How can Storage Solutions solve India’s Renewable Energy Puzzle?

Energy Storage in India’s Renewable Grid

The global energy sector is undergoing a significant shift towards renewable sources to combat climate change. India, a leader in renewable energy (RE) adoption, has set ambitious targets to transition to a green energy economy.

Currently, India’s RE capacity is rapidly expanding, driven by solar and wind projects, but these sources bring variability that could destabilize the grid. Known as the “duck curve,” this variability results from the intermittent nature of solar and wind energy, which do not align with daily electricity demand patterns.

ESS technologies, particularly Battery Energy Storage Systems (BESS) and Pumped Storage Projects (PSP), can balance this variability by storing surplus RE during periods of high production and releasing it when production dips, helping to achieve grid stability.

Investment Opportunity: This rapid shift to RE and the need for stable, reliable energy creates an investment opportunity in ESS. Projections indicate that India’s ESS capacity could reach 60 GW by FY32, reflecting a 12-fold growth from current levels, with BESS expected to grow 375 times and PSP by four times. The investment potential in ESS could reach around INR 5 trillion, supported by both public and private investment.

Economic Drivers and Projected Market Growth

The ESS market in India is poised for exponential growth due to the rising share of renewables in the energy mix and supportive government policies that lower ESS adoption costs.

Current ESS Demand: As India integrates renewables into the grid, ESS is increasingly necessary. The report indicates that ESS projects now account for approximately 23% of renewable energy tenders in FY24, compared to just 5% in FY20. The rising demand for ESS in these tenders signals the market’s recognition of ESS as critical for a stable RE grid.

Projected Market Growth: ESS capacity is forecasted to increase significantly, reaching approximately 60 GW by FY32. This growth is primarily driven by BESS, projected to reach 42 GW, and PSP, expected to contribute an additional 19 GW by FY32. The expanding scope of ESS could drive approximately INR 5 trillion in investments by FY32, fueled by cost reductions, technological advancements, and policy support.

Cost Competitiveness: ESS technology costs are falling, making them a viable alternative to fossil-fuel generation during peak demand hours. BESS tariffs, for instance, are projected to decline further due to policy-driven incentives like the Viability Gap Funding (VGF) and the Production Linked Incentive (PLI) schemes, making ESS adoption even more attractive for DISCOMs and investors alike.

Battery Energy Storage Systems (BESS): Leading the Market Growth

BESS offers significant advantages in terms of flexibility, scalability, and rapid deployment, making it the preferred ESS technology in India’s market.

Advantages of BESS: BESS is attractive due to its high locational flexibility, fast response times, and decreasing costs. Furthermore, BESS can be deployed closer to demand centers, reducing the need for extensive transmission infrastructure. Technological advances are further enhancing BESS performance, improving discharge characteristics, and reducing tariffs.

Projected Capacity and Investment Requirements: BESS capacity is set to reach 47 GW by FY32, requiring investments of approximately INR 3.5 trillion. These investments are essential to scale production, reduce dependency on imports, and build a domestic manufacturing ecosystem that can sustain the demand for battery cells and related components.

Challenges to BESS Expansion:

Cost Factors: Currently, BESS costs are driven primarily by battery cells and associated components, which account for ~80% of total project costs. Most of these components are imported, leading to high initial costs and dependency on foreign supply chains.

Technological Constraints: The lack of domestic manufacturing for critical components, including lithium-ion battery cells, also drives up costs. In addition, managing electronic waste (e-waste) is an ongoing challenge as BESS deployments increase, necessitating responsible disposal and recycling solutions.

Government Initiatives and Support:

Production Linked Incentive (PLI) Scheme: The PLI scheme incentivizes the development of battery cell manufacturing within India, aiming to build a sustainable ESS value chain and achieve Levelized Cost of Storage (LCOS) targets in the range of INR 5.5–6.6 per unit.

Viability Gap Funding (VGF): VGF provides up to 40% of capital cost coverage, reducing tariffs and improving the project economics for BESS, thus making ESS projects more viable and appealing to private investors.

Complementary Role of Pumped Storage Projects (PSP)

PSPs serve as a complementary ESS technology, addressing peak demand during periods of low renewable generation. PSPs, while having a longer gestation period than BESS, are critical for grid stabilization due to their ability to provide long-duration energy storage and peak shaving.

PSP as a Peak-Shaving Tool: By storing energy in the form of gravitational potential energy, PSPs release it during peak demand, ensuring a stable supply of power when renewable generation is insufficient.

Growth Potential and Projected Capacity: The PSP market in India is also set for growth, with projects totaling approximately 4 GW currently under construction and another 64 GW in various planning stages. This expansion positions PSP as a valuable component of India’s future energy infrastructure.

Challenges and Risks:

Long Gestation and High-Cost Clearances: PSP projects require extensive planning and regulatory approvals, including environmental, land acquisition, and tribal clearances, which can cause delays and cost overruns.

Geographic Constraints: PSPs are location-specific, requiring suitable water reservoirs and significant land resources. Only certain states, like Maharashtra and Andhra Pradesh, have high potential for PSP development due to their geographical characteristics and renewable generation capacity.

Government Policy and Funding Support: Policies promoting RE-PSP bundling and concessional funding are in place to support PSP growth. PSP projects are also being encouraged through state partnerships, especially in states with strong renewable generation potential.

Strategic Importance of ESS in India’s Power Sector Transformation

ESS technologies like BESS and PSP play a crucial role in stabilizing India’s power grid and facilitating the transition to a low-carbon energy mix.

ESS, particularly BESS, can absorb excess renewable power during off-peak times and release it when demand rises, helping to smooth out fluctuations and stabilize grid frequency.

As ESS projects grow, corresponding investment in transmission infrastructure will be needed, particularly in states where renewable and PSP potential is high, to ensure efficient power delivery to demand centers.

Support for DISCOMs to Meet Obligations:

• Policies like RPO and ESO are mandatory for DISCOMs, which incentivizes them to invest in ESS to meet renewable energy and storage targets.

• Storage-based tenders and power purchase agreements (PPA) enable DISCOMs to partner with private investors and reduce their dependency on fossil-fuel-based power sources.

The BESS Value Chain: Building a Self-Sustaining Ecosystem

Battery Manufacturing and the Domestic Ecosystem: ESS expansion depends heavily on domestic battery cell production to minimize import reliance. With around 120 GWh of battery cell capacity expected by FY27, investments in battery components and recycling facilities are also critical to support sustainable growth.

Synergies with the Electric Vehicle (EV) Sector: There is a strong overlap between ESS and EV battery technologies. As the EV market grows, shared production infrastructure will help achieve scale economies, further driving down costs.

Raw Material Constraints and Domestic Manufacturing:

• Lithium-Ion Supply Chain: Currently, India relies heavily on imports for lithium and other critical raw materials. This dependency could be reduced by fostering a domestic supply chain for ESS components through targeted policy support.

• Government Support for Material Production: The PLI scheme aims to promote domestic value addition, with companies required to achieve a 60% localization target within five years, which will be crucial for the long-term viability of India’s ESS ecosystem.

Policy Landscape and Its Role in ESS Expansion

The Indian government has introduced policies to accelerate ESS adoption, including waivers on Inter-State Transmission System (ISTS) charges, ancillary market regulations, and concessional funding mechanisms.

Regulatory Framework for ESS Projects: Policies like ISTS charge waivers and VGF support are designed to reduce ESS project costs and encourage private investment.

International Policy Trends: ESS policies in leading renewable energy countries, such as the U.S. and Germany, serve as models for India to implement policies that support large-scale ESS integration.

Future Policy Needs: Additional incentives and streamlined regulatory processes will be required to unlock the full potential of ESS, particularly in areas like raw material sourcing and domestic battery manufacturing.

Investment Risks and Mitigation Strategies

While the potential for ESS investment in India is substantial, there are risks, including technological obsolescence, environmental and social challenges, and financing hurdles.

Technological Obsolescence: Advances in ESS technology can quickly render existing BESS installations outdated, but DISCOMs are currently falling short of their renewable targets, making current ESS technologies viable.

Environmental and Social Concerns: PSPs often require significant land use and can impact local communities. These concerns require thoughtful management and responsible practices.

Funding and Project Delays: Both BESS and PSP projects face financing challenges, especially given their high upfront costs. However, new financing models, such as green bonds and M&A, provide alternative funding solutions to mitigate these risks.

The Roadmap for ESS Investment in India

The ESS market in India, projected to reach INR 5 trillion by FY32, offers a significant investment opportunity in a high-growth sector.

ESS technologies, particularly BESS, will dominate the market, supporting India’s transition to a low-carbon energy mix.

With strong policy backing, synergies with the EV sector, and investment in the domestic manufacturing ecosystem, the ESS market is positioned for robust growth.

Investors can benefit by focusing on BESS projects, partnerships in PSP, and contributing to the local manufacturing ecosystem, tapping into a market poised for exponential growth.