1. Introduction

Grid-scale energy storage has become an important component of modern electricity regulation because electricity generated from solar and wind resources is variable, while electricity demand must be balanced continuously. Battery Energy Storage Systems (BESS), pumped-storage hydropower (PSP), and other storage technologies can absorb electricity when supply is abundant and discharge it during periods of high demand.

From a legal and regulatory perspective, grid-scale storage investment involves much more than providing financial subsidies. A workable framework must address:

classification of energy storage as part of the electricity system;

ownership and investment structures;

procurement and competitive bidding;

viability-gap funding and capital subsidies;

tariff and revenue models;

transmission and network charges;

ancillary and balancing services;

renewable-energy integration;

grid connectivity;

environmental and safety requirements;

recovery of public financial support; and

regulatory oversight.

In India, this framework is developing principally under the Electricity Act, 2003, Ministry of Power policies, CERC regulations and bidding guidelines, and government VGF schemes.

2. Legal Meaning and Role of Grid-Scale Storage

Energy storage occupies an unusual position because it can behave both as a consumer and as a source of electricity. A battery may consume electricity while charging and inject electricity while discharging.

The Ministry of Power has expressly recognized Energy Storage Systems as part of the power system under Section 2(50) of the Electricity Act, 2003. Government policy has consequently moved toward treating storage as an infrastructure component capable of providing system services rather than merely as a battery attached to a generating plant. (Power Ministry of India)

The legal functions of grid-scale storage can therefore include:

energy arbitrage;

peak-load management;

renewable-energy firming;

frequency regulation;

balancing;

capacity adequacy;

congestion management;

reserve services;

black-start and restoration support; and

reduction of renewable curtailment.

This multi-functional character creates a major regulatory question: who pays for the storage service and under which tariff or market mechanism?

3. Investment Framework

A grid-scale storage investment framework normally has five layers.

A. Capital investment

The project developer finances:

battery cells/modules;

power-conversion systems;

transformers and switchgear;

energy-management systems;

fire-safety systems;

land and civil infrastructure;

grid interconnection;

control and communication systems.

For PSP projects, the investment structure is substantially different because it involves reservoirs, tunnels, turbines, generators and associated transmission infrastructure.

B. Revenue contract

The investor requires predictable revenue. Common structures include:

capacity payments;

energy payments;

availability payments;

tolling arrangements;

capacity-as-a-service contracts;

ancillary-service payments;

market-based electricity trading;

renewable-plus-storage PPAs.

C. Long-term procurement

Long-term contracts are particularly important because storage projects have substantial upfront capital expenditure.

India has increasingly used competitive procurement. CERC records, for example, show proceedings under Section 63 of the Electricity Act concerning tariff adoption for 500 MW/1000 MWh standalone BESS projects. (CERC)

D. Government support

Where market revenues are insufficient to make a project financially viable, government assistance may take the form of:

VGF;

capital subsidy;

interest support;

transmission-charge waivers;

tax incentives;

concessional land;

public procurement guarantees.

E. Regulatory protection

Investors also require certainty concerning:

grid connection;

dispatch;

curtailment;

payment security;

change in law;

force majeure;

degradation;

availability guarantees;

battery replacement;

termination compensation.

4. India's Viability-Gap Funding Framework

India's most significant policy intervention for grid-scale BESS has been the Viability Gap Funding (VGF) scheme.

The Union Cabinet approved the initial BESS VGF scheme in September 2023. The original programme targeted 4,000 MWh of BESS and provided budgetary support of ₹3,760 crore, with VGF of up to 40% of capital cost. (Power Ministry of India)

The scheme was designed to reduce the difference between:

the cost of constructing storage and the revenue that the electricity market can initially support.

This is important because storage produces several public-system benefits that may not be fully captured by a conventional energy tariff.

Subsequent expansion

As battery costs declined, the government's 4,000-MWh target was increased to 13,200 MWh without increasing the approved ₹3,760-crore budget allocation under the initial scheme. Government information states that the VGF amount was revised to ₹46 lakh/MWh or 30% of capital cost, whichever is lower. (Power Ministry of India)

A further VGF framework was notified in June 2025 for 30 GWh of BESS, with a proposed VGF of ₹18 lakh/MWh and a total budget allocation of ₹5,400 crore. (Power Ministry of India)

Thus, India's policy has evolved from a relatively large subsidy per unit of storage toward a model in which declining technology costs allow government support to be spread across a larger storage capacity.

5. Structure of Subsidy Disbursement

An important legal feature is that VGF is not simply an unconditional upfront grant.

Under the initial framework, government support is linked to project milestones. The government stated that disbursement would occur in five tranches, including payment following financial closure, commercial operation, and subsequent annual periods. (Power Ministry of India)

This approach serves several purposes:

reduces misuse of public funds;

links subsidy to actual project development;

protects the government against incomplete projects;

encourages financial closure;

aligns public support with commercial operation.

The subsidy therefore operates as a performance-linked investment instrument.

6. Public and Private Investment

The Indian framework permits participation by both public and private entities.

This is significant because grid-scale storage is not necessarily required to be publicly owned. Instead, government can stimulate private investment through competitive procurement.

The VGF framework specifically contemplated selection of public and private entities through bidding conducted by implementing agencies. (Power Ministry of India)

This produces a structure broadly resembling:

Government support → competitive procurement → private/public developer → storage capacity → contracted electricity-system services

Such a structure can reduce the need for direct government ownership while retaining public oversight.

7. Competitive Bidding and Section 63

Section 63 of the Electricity Act is particularly relevant to storage procurement.

Under Section 63, tariff is adopted by the appropriate regulatory commission where it has been determined through a transparent competitive bidding process conducted according to Central Government guidelines.

The Supreme Court's decision in Energy Watchdog v. CERC, (2017) 14 SCC 80 is therefore highly relevant. The Court explained the distinction between tariff determination under Section 62 and tariff adoption under Section 63 and emphasized the importance of transparent bidding and applicable government guidelines. (Indian Kanoon)

For storage projects, this principle is important because the commercial price of storage capacity or stored energy can be discovered through competitive procurement rather than necessarily being administratively fixed.

8. Case Law: Energy Watchdog v. CERC

Principle

Energy Watchdog v. Central Electricity Regulatory Commission, (2017) 14 SCC 80

The Supreme Court considered the relationship between competitive bidding under Section 63 and regulatory authority under the Electricity Act.

The Court recognized that a Commission adopting a competitively discovered tariff is not merely performing a mechanical function. The Commission continues to exercise statutory regulatory authority within the framework of the Act and applicable bidding guidelines. (Indian Kanoon)

Relevance to storage

The principle is applicable to BESS procurement because storage projects are increasingly being procured through competitive bidding.

A storage developer therefore cannot assume that:

"The bid price has been accepted, so every subsequent regulatory issue is automatically outside the Commission's jurisdiction."

Regulatory commissions retain statutory functions concerning implementation, tariff adoption and regulatory compliance.

9. Case Law: PTC India Ltd. v. CERC

Another important case is:

PTC India Ltd. v. Central Electricity Regulatory Commission, (2010) 4 SCC 603.

The Supreme Court examined the relationship between the Electricity Act and regulations made by CERC under its statutory regulation-making authority. (Indian Kanoon)

The decision is important for storage because BESS investment depends heavily on regulatory rules governing:

market participation;

transmission;

trading;

tariff;

system operation;

technical requirements.

The case demonstrates that electricity regulation involves a structured hierarchy:

Parliamentary statute → statutory regulations → regulatory orders → contractual arrangements.

Storage investors therefore need to examine not merely the subsidy notification but also the regulatory framework governing the project.

10. Case Law: Gujarat Urja Vikas Nigam Ltd. v. Essar Power Ltd.

The Supreme Court's decision in Gujarat Urja Vikas Nigam Ltd. v. Essar Power Ltd., (2016) 9 SCC 103 is relevant to the contractual dimension of electricity investment.

The case concerned interpretation and enforcement of a power purchase agreement and the regulatory jurisdiction surrounding disputes arising from electricity contracts. (Indian Kanoon)

Relevance to storage

Grid-scale storage projects will frequently depend on long-term contracts.

Examples include:

Storage Purchase Agreements;

Energy Storage Agreements;

Renewable-plus-storage PPAs;

capacity contracts;

tolling agreements.

Consequently, contractual provisions concerning dispatch, availability, payment, default, change in law and compensation can become as important as the subsidy itself.

11. CERC's Emerging BESS Procurement Practice

CERC proceedings demonstrate that standalone storage is increasingly being treated as a distinct procurement category.

For example, CERC records proceedings for adoption of tariffs for 500 MW/1000 MWh standalone BESS projects procured through tariff-based global competitive bidding. (CERC)

More recent CERC records also show proceedings involving large renewable-energy projects combined with energy-storage systems, including projects involving thousands of MWh of storage. (CERC)

This reflects an important legal transition:

Storage is moving from being merely an auxiliary component of renewable generation toward being independently procured as a grid resource.

12. Transmission Incentives

Investment economics also depend heavily on transmission costs.

Government information indicates that 100% waiver of Inter-State Transmission System (ISTS) charges has been extended for specified co-located BESS projects commissioned up to June 2028, subject to the applicable conditions. (Power Ministry of India)

Transmission-charge waivers effectively operate as an indirect investment incentive.

For a large storage project, the economic effect can be significant because transmission charges affect the delivered cost of stored electricity.

Thus, the overall investment incentive can be represented as:

Capital VGF + transmission incentive + contracted revenue + market revenue = project bankability

13. Storage as a Market Asset

Grid-scale storage can generate several revenue streams.

A subsidy framework becomes more efficient when it is designed to address only the revenue gap rather than permanently subsidising all storage revenues.

14. Balancing-Pool Mechanism

The original BESS VGF framework also contemplated a BESS Balancing Pool to address differences between surplus and deficit revenues among supported BESS projects. Government reporting identifies GRID-INDIA as the relevant BESS nodal agency for this mechanism. (Power Ministry of India)

This concept is legally significant because different storage projects may have different revenue profiles.

For example:

Project A may earn substantial revenue from peak-period discharge.

Project B may provide more ancillary services.

Project C may primarily provide renewable firming.

A balancing mechanism can therefore reduce excessive revenue volatility across participating projects.

15. Subsidy Design and Regulatory Principles

A sound storage subsidy framework should follow several principles.

1. Technology neutrality

Government should generally avoid unnecessarily favouring one storage technology when multiple technologies can provide the required service.

2. Competitive allocation

Subsidies should preferably be allocated through transparent competitive processes.

3. Performance-based support

Payment should depend on:

commissioning;

availability;

performance;

contracted capacity;

compliance with technical requirements.

4. Sunset mechanisms

Subsidies should not become permanent if storage becomes commercially viable without them.

5. Avoidance of double subsidy

A project receiving VGF should not receive overlapping public support for the same cost component unless expressly permitted.

6. Revenue transparency

Where public money supports a storage project, the regulatory framework should provide mechanisms for monitoring project revenues and performance.

16. Major Legal Risks for Investors

A. Battery degradation

A battery's usable capacity declines over time. Contracts therefore need legally enforceable degradation assumptions.

B. Change in law

Changes in:

taxation;

transmission charges;

market rules;

environmental regulations;

battery standards;

grid codes

can materially affect project economics.

C. Dispatch risk

A project may be technically capable of discharging but may not be dispatched as anticipated.

The contract should clearly allocate this risk.

D. Payment risk

Storage projects are capital-intensive, making delayed payments particularly damaging.

Payment-security mechanisms are therefore important.

E. Subsidy clawback

A subsidy framework should specify what happens if:

the project fails to achieve COD;

minimum availability is not achieved;

capacity is reduced;

the project is sold;

the project is abandoned.

17. Grid-Scale Storage and Renewable Integration

India's storage requirement is closely linked with renewable-energy expansion.

The Ministry of Power has stated that the National Electricity Plan 2023 estimates substantial BESS requirements for 2031–32, while government policy has progressively expanded VGF support. (Power Ministry of India)

Storage performs an important legal-policy function because renewable generation frequently does not coincide with demand.

For example:

Solar generation → midday surplus → battery charging → evening discharge

This transforms storage into an instrument of system balancing and renewable integration, rather than merely an electricity-generation technology.

18. Relationship with Energy Justice

Subsidy policy also has a distributive dimension.

If public funds support large storage projects, regulators should consider:

who ultimately pays for the subsidy;

whether consumers receive lower peak electricity costs;

whether storage reduces renewable curtailment;

whether reliability improves;

whether benefits reach states with weaker electricity infrastructure.

Consequently, subsidy design should balance:

investor viability + consumer protection + grid reliability + decarbonisation.

19. Regulatory Challenges

The principal legal challenges for grid-scale storage include:

determining whether storage is generation, transmission, distribution or a separate electricity-system asset;

developing uniform market-participation rules;

preventing double recovery of costs;

establishing degradation standards;

determining ownership of environmental attributes;

regulating battery recycling and end-of-life management;

establishing clear ancillary-service markets;

coordinating CERC, SERC, CEA and system operators;

maintaining subsidy transparency; and

ensuring long-term contractual certainty.

The Ministry of Power has also been developing amendments concerning Energy Storage Systems under Rule 18 of the Electricity Rules, 2005, demonstrating that the legal classification and regulatory architecture continue to evolve. (Power Ministry of India)

20. Conclusion

Grid-scale storage investment and subsidy frameworks represent a transition from a conventional electricity system based primarily on generation, transmission and distribution toward a flexible electricity system in which storage itself becomes a strategic infrastructure asset.

India's approach combines:

competitive procurement under the Electricity Act;

VGF/capital support;

transmission incentives;

long-term storage procurement;

regulatory tariff adoption;

renewable-energy integration; and

private-sector participation.

The initial BESS VGF scheme targeted 4,000 MWh with ₹3,760 crore of support and up to 40% of capital cost; falling battery costs subsequently enabled the supported capacity to rise to 13,200 MWh within the same approved allocation. A separate 2025 VGF framework targets another 30 GWh. (Power Ministry of India)

The leading electricity cases provide the legal foundation for this framework. Energy Watchdog is particularly important for competitive tariff procurement under Section 63; PTC India establishes principles concerning electricity-sector regulation and delegated regulatory powers; and Gujarat Urja Vikas Nigam v. Essar Power illustrates the importance of contractual certainty and regulatory jurisdiction in electricity-sector projects. (Indian Kanoon)

Ultimately, the objective of a mature storage framework is not simply to subsidize batteries. It is to create a legally stable environment in which storage can become commercially bankable, competitively procured, technically reliable, and capable of providing measurable value to the electricity system and consumers.