Govt eyes small-hydro policy in Union Budget 2026 amid 16,000 MW untapped potential

.

The central government is planning to revive its small hydropower policy—discontinued in 2017—in a move that could unlock clean-energy potential across India’s mountainous regions, including Jammu and Kashmir and the northeastern states. The policy is likely to be included in the Union Budget 2026, two government officials told Moneycontrol.

The officials said the Ministry of New and Renewable Energy (MNRE) is currently in discussions with the Department of Expenditure (DoE) to reintroduce financial and policy support for small hydropower projects.

In India, a small hydro project refers to hydropower stations with an installed capacity of up to 25 megawatts (MW). These plants are typically built as run-of-the-river systems that do not require large dams or reservoirs, allowing them to tap the natural flow of streams and rivers. Their relatively low ecological impact makes them particularly suitable for hilly and mountainous terrain, where water gradients are high.

“Most of our mountainous states have significant scope for small hydropower, but the absence of a policy since 2017 has slowed development. We are now working with the Department of Expenditure to frame a new support mechanism. If all goes well, the policy could be included in the Union Budget 2026,” said one of the officials quoted above, adding that a final call will be taken by the Ministry of Finance.

The proposed small-hydro policy could offer developers up to 30 percent of project costs as central financial assistance (CFA), significantly lowering the barrier to entry for new projects.

As a precursor to the upcoming policy, MNRE in May this year revised its small-hydro guidelines, which make projects more performance-oriented and easier to implement by linking financial assistance to actual generation, allowing flexible timelines for commissioning, and mandating post-commissioning verification and equipment certification. Projects now need to achieve 80 percent of projected generation for one month, instead of three, to receive the balance of CFA, with proportional reductions if the target is not met, read the guidelines.

Until 2017, India had a dedicated small-hydro scheme that provided CFA and capital subsidies for projects up to 25 MW, encouraging private participation and development in remote areas. Many projects then got stalled as central support was withdrawn, and since then MNRE has largely focused on clearing pending liabilities from the old programme.

“The small-hydro policy was discontinued in 2017 mainly due to budgetary constraints, delays in project execution, and non-compliance by developers. Besides, shifting government priorities toward solar and wind energy also reduced focus on small hydro,” said the second official.

India’s small-hydro sector has significant untapped potential. The estimated technical potential is around 21,133 MW from over 7,100 sites, of which at least 5,000 MW has been developed, leaving roughly 75 percent of the capacity unused. Most of this potential is in mountainous regions such as Himachal Pradesh, Uttarakhand, Jammu & Kashmir, and the northeastern states, where rivers and steep gradients allow run-of-the-river small-hydro projects.