Energy Storage Mandate: Why Power Distributors Face a Funding Challenge

India’s proposed energy storage mandate for electricity distribution companies (discoms) is raising concerns about the financial capacity of utilities to meet additional investment requirements. As the country expands its solar and wind power capacity, energy storage is becoming increasingly important for maintaining a reliable electricity supply. However, many state-owned discoms are already dealing with substantial losses, accumulated debt and high borrowing costs.

The government is considering a requirement for discoms to include energy storage capacity in their power procurement plans. Although the specific storage capacity that utilities may have to procure has not yet been finalised, the proposal could create another financial responsibility for electricity distributors.

The central challenge is how to expand storage infrastructure without placing additional pressure on utilities that are already struggling to manage their finances.

Key Highlights

• The government is considering an energy storage mandate for electricity distribution companies.
• Public sector discoms have accumulated losses of Rs 6.77 lakh crore and borrowings of Rs 7.11 lakh crore.
• Battery storage can help balance electricity supply when solar and wind generation fluctuates.
• Experts suggest competitive procurement of storage services as a possible alternative to direct infrastructure investment.
• Industry representatives have called for state-specific storage requirements instead of a uniform mandate.

Why India Needs an Energy Storage Mandate

India is increasing its Renewable Energy capacity to support its climate commitments and reduce dependence on conventional sources of electricity. Solar and wind power are central to this transition, but their generation depends on weather conditions and the availability of sunlight and wind.

This creates a challenge for electricity grid operators. Solar power generation is generally higher during daylight hours, while electricity demand may remain elevated during the evening. Similarly, wind generation can fluctuate depending on weather patterns. As renewable energy becomes a larger part of the electricity mix, managing these variations becomes increasingly important.

Energy storage systems can help address this imbalance by storing surplus electricity when generation is high and releasing it when renewable output declines or demand increases. This can improve the flexibility and reliability of the electricity system.

Storage capacity can also support better utilisation of renewable energy by reducing the mismatch between the timing of electricity generation and consumption.

Government’s Proposed Battery Storage Requirement

The government has already proposed making battery storage mandatory for all new government solar and wind power projects from July 2027. The proposal under consideration for electricity distributors would extend the storage requirement beyond renewable energy project developers to electricity procurers, including discoms.

Discoms purchase electricity from generating companies and supply it to consumers. If the proposed requirement is implemented, they may have to account for storage capacity while preparing their power procurement plans.

However, the proposal is still at an early stage. The government has not finalised the specific storage capacity that utilities would be required to procure. The design of the mandate, including how it would apply to different distribution companies, remains under consideration.

Financial Pressure on Discoms Raises Concerns

The biggest concern surrounding the proposed mandate is the financial condition of India’s electricity distribution companies. Many state-owned discoms continue to face operating losses and accumulated liabilities, making it difficult for them to finance additional infrastructure projects.

Public sector discoms have accumulated losses of Rs 6.77 lakh crore and borrowings of Rs 7.11 lakh crore. These figures highlight the scale of the financial challenges facing the distribution sector.

Building or acquiring energy storage capacity could require significant additional investment. If utilities finance these requirements through fresh borrowing, their existing debt burden could increase further.

The financial position of a discom also affects the interest rates it pays on loans. Utilities with weaker balance sheets may face higher borrowing costs, increasing the expense of financing new infrastructure.

Consequently, a mandate implemented primarily through direct capital investment could create difficulties for financially stressed distribution companies. The government would need to consider how storage requirements can be met without weakening the financial position of these utilities.

Capex and Opex Models: Two Ways to Procure Storage

One important question is whether discoms should build and own energy storage infrastructure or purchase storage services from specialised providers. These approaches are generally described as capital expenditure (capex) and operating expenditure (opex) models.

Capital Expenditure Model

Under the capex model, a distribution company invests directly in storage infrastructure. This could involve purchasing battery systems, developing facilities and managing the associated infrastructure.

Although direct ownership may give utilities greater control over storage assets, it also requires substantial upfront investment. For discoms with existing financial liabilities, raising the necessary capital could be challenging.

Operating Expenditure Model

Under an opex-based approach, utilities can procure energy storage services rather than financing and owning the entire infrastructure themselves. Competitive bidding can help identify service providers and determine the cost of storage services.

Anoop Singh, Founder and Coordinator of the Centre for Energy Regulation and Energy Analytics Lab at IIT Kanpur, said the choice between capex and opex should depend on competitive cost discovery and the management of operational risks for discoms.

He suggested that procuring storage services through competitive bidding, including aggregated bids through the Solar Energy Corporation of India (SECI), could be more economical. Aggregated procurement may help achieve scale and improve cost competitiveness for distribution companies.

This approach could reduce the need for individual utilities to make large upfront investments, although its financial benefits would depend on the prices discovered through bidding and the terms of the contracts.

Energy Storage Obligation: What Happened to the Earlier Framework?

India has previously outlined a framework for increasing energy storage requirements. In July 2022, the Ministry of Power introduced an Energy Storage Obligation (ESO) trajectory that envisaged a gradual increase in storage requirements linked to total electricity consumption.

The framework proposed increasing the obligation from 1% of total electricity consumption in financial year 2023-24 to 4% by FY 2029-30.

However, according to Anoop Singh, subsequent notifications did not include references to the Energy Storage Obligation. This has raised questions about the continuity and implementation of the earlier framework.

The proposed mandate for discoms could bring storage procurement back into focus, but its structure and relationship with previous obligations will need to be clarified.

Why a Uniform Storage Requirement May Not Work for Every State

Electricity demand and renewable energy generation patterns differ across Indian states. Factors such as local consumption, the existing power generation mix and the availability of renewable resources can influence how much storage capacity a distribution company needs.

For this reason, industry representatives have cautioned against imposing an identical storage requirement on every discom.

Satyendra Nath Kalita, Director of Policy and Regulatory Affairs at the All India Discoms Association (AIDA), said the government should avoid prescribing a fixed percentage or blanket requirement for all distribution companies.

He argued that storage requirements should be determined after proper assessment by the respective State Electricity Regulatory Commissions. This would allow regulators to consider the demand patterns and specific requirements of individual states before setting obligations.

A state-specific approach could help prevent utilities from investing in storage capacity that does not match their actual electricity system requirements.

Rooftop Solar Could Increase the Need for Local Storage

The expansion of rooftop solar is another factor that could influence future storage requirements. As more households, businesses and institutions install rooftop solar systems, electricity generation becomes more distributed across the power network.

While rooftop solar can reduce dependence on grid electricity during periods of strong sunlight, generation and consumption may not always occur at the same time. This creates a potential need for local storage solutions that can help balance electricity flows.

Singh highlighted the possible role of Distribution Energy Storage Systems (DESS) and Community Energy Storage Systems (CESS). These systems could help manage storage requirements closer to consumers and within local distribution networks.

However, their deployment would also require careful planning by discoms, particularly in areas where rooftop solar adoption is increasing.

What the Proposed Mandate Means for India’s Power Sector

The proposed energy storage requirement reflects a broader shift in India’s electricity planning. As renewable energy capacity expands, the power sector will need infrastructure that can manage fluctuations in generation and support electricity supply during periods of higher demand.

For renewable energy developers, storage requirements could influence project planning and procurement costs. For discoms, the proposal could introduce additional obligations at a time when many utilities are already managing significant financial liabilities.

The design of the mandate will therefore be important. A requirement based on direct infrastructure ownership could create substantial capital demands, while competitive procurement of storage services may provide another route for utilities to access the required capacity.

Regulatory flexibility will also matter. Allowing State Electricity Regulatory Commissions to assess local requirements could help align storage investments with actual demand and grid conditions.

Conclusion

India’s proposed energy storage mandate could play an important role in supporting the country’s growing renewable energy capacity. Battery storage can help manage fluctuations in solar and wind generation, making electricity supply more flexible and reliable.

However, the financial condition of distribution companies presents a major implementation challenge. With public sector discoms already carrying Rs 6.77 lakh crore in accumulated losses and Rs 7.11 lakh crore in borrowings, additional investment requirements could increase financial pressure.

Competitive procurement, suitable capex and opex arrangements, and state-specific storage assessments could help address these concerns. Ultimately, the success of the proposed mandate will depend on balancing India’s energy storage needs with the financial capacity of the utilities responsible for procuring electricity.