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Viability gap funding (VGF) for battery energy storage systems (BESS)

  • September 8, 2023
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Viability gap funding (VGF) for battery energy storage systems (BESS)

Subject: Schemes

Context:: Cabinet approves viability gap funding of ₹3,760 cr for battery energy storage systems l.

Key Points:

  • The approved scheme envisages development of 4,000 megawatt hour (MWh) of BESS projects by 2030-31 with a financial support of up to 40 per cent of the capital cost as budgetary support in the form of VGF.
  • The move is expected to bring down the cost of battery storage systems increasing their viability.
  • Designed to harness the potential of renewable energy (RE) sources such as solar and wind power, the scheme aims to provide clean, reliable, and affordable electricity to the citizens.
  • By offering VGF support, the scheme targets achieving a levelised cost of storage (LCoS) ranging from ₹5.50-6.60 per kilowatt-hour (kWh), making stored renewable energy a viable option for managing peak power demand across the country.
  • The VGF shall be disbursed in five tranches linked with the various stages of implementation of BESS projects.
  • A minimum of 85 per cent 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 minimise wastage while optimising the utilisation of transmission networks.
  • Consequently, this will reduce the need for costly infrastructure upgrades.

Benefits of VGF:

  • The selection of BESS developers for VGF grants will be carried out through a transparent competitive bidding process, promoting a level playing field for both public and private sector entities. This approach will foster healthy competition and encourage the growth of a robust ecosystem for BESS, attracting significant investments and generating opportunities for associated industries.
  • A production-linked incentive programme to promote indigenous manufacturing could also facilitate not only technology and innovation, but also create employment opportunities.
  • VGF would play a critical role in bridging the development cost that battery manufacturers need during technology development stages. This will also come in handy for pre-commercial battery projects to reach commercial stage.
  • This funding from the government has the benefit of bringing non-dilutive capital to battery tech companies thus lowering the pressure of fund raise during the early technology development stage of various battery tech start-ups.
  • Overall, a good move from the government and India is showing its clear intent to develop and promote indigenisation of battery tech in the country, he added.
Viability gap funding (VGF)

  • Viability Gap Finance means a grant to support projects that are economically justified but not financially viable.
  • Generally VGF is provided as a capital subsidy to attract the private sector players to participate in PPP projects that are otherwise financially unviable.
  • Projects may not be commercially viable because of the long gestation period and small revenue flows in future.
  • The VGF scheme was launched in 2004 to support projects that come under Public-Private Partnerships.
Schemes Viability gap funding (VGF) for battery energy storage systems (BESS)

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