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India has made great strides in increasing its renewable energy generation capacity, particularly from variable sources such as solar and wind energy (VRE). These account for some 137GW, or 30% of the total installed capacity of 453GW. However, their contribution in terms of energy is only about 13% to 14% because of their intermittent nature. In the future, VREs are projected to reach some 485GW out of a total anticipated installed capacity of about 900GW by 2032. However, without integrating VREs with energy storage systems (ESSs), decarbonisation of the sector will not be possible because of the continued need for large operating reserves from thermal power plants.

ESSs are facilities in which electrical energy is converted into a storable form of energy. This can later be reconverted into electrical energy and injected into the grid. While there are many forms of ESSs, pumped hydro storage systems (PHSs) and battery energy storage systems (BESSs) are the most used. By pairing VREs with ESSs, India can achieve a round-the-clock power supply from VREs, enabling industries to transition to clean energy. ESSs can enhance grid stability and load balancing, provide ancillary services such as spinning reserves, voltage control and black-start, and help in decentralised and micro-grids.

Installed ESS capacity is roughly 5GW, with almost 4.7GW coming from PHSs. Projected ESS requirements by 2031-32 are 26.69GW and 175.18GWh of PHSs and 47.24GW and 236.22GWh of BESSs. National and state governments have introduced and are further considering policies to promote the use of ESSs.

These include interstate transmission system (ISTS) charge waivers for PHS projects for which construction work is awarded, and for BESS projects commissioned both by 30 June 2025. Energy storage obligations for distribution licensees will require procurement of 1% of their consumption from VREs integrated with ESSs for the financial year 2023-24, increasing to 4% by 2029-30. A production-linked incentive scheme will be introduced for the manufacture of advanced chemistry cells with a budget of INR181 billion (USD2.13 billion). Viability gap funding of INR37.6 billion will be offered to develop 4,000MWh of BESS capacity by 2030-31.

Simplified environmental clearance is proposed for off-river PHS projects. Concessionary green finance and sovereign green bonds will fund green infrastructure, including BESSs, and encourage long-term institutional loans. States will be asked to consider tax benefits and exempting input power from electricity duty, cross-subsidy surcharges, stamp duty, registration fees and local area development funds.

Several market models are being considered for the ESS projects. These include procurement through competitive bidding for ESSs on the basis of availability-based storage charges, energy tariffs or tariffs for firm and dispatchable energy from VREs integrated with storage; direct allotment to public sector companies; merchant power models where the ESS provider can participate in energy arbitrage, and bilateral sale and captive power models. A few tenders have been offered in the past two years, and several PHS projects for merchant, bilateral and captive sale models are under development.

While ESS is gaining momentum, central and state governments could further encourage the growth of the ESS sector. They could offer flexible frameworks for consumers to obtain ESS services directly from their owners. This is presently not contemplated under the Electricity (Amendment) Rules, 2022. This could be systemically beneficial to end consumers, enabling them to procure VREs from one source and storage from another. There could also be tax advantages to separating tariff and storage charges. Central and state policies should align, which has not always been the case with VREs. Clear policy guidance on the integration of ESSs with existing VREs, supplying power to nodal agencies and distribution licensees, may also go a long way in accelerating ESS integration.

With incentives such as ISTS waivers being offered, participants may rush to enter contracts to develop PHSs. However, all stakeholders involved have to be sure of the demand for PHSs, because of their long completion periods, which could result in, cost overruns and the competition from BESSs with their falling costs. Only if ESSs become widely integrated with VREs can India realise the potential of clean energy.

Gautam Chabra is a partner at Trilegal.