Viability Gap Funding (VGF) for BESS in India: Tranches, Eligibility and Impact
India is using Viability Gap Funding (VGF) to make Battery Energy Storage Systems (BESS) more commercially viable and accelerate their deployment alongside renewable energy.
The original 2023 scheme targeted 4,000 MWh of BESS with central budgetary support of ₹3,760 crore. Falling battery costs subsequently allowed the government to expand the supported capacity to about 13.8 GWh without increasing that budget. In 2025, a separate ₹5,400 crore PSDF-backed VGF scheme was launched for another 30 GWh. As of March 2026, the government said the two schemes together covered about 43.8 GWh of BESS capacity.
For developers, utilities and investors, the important question is no longer simply whether VGF exists. It is how the funding is structured, who qualifies, when money is released, and how much the support can change project economics.
What is VGF for BESS?
Viability Gap Funding is government financial support designed to help infrastructure projects that are economically or strategically valuable but may not initially be financially viable at market-based tariffs.
For BESS, the rationale is straightforward. Storage can provide significant grid value by:
- Shifting renewable electricity to periods of higher demand
- Supporting peak-hour supply
- Reducing renewable curtailment
- Providing flexibility to the power system
- Helping integrate larger volumes of variable renewable generation
The original 2023 BESS VGF scheme provided support of up to 40% of project capital cost. The scheme was initially designed around 4,000 MWh, with a total project outlay of ₹9,400 crore and ₹3,760 crore of budgetary support.
The government subsequently expanded the supported capacity as battery costs declined.
How much BESS capacity is covered by VGF?
There are now two major VGF mechanisms relevant to BESS.
| VGF mechanism | Supported capacity | Government support |
|---|---|---|
| Original budgetary-support scheme | About 13.8 GWh | ₹3,760 crore |
| PSDF-backed scheme | 30 GWh | ₹5,400 crore |
| Combined | About 43.8 GWh | ₹9,160 crore |
The March 2026 Ministry of Power update reported that the first scheme had 13.8 GWh of capacity under the revised allocation, with Letters of Award issued for 12.7 GWh. The second scheme covered 30 GWh, with 25 GWh allocated to 15 states and 5 GWh to NTPC.
This is significant because India’s storage requirement is expected to grow sharply as renewable penetration increases. The government has cited a CEA estimate of 236 GWh of BESS requirement by 2031-32.
VGF tranches for the original BESS scheme
The original scheme does not pay the entire VGF amount upfront.
The central VGF is released in five tranches linked to project milestones:
- 10% at financial closure
- 45% at Commercial Operation Date (COD)
- 15% after one year from COD
- 15% after two years from COD
- 15% after three years from COD
That structure ties government support to actual project progress and continued operation rather than simply awarding the full grant at the beginning.
This distinction matters for project financing. A developer cannot treat the entire VGF amount as cash available on day one. The timing of each tranche needs to be incorporated into the project’s funding model and cash-flow requirements.
What is the PSDF-backed BESS VGF scheme?
In June 2025, the Ministry of Power introduced an additional VGF scheme funded through the Power System Development Fund (PSDF).
The scheme provides:
- 30 GWh of BESS capacity
- ₹5,400 crore of financial support
- VGF of ₹18 lakh per MWh
- 25 GWh allocated to 15 states
- 5 GWh allocated to NTPC
Unlike the original market-oriented scheme, this PSDF mechanism is designed around specified eligible entities and identified storage requirements.
The stated objective is to support renewable-energy integration and reliable electricity supply. The guidelines also recognize that BESS can be deployed around existing thermal generation and transmission infrastructure to help meet demand during non-solar hours.
What are the PSDF scheme’s funding tranches?
The PSDF-backed scheme uses three tranches, rather than the five-tranche structure of the original scheme:
| Milestone | VGF released |
|---|---|
| Financial closure, subject to bank guarantee | 20% |
| Commercial Operation Date | 50% |
| Completion of first year after COD | 30% |
| Total | 100% |
Projects are generally required to achieve commissioning within 18 months from signing the BESS Purchase Agreement or Power Purchase Agreement.
The shorter three-tranche structure provides a larger portion of the support at COD, which can be important for projects with significant construction-period financing requirements.
Who is eligible for BESS VGF?
Eligibility depends on which VGF component is being considered.
Original market-based component
The original BESS VGF framework allows public and private sector entities to participate through competitive bidding conducted by designated implementing agencies. The scheme therefore creates a route for private BESS developers, but typically through the relevant procurement and bidding structure rather than through a simple standalone grant application.
The scheme was designed around competitively selected BESS projects supplying storage services to beneficiaries, with a significant portion of capacity intended to benefit distribution companies.
PSDF component
The 2025 PSDF scheme has a narrower eligibility structure.
Eligible entities include state utilities or agencies authorized by state governments, as well as eligible central government entities, subject to the scheme’s specific allocation and implementation framework.
The 30 GWh allocation was specifically divided between state requirements and NTPC:
- 25 GWh: 15 states
- 5 GWh: NTPC
States and NTPC are required to submit proposals through the PSDF process, with NLDC acting as the nodal agency for PSDF funding.
This means a private developer looking at the PSDF component should not assume that it can directly apply for the ₹18 lakh/MWh support. The relevant opportunity generally comes through an eligible utility or implementing entity and its procurement process.
How does BESS VGF affect project economics?
The biggest impact of VGF is that it reduces the amount of capital that needs to be recovered through the project’s commercial revenues.
Consider a simplified example.
Suppose a BESS project has:
- 100 MWh capacity
- ₹2 crore/MWh capital cost
- Total capital cost of ₹200 crore
If the project receives VGF equal to ₹18 lakh/MWh, the nominal VGF would be:
100 MWh × ₹18 lakh = ₹18 crore
That represents 9% of the assumed ₹200 crore capital cost.
The exact benefit will vary because the original scheme and the PSDF scheme use different funding mechanisms and limits. Developers therefore need to model the actual applicable scheme rather than applying a generic VGF percentage to every project.
Why does VGF matter for BESS developers?
BESS economics can be challenging because revenue depends heavily on utilization, tariff structure, ancillary services, capacity payments and the value of shifting electricity between time periods.
VGF can improve the economics in several ways.
Lower upfront capital burden
A government contribution reduces the amount of project capital that must be financed privately.
Improved debt coverage
Lower net project cost can improve debt-service coverage ratios, depending on the financing structure.
Greater tariff competitiveness
If the project needs to recover less capital through its contracted tariff, the developer may be able to submit a more competitive bid.
Better renewable integration economics
Storage becomes particularly valuable when it can absorb low-cost renewable generation and discharge during high-demand periods.
Reduced investment risk
Milestone-based government support provides an additional source of project funding, although developers still need to manage construction, financing, performance and operating risks.
What does VGF mean for DISCOMs?
The scheme is not designed only to support BESS developers.
The original government announcement specified that at least 85% of BESS project capacity would be made available to distribution companies. The objective was to increase access to storage during peak periods and support renewable integration while avoiding unnecessary grid infrastructure expenditure.
For DISCOMs, this can make storage procurement more attractive because part of the underlying capital requirement is supported by the government.
The commercial question, however, remains important: the contracted storage tariff must still be compared with alternatives such as peak power purchases, flexible generation, transmission upgrades and other forms of energy storage.
How VGF has changed since 2023
The evolution of the programme is worth watching.
2023: Initial 4 GWh scheme
The Cabinet initially approved 4,000 MWh of BESS capacity with ₹3,760 crore of budgetary support. VGF could cover up to 40% of capital cost.
2024: Higher capacity within the same budget
Falling battery prices allowed the government to increase the supported capacity substantially without increasing the ₹3,760 crore budget. The CEA currently describes this component as about 13.85 GWh.
2025: Additional 30 GWh through PSDF
The government added another 30 GWh of BESS support with ₹5,400 crore from PSDF. The fixed support level under this mechanism is ₹18 lakh/MWh.
2026: Implementation moves forward
As of March 2026, the Ministry of Power reported that 12.7 GWh had received Letters of Award under the first scheme and 17.1 GWh had received Letters of Award under the 30 GWh PSDF scheme. About ₹100 crore had been disbursed under the first scheme during FY 2025-26 at that point, while no VGF had yet been disbursed under the PSDF scheme because its projects had not reached the relevant release milestones.
What are the practical challenges?
VGF improves project economics, but it does not remove the main execution risks associated with BESS.
Developers still need to address:
- Battery degradation and replacement assumptions
- Availability guarantees
- Round-trip efficiency
- Revenue certainty
- Contract duration
- Financing and debt structure
- Land and grid connectivity
- Battery safety
- EPC execution
- O&M requirements
- Recycling and end-of-life obligations
- Changes in battery prices and technology
There is also an important distinction between capacity being allocated and VGF actually being disbursed. The March 2026 government update illustrates this clearly. Projects can receive Letters of Award while funding remains contingent on achieving specified milestones.
How should developers evaluate a VGF-supported BESS project?
A good investment model should start with the project’s underlying commercial case and then layer VGF on top.
Key questions include:
- What is the contracted revenue?
Is the project being paid for capacity, energy discharged, availability, or a combination? - What is the expected utilization?
A BESS with low annual utilization may have very different economics from one dispatched frequently. - What is the storage duration?
A two-hour system and a four-hour system can have materially different capital costs and revenue opportunities. - When is VGF received?
Model the actual milestone-based cash flows rather than treating VGF as an immediate reduction in project cost. - What happens after the initial contract?
Residual battery life and merchant revenue potential can materially affect project value. - How is degradation treated?
Revenue forecasts should reflect usable capacity and performance over the full contract period. - What happens if COD is delayed?
Construction delays can affect both financing costs and eligibility for milestone-linked support.
What is the broader impact on India’s energy-storage market?
The scale-up of VGF signals that the government views BESS as a critical part of India’s future power system rather than simply an emerging renewable-energy technology.
The impact extends beyond individual projects.
More supported BESS capacity can help create:
- A larger domestic BESS project pipeline
- More competitive storage tariffs
- Greater experience among EPC and O&M providers
- Better financing familiarity among lenders
- More predictable demand for battery suppliers
- Greater renewable-energy integration
- More flexibility during peak-demand periods
The government’s own estimates highlight the scale of the challenge. CEA has projected a requirement of hundreds of GWh of storage by the early 2030s, while the current VGF schemes cover about 43.8 GWh.
That means VGF is better understood as a market-development mechanism than as a complete solution to India’s storage financing requirements.
Frequently Asked Questions
What is the maximum VGF for BESS in India?
Under the original 2023 scheme, VGF could be up to 40% of capital cost. Subsequent allocations use different support structures. For the 2025 PSDF-backed scheme, the support is ₹18 lakh per MWh.
How many tranches are used for BESS VGF?
The original BESS VGF scheme uses five milestone-linked tranches: 10% at financial closure, 45% at COD, and 15% in each of the following three years. The 2025 PSDF-backed scheme uses three tranches: 20% at financial closure, 50% at COD and 30% after the first year.
Can private companies receive BESS VGF?
Private-sector participation is possible under the original market-based BESS VGF framework through competitive bidding conducted by designated implementing agencies. The PSDF-backed 30 GWh component has a more specific eligible-entity structure focused on state utilities/agencies and designated central entities.
How much BESS capacity does India’s VGF programme support?
As of March 2026, the Ministry of Power reported two VGF schemes covering approximately 43.8 GWh of BESS capacity: about 13.8 GWh under the budgetary-support scheme and 30 GWh under the PSDF-backed scheme.
Is VGF paid upfront?
No. VGF is linked to project milestones. The timing differs between schemes, so developers need to account for the actual disbursement schedule when preparing their financing model.
Key takeaway
India’s BESS VGF programme has evolved from an initial 4 GWh intervention into a much larger support framework covering roughly 43.8 GWh across two schemes.
For developers, the most important point is that VGF is not simply a capital subsidy paid at the start of a project. Eligibility, procurement route, storage duration, milestone requirements and disbursement schedules depend on the specific VGF component.
The larger opportunity is the market signal. By reducing the initial cost barrier for storage, the government is helping move BESS from a relatively expensive grid technology toward a more scalable part of India’s power infrastructure. The long-term economics will still depend on tariffs, utilization, battery costs, degradation, financing and the value that storage provides to the grid.
