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.