By Labanya Prakash Jena & Prasad Ashok Thakur
India’s ambitious green energy transition trajectory aims to achieve at least 50% cumulative installed capacity by 2030 of non-fossil fuel-based energy resources (500 GW) by 2030 and add renewable energy capacity in the range of 40GW-120GW per year from today for the next couple of decades. To support this large-scale intermittent renewable energy system needs robust and scalable battery storage infrastructure – 47GW (236 GWh) by 2030, according to the Central Electricity Authority (CEA) and in the range of 2042 GW – 3100 GW by 2050. Battery Energy Storage Systems (BESS) can store intermittent RE when solar, wind, and tidal energies are available and complement the banking facilities provided by the grid. For behind-the-meter users, it can provide flexibility regarding when, where, and how much to consume. It also enables regulation of grid frequency and optimisation of investments in energy infrastructure. Thus, BESS have a versatile role in shaping future power systems.
BESS is increasingly becoming cost-effective globally. During the past 2 years, BESS tariffs have almost halved, from a cost of INR ~12000 per kW per year to an average of INR 5500 per kW per year for a 2-hour duration BESS. However, BESS penetration is still very low in India – with only 220 MWh installed till March 2024. China, on the other hand, has surpassed 168 GWh by December 2024.
Challenges galore to scale up BESS
The key challenges associated with the limited instalment of BESS are the high cost of energy storage, the capital-intensive nature of the technology, the below-expectation performance record, and the high import reliance on China. From the supply side, India doesn’t have significant experience in battery manufacturing compared to its global peers. Besides, the lack of access to critical minerals and the ultra-competitiveness of China in BESS technology due to massive investment in battery manufacturing capacity and technology development, thanks to heavy subsidies from the Government and enormous scale of manufacturing, make it challenging for India to compete with China. However, India needs to develop its battery supply chain for energy security.
Financing challenges exacerbate it further
The lack of access to financing at a reasonable rate is a formidable challenge to adopting BESS in India. The private sector faces significant hurdles in investing in large-scale battery networks, primarily due to high upfront costs and uncertain revenue streams. It is still an expensive technology to store energy for a long enough time to supply electricity when the sun is not shining, and the wind is not flowing. Besides, the lack of performance records induces scepticism in potential financiers. Such issues constrain the capital flows into BESS, resulting in low adoption of BESS in the energy sector.
Battery Network Development Fund (BNDF)
To address the above challenges, a dedicated Battery Development Fund (BNDF) is proposed, acting as a catalyst for private sector investment and accelerating the deployment of this critical technology. The fund can function as a leasing company that mitigates the high capital requirement challenges of the BESS technology. It can capital-lease batteries and other necessary BESS equipment reasonably to private operators. The private operators can take advantage of the depreciation of assets. The private operator pays a certain upfront premium to the fund and then pays the capital lease over time. The private operators can be energy companies, pure-play energy storage operators, and commercial or industrial facilities. The fund can assume technical/performance risks backed by BESS manufacturers, which will reduce user performance risk. The fund can leverage its purchasing power to negotiate competitive prices and incentivise domestic manufacturing by acting as a significant procurer of battery technologies and related equipment. The fund can also bring demand certainty in the market, encouraging BESS manufacturers to set up factories or expand their existing capacity, further reducing costs.
Capitalisation of BNDF
The BNDF would operate as a blended finance mechanism, combining government equity with long-term debt financing from multilateral institutions and private investors. This approach would mitigate the financial risks associated with battery development and leverage the government’s capacity to mobilise resources and shape market dynamics. The fund would prioritise projects demonstrating strong environmental and social benefits, such as those in non-urban areas with limited grid access or facilitating the integration of variable renewable energy sources.
Manufacturing
Incremental battery manufacturing capacities tend to decrease the cost of batteries due to economies of scale but also create cut-throat competition among manufacturers to grab market share. This may not always generate adequate profit for private investors. Thus, most governments heavily support local battery manufacturers to keep them afloat despite the latter’s meagre investment returns. Hence, the battery industry needs patience, risky, and long-term capital to compete globally and be stabilised in the mid-long term when commercial rationalisation is expected. Although the private sector can invest equity capital, they need long-term debt concessional capital for manufacturing batteries until mainstream investors find the industry attractive. The Government can use state-owned financial companies to provide this subsidised debt capital. Instead of grants and subsidies, debt capital is a better use of public capital as debt capital is paid back to debt financers (state-owned financing companies) while grants and subsidies are not returnable. However, the long duration of low-cost debt financing can enable battery manufacturers to stay afloat for a long time and pay back later when they can compete with global manufacturers. The long-term nature of debt capital will allow them to advance BESS by investing in research and development initiatives focusing on improving performance, reducing costs, extending lifespan and promoting safe recycling or disposal.
Establishing a well-structured and effectively managed financial intervention by the Government of India presents a compelling opportunity to accelerate the deployment of battery networks in India. By addressing private investors’ financial and regulatory challenges, the mechanism can unlock significant private capital, drive innovation, and create a more sustainable and resilient energy system.
Jena is working as a sustainable finance consultant at CEEW and IEEFA, and is an advisor at the Climate and Sustainability Initiative (CSI) whereas Thakur is a CIMO scholar and has authored a book and several articles published with The World Bank Asian Development Bank Institute United Nations Government of India etc.
Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.