Tailwinds from government grants in the form of viability gap funding (VGF) for battery storage systems and other favourable policy announcements should lead to ~4 gigawatt (GW) of battery storage capacity¹ by fiscal 2028. Another driver will be the improvement in return on capital (returns) profile of standalone storage projects by 300-400 basis points (bps) to 12-13%², bumped up by grants and an on-year fall of ~20% in battery prices.

Driven by government thrust and strong investor interest, renewable capacity (solar and wind) has grown to ~120 GW as of December 2023 from ~70 GW as of December 2019. By fiscal 2028, the capacity is expected to touch 220 GW³, leading to an increase in the proportion of renewable energy in overall power mix to over 20% compared with 11% now. As renewable generation is intermittent, this may increase the risk of imbalance in the power grid if not absorbed suitably through storage.

Battery storage is a key technology envisaged for storing renewable power and matching it with demand, thereby supporting stability of the power grid. Till now, battery storage capex in the country was low primarily because of high cost of batteries, which results in unattractive returns for the developers. To address this issue, the government has announced steps such as the VGF scheme under which it will provide financial support of up to Rs 3,760 crore to 4 GW-hour of battery projects.

Says Ankit Hakhu, Director, CRISIL Ratings, “VGF can help reduce battery-storage project cost by up to 40% and improve overall project returns by 200-300 bps at a constant tariff of Rs 8-8.5 per unit (around the levels auctioned in calendar year 2023 for similar projects) and battery prices seen at the start of the year. This would be attractive to developers, who can appropriately leverage the project and generate equity returns over 16%.”

Meanwhile, battery prices have also fallen on-year to ~$140 per kilowatt-hour (kWh) in November 2023 after over a year of marginal increase to ~$175 per kWh. Given the growth in mining and extraction capacities of key elements such as lithium, a key determinant of pricing, prices are likely to stay at the current levels, if not go down further. At these lower prices, returns will improve a further 150-200 bps to 12-13%.

Further, the government has announced policies such as passthrough on duties or taxes paid for input power, interstate transmission charge waiver for storage projects and allowance of additional revenue streams that have added to the returns.

Says Varun Marwaha, Associate Director, CRISIL Ratings, “A combination of improving returns and supportive government policies is expected to enable ~4 GW of battery capex to come up by fiscal 2028. In fact, traction is already visible through the battery storage capacity of over 1 GW⁴, which has been auctioned till date.”

That said, adoption of battery storage and tariff trajectory will remain sensitive to clarity around the applicability and manner of VGF grants and macroeconomic developments that impact commodity and battery capex prices.

¹ Battery storage capex is being incurred under two models: a) as part of a renewable energy (RE) project that provides round-the-clock RE or peak hour RE power and b) as standalone projects that offer storage as a service. An example of standalone storage project would be when renewable power is supplied by a distribution company to project at time of generation and is later taken back at time of usage/ demand for a fixed charge per unit stored
² Calculations assume a setup of standalone lithium-ion battery system with 4 hours of storage capacity, degradation of 2% annually, availability and efficiency of 85%, depth of discharge of 90%, and battery life of 10-12 years
³ Excludes capacity set up for green hydrogen/ ammonia production
⁴ Factors in estimates of standalone storage and mixed renewable projects to be taken up through battery storage