Union Cabinet approves Rs 3,760 crore viability gap funding for battery energy storage systems

The VGF for a BESS will be capped at 40 percent of the capital cost of the project, Union minister for information and broadcasting Anurag Thakur said in a press briefing after the Cabinet meeting.

The Union Cabinet on September 6 approved the Ministry of Power's proposal to offer a viability gap funding (VGF) of Rs 3,760 crore for building battery energy storage systems (BESS) with a total capacity of 4,000 megawatt hours (MWh).

With the VGF, the government is hoping to reduce the cost of battery storage, needed for round-the-clock renewable energy, from the current Rs 10 per kilowatt-hour (kWh) to Rs 5.50-6.6 kWh by 2030-31.

The VGF will be a 100 percent grant from the Central government which will be given out in five tranches till 2030-31, linked with various stages of implementation of BESS projects. Selection of projects for the VGF will be done through transparent competitive bidding within three years (2025-26).

The government's plan to offer VGF for BESS was first announced by Union finance minister Nirmala Sitharaman in her Budget 2023 speech on February 1. Even before that, on January 16, Moneycontrol was the first to report about the Ministry of Power's proposal to offer a grant of at least Rs 3,500 crore for BESS totalling 4,000 MWh.

The VGF for a battery storage system will be capped at 40 percent of the capital cost of the project. To ensure that the sanctioned projects are efficient and commissioned in time, the government has decided to disburse the VGF amount based on milestones that will have to be met.

At least Rs 9,500 crore investment is expected in the battery energy storage sector from the VGF announcement, Union minister for information and broadcasting Anurag Thakur said in a press briefing after the Cabinet meeting.

As India scales up its renewable energy capacity, battery energy storage systems are gaining importance as a solution to reduce the intermittency of renewable energy projects to provide round-the-clock power. India aims to add 500 GW of renewable energy (RE) capacity by 2030, which means a large quantum of intermittent wind and solar energy will come into the grid and at one point, mostly during the day time, and will vanish during the night time. BESS will be able to store the excess RE power for use during the night peak hours.

At present, at least 128 GW of RE projects are either under construction or have been bid out. India has an installed RE capacity of 172 GW, excluding about 7 GW of nuclear power.

To ensure that the benefits of the scheme reach the consumers, a minimum of 85 percent of the BESS project capacity will be made available to distribution companies (discoms). This will not only enhance the integration of renewable energy into the electricity grid but also minimize wastage while optimizing the utilization of transmission networks. Consequently, this will reduce the need for costly infrastructure upgrades.

By offering VGF support, the scheme aims to achieve a levelized cost of storage (LCoS) ranging from Rs. 5.50-6.60 per kilowatt-hour (kWh), making stored renewable energy a viable option for managing peak power demand across the country.

In March 2022, NTPC Ltd, through its subsidiary NTPC Renewable Energy Ltd, invited bids for 3 GWh (3,000 MWh) energy storage systems. The price discovered through that tender was as high as Rs 10 kWh. Later, NTPC invited bids for energy storage system with a capacity of 9 GWh, which by far has been the largest such bid in India.

India aims to meet its 50 per cent of energy requirements through renewable energy and non-fossil energy sources. In July 2022, India added an Energy Storage Obligation to its existing Renewable Purchase Obligation policy for the first time.

Energy storage can be of different forms - battery energy storage systems, pumped hydro storage systems and even green hydrogen or green ammonia storage systems.

This particular VGF, approved by the Union Cabinet on September 6, is for battery energy storage systems, which is primarily made of large lithium ion batteries.

Kartik Ganapathy, founding partner, Induslaw, said by declaring that the scheme will have a transparent competitive bidding process, and also mandating that a minimum of 85 percent of the BESS project capacity will be made available to discoms, the twin objectives of fostering innovation and investment, as well as benefiting the public at large are sought to be achieved.

“There are certainly some minutiae to be ironed out, including a spot energy market, carbon credits, and the working of the electricity duty and cross-subsidy surcharge (particularly when input power is utilized for charging the energy storage system, to call out a few,” Ganapathy said.

“The scheme could be made more lucrative by waiving stamp duty and registration fees on land acquisition designated for the installation of energy storage systems. A production-linked incentive program to promote indigenous manufacturing could also facilitate not only technology and innovation, but also create employment opportunities, further advancing the agenda of development,” he said.