Ministry Proposes Viability Gap Funding for Energy Storage Projects

The government has proposed various measures to accelerate ESS project implementation


The Ministry of Power has released a comprehensive framework to create an ecosystem for developing energy storage systems (ESS) to guarantee affordable, clean, stable, flexible, and secure power. The recommendations range from financial incentives to changes in bidding guidelines for storage projects. The Ministry has proposed policy and regulatory measures that are either under review or may be contemplated in the future.

Viability Gap Funding

To enhance the cost-effectiveness of energy storage and make the battery energy storage system (BESS) a feasible choice, a recommendation has been made to extend the viability gap funding (VGF) support to the first few BESS projects. This VGF assistance could potentially cover up to 40% of the project’s capital expenses, subject to the condition that the projects are completed and commissioned within a timeframe of 18 to 24 months.

Through the suggested VGF, it becomes feasible to maintain the Levelized Cost of Storage (LCoS) at affordable levels. Considering the energy charging expenses for the BESS, the overall energy cost from BESS would be in line with market rates on power exchanges during peak demand periods. Consequently, with the proposed VGF, BESS becomes a practical choice for managing peak power needs.

Support for Pumped Storage Projects

Pumped Storage Projects are frequently initiated in remote regions that lack adequate infrastructure. The infrastructure created for these projects not only serves their immediate purpose but also facilitates the broader development of the area, offering opportunities for repurposing. This encompassing infrastructure scope may include the provision of transmission infrastructure extending up to the pooling point.

Green Finance

Government-concessional green financing can be harnessed to kickstart and expedite the development of the ESS industry. Sovereign Green Bonds, incorporated into the government’s broader financial initiatives, can serve as a source of funding for eco-friendly infrastructure and reducing carbon emissions in the economy. Additionally, financial institutions such as Power Finance Corporation, REC, and the Indian Renewable Energy Development Agency may offer extended, long-term loans to support ESS projects.

Resource Adequacy Plan

According to the Ministry, the guidelines for formulating a Resource Adequacy Plan can incorporate ESS within the planning framework.

The Central Electricity Authority (CEA) will issue a Long-term National Resource Adequacy Plan that estimates the national-level storage requirements for the upcoming decade. Furthermore, distribution companies (DISCOMs) must develop a Long-term Resource Adequacy Plan covering a ten-year horizon.

The Long-Term Resource Adequacy Plan will outline the projected need for ESS, spanning from the distribution level to the national level. This will enable developers, particularly pumped storage project developers, to plan and prepare for additional capacity well in advance.

The statutory obligation associated with the Resource Adequacy Plan will provide clarity regarding future ESS demand. Moreover, the statutory provision mandating 24/7 power supply will necessitate that DISCOMS integrate ESS as an essential component of their respective Resource Adequacy Plans.

Bidding Guidelines for ESS

The government may issue technology-agnostic bidding guidelines for long-term energy storage, short-term energy storage, and ancillary services. These guidelines aim to facilitate the rapid development of financially viable and ecologically sustainable ESS projects in the power sector, benefiting utilities, procurers, and developers.

The bidding process can be structured in two ways: either as a composite tariff, which includes the cost of input power if the developer arranges for the input power, or as a tariff per MWh for storage if the procurer of the storage capacity is responsible for arranging the input power.

Earlier this year, the Ministry of Power issued guidelines for the tariff-based competitive bidding process for procuring firm and dispatchable power from grid-connected renewable energy projects with ESS.

ESS with Renewable Generation

To guarantee a dependable power supply through sufficient storage capacity, new renewable energy ventures (excluding hydro projects) with an installed capacity exceeding 5 MW or as determined by the government may be required to incorporate Energy Storage Systems (ESS) with a minimum storage duration of 1 hour, representing at least 5% of the renewable energy project’s capacity.

The inclusion of such ESS capacity can be factored into the bidding process and may either be co-located with the renewable energy project or integrated with storage situated elsewhere.

Regulatory Measures

To achieve financial and commercial viability, ESS developers and intermediary agencies would be permitted to offer a range of market-based energy and power products. These products may include:

  • Spot energy market
  • Capacity market/Energy arbitrage (boosting capacity value by shifting off-peak generation to peak times)
  • Provision of ancillary services to the grid
  • Providing storage to other generating stations
  • Bundling to make renewable energy firm and dispatchable
  • Replacing diesel generators in various sites
  • Any other product that meets market demand or requirements

The appropriate commission may consider ESS an alternative when approving the Capital Expenditure (CAPEX) requirements for any new transmission or distribution system.

The Ministry has emphasized the need for the relevant commission to define Time of Day (ToD) tariffs applicable to commercial and industrial (C&I) and other consumer categories per the established regulations. This initiative aims to incentivize consumers and utilities to leverage ESS to optimize their power costs.

Additionally, ESS systems utilizing renewable energy sources for charging may be eligible for carbon credits, with the specific accounting methodology to be provided separately.

Also, ESS integrated into rooftop solar projects or deployed in a distributed manner can be aggregated on a grid-scale level, benefiting both DISCOMs and system owners. To facilitate this, the relevant commission may establish a supportive framework for peer-to-peer energy trading.

The relevant commission may introduce distinct tariff regulations for pumped storage projects to ensure tariff viability. This may encompass rationalizing factors like the return on equity, debt-to-equity ratio, and similar considerations.

Tax and Duty waivers

In accordance with the principles of double taxation avoidance, the framework recommends that the electricity duty and cross-subsidy surcharge should not be imposed on the input power utilized for charging ESS. ESS primarily serves to efficiently store energy during off-peak periods and release it during peak demand periods. Therefore, the electricity duty and the cross-subsidy surcharge should apply solely to the ultimate electricity consumption.

Also, states can waive the payment of stamp duty and registration fees for the acquisition of land designated for the installation of ESS.

Manufacturing of BESS

To promote indigenous manufacturing, the government may formulate a production-linked incentive (PLI) program specific to BESS to be used in the power sector.

In June this year, Union Power Minister R.K. Singh proposed implementing a PLI initiative for grid-scale storage to bolster capacity and encourage ongoing investments.

Quality and Standards

To uphold quality and standards for BESS in power sector applications, the government may contemplate the creation of an Approved List of Models and Manufacturers (ALMM) for BESS, akin to the ALMM list for solar modules issued by the Ministry of New and Renewable Energy (MNRE).

Research and Development

The government may set up a nodal agency to oversee the sector’s research and development endeavors, with funding channeled through this entity. Furthermore, the nodal agency may establish and maintain a nationwide online platform to streamline knowledge exchange and prevent redundant R&D initiatives.

Recycling and Sustainability

Specialized waste management facilities could be established to streamline electronic waste collection in adherence to government regulations. A structured mechanism, complete with predefined criteria and essential standards, will be instituted to enable the repurposing of ESS components from one application for reuse in another. Formulating a standardized operating procedure can promote recycling endeavors and the recovery of materials from end-of-life batteries.

Moreover, discarded mines, including those previously exploited and excluding coal mines designated for ash back-filling, can be repurposed as hydro storage facilities, naturally facilitating the establishment of pumped storage projects.

New mines earmarked for mining operations should include an approved mine closure plan encompassing pumped storage projects’ development. Collaboration between the central public sector undertakings (CPSUs) and coal sector CPSUs can aid in identifying potential and feasible sites and expedite the deployment of pumped storage projects in such coal mines across the country.

In June this year, the government introduced several initiatives to expedite pumped storage project commissioning.

Last year, the Ministry of Power had issued the Renewable Purchase Obligation (RPO) and Energy Storage Obligation (ESO) until the financial year 2029-2030. The ESO will be calculated in energy terms as a percentage of the total electricity consumption and treated as fulfilled only when at least 85% of the total energy stored in the ESS is procured from renewable energy sources annually.

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