Bid prices in the battery energy storage system (BESS) market are declining sharply, driven by viability gap funding (VGF) support and intense competition. While VGF has reduced upfront project costs, it has also spurred aggressive bidding that may not fully reflect the actual levelized cost of storage (LCOS), which represents the true lifecycle cost of storage assets.

Aggressive Bidding Masks True Storage Costs

Experts warn that overly aggressive pricing in VGF-supported tenders could lead to execution challenges and performance risks over the project lifecycle.

Actual cost of storage does not depend solely on capacity-based hardware expenditure (₹/kWh of battery) or on power-based project expenditure (₹/MW of project capital). The storage system’s lifecycle factors, including charging-discharging cycles, charging costs, operation and maintenance, financing, round-trip efficiency, and battery degradation, also affect the total system costs.

LCOS was adopted to include such lifecycle metrics to better estimate the total BESS costs.

Rahul Kodali, Managing Director at Vyomaa Energy, stated that the cycling frequency, depth of discharge, and dispatch strategy are largely dictated by the end user, making LCOS highly usage-dependent rather than a fixed technology cost. Charging the battery with solar or wind power can further reduce LCOS.

Bid-Stage LCOS vs. Operational Reality

Experts also warn that LCOS assumptions during bidding can differ from the costs realized during actual project operations.

Noting the increasing gap between the LCOS stated during bidding and the actual LCOS, Kodali explained, “India is a highly price-sensitive market, where bids are primarily driven by tariff competitiveness rather than long-term quality or lifecycle performance. Unlike more mature markets, where pricing is anchored around proven performance and risk-adjusted returns, Indian tenders often push developers to the lowest possible bid to win projects.”

The LCOS figures in bids are not meant to reflect positive project economics since they are competitive by design. On the other hand, actual LCOS figures are driven by operating data and real system behaviour over time.

Parveen Jangra, Co-Founder, Chief Technical and Operating Officer at Oriana Power, opined that the growing divergence between bid-stage LCOS and realized LCOS serves as a filter rather than a result of market flaws. Storage assets structured with conservative degradation curves, robust warranty frameworks, adequately provisioned operations and maintenance, and realistic charging assumptions are demonstrating superior performance after the commercial operation date.

“As operating data accumulates, investors are likely to reward portfolios that prioritize lifecycle economics over headline tariffs,” stated Jangra.

VGF Anchors Early-Stage BESS Viability

 Despite the risks associated with VGF, the funding assistance has significantly helped grow the BESS segment in India, as projects without this support would have become increasingly difficult to implement.

“In most cases, today’s bid prices would not be viable without VGF support at current LCOS levels,” said Kodali.

He added that while battery prices have fallen significantly over the last decade, the storage market has not yet matured to a point where projects can be built on a standalone, unsubsidized basis. Most BESS projects today across the commercial, industrial, and government segments are led by early adopters. These projects are structured around VGF to achieve bankability.

“Policy direction also indicates that storage will soon be mandatory, which is driving adoption ahead of full cost competitiveness,” said Kodali.

In February last year, the Ministry of Power advised that all renewable energy implementing agencies and state utilities incorporate a minimum two-hour co-located energy storage system equivalent to 10% of the installed solar capacity in all solar tenders.

Jangra said that current BESS bids reflect aggressive competition rather than structural unviability. “While several late-2025 to early-2026 bids are below standalone LCOS benchmarks, VGF effectively bridges the gap between early-stage cost structures and long-term asset economics. For well-capitalized developers with realistic assumptions and execution depth, VGF converts otherwise marginal tariffs into bankable, infrastructure-grade returns.”

VGF Reshapes Developer Risk Appetite

Support mechanisms such as VGF can materially shift BESS developers’ risk appetite.

Commenting on how the introduction of VGF is affecting developer risk appetite, Kodali said, “VGF improves upfront project viability and auction participation, but it does not fundamentally change the risk profile of storage projects. LCOS remains exposed to long-term uncertainties, maintenance intensity, degradation behavior, replacement cycles, and operating strategy, all discounted over time.”

According to Kodali, since storage does not operate in isolation, its performance depends on how generation, battery sizing, and dispatch logic interact in real operating conditions. He added that developers do not yet have enough long-term, at-scale operating data to be fully confident about lifecycle performance. Therefore, developers remain cautious about BESS.

Meanwhile, Jangra said VGF is catalyzing a shift towards quality differentiation, in addition to reviving participation. “Risk is allocated to balance-sheet strength, supply-chain control, technology selection, and operating discipline- favouring experienced platforms over speculative entrants. This transition is healthy; it reduces long-term asset risk and creates a clearer separation between bankable developers and purely price-led bidders.”

Local Content Requirements

Recently, the Ministry of Power directed states and procuring entities to ensure a minimum of 20% local content in the procurement of BESS projects being implemented under the VGF program.

This direction will change both who the BESS developers can source components from and how the storage bids will be structured. The local component requirement will add a new compliance requirement that developers must add to receive the VGF assistance.

On how this mandate will affect BESS project execution and storage bidding, Kodali said the 20% local content requirement will slightly increase LCOS and project execution complexity. However, the mandate will have minimal impact on bid pricing. “Local content supports ecosystem development, but today it affects LCOS more than it affects bid prices.”

However, Kodali added that bid prices will continue to be driven mainly by VGF availability, tender design, and competitive pressure. The 20% local content requirement will largely be absorbed within project economics rather than explicitly reflected in tariffs.

Jangra stated that the 20% domestic content mandate would introduce a modest “near-term LCOS uplift,” meaning higher underlying lifecycle costs due to price increases for some content. However, the mandate will make investment in the storage projects more attractive throughout the BESS’ life.

“Local manufacturing depth improves supply security, reduces foreign exchange and geopolitical exposure, shortens response time for spares and warranties, and enhances system availability. Over time, localization is expected to compress costs and stabilize performance assumptions, key positives for long-term investors,” said Jangra.

As India’s BESS market scales rapidly, the interplay among VGF support, aggressive bidding, and evolving cost realities will determine which projects succeed in the long term. While VGF has been instrumental in accelerating adoption and improving bankability, sustainable growth will increasingly depend on realistic LCOS assumptions, disciplined execution, and lifecycle-focused project design. As operating data builds and market maturity improves, investors and procurers are likely to place greater emphasis on quality, resilience, and long-term performance, shifting the market from price-led competition toward durable, infrastructure-grade storage assets.