Central Idea

The Union Cabinet recently granted approval for a viability gap funding (VGF) scheme worth ₹3,760 crore to advance battery energy storage systems (BESS) development.

Viability Gap Funding (VGF) Scheme

VGF means a grant to support projects that are economically justified but not financially viable.
The VGF scheme was launched in 2004 to support projects that come under Public-Private Partnerships.
The scheme is designed as a Plan Scheme to be administered by the Ministry of Finance and amount in the budget are made on a year-to-year basis.
Such a grant under 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.

This scheme aims to create 4,000 megawatt hours (MWh) of BESS projects by 2030-31, offering financial support of up to 40% of the capital cost in the form of VGF.
It is expected to lower battery storage costs, enhancing their practicality.
Designed to leverage renewable energy sources like solar and wind power, the scheme aims to provide clean, dependable, and cost-effective electricity to the public.

By offering VGF support, the scheme targets achieving a levelised cost of storage (LCoS) ranging from ₹5.50-6.60 per kilowatt-hour (kWh).
It would thus make stored renewable energy a viable option for managing peak power demand across the country.
The VGF disbursement will occur in five stages linked to BESS project implementation milestones.

To ensure consumer benefits, a minimum of 85% of BESS project capacity will be allocated to distribution companies (Discoms).
This strategy enhances renewable energy integration into the electricity grid, minimizes wastage, and optimizes transmission network usage, reducing the need for costly infrastructure upgrades.
This approach stimulates healthy competition and encourages BESS ecosystem growth, drawing substantial investments and generating opportunities for related industries.