Is Viability Gap Funding an effective tool for bringing private capital into new energy infrastructure? Discuss its strengths and limitations.

Viability Gap Funding (VGF) is a one-time capital grant. It covers the gap between what a project costs and what it can earn through tariffs. The Union Cabinet's recent ₹14,500 crore VGF for 92 GWh of grid-scale storage (2026-27 to 2030-31) is expected to bring in ₹97,600 crore of investment [1]. VGF is good at drawing in capital, but it does not make sure projects actually get built.

Strengths

• High leverage: every ₹1 of VGF brings in about ₹6.7 of total investment [1].
• Market-based allocation: Tariff-Based Competitive Bidding keeps the process transparent and pushes tariffs down [1].
• Smaller subsidy needed each round: support per MWh fell from about ₹28 lakh in the 2023 scheme (₹3,760 crore for 13.22 GWh) [2] to ₹18 lakh in the 2025 PSDF-funded tranche [3][4]. It is now about ₹16 lakh on average [1].
• Public money is protected: VGF is released only after financial closure, when all loans and equity are in place. Projects that never get built are not paid [2].
• Wider benefits: the scheme supports domestic BESS manufacturing. Both public and private discoms are eligible, so more players can take part [1].

Limitations

• Winning a bid is not the same as building: in the 2025 tranche, 22.43 GWh received award letters and 19.65 GWh signed purchase agreements. Only 5 GWh reached financial closure, and just ₹180 crore had been sanctioned [2].

Bid → Award letter (22.43 GWh) → Purchase agreement (19.65 GWh) → Financial closure (5 GWh) → VGF paid

Fig.: Where projects stall in the 2025 BESS VGF tranche

• Discom finances: lenders still depend on cash-strapped state discoms paying on time.
• Risk of underbidding: low VGF combined with very low bids can produce projects that win on paper but cannot raise loans.
• Technology mismatch: pumped storage makes up 60 of the 92 GWh but is slow to build and needs clearances. The split of funds between technologies has not been published [1].
• Scale gap: even if every scheme is built, capacity reaches only about 189 GWh, against 411 GWh needed by 2031-32 [1][2][3].

Way forward

• Publish how much VGF per MWh each technology will get.
• Track how long each project takes to go from purchase agreement to financial closure, and take back capacity from projects that stall.
• Pay pumped-storage VGF in instalments tied to building milestones.
• Strengthen payment security for discoms.

VGF is therefore an effective but incomplete tool. It makes projects viable and draws in private money, but results depend on bankable contracts and healthy discoms. Combined with PLI for ACC batteries and discom reform, VGF can help India meet its Panchamrit non-fossil target and SDG 7.