Key highlights from the report “Returns Charge Ahead As Battery Prices Discharge” by SBI Capital Markets are:
- In May’25, power exchanges observed an unprecedented market bifurcation: spot prices for electricity during solar hours plummeted to Rs. 0/unit, while non-solar peak hour prices grazed the Rs. 10/unit ceiling. This divergence highlights an extreme case for the economic viability and practical necessity of ESS. Recognising this, pure solar tenders <50% of RE tenders issued in FY25, a significant decrease from 78% in FY20. However, despite over 150 GWh of BESS tenders being floated to date, only a negligible portion has reached completion. Achieving the ambitious target of 230 GWh of BESS by FY32 necessitates a substantial increase in tendering activity, supported by a stable policy framework and stringent adherence to the ESO trajectory.
- Standalone BESS tenders are the primary mechanism for enhancing the capacity credit of existing VRE systems integrated with the grid. Following an initial period of aggressive bidding by new market entrants, tariffs have stabilised in the range of Rs. 0.22-0.28 mn/MW/month for 2h systems. Notably, while tariffs reached troughed in Oct’24, battery prices, which constitute over 50% of the total capex, have significantly decreased from approximately USD 115/kWh in Dec’24 to about USD 55/kWh currently. This price rationalisation is expected to lead to the realization of sustainable IRR for projects, which should ideally reduce the currently high cancellation rate of tenders and improve lender comfort.
- Current standalone BESS tariffs are competitive when compared to alternative sources of high-quality baseload power, such as thermal power. This competitiveness is contingent on two key factors: the availability of inexpensive Li-ion batteries from China and the provision of a 40% VGF (up to Rs. 2.7 mn/MWh). For instance, removal of VGF can increase tariffs by over 30%. Therefore, the introduction of ALBM needs to be phased. Critical preceding steps should include incentives for pack and BESS manufacturing, increased duty on imports of containerised systems, zero import duty on battery manufacturing equipment, a reduced GST of 5% on critical BESS components, and a gradual increase in DCR content.
- While standalone BESS addresses the integration of existing RE within the system, government policy also aims for future RE capacities to possess high capacity credit. This strategic shift has led to the emergence of sophisticated FDRE contracts. Under these, developers are required to adhere to a strict 96*15-minute block schedule daily, with high availability mandated during evening peaks. The inherent complexity of such FDRE contracts, combined with their holistic emphasis on solar, wind, and storage (rather than just storage), has readily attracted traditional power sector participants. The potentially higher IRRs offered, which compensate for the elevated risk of penalties, likely contribute to their engagement in this segment.
Access the full report here
