By Anasuya Gangopadhyay, Senior Associate, Climate Change Mitigation, Center for Study of Science, Technology and Policy (CSTEP); and Sunil Mani, Policy Adviser, International Institute for Sustainable Development (IISD)
India has made significant strides in its energy transition, achieving 50 per cent of non-fossil electricity capacity five years ahead of its 2030 Nationally Determined Contribution target and adding 34.95 GW in 2025–26 alone. However, as renewable penetration increases, grid integration has moved from a future consideration to a central challenge in the next phase of the transition.
The Union Budget 2026–27 recognises this shift, moving beyond “vanilla” wind and solar towards solutions that deliver power when needed. Anchored in resilient macroeconomic fundamentals, the energy transition is framed not only as a climate imperative but also as a driver of industrial growth and employment.
From capacity expansion to reliable power
To translate the shift from rapid capacity additions to reliable, time-aligned supply into policy, the government introduced utility-scale firm and dispatchable renewable energy (FDRE) tenders in 2023. The tenders aimed to combine solar, wind and energy storage to meet the demand profiles specified by buyers (mainly electricity distribution companies). However, the market uptake of FDRE has been slow owing to various concerns, including project profitability for developers.
An IISD–CSTEP joint study helps explain why. At present, under realistic operating conditions, FDRE generation has an effective levellised cost of energy (LCOE) of around Rs 5.45 per kWh, compared to Rs 4.65 per kWh for coal-based power. However, the future cost dynamics will be driven primarily by falling battery costs.
The budget’s most impactful intervention in this regard is a nine-fold increase in viability gap funding (VGF) for battery energy storage systems (BESS). Alongside production-linked incentive schemes and basic customs duty support, which reduce import dependence and strengthen domestic BESS manufacturing, VGF can lower capital costs and reduce battery LCOE through economies of scale. The result would be a faster decline in FDRE costs, helping dispatchable renewables from FDRE plants reach price parity with coal. The LCOE gap in FDRE can be bridged by improving system design. FDRE can become cheaper than power produced from new thermal power plants (commissioned after 2020) much earlier if a greater share of surplus is sold. Selling 50 per cent of the surplus electricity generated from FDRE will help achieve cost parity around 2030, while selling only 30 per cent will delay parity to 2048. In an optimistic scenario, selling 100 per cent of the surplus can make FDRE competitive immediately.
Why the macro case is stronger than the tariff debate
The macroeconomic case for FDRE is compelling even though full cost parity has not yet been achieved. In terms of GDP, there are two dividends from FDRE: one is energy cost reduction (after cost parity is reached) and the second is additional economic growth resulting from higher labour productivity due to reduced health and climate costs. Compared to a scenario without FDRE, GDP is projected to be 0.5 per cent higher by 2032, 1 per cent higher by 2038 and 1.8 per cent higher by 2050, assuming a realistic future growth trajectory for FDRE. Net job creation is likely to reach 64,000 by 2050, after accounting for reduced employment in coal-based power generation.
What comes next
Three practical moves can translate the budget’s storage push into cheaper, firmer renewables:
Operationalising BESS VGF quickly and transparently: Standardised guidelines and predictable disbursement matter as much as the budgetary declarations because they can lower financing costs and unlock scale effects.
Moving procurement towards “resource adequacy” outcomes: Even without a full capacity market, India can gradually integrate reliability metrics, including capacity credit/effective load carrying capability seasonal adequacy and performance obligations, into planning and tenders.
Enabling revenue stacking with guardrails: Allowing storage (and FDRE projects) to earn from ancillary services and limited market sales while protecting the primary obligation to contracted buyers can improve project bankability and encourage efficient oversizing where it benefits the system.
The budget’s message is clear: India’s energy transition has matured. The next phase is not only about more gigawatts; it is about delivering clean power that behaves like a system resource. The increase in storage VGF is a strong start. Whether it becomes a genuine turning point will depend on the follow-through, as well as better contracts, improved markets for flexibility, and a grid and distribution system capable of absorbing and paying for reliable clean energy.