World Bank will provide around Rs 2,932 crore ($648 million) soft credit to THDC India to build a 444-MW capacity Vishnugad Pipalkoti Hydro Electric Project on Alaknanda river in Uttarakhand.
The power from the project will go to India's northern electricity grid, which faces severe power shortages at high-consumption times.
"The electricity generated from the project will be supplied to Punjab, Haryana, Rajasthan, Uttar Pradesh, Himachal Pradesh, Uttarakhand, Chandigarh, Delhi and Jammu and Kashmir," a finance ministry statement said.
THDC (Tehri Dam & Hydro Electric Project) is a joint venture between central and Uttar Pradesh governments.
The tri-party agreement in this regard was signed between the World Bank, Uttarakhand Government and central government.
Uttarakhand government will get a royalty of 12% or about Rs 90 crore ($20 million) per annum.
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The assistance will be used to build a 65 metre diversion dam in Chamoli district of Uttarakhand to create a reservoir in the Alaknanda river along with a 13.4 km headrace tunnel. The loan will also be utilised to build a 3 km tailrace tunnel that will take all the diverted water back to the river.
"The project is expected to have minimal negative impacts on local communities and environment," the release said.
On the occasion, World Bank Country Director Robert Zagha said that the project was cleared for construction only after the Ministry of Environment and Forests studied the cumulative impacts of hydropower development on the Alaknanda basin.
Economic Affairs Joint Secretary Venu Rajamony said social safeguard measures like planning for afforestation, provision for free electricity for 10 years to affected households, allocation of 1% of project revenues for local area development, have been inculcated in this project.