India Proposes Payment Protections for Standalone Energy Storage Firms

The Indian power ministry has put forward a proposal to revise the Electricity (Late Payment Surcharge and Related Matters) Rules, 2022, aiming to include standalone energy storage systems under its scope. This move is intended to encourage investment in energy storage projects by providing these independent operators with the same safeguards against delayed payments from electricity distribution companies (DISCOMs) that already exist for power generators, transmission firms, and electricity traders.

Introduced in 2022, the Late Payment Surcharge (LPS) Rules were designed to curb the buildup of unpaid dues that DISCOMs owe to various entities in the power supply chain. According to these rules, payments must be settled by the date specified in the power purchase agreement (PPA). If there is no specified date, the payment is required within 45 days of billing.

The LPS imposes a surcharge on overdue payments, starting at the State Bank of India’s one-year lending rate plus 5 percentage points. This penalty increases by 0.5 percentage points for each additional month the payment is delayed. Additionally, DISCOMs must maintain a letter of credit with a bank, which suppliers can draw upon if payments are not made on time. To further discourage delays, DISCOMs that do not pay bills within two-and-a-half months lose the ability to purchase electricity from the short-term market or power exchanges.

The ministry emphasized that applying these protections to energy storage projects is vital due to the significant upfront investments involved. These projects typically recover costs over several years, so investors and financial institutions require assurance that payments will be punctual to commit capital.

India’s battery energy storage system (BESS) capacity is expected to grow substantially, from 15 gigawatt hours (GWh) in October 2026 to 321 GWh by the fiscal year 2035-36. Similarly, pumped hydro storage capacity is projected to expand from 44 GWh in September 2026 to 630 GWh during the same period. Such large-scale expansion demands reliable and timely payment mechanisms to attract the necessary investment.

As renewable energy sources such as solar and wind contribute a larger share of electricity generation, storage solutions become essential to provide consistent power supply and optimize the use of renewable resources. Rule 18 of the Electricity Rules, 2005, currently allows energy storage systems to be owned by power generators, transmission companies, DISCOMs, consumers, or independent storage entities.

Storage systems owned by power generators are treated legally as generators and are already covered under the LPS Rules. However, standalone energy storage providers do not benefit from these statutory protections and must depend solely on contractual terms with DISCOMs, which can be less secure.

The proposed amendment seeks to introduce a new category called “energy storage service provider” within the rules. This category would encompass companies offering energy storage as a service or supplying electricity from storage, which are not owned by generators, transmission companies, DISCOMs, or consumers.

The ministry believes that extending the LPS protections to standalone storage providers will enhance payment certainty for developers and lenders. This increased confidence could stimulate more investment, lower financing costs, and ultimately reduce the overall cost of energy storage solutions. End users stand to benefit as well, through expanded storage capacity and improved integration of renewable energy sources into the grid.

This regulatory update reflects India’s broader efforts to strengthen its power sector infrastructure while promoting clean energy technologies. As the country aims to meet ambitious renewable energy targets, ensuring financial stability for energy storage projects is a crucial step toward a more reliable and sustainable power system.