VGF Scheme for Grid-Scale Energy Storage Systems 2026

Introduction

To address this challenge, the Union Cabinet has approved the Viability Gap Funding (VGF) Scheme for Development of Grid-Scale Energy Storage Systems, with total financial support of ₹14,500 crore for FY 2026–27 to FY 2030–31. The scheme aims to develop 92 Gigawatt-hours (GWh) of new energy storage capacity, strengthen India’s electricity grid, promote domestic battery manufacturing and improve the integration of renewable energy into the national power system. It is an important step towards achieving India’s long-term renewable energy targets and ensuring affordable, reliable and round-the-clock electricity supply.

What is the VGF Scheme for Grid-Scale Energy Storage Systems?

• The Viability Gap Funding Scheme is a government initiative designed to encourage the development of large-scale energy storage infrastructure in India.
• Energy storage systems help store electricity when generation is high and release it when demand increases or electricity generation from renewable sources decreases.
• However, establishing large-scale storage projects requires substantial initial investment. Their commercial returns may not always be sufficient to attract private investors.
• To overcome this financial challenge, the government provides Viability Gap Funding (VGF) in the form of financial assistance.
• Under this scheme, the government will provide ₹14,500 crore in financial support to encourage the development of 92 GWh of grid-scale energy storage capacity over five financial years, from 2026–27 to 2030–31.
• The initiative will support pumped hydro storage projects, battery-based storage technologies and emerging energy storage solutions.

Key Highlights of the VGF Scheme

Target of 92 GWh: How Will India's Energy Storage Capacity Increase?

• One of the most important objectives of the scheme is to develop 92 GWh of additional grid-scale energy storage capacity.
• This capacity is equivalent to approximately 170% of India’s existing grid-scale energy storage capacity, highlighting the scale of the proposed expansion.
• The government has divided the 92 GWh target into three major categories.

A. Pumped Hydro Storage Projects (60 GWh)

Pumped Hydro Storage (PHS) is a method of storing electricity by using water and two reservoirs located at different heights.

How does it work?

• When electricity is available in excess, particularly during periods of high solar or wind generation, electricity is used to pump water from a lower reservoir to an upper reservoir.
• When electricity demand increases, the stored water is released from the upper reservoir.
• The flowing water passes through turbines, generating electricity that is supplied to the grid.

In simple words, pumped hydro storage works like a giant rechargeable battery that uses water instead of chemical cells.

Importance of Pumped Hydro Storage:

1. It can store large quantities of electricity.
2. It helps balance electricity demand and supply.
3. It supports the integration of solar and wind energy.
4. It provides flexibility and stability to the electricity grid.
5. It can support long-duration energy storage.

B. Battery Energy Storage Systems (30 GWh)

Battery Energy Storage Systems (BESS) are technologies that store electricity in rechargeable batteries and release it whenever required.

Lithium-ion batteries are among the widely used technologies in modern battery energy storage systems.

How does BESS work?

• During periods of excess electricity generation, batteries are charged using available electricity.
• The stored electricity is retained in the battery.
• When electricity demand increases or renewable energy generation falls, the batteries discharge electricity into the grid.

Importance of BESS:

• Helps manage fluctuations in solar and wind power generation.
• Provides quick response during sudden changes in electricity demand.
• Improves grid reliability and stability.
• Supports peak-load management.
• Reduces the need to depend entirely on conventional power generation during peak demand.

C. Alternative and Emerging Energy Storage Technologies (2 GWh)

Apart from pumped hydro and battery storage, the scheme also provides 2 GWh for alternative and emerging energy storage technologies.

These technologies can help diversify India’s energy storage infrastructure and reduce dependence on a limited number of storage solutions.

Examples of emerging energy storage technologies include:

• Compressed Air Energy Storage (CAES).
• Thermal Energy Storage.
• Flow Batteries.
• Hydrogen-based Energy Storage.

These technologies offer different storage durations, operating characteristics and applications.

What is Viability Gap Funding (VGF)?

• Viability Gap Funding is a financial assistance mechanism provided by the government to infrastructure projects that are economically important but may not be financially attractive to private investors.
• Many infrastructure projects require significant initial investment. However, the revenue generated from these projects may be insufficient to cover the investment and operating costs.
• As a result, private companies may hesitate to invest in such projects.
• To overcome this problem, the government provides financial support to bridge the gap between the project’s total cost and its expected commercial returns.

Promotion of Make in India Through Domestic Content Requirement (DCR)

• Another important feature of the scheme is its focus on strengthening domestic manufacturing.
• The government has introduced a mandatory minimum Domestic Content Requirement (DCR) of 40% for Battery Energy Storage System projects.
• This means that qualifying BESS projects must meet the prescribed domestic-content threshold under the applicable scheme rules.
• The objective is to encourage the use of domestically manufactured components and strengthen India’s battery manufacturing ecosystem.

Why is the Domestic Content Requirement important?

India’s energy storage sector has significant potential, but dependence on imported battery components and technologies can create supply-chain vulnerabilities.

The 40% DCR requirement aims to:

1. Promote domestic battery manufacturing.
2. Reduce dependence on imported components.
3. Encourage investment in indigenous technology.
4. Generate employment opportunities in the manufacturing sector.
5. Strengthen India’s position in the global energy storage market.

The scheme provides demand-side support by encouraging the deployment of storage systems. This complements supply-side incentives that support battery manufacturing.

In this way, India can develop both the manufacturing capacity and the market demand required for a strong domestic energy storage industry.

Competitive Bidding Process for Project Allocation

• The projects under the scheme will be allocated to public and private sector electricity distribution companies (DISCOMs) through a tariff-based competitive bidding process.
• Competitive bidding allows eligible participants to compete by offering tariffs for the development and operation of energy storage projects.

This approach is intended to:

• Encourage transparency in project allocation.
• Promote competition among developers.
• Improve cost efficiency.
• Encourage private sector participation.
• Help achieve more competitive electricity storage tariffs.

The participation of both public and private sector entities is expected to expand investment opportunities in India’s energy infrastructure.

Financial Investment: ₹97,600 Crore Infrastructure Opportunity

• The scheme provides ₹14,500 crore in government financial support and is expected to attract an estimated total investment of ₹97,600 crore.
• This demonstrates the government’s intention to use public financial support to mobilise larger investments in the energy storage sector.

The expected investment can support:

• Construction of large-scale pumped hydro storage projects.
• Installation of battery energy storage systems.
• Development of domestic battery manufacturing.
• Expansion of electricity transmission and grid infrastructure.
• Research and development in emerging energy storage technologies.
• Employment generation in the energy and infrastructure sectors.

The scheme can also create opportunities for private companies, infrastructure developers, battery manufacturers and technology providers.

Why Does India Need Grid-Scale Energy Storage Systems?

• India’s electricity demand is increasing due to urbanisation, industrial development, digitalisation and economic expansion.
• At the same time, the country is increasing its reliance on renewable energy sources such as solar and wind.
• However, renewable energy generation is not always aligned with electricity demand.
• For example, solar power generation is generally high during the daytime, but electricity demand may remain high during the evening when solar generation declines.
• Similarly, wind power generation fluctuates depending on weather conditions.
• This creates a need for efficient electricity storage solutions.

Major Reasons Why India Needs Energy Storage

1. Managing Renewable Energy Fluctuations

Solar and wind energy are intermittent sources of electricity. Storage systems can absorb excess electricity and release it when renewable generation falls.

2. Maintaining Grid Stability

Electricity supply and demand must remain balanced. Energy storage systems help maintain this balance and improve the reliability of the power grid.

3. Meeting Peak Electricity Demand

During peak hours, electricity consumption increases. Stored electricity can be supplied during these periods, reducing pressure on conventional power plants.

4. Reducing Dependence on Fossil Fuels

Energy storage allows greater utilisation of renewable electricity and can reduce the need for fossil-fuel-based generation to balance variable renewable output.

5. Ensuring Round-the-Clock Electricity Supply

Combining renewable energy projects with storage facilities can help provide more reliable electricity throughout the day and night.

6. Improving Energy Security

Domestic storage infrastructure can strengthen India’s ability to manage electricity supply fluctuations and reduce exposure to disruptions in energy supply chains.

Strategic Significance of the VGF Scheme for India's Renewable Energy Transition

The VGF Scheme has several long-term implications for India’s energy sector.

Contribution Towards India’s 411 GWh Energy Storage Target

• India aims to achieve 411 GWh of energy storage capacity by 2031–32.
• The proposed addition of 92 GWh under this VGF scheme represents an important contribution towards that target.
• Large-scale storage infrastructure will be particularly important as India’s renewable energy capacity expands.
• It will help ensure that electricity generated from renewable sources is not wasted due to generation-demand mismatches and can instead be stored for later use.

Challenges in the Development of Grid-Scale Energy Storage in India

Despite its potential, the development of large-scale energy storage infrastructure faces several challenges.

• 1. High Initial Investment: Pumped hydro and battery storage projects require substantial capital investment, making financing an important concern.
• 2. Land and Environmental Clearances: Pumped hydro projects may require large areas of land and can affect local ecosystems, forests and water resources.
• 3. Dependence on Imported Raw Materials: Battery manufacturing depends on minerals such as lithium, cobalt and nickel. Import dependence can create supply-chain risks.
• 4. Technology and Infrastructure Limitations: Advanced energy storage technologies require specialised infrastructure, technical expertise and efficient grid integration.
• 5. Battery Recycling and Waste Management: The increasing use of batteries may generate significant waste. Proper recycling and safe disposal systems are essential.
• 6. Financial Viability: Even with government support, project developers need sustainable revenue models to recover their investments and operational costs.
• 7. Long Project Development Periods: Large pumped hydro projects may face delays due to land acquisition, construction and environmental approval requirements.

Way Forward

To ensure the successful implementation of the VGF Scheme, India needs a comprehensive approach towards energy storage development.

• Strengthen Domestic Manufacturing: Encourage indigenous battery production and reduce dependence on imported components and critical minerals.
• Promote Research and Development: Invest in advanced batteries, flow batteries, thermal storage and other emerging technologies.
• Develop Recycling Infrastructure: Establish efficient battery collection, recycling and waste-management systems.
• Improve Regulatory Frameworks: Create clear policies and regulations for energy storage project development and grid integration.
• Encourage Private Investment: Maintain transparent bidding processes and develop commercially sustainable business models.
• Ensure Environmental Sustainability: Adopt environmentally responsible practices in pumped hydro development and battery manufacturing.
• Improve Grid Infrastructure: Strengthen transmission and distribution networks to facilitate the integration of renewable energy and storage systems.

A coordinated effort involving the government, private sector, electricity distribution companies and technology developers will be essential for achieving India’s long-term energy storage ambitions.

13. Frequently Asked Questions (FAQs)

Q1. What is the VGF Scheme for Grid-Scale Energy Storage Systems?

The VGF Scheme is a government initiative aimed at promoting large-scale energy storage infrastructure through financial assistance of ₹14,500 crore. It seeks to develop 92 GWh of additional storage capacity between FY 2026–27 and FY 2030–31.

Q2. What is the main objective of the VGF Scheme?

Its primary objective is to improve renewable energy integration, maintain electricity grid stability, balance electricity demand and supply, and ensure reliable power availability.

Q3. What is the total energy storage capacity targeted under the scheme?

The scheme aims to develop 92 GWh of new energy storage capacity, comprising 60 GWh of pumped hydro storage, 30 GWh of battery energy storage and 2 GWh of alternative technologies.

Q4. What is the Domestic Content Requirement under the scheme?

A minimum Domestic Content Requirement of 40% has been prescribed for Battery Energy Storage System projects to promote indigenous manufacturing and reduce import dependence.

Q5. What is the difference between BESS and Pumped Hydro Storage?

BESS stores electricity in rechargeable batteries, whereas pumped hydro storage uses water stored at different elevations to store and generate electricity.

Q6. What is the purpose of Viability Gap Funding?

VGF provides government financial assistance to economically important infrastructure projects that may not be commercially viable without additional support. It helps attract private investment by improving project viability.

Q7. How will the scheme support India's renewable energy targets?

It will enable better utilisation of solar and wind energy by storing surplus electricity and supplying it during periods of low renewable generation or high electricity demand.

Conclusion

The Viability Gap Funding Scheme for Grid-Scale Energy Storage Systems is an important initiative towards building a reliable, affordable and sustainable electricity infrastructure in India. With financial support of ₹14,500 crore and a target of developing 92 GWh of additional energy storage capacity, the scheme aims to address one of the major challenges of renewable energy expansion: the intermittent nature of solar and wind power.

Its focus on pumped hydro storage, battery energy storage, domestic manufacturing and private sector participation can strengthen India’s energy ecosystem. More importantly, the scheme represents a shift towards an electricity system where renewable energy is not only generated but can also be stored and utilised whenever required. For India, achieving energy security will depend not only on increasing renewable energy generation but also on developing sufficient storage capacity to ensure reliable electricity supply.