Will Viability Gap Funding make the path to battery-based energy storage easier?

In case of non-availability of electricity, you must use a power bank to charge your mobile phone or any other electric appliances. The Government of India is now making similar ‘power banks’ nationwide to provide uninterrupted electricity to your homes. These ‘power banks’ are connected to the power grid that supplies electricity to your homes, called a battery energy storage system (BESS). The Government of India approved the Viability Gap Funding Scheme on 6 September 2023 to accelerate the construction of such battery energy storage systems.

Viability gap funding is financial support provided by the government to infrastructure projects that are vital to the economy, but which currently involve significant financial risk. This is a very important step for India which is rapidly moving towards clean and renewable energy. Before we talk about this in detail, it is essential to understand why we need a battery-based energy storage system in the first place.

Why is a battery energy storage system needed?

India still supplies 56.8 per cent of its electricity from fossil fuels such as coal (49.1%), lignite (1.6%), gas (6.0%) and diesel (0.1%). These sources are responsible for 75 per cent of global greenhouse gas emissions and 90 per cent of carbon dioxide emissions, which is the leading cause of climate change. That is why now we are transitioning from fossil fuels energy and expanding renewable energy sources like solar and wind, to significantly reduce the environmental impact.

According to the 14th National Electricity Plan, India has set a target of getting 450 GW of electricity from non-fossil-based energy sources by the year 2030. However, electricity obtained from renewable energy sources such as solar and wind is variable and intermittent, i.e., it is not available all the time. This variable behaviour poses a challenge to the stability of the power grid.

According to Dr Somit Dasgupta, a former member of the Central Electricity Authority of India

“The stability of the power grid depends on the balance of energy production and consumption. If there is an excess of energy generated with insufficient demand, there is a potential risk of damage to infrastructure due to energy surges. Conversely, if there is insufficient supply of generated energy, there is a risk of blackouts.”

The intermittent behaviour of renewable energy sources such as solar and wind power creates a gap between generation and demand, leading to grid instability (frequency and voltage fluctuations). This gap can be bridged by measures like load shedding, increasing the use of alternative energy sources or using storage. Dr Somit adds,

“India can currently stabilize the grid by ramping up coal thermal power plants. But the reason we are adopting renewable energy is to reduce carbon emissions, in such a situation the storage systems become important.”

In simple language, this question can also be answered with another question, solar energy generates electricity only during the day, what will you do to use it at night?

10 MW battery storage system in Rohini, Delhi

The battery energy storage system built in Delhi's densely populated Rohini can store energy up to 10MW/ 10 Mwh. This is the first grid-scale lithium-ion battery energy storage system installed in the country. It has been established by Tata Power in collaboration with AES and Mitsubishi Corporation.

This sub-station helps in providing uninterrupted electricity to 20 lakh consumers of Tata Power Delhi Distribution Limited present in Delhi. This battery-based energy storage system helps store electricity and distribute it within milliseconds, thereby reducing the instability of the electricity grid. With the system's help, it is possible to store more energy and supply when needed. This helps network operators reduce pressure on the region's transmission system and supply affordable and quality energy to consumers.

According to Tata Power DDL,

“Battery-based energy storage system is very helpful in peak load management. In Delhi, electricity consumption is high in the evening when people return home from work. BESS stores excess energy during periods of low demand and can be released into the grid during periods of high demand.”

According to Dr Bharath Reddy, former Additional General Manager at Solar Energy Corporation,

“Battery-based energy storage systems can stabilize the grid as well as reduce curtailment of renewable energy. Furthermore, helps in its efficient use, reduces expenditure on long transmission networks by 70 per cent and provides electricity to rural areas of India where laying transmission lines is challenging”

Current Capacity and Expansion

According to the National Electricity Plan 2023 of the Central Electricity Authority of India, India will need grid-scale energy storage capacity of 74 GW/ 411 GWh by the year 2032. It is expected to achieve 47.24 GW from battery-based storage and 26.69 GW from pumped hydro storage. If we look at the installed battery storage in India by the year 2021, it is around 1.04 GW, by the year 2030 it is likely to reach 26.54 GW. This is far behind the target of 47.24 GW. 

To bridge this gap and accelerate the construction of battery-based storage projects, the Government of India has approved the Viability Gap Funding Scheme.

What is a Viability Gap Funding Scheme?

Viability gap funding is a financial mechanism used by governments to bridge the gap between the cost of infrastructure projects and their economic feasibility. It is generally employed in projects that are important for the development of the country, but are considered economically unviable or financially unattractive to private investors for various reasons, such as high capital cost, and low revenue capacity, or long construction period.

Through Viability Gap Funding Scheme for BESS, the Government is looking to reduce the cost for investors, making BESS more economically viable as well as ensuring clean, reliable and affordable electricity for citizens. India wants to set up 4,000 MW of battery energy storage projects by the year 2030-31 by providing grants and subsidies under this scheme. The Union Cabinet has approved a budget of Rs 3,760 crore for this.

The incentives will be in the form of grants distributed over three years. These contracts will be awarded in five instalments through fiscal year 2030-31, and the selection of recipients will be based on a competitive process, with the lowest bid given priority. According to information received through RTI from the Ministry of Energy, Government of India, the operational guidelines of the scheme have not been finalized yet. These will be released soon.

Financial risks associated with battery energy storage

The cost of setting up a battery energy storage system can be understood from the example of the Rohini Battery Energy Storage Unit in Delhi. The project was established in 2018 at USD 6.5 million (without taxes). Of this, 30 per cent of the total cost is spent on batteries and the remaining on power-conditioning units, EMS, isolation transformers, project foundation, construction, inverters and communication equipment.

Charith Konda, an energy expert with the Institute for Energy Economics and Financial Analysis (IEEFA), says

“Lack of historical data related to this sector, lack of experience on battery life, warranty, guarantee, fire safety, recycling etc., high upfront capital cost and raw material cost along with long investment returns make it risky for investors.”

However, according to Fluence Energy, the technology provider of the Rohini battery storage system,

“A whole system approach, working with an experienced technology provider with a long-term service agreement reduces technical complexities”

Viability Gap Funding aims to assist developers with upfront capital investment and high costs. Hence, it can be said that the path to installing battery energy storage systems can be easy in India. Charith Kaunda says,

“It remains to be seen how tenders for VGF projects will be structured. Government and industry estimates indicate that VGF can help reduce the levelized cost of storage for BESS projects from Rs 10-11/kWh to Rs 5.50-6.60/kWh or ~40%. As costs reduce, financial risk will also reduce.”

Neshwin Rodrigues, electricity policy analyst at Ember India, says,

“India must continue to finance renewable energy, storage and transmission projects despite financial and investment risks. This will help achieve the goals set by India in the National Electricity Plan 14. It is also necessary to avoid construction of new coal capacity.”

How appropriate is it to use public money to finance private companies?

Umang Maheshwari, Director, Solution Deployment, at the Global Energy Alliance for People and Planet (GEAPP), believes that the Viability Gap Funding is great for rolling out battery storage solutions in the country. He says that the government needs to find other solutions such as revenue-sharing models with private companies, encouraging private investment, etc. to scale up such storage solutions for the energy transition.

It is important to mention that public funds are being used by private companies to advance India's energy transition. Historically, such arrangements have led to variations in the quality of electricity reaching different levels in India. Inadequate infrastructure, variable voltage and power outages impacted power quality in rural India. Recently, government schemes have created transmission infrastructure to reach every household. Despite this, 24X7 electricity for all is still a distant reality, however, supply has improved.

Here, Umang believes that we need to make effective rules to maintain the quality of electricity. Private companies are very important in providing electricity in rural or peri-urban areas. Umang says,

“We cannot portray private companies as villains… They will want to make profits… It is a capitalist system.”

Currently, electricity production through renewable sources is economically competitive. Through this change, the quality of electricity provided to every citizen should be uniform. We can hope that the mistakes made earlier will not be repeated and the rules will be implemented with the same effect.

Efforts to make India self-reliant in the field of battery-based energy

Over the years, huge investments and technological advancements in the lithium-ion batteries market have made them more efficient and cheaper than other storage options. However, India is still dependent on other countries for lithium-ion batteries. Between April 2022 and January 2023, India imported lithium and lithium-ion worth Rs 18,763 crore.

The government intends to strengthen India's lithium battery manufacturing by promoting investment in this sector. Also, the reserves of Lithium found in Reasi and other places of Jammu and Kashmir can help make India self-reliant in this field in future.

According to Mordor Intelligence Industry Report 2022, India's battery energy storage market could be worth US$ 5.27 billion in the next 5 years. This shows that there is immense potential for investment in this sector in India.

Energy storage options other than lithium batteries

In the National Electricity Plan of the Central Electricity Authority, priority has been given to lithium-ion batteries and pumped hydro storage for energy storage. Both these technologies have their environmental risks. Pumped hydro storage is associated with environmental concerns such as long construction periods, lack of suitable sites with required topography, displacement and ecological damage. Lithium is being addressed as second coal because its mining is associated with problems like air and water pollution, land degradation, and groundwater pollution.

Innovations are taking place in the field of energy storage all over the world including India. Apart from lithium, there are many options which can store energy without harming the environment. Sodium-ion battery is one such option which is considered cheaper, safer and eco-friendly than lithium. AATRAL ESP, based in Chennai, India, manufactures sodium-ion batteries. According to Subhadra Rajendran, CEO of AATRAL

“Sodium-ion batteries are also called salt batteries as they are made from salt, which is available in abundance around us. The raw material does not harm the environment and it is cheaper than lithium as well as fire safe.”

One drawback of sodium batteries is that they are larger than lithium. However, they can be used in grid-scale battery storage, where we have the space to install larger batteries. Subhadra says that she has not yet received any research, development or financial help from the government. She wants the government to also pay attention to sodium-ion batteries because when investment increases in this sector, this technology will help in development, Subhadra says

“If we want to protect the environment, we cannot ignore the environmental risks of recycling and mining lithium.”

‍This article is published as a part of the Smitu Kothari Fellowship 2023 of the Centre for Financial Accountability, Delhi.

Keep reading

• Renewable energy expansion needs an integrated sustainable storage solution, here’s how
• Sanchi solar city, utility-scale solar system, and the looming storage problem 
• India’s Renewable Energy Expansion Posing Threats To Its Grid Stability 

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