Pumped storage is making a comeback after losing ground to battery energy storage systems (BESS), according to Bernstein, which believes rising battery prices, evening power shortages and India’s effort to reduce dependence on imported battery cells have changed the economics of long-duration energy storage.
The brokerage said Tata Power‘s latest pumped storage project could generate an equity internal rate of return (IRR) of more than 20%, with equity recovered in about five years under a 40-year contract. Bernstein retained its ‘Outperform’ rating on Tata Power with a target price of Rs 430.
Bernstein says the economics have turned in favour of pumped storage
Bernstein said it had long favoured pumped storage for meeting evening power demand before rapidly falling battery prices reduced its appeal. That view has now changed as battery costs have risen, the US dollar has strengthened, evening power shortages have persisted and the government has become increasingly focused on limiting dependence on imported battery energy storage systems.
The brokerage said, “We were very fond of pumped storage for evening power, but it fizzled out as battery prices crashed last couple of years. Now with the Indian Govt keen to avoid excessive dependence on imported BESS, consistent evening power shortages, and rising battery prices (and a strong $), PSP is back. Tata Power could make 20%+ equity IRR in the latest bid (5-year payback in a 40-year contract!).”
Bernstein estimates Tata Power’s latest SECI pumped storage project could generate an equity IRR of about 22%, broadly matching returns from recent private thermal power projects that offered 22% to 24% equity IRRs. The brokerage said the tender’s requirement to commission the project within three years of signing the power purchase agreement also reduced competition.
Access to project sites keeps competition in check
Bernstein said pumped storage projects enjoy a market structure that is materially different from solar-plus-BESS projects because suitable project sites are limited.
The brokerage noted that the latest SECI pumped storage tender attracted three bidders, while recent solar-plus-BESS tenders drew more than 20 bidders. It said private thermal power projects also tend to attract only a handful of participants, making both businesses structurally less competitive than solar-plus-BESS projects.
Bernstein added that Tata Power benefits from an existing reservoir at its project site, giving it an advantage despite having a smaller pumped storage pipeline than some larger developers.
Lower storage costs improve the chances of securing long-term contracts
Bernstein believes Tata Power’s latest project has a strong chance of converting into a firm power purchase agreement because pumped storage now offers lower storage costs than battery-based alternatives.
The brokerage estimated storage costs at Rs 4.6 per kWh for the latest SECI pumped storage tender, compared with Rs 5.5 per kWh in the latest PSPCL battery storage tender and Rs 6.9 per kWh based on a battery system with capital expenditure of $150 per kWh. It also pointed to a 25-year waiver on transmission charges for eligible pumped storage projects awarded on or before June 30, 2028, further improving project economics.
Government plans point to a bigger role for pumped storage
Bernstein said policy support is becoming another tailwind for pumped storage.
The brokerage cited Central Electricity Authority projections showing 66 GW of pumped storage additions between FY27 and FY36, compared with 59 GW of battery energy storage capacity over the same period. It also noted that China plans to add 101 GW of pumped storage capacity during its 15th Five-Year Plan despite already being the world’s largest battery manufacturer, suggesting that hydro-based storage continues to play an important role in electricity systems with growing renewable energy capacity.
The brokerage values the company using a sum-of-the-parts methodology covering its regulated generation, transmission and distribution businesses, renewable portfolio, solar manufacturing and EPC operations, while also factoring in 2.8 GW of pumped storage additions by FY32. It said downside risks include delays in signing power purchase agreements for pumped storage projects, slower rooftop solar additions, pressure on solar module margins and execution challenges in renewable and pumped storage projects.
Conclusion
Bernstein believes pumped storage has become commercially attractive again after several years in which falling battery prices reduced its appeal. The brokerage said improving project returns, lower competitive intensity, supportive government policy and lower storage costs have strengthened the investment case for pumped storage.
With Tata Power’s latest project illustrating how these factors can translate into returns comparable with private thermal power investments, Bernstein maintains ‘Outperform’ rating on the stock.
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