The recently announced Viability Gap Funding (VGF) for Battery Energy Storage Systems (BESS) has been welcomed by industry stakeholders for its potential impact on system cost, demand, and manufacturing in the country.

In September 2023, the Union Cabinet approved the VGF program, allocating an initial sum of ₹94 billion ($1.1 billion), with ₹37.6 billion ($452 million) designated as budgetary assistance to facilitate 4 GWh of BESS projects by 2030-31.

The VGF program is expected to provide the standalone BESS projects the much-needed boost, which, according to Mercom India Research’s Project Tracker, has 5,520 MWh of projects in the pipeline.

Prominent leaders in the battery industry expressed their enthusiasm to Mercom regarding the potential of VGF to accelerate India’s shift towards clean and sustainable energy.

Rupam Raja, Chief Commercial Officer at Fluence India, applauded the government’s decision. “This is a necessary step to accelerate the energy transition. BESS plays a vital role in enhancing energy security and grid stability. VGF will encourage the deployment of BESS at critical infrastructure points, enhancing grid reliability and aligning with the goal of achieving 450 GW of renewable energy by 2030.”

Pankaj Sharma, Co-Founder and Director of Log9 Materials elaborated, “Given that battery storage technologies are still in their nascent stages, VGF will play a pivotal role in bridging the development costs required during technology maturation. This funding will also prove invaluable for pre-commercial battery projects, helping them achieve commercial viability.”

Impact of VGF on BESS Cost

One of the primary challenges plaguing the BESS segment in India is the cost, which remains prohibitive, posing difficulties for distribution companies in integrating them into their infrastructure.

According to Ankit Mittal, Co-Founder and CEO of Sheru, numerous energy storage projects have faced challenges in taking off due to high costs and extended payback periods. He feels that with VGF backing these projects, a surge in energy storage capacity is expected.

“The Levelized Cost of Storage (LCoS) in India currently ranges from ₹7 (~$0.08)/kWh to ₹8 (~$0.09)/kWh. While this cost has gradually reduced with declining battery prices, it remains relatively high. The primary goal of VGF is to further bring down this cost to a range of ₹5.50 (~$0.06)/kWh to ₹6.60 (~$0.07)/kWh, making green energy + storage more affordable. The objective is to enable the storage sector to achieve economies of scale, reducing the need for external support once VGF is exhausted.”

The VGF assistance, subject to the completion and operation of projects within an 18 to 24-month window, has the potential to cover up to 40% of the project’s initial capital cost.

Pankaj Sharma emphasized, “Moreover, this government funding will benefit battery tech companies by providing non-dilutive capital, alleviating fundraising pressures during the early technology development stages of various battery tech startups. ”

VGF and Demand

In the dynamic and rapidly evolving Indian energy sector, BESS is increasingly essential for ensuring a reliable and sustainable energy supply.

Stakeholders expect VGF to spark substantial demand, facilitate cost optimization, and attract private-sector investments.

Mallikarjuna Bhuvaneswari, Head of Business Development – New Energy (BESS & Green Hydrogen) from battery manufacturing company Amara Raja said, “VGF has generated significant demand, particularly for 4 GW of BESS for transmission utilities. Furthermore, the prospect of another PLI program for standalone storage systems within the next two years provides a strong impetus for the BESS ecosystem. This approach fosters cost optimization, the introduction of new technologies, and aligns with the ‘Make in India’ initiative.”

He said, “From a bidder’s standpoint, VGF enhances the viability of business proposals, increasing visibility and offsetting undue cost reductions. India’s burgeoning market, coupled with exponential BESS expansion supported by VGF, becomes an attractive entry point for substantial private sector investors, contributing to India’s sustainable energy future.”

In such a case, VGF is expected to act as a catalyst for India’s sustainable energy future by attracting private sector investments, ensuring competitive and high-quality project development, and fostering innovation within the renewable energy sector.

Integration of BESS in Energy Infrastructure

Industry stakeholders were particularly pleased with the timing of the VGF introduction, coming at a time when the government plans to come out with a policy framework to make energy storage mandatory for renewable projects of 5 MW and above.

N Venu, MD & CEO, India and South Asia at Hitachi Energy, also hailed the approval of the VGF program, saying, “This is excellent news for the renewable energy sector. The timing couldn’t have been better. Collectively, these steps represent a significant stride towards building a flexible grid and adopting clean energy. It will help create a stable and responsive energy system capable of meeting peak and low demands. A dedicated energy storage system at each renewable power project will also address the challenge of power intermittency.”

Integrating BESS into the energy ecosystem could improve power quality, balance grid, and reduce costs.

Mallikarjuna said, “This eventually reduces transmission and distribution referral costs and costly infrastructure upgrades, ultimately benefiting consumers by lowering peak deficits, peak tariffs, energy arbitrage costs, and more.”

The executive also highlighted that the Energy Storage Obligation requires DISCOMs to purchase 4% of their total electricity consumption from energy storage by 2030, as mandated by the government. This obligation not only encourages grid optimization but also leads to a substantial reduction in infrastructure costs through BESS.

The issue of surplus energy production during certain times of the day due to the intermittent nature of renewables is another real challenge. Without effective energy storage solutions, this excess energy often goes to waste, which is both inefficient and unsustainable.

Mittal opined, “Without energy storage to absorb surplus energy, grid supply is curtailed to match demand, leading to significant energy wastage. Energy storage is, therefore, pivotal for seamlessly integrating renewable energy into the grid and forms the cornerstone of the future grid. VGF’s focus on allocating capacity to DISCOMs plays a crucial role in this regard.”

Building a Resilient Renewable Power System

Venu highlighted that government funding will attract additional investments and play a crucial role in building a resilient renewable power infrastructure. The most significant outcome lies in making the country’s renewable power system more flexible, scalable, and secure.

Amara Raja’s perspective reinforces the positive effects of government funding, which alleviates the fundraising pressure on early-stage battery tech startups.

Elaborating on the motivation behind the funding, Mallikarjuna emphasized, “The government funding also fosters a new ecosystem for manufacturing, innovation, cost optimization, and job creation, building upon India’s successful track record with solar projects over the past decade.”

While most stakeholders have hailed the new VGF program as a significant catalyst for the BESS sector growth, utilizing it to build a stable, cost-effective, and sustainable ecosystem remains critical.