Will VGF for 4GWh help India’s energy storage sector?

Ankit Mittal Co-founder and CEO of Sheru

India’s 2023 Union Budget had green growth as a core component, of which green energy and green mobility were significant sections. It also announced numerous plans to help sustain this growth – an allocation of ₹350 billion for energy transition and net-zero goals, ₹207 billion for grid infrastructure, customs duty exemption on capital goods and machinery required to manufacture lithium-ion cells, and so on. It also saw energy storage get a significant mention with support for Viability Gap Funding (VGF) for projects totalling 4GWh. This is significant for the energy storage sector, the energy industry as a whole and India’s goals to decarbonise its economy.

Across the world, the rollout of clean energy has seen an acceleration in recent years, led by the stunning rise of solar energy. Globally, more than 75% of installed capacity in 2021 was from renewables. Solar alone was nearly half of all additions for the year, with 182 GW of installations. With wind energy adding another 15% and hydro at 13%, renewables and nuclear were 85% of total capacity additions in 2021. The trend is not different in India. Though coal used to be the dominant source of new capacity in the early years of the last decade, solar started to gain prominence in 2016. In 2021, solar, wind, and large hydro together accounted for more than 75% of total installations, with solar alone taking 62% of the share.

The rise in dominance of solar as the primary source of energy installations has been due to a sustained decline in the cost of solar modules and continuing improvements in technology. While solar projects saw tenders at ₹12/kWh in 2010, these fell to ₹2/kWh in 2020. Coal, once the cheapest form of power supply, currently sells at more than ₹3/kWh. New solar power is thus cheaper than existing coal in India. However, the intermittency of solar and wind poses problems for the industry as well as the grid. With increasing amounts of renewables added to the grid, periods of peak production such as the middle of the day see a large amount of power produced. Since there is only limited demand for electricity during this period, supply from renewables has to be curtailed for the power grid to remain stable.

Curtailing power from renewable sources is a loss for multiple stakeholders – it hits the bottom line of power producers, is a loss of an energy asset, and is a wasted opportunity to make the grid greener. To avoid curtailment, solar and other renewables need energy storage to supplement them. Though prices of storage technologies have been declining, they are still a large capital investment. This is where the recent announcement of VGF for 4 GWh assumes significance.

Energy storage is of two types – short-duration storage and long-duration storage. Short duration typically is for storage requirements of up to 4 hours. It helps in grid balancing, storing and releasing energy within cycles of a few hours, and for other ancillary support. Long-duration storage ensures that the energy supply is available and secured for the long term. The growth of India’s EV sector would help meet a good part of short-duration storage requirements. While India’s target of 500 GW of renewable energy by 2030 needs a projected 600 GWh of storage to support it, battery storage in EVs alone is estimated to contain 800 GWh by the same period. Utilising just a fraction of this would help meet the power sector’s short-duration requirements.

However, long-duration storage requires dedicated storage plants, large capital investments, and integration with the grid. Such projects might also need to be co-located with solar or wind plants to act as base-load support. And the pipeline needed to unlock this requires government support at the moment. The VGF announced in budget ’23 for 4 GWh of energy storage would not just bring this online, it also signals government support for the sector and allows the market to direct private investments. Apart from technological improvements, a lower cost of capital helps ensure that more long-duration storage gets greenlit.

India’s energy sector, and energy storage in particular, is set to witness rapid growth over the coming years. To meet that potential, several pre-conditions need to be fulfilled, of which government support and low-cost capital are crucial. The VGF helps tick both boxes and lends a much-needed helping hand to the sector.