kanwar said. “With extra funds, we can modernise and upgrade our equipment. Otherwise, this sector will die out over the 20–25 years,” he warned.

How is climate change affecting small hydropower projects?

To make matters worse, the very thing that RE hopes to mitigate has become a problem: climate change. New climatic patterns have increased the frequency of extreme weather events, such as floods, which play havoc for developers. Floods damage the projects, with insurance companies loath to cover the cost because, as per insurance industry norms, there is no distinction between large and small hydro projects. Due to extensive damage of large hydro dams in recent years, the premium costs for SHPs have also gone up fivefold. While earlier premiums were in the range of Rs 2 lakh–Rs 2.5 lakh per MW, these have now spiralled to Rs 30 lakh, said Kanwar.

 

Then there are additional expenses that developers must pay, such as operation and maintenance (O&M) costs, which see annual increases, making the projects unviable over time. “On a 1 MW project, we have a revenue of about Rs 1.5 crore annually while the O&M costs are coming to Rs 25 lakh–Rs 30 lakh,” Kanwar said.

Why does lack of data and financing hinder SHP growth?

Lack of historical hydrological data is another problem that can reduce project viability and affect access to capital. Bhawna Tyagi, programme lead, Council on Energy, Environment and Water (CEEW), said: Project viability is closely tied to hydrology, and there is a clear opportunity to strengthen SHP projects by improving access to accurate historical data on river flow across lean and peak seasons. Clearer visibility on this will make it easier to access finance and lower risk premiums. Recent announcements showcase an encouraging momentum with government agencies targeting to bridge this gap."  While the SHP development scheme will resolve some of the issues related to access to capital by catalysing private investment, there are various other measures that are needed to accelerate SHP deployment and realise the sector's full potential.

What policy reforms can revive India’s SHP sector?

Single-window clearance and fast-tracking of green clearances are required urgently, said M M Madan, former executive director, NHPC, and advisor (Council of Hydro Power and Tunnels) at Assocham. “Establishing a dedicated, centralised platform for all statutory permits — similar to those for large hydro and solar — to reduce the current fragmented approval process will help," he said. "There is also a need to streamline the environment and forest clearance process specifically for small hydro, which often gets stuck in the same bureaucratic loops as mega-projects,” Madan added.

 

More importantly, SHPs need assurance for guaranteed power offtake and timely payments from state discoms to reduce the risk premium currently demanded by lenders. The industry has also been demanding a national SHP policy to eliminate policy inconsistencies across states. “The Ministry of New and Renewable Energy (MNRE) should promulgate a National SHP Policy that state governments can use as a guiding framework to harmonise their respective policies,” Mazumdar said.

 

FISH has conducted several rounds of discussions with stakeholders in the recent past regarding such a central SHP policy. “We are asking for an SHP-specific insurance policy, because the large and small hydro projects have a vast difference. We want the General Insurance Corporation of India to issue a specific policy for SHP,” the developer quoted earlier said. 

 

Meanwhile, India possesses strong indigenous manufacturing capability, with roughly 20 manufacturers producing SHP equipment for a 300 MW annual capacity, noted Madan. Indian SHP equipment manufacturers have performed well in export markets, including Nepal and Southeast Asia, and have even executed projects in advanced countries such as Japan, as well as in Europe and the Americas. This demonstrates that India possesses the necessary indigenous capabilities to accelerate SHP development domestically, but for that to happen, the sector needs an enabling policy framework and adequate access to finance.