Small Hydro Power Development Scheme (2026)

Policy Update
Purbaa Jagannath

Background

Small hydropower is among the oldest and most geographically democratic forms of renewable energy in India, capable of delivering firm, round-the-clock power to hilly and remote regions where the terrain makes solar parks and large transmission corridors difficult to build. In India, hydro projects with an installed capacity of up to 25 MW are classified as “small hydro power” (SHP) and fall under the jurisdiction of the Ministry of New and Renewable Energy (MNRE), while larger hydro projects remain with the Ministry of Power. The country’s first small hydro project, a 130 kW unit at Darjeeling, was commissioned in 1897, making SHP one of the oldest power technologies deployed in the subcontinent.

India’s assessed small hydro potential stands at 21,133 MW spread across 7,133 identified sites, as compiled in the Small Hydro Database prepared by the Alternate Hydro Energy Centre (AHEC) at IIT Roorkee. Nearly half of this potential is concentrated in the Himalayan states of Arunachal Pradesh, Himachal Pradesh, Jammu & Kashmir and Uttarakhand, with the remainder spread across states such as Maharashtra, Chhattisgarh, Karnataka and Kerala. Despite this considerable and well-mapped resource base, only about 5,171 MW  roughly a quarter of the assessed potential  had been harnessed by early 2026, and small hydro today accounts for barely 2.6 per cent of India’s renewable energy installed capacity, excluding large hydro.

The persistent gap between resource endowment and actual deployment is the central policy problem the Small Hydro Power Development Scheme (2026-31) seeks to address. On 18 March 2026, the Union Cabinet approved the scheme for the period FY 2026-27 to FY 2030-31, with a total outlay of ₹2,584.60 crore, aiming to add approximately 1,500 MW of new capacity. This Policy Update traces the evolution of India’s SHP programme from its origins in the 1980s through a period of policy stagnation after 2017, and assesses the design, financing and early implementation challenges of the newly restructured scheme.

The Small Hydro Power Programme Before 2026

India’s institutional engagement with small hydro predates most other renewable energy programmes. The Government of India established AHEC as a dedicated resource centre at IIT Roorkee in 1982 to support states and central agencies in site identification, design and capacity building for SHP projects; the centre has since assisted more than 25 state and central organisations.

Administrative responsibility for small hydro shifted gradually from the Ministry of Power to the renewable energy establishment: in 1989, plants of 3 MW capacity and below (then about 63 MW in aggregate) were transferred to the newly created renewable energy ministry, and in November 1999 the threshold was raised to 25 MW, bringing the sector under what is now MNRE in its present form.

A formal capital subsidy regime for SHP followed in December 2006, differentiating between “Special Category States” the North-Eastern states, Sikkim, Jammu & Kashmir, Himachal Pradesh and Uttarakhand  which received higher per-MW support, and other states, which received a lower rate. Around 24 states subsequently notified their own policies to invite private investment into SHP, and MNRE issued its first exclusive small hydro policy in November 2009, having previously folded SHP into a combined renewable energy policy framework.

The programme’s record under the Five-Year Plans was mixed. During the Eleventh Plan (2007-12), the sector added 1,419.17 MW against a target of 1,400 MW, effectively meeting its goal. Momentum slowed in the Twelfth Plan (2012-17): MNRE had set a target of roughly 2,100 MW, requiring an average addition of about 420 MW a year, but a 2015 performance audit by the Comptroller and Auditor General (CAG) found the sector falling well short, needing a further concerted addition of about 3,197 MW in the plan’s closing years to reach target  an addition that did not materialise at that pace.

Dedicated central financial assistance for new grid-connected SHP projects subsequently lapsed after 2017, leaving the sector without a focused central scheme for close to a decade even as India’s solar and wind capacity expanded rapidly. This policy gap, combined with a broader decline in hydropower’s overall share of national generation  which fell below 10 per cent for three consecutive years from 2016-17 and touched a four-decade low of 8.3 per cent in FY 2023-24 amid erratic monsoons — set the stage for the 2026 restructuring.

The Restructured Scheme (2026-31): Design and Functioning

The Small Hydro Power Development Scheme approved in March 2026 is structured as a five-year, centrally administered financial assistance programme rather than a plantation- or subsidy-only intervention. MNRE remains the overall policy authority, while the Solar Energy Corporation of India (SECI) has been designated the National Programme Implementing Agency responsible for day-to-day scheme administration, sanctioning of projects and disbursement of assistance. The President’s sanction for implementation was accorded shortly after Cabinet approval, and MNRE issued detailed operational guidelines covering eligibility, the CFA structure, project timelines and monitoring mechanisms in May 2026.

Core objectives

●       Add approximately 1,500 MW of new small hydro capacity (1-25 MW projects) over five years, with a strong tilt towards hilly and North-Eastern states.

●       Build a credible future project pipeline by sanctioning at least 200 Detailed Project Reports (DPRs), backed by GIS-based hydrology and resource assessment.

●       Prioritise run-of-river and canal-based schemes that draw on natural stream flow rather than large reservoirs, limiting submergence, displacement and ecological disruption.

●       Support renovation, modernisation and life-extension of ageing or underperforming (“sick”) SHP plants alongside new capacity addition.

●       Advance the Atmanirbhar Bharat objective by requiring reliance on domestically manufactured plant and machinery for supported projects.

●       Contribute to India’s Panchamrit commitment of 500 GW of non-fossil-fuel capacity by 2030 and its long-term net-zero target for 2070.

The scheme’s financing architecture recognises that project viability in small hydro is highly location-specific: civil-works costs in mountainous, seismic and logistically difficult terrain are considerably higher than in the plains, even though such terrain holds most of the country’s untapped potential. Central Financial Assistance is therefore tiered by geography rather than applied uniformly.

Central Financial Assistance Structure

Source: PMO/PIB (March 2026); MNRE Operational Guidelines (May 2026); Renewable Watch (2026).

The figure illustrates that states with relatively modest potential have generally achieved higher utilisation rates than resource-rich Himalayan states, highlighting that institutional and geographical constraints rather than resource availability have become the principal bottleneck. 

Performance and Physical Progress

Because the restructured scheme became operational only in 2026, no multi-year implementation record yet exists; the more instructive picture is the resource-utilisation gap the scheme is designed to close. As of early 2026, India had harnessed about 5,171 MW of an assessed small hydro potential of 21,133.61 MW across 7,133 sites  meaning roughly three-quarters of the country’s mapped small hydro resource, over 15,900 MW, remains untapped even after nearly a century and a half of hydropower development in the country.

Source: MNRE Small Hydro Database (AHEC, IIT Roorkee); GeniusWindow (2026); ESG News.earth (2026).

The shortfall is not evenly distributed. An analysis published by the National Council of Applied Economic Research (NCAER) in March 2026 found sharp disparities in how far individual states have exploited their own assessed small hydro potential. States with fewer topographical constraints have moved furthest: Telangana had tapped 89 per cent of its assessed potential, Haryana 68 per cent, and Gujarat 56 per cent. By contrast, the resource-rich Himalayan states — precisely where most of India’s small hydro potential lies — lag well behind: Karnataka had utilised 34 per cent of its potential, Himachal Pradesh 29 per cent, Uttarakhand only 14 per cent, and Arunachal Pradesh a mere 7 per cent.

Source: NCAER, “Small hydro power push needs state capacity, not just funds,” Policy Circle, 30 March 2026.

This pattern points to a structural feature of the sector rather than a simple funding shortage: the states that have utilised their potential most fully are generally those where the resource base itself is smaller and less encumbered by difficult terrain, forest clearances and weak evacuation infrastructure, while the Himalayan states with the largest raw potential face the highest execution costs. The 2026 scheme’s tiered CFA design, offering the highest support to North-Eastern and border-district projects, is a direct policy response to this mismatch between where the resource lies and where it has historically been easiest to develop.

Impact: Livelihoods, Emissions and Energy Security

Decentralised power and grid stability

Unlike solar and wind, which generate intermittently and require storage or balancing capacity, small hydro can supply relatively steady baseload power, particularly valuable for remote hilly and border settlements where extending the central grid is costly and technically difficult. By generating power close to the point of consumption, SHP projects also reduce transmission and distribution losses, a long-standing inefficiency in India’s rural electricity supply chain.

Employment and investment

The scheme is projected to catalyse around ₹15,000 crore of private investment against a central outlay of ₹2,584.60 crore  a leverage ratio of roughly six times  and to generate about 51 lakh person-days of employment during the construction phase alone, with additional long-term roles created in the operation and maintenance of commissioned plants, mostly in rural and remote parts of the country. Because the scheme mandates the use of domestically manufactured plant and machinery, it is also expected to support India’s small hydro equipment manufacturing base; industry assessments have previously counted around two dozen domestic SHP equipment manufacturers, including public-sector major BHEL, with a combined annual manufacturing capacity in the low hundreds of megawatts.

Emissions

Industry estimates suggest that the additional 1,500 MW of small hydro capacity targeted under the scheme could offset approximately 4.3 million tonnes of carbon dioxide emissions annually once fully commissioned, reinforcing India’s Panchamrit and net-zero commitments while diversifying the renewable energy mix beyond solar and wind.

Market Development and Industry Outlook

India’s small hydropower market remains modest in commercial scale relative to solar and wind. Industry research places the market’s value at approximately US$ 117 million in 2025, projected to grow to around US$ 169 million by 2031 at a compound annual growth rate of about 6.2 per cent, driven by government incentives, the scalability of run-of-river technology, and a growing emphasis on renovating and upgrading existing plants rather than building only new capacity. (This industry estimate typically defines small hydro more narrowly, up to about 10 MW, so it should be read as indicative of market direction rather than a precise figure for the full 1-25 MW category covered by the government scheme.)

Source: India Small Hydropower Market report, ResearchAndMarkets/GlobeNewswire (June 2025).

The broader hydropower sector’s recent performance underlines why a dedicated push for small hydro matters for energy security as well as climate goals. India’s overall hydroelectric generation fell sharply in FY 2023-24, with output dropping to about 8.3 per cent of total power generation  its lowest share in roughly four decades — as erratic monsoon patterns forced greater reliance on coal-fired capacity. Small, decentralised, run-of-river projects are less exposed to some of the large-dam-specific risks affecting big hydro, but they remain dependent on reliable river flows, meaning market growth in this segment is closely tied to hydrological and climate conditions in the source states.

Emerging Issues

●       Near-decade-long policy gap: Dedicated central financial assistance for new grid-connected SHP projects lapsed after 2017, and the sector went without a focused central scheme until 2026, contributing to slow capacity addition even as other renewable segments scaled rapidly.

●       Uneven state-level execution capacity: Because water is a state subject, clearances, land access, evacuation infrastructure and local coordination depend heavily on individual state governments. This explains why resource-rich Himalayan states such as Arunachal Pradesh (7% utilised) and Uttarakhand (14% utilised) lag well behind smaller-potential states such as Telangana (89% utilised).

●       High civil-works costs and weak bankability in remote terrain: Difficult topography, long construction cycles, and forest and land clearances raise upfront costs in precisely the geographies where most untapped potential lies, discouraging private capital without concessional support such as viability gap funding.

●       Climate and hydrological risk: Erratic rainfall, glacial melt, higher sedimentation, flashier river flows and increased landslide risk  especially in the Himalayan belt  are altering the assumptions on which small hydro projects are designed, raising both engineering and financing risk.Accelerating glacier retreat across the Hindu Kush Himalaya is reshaping the hydrology that these projects were originally modelled on, since many run-of-river schemes assumed a relatively stable glacial-melt contribution to dry-season flows.

As glaciers thin and recede, this contribution is expected to rise in the near term before declining over the coming decades, undermining long-term generation forecasts and debt-servicing assumptions built into project financing. Retreating glaciers are also giving rise to a growing number of unstable moraine-dammed lakes, raising the risk of Glacial Lake Outburst Floods (GLOFs) that can send sudden, high-magnitude flood pulses downstream  capable of damaging or destroying intake structures, penstocks and powerhouses with little warning, and complicating insurance and risk-assessment frameworks for projects sited in or downstream of glaciated catchments. 

●       Scale of the outlay relative to the resource gap: At ₹2,584.60 crore over five years for roughly 1,500 MW, the scheme addresses only a fraction of the more than 15,900 MW of assessed potential that remains untapped, meaning continued multi-cycle investment will be needed well beyond FY 2030-31.

●       Renovation and modernisation backlog: A number of existing SHP plants are ageing or underperforming, and the scheme’s R&M component competes for the same limited financial envelope as new project development.

●       Data and monitoring gaps: Robust, regularly updated state-wise physical and financial progress data for small hydro is not as readily available as for solar or large hydro, making independent verification of outcomes and course-correction more difficult.

Way Forward

●       Strengthen state-level execution capacity through technical assistance, streamlined forest and land clearances, and dedicated support for evacuation infrastructure, rather than relying on central funding alone to unlock the resource-rich but low-utilisation Himalayan states.

●       Deploy viability gap funding and concessional debt instruments for high-risk, high-potential geographies where private capital is unlikely to enter on the strength of central financial assistance alone.

●       Publish state-wise physical and financial progress dashboards for the scheme period, tied to DPR sanctioning and disbursement milestones, to improve transparency and enable comparison across states, echoing the accountability gaps seen in other centrally sponsored resource missions.

●       Encourage state-level enabling policies on the model of Tamil Nadu’s framework permitting private developers to generate small hydro power for self-consumption or third-party sale, to widen the range of viable business models beyond central subsidy.

●       Build climate-resilient project design standards — more conservative flow assumptions, stronger safety margins, and realistic operating-risk assessments — into DPR preparation, given the accumulating evidence of hydrological instability in the Himalayan belt.

●       Pursue hybridisation of small hydro with solar or storage at suitable sites to improve supply stability and reduce dependence on seasonal water flows, extending the system value of SHP assets beyond their installed-capacity numbers.

●       Prioritise renovation and modernisation of existing but underperforming plants alongside new capacity addition, since upgrading known, already-connected assets can often deliver faster and cheaper capacity gains than greenfield development in difficult terrain.

●       Use the scheme’s DPR pipeline (at least 200 reports) to build a bankable, GIS-verified project shelf for the next investment cycle, recognising that a five-year, ₹2,584.60 crore programme is best understood as one phase in a longer-term effort to close India’s small hydro potential gap.

Eight years after dedicated central support for new small hydro projects lapsed, the Small Hydro Power Development Scheme (2026-31) marks a considered, if modest, restart. Its tiered financing, focus on run-of-river technology, and emphasis on both new capacity and renovation of existing plants reflect lessons from the sector’s uneven history.

Yet the scale of the challenge is substantial: over three-quarters of India’s assessed small hydro potential remains untapped, concentrated in states where execution capacity, not resource availability, has historically been the binding constraint. As the NCAER assessment of the scheme observes, the central outlay is best understood as an enabling step rather than a breakthrough — the sector’s future will depend as much on state-level clearances, evacuation infrastructure and climate-resilient design as on the funds disbursed from New Delhi. If states can convert this renewed central commitment into faster, bankable project pipelines, small hydro could yet become a meaningful, if specialised, contributor to India’s decentralised clean energy transition and its 2030 and 2070 climate commitments.

 References

1. Chaudhuri, C., & Kumari, U. (2026, March 30). Small hydro power push needs state capacity, not just funds. National Council of Applied Economic Research (NCAER); Policy Circle.
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2. Comptroller and Auditor General of India. (2015). Union civil performance audit report no. 34 of 2015 — Renewable energy (Chapter V: Small Hydro Power). https://cag.gov.in/uploads/download_audit_report/2015/Union_Civil_Performance_Renewable_Energy_Report_34_2015_chap_5.pdf
   
3. Council on Energy, Environment and Water. (n.d.). Small hydropower (SHP) — Factsheet.
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4. Drishti IAS. (2026, March). Small hydro power development scheme. https://www.drishtiias.com/daily-updates/daily-news-analysis/small-hydro-power-development-scheme
   
5. Energetica India Magazine. (2026, May 16). MNRE issues operating guidelines for INR 2,584.60 Cr Small Hydro Power Development Scheme.
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6. India small hydropower market, by region, competition, forecast & opportunities, 2021–2031F. (2025, June 10). ResearchAndMarkets.com; GlobeNewswire. https://www.globenewswire.com/news-release/2025/06/10/3096830/0/en/India-Small-Hydropower-Industry-Report-2025-Shift-Towards-Modernization-and-Upgradation-of-Existing-SHP-Projects.html
   
7. International Water Power. (2024, May 17). India’s hydropower output plunges to four-decade low (Reuters data analysis).
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8. Ministry of New and Renewable Energy. (2026). Administrative approval for implementation of Small Hydro Power (SHP) Development Scheme from 1 MW to 25 MW for the period FY 2026–27 to FY 2030–31. Government of India. https://mnre.gov.in/en/notice/administrative-approval-for-implementation-of-small-hydro-power-shp-development-scheme-from-1-mw-to-25-mw-for-the-period-fy-2026-27-to-fy-2030-31/
   
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12. Renewable Watch. (2026, May 19). MNRE issues operational guidelines for small hydro power scheme.
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About the contributor 

Purbaa Jagannath is a Research Intern at IMPRI (Impact and Policy Research Institute), working on policy writing. She completed a Bachelor of Social Work (Honours with Research), with a minor in Political Science, at University of Delhi, currently she is pursuing her masters in TISS mumbai in Social Work. Her work spans social work, political science, and grassroots fieldwork across India, with recurring interests in governance, community development, and youth empowerment. 

Acknowledgements

The author extends sincere gratitude to the IMPRI team for their guidance and support, along with the reviewers Pritha Chowdhury and Dolly Kaushik for their valuable feedback and insights.

Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organization

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