Indian Union Cabinet has granted approval for a ₹3,760 crore Viability Gap Fund (VGF) dedicated to battery energy storage systems (BESS) has given a significant move to bolster the renewable energy sector, and fuels its ambitions to meet 50% of the nations energy requirements.
This financial boost comes at a crucial juncture when the renewable energy industry relies on efficient energy storage solutions during periods of low or no green power generation.
Under the scheme, the government will extend financial support of up to 40% of the capital cost for BESS projects, totaling 4,000 megawatt-hours (MWh) until the fiscal year 2031. The primary objective of this initiative is to reduce the levelized cost of storage (LCoS) to a range of ₹5.50-6.60 per kilowatt-hour (kWh), making energy storage a viable option to manage peak power demand. Presently, industry estimates peg the LCoS at around ₹10-11 per kWh.
An official statement on this development highlights that the Viability Gap Fund will be disbursed in five tranches, each linked to various stages of BESS project implementation. Union Minister for Information and Broadcasting, Anurag Thakur, emphasized the government’s commitment to achieving 50% of the country’s energy requirements from renewable or non-fossil energy sources by 2030.
Viability Gap Fund Move to attract Rs. 9,500 Crores Investment
Thakur stated, “This is a 100% central grant, and ₹3,760 crore will be allocated. This move is expected to attract investments of about ₹9,500 crore.”
The plan for a 4,000 MWh Viability Gap Fund (VGF) for battery storage was initially announced in the Union budget by Finance Minister Nirmala Sitharaman.
To ensure that the benefits of this scheme directly reach consumers and contribute to power generation from storage projects incentivized by the program, a minimum of 85% of BESS project capacity will be allocated to distribution companies (discoms).
This strategic allocation through Viability Gap Fund aims to enhance renewable energy integration into the electricity grid, reduce wastage, and optimize transmission networks, ultimately minimizing the need for expensive infrastructure upgrades.
Developers of BESS will be selected to receive VGF grants through competitive bidding. This approach is designed to foster healthy competition and encourage the growth of a robust ecosystem for BESS, attracting substantial investments and creating opportunities for associated industries.
Grid-scale battery storage systems play a pivotal role in the energy transition, mitigating the fluctuations in renewable power generation due to varying sunlight and wind conditions. Although such systems are essential, they have been slow to gain traction in India due to high associated costs.
The Indian government’s focus on renewable sector policies aligns with its ambitious target to achieve 500 gigawatts (GW) of installed renewable energy capacity. In recent years, the Ministry of Power has introduced guidelines for the procurement and utilization of BESS across various energy sectors, including generation, transmission, and distribution.
Additionally, the Energy Storage Obligations (ESO) of 4% of total electricity consumption by FY30 for power discoms have been established in line with renewable purchase obligations.
Furthermore, the Ministry of Power is developing a production-linked incentive (PLI) scheme for battery storage, and there is a proposal to reduce the Goods and Services Tax (GST) on grid-scale battery storage to 5%. Currently, GST on lithium-ion batteries used for grid-scale power projects is 18%, while non-lithium-ion batteries are taxed at 28%.
As of FY23, India possessed approximately 37 MWh of BESS capacity, and the Central Electricity Authority projects a requirement of 236.22 gigawatt-hours by 2031-32.
In a separate development, the Cabinet has also approved ₹1,164.53 crore for the Industrial Development Scheme (IDS), 2017, for Himachal Pradesh and Uttarakhand. Under this scheme, eligible industrial units, both new and existing, will receive central capital investment incentives to encourage substantial expansion in the manufacturing and service sectors.
Additionally, industrial units will be eligible for the reimbursement of 100% of insurance premiums on buildings and plant and machinery for up to five years from the commencement of commercial production and operation.