Quick Facts
What Viability Gap Funding is
Viability Gap Funding (VGF) is a one-time grant from the Government of India to a solar project developer that bridges the gap between the project’s required tariff for commercial viability and the tariff that DISCOMs are willing to pay. The mechanism is used in specific SECI tenders to support solar capacity addition when discovered tariffs would otherwise be too low for project viability.
VGF is a project-finance support mechanism rather than an ongoing revenue stream. It is paid at the commissioning stage of the project (sometimes split into milestones such as commissioning plus performance verification) and reduces the developer’s effective capital outlay. The PPA then runs at the lower tendered tariff for 25 years.
The structure offers government a way to support solar capacity while ensuring that long-term consumer prices remain low. From the DISCOM and consumer perspective, the tariff is what it is; the government bears the cost of the supplementary VGF.
How VGF works
In a VGF-supported tender, the structure is as follows.
The Government of India (through MNRE and SECI) announces a tender with a defined tariff (the “ceiling tariff”) and the maximum VGF available per MW.
Developers bid the lowest VGF they need to deliver the project at the announced tariff. Bids are evaluated on lowest VGF, similar to lowest tariff in conventional auctions.
The winning developer signs a PPA at the announced tariff and a separate VGF agreement specifying the grant amount and disbursement milestones.
The project is built. VGF is disbursed at commissioning (sometimes in milestones such as commissioning plus 6-month performance verification).
The PPA runs at the tendered tariff for 25 years. The developer earns revenue at this tariff plus the upfront VGF support.
The combination of tariff revenue and VGF makes the project financially viable for the developer.
When VGF is used
VGF is appropriate when:
DISCOMs are unwilling to sign PPAs at tariffs above a certain threshold (often for financial reasons or due to existing high-cost long-term PPAs).
The cost of supplying solar at that low tariff is below the project’s viability threshold.
Government policy prioritises solar capacity addition.
In recent years, competitive bidding has produced very low solar tariffs (below Rs 2.50 per kWh) without VGF support. Indian solar PPAs at Rs 2.18 per kWh have been signed without VGF, demonstrating that aggressive bidding can deliver low tariffs at project viability.
VGF has therefore been used less frequently in 2024 to 2026 than in earlier years (2015 to 2020), when solar tariffs were higher and additional support was needed.
Historical VGF usage in Indian solar
Several SECI tenders between 2015 and 2018 used VGF:
CPSU Phase-I solar projects: 1 GW at fixed tariff with VGF.
JNNSM Phase-II Batch-III: 750 MW with VGF.
Various Component A KUSUM projects with VGF for distributed solar plants.
Defence Solar VGF tenders.
Total VGF-supported capacity added through these tenders was 2 to 4 GW over the 2015 to 2020 window. The capacity contributed meaningfully to India’s overall solar growth during the period.
VGF amounts
Specific VGF amounts varied by tender. Indicative ranges:
CPSU Phase-I: VGF ceiling Rs 1.20 crore per MW with bid-based discovery.
JNNSM Phase-II Batch-III: Discovered VGF between Rs 50 lakh and Rs 1.50 crore per MW depending on lot and developer.
KUSUM Component A: VGF for specific decentralised solar plants at lower amounts.
In each case, the VGF complemented the PPA tariff to deliver acceptable project IRR. Lower VGF bids reflect more efficient developers and lower capital costs.
Why VGF is used less in 2024 to 2026
Several factors have reduced VGF dependence in current Indian solar.
Module cost reduction: Module CAPEX has fallen sharply, allowing lower tariffs at the same project IRR.
CUF improvements: Tracker bifacial designs have raised generation per MW, improving revenue per CAPEX.
Lower cost of capital: Better project finance terms and lower interest rates have reduced viable tariff thresholds.
Competition: Aggressive bidding in SECI auctions has driven tariffs to Rs 2 to Rs 2.50 per kWh without VGF.
ISTS waiver: The waiver of inter-state transmission charges for renewables has improved net economics for inter-state projects.
Combined, these factors mean that recent tenders typically clear without VGF support. The mechanism remains available for situations where it adds value, but it is no longer the primary policy lever for solar deployment.
VGF compared with feed-in tariff
| Feature | VGF | Feed-in Tariff |
|---|---|---|
| Payment type | One-time grant | Ongoing per-kWh tariff |
| Payment timing | At commissioning | Through PPA life |
| Risk to developer | Lower (upfront cash) | Higher (PPA performance) |
| Cost to government | One-time capital expense | Long-term operating cost |
| Best for | Specific tendered capacity | General market support |
| Common in India | Selective tenders 2015-2020 | Common, especially gross metering |
The two mechanisms can also be combined in specific scheme designs, with VGF reducing capital cost and FiT providing operating revenue.
Common mistakes regarding VGF
Treating VGF as ongoing revenue. It is a one-time grant.
Underestimating disbursement complexity. VGF disbursement involves milestone verification, performance metrics, and government processes.
Assuming all SECI tenders include VGF. Most current tenders do not.
Confusing VGF with PLI. PLI is for manufacturing; VGF is for project deployment.
Treating VGF amount as fixed. It is bid-based in competitive tenders.
Best practices
For developers bidding VGF-supported tenders, model the project at the bid VGF and tendered tariff combined, with realistic IRR targets.
Document VGF disbursement milestones clearly in agreements.
For lenders evaluating VGF projects, the VGF reduces required equity and improves IRR. Accounting treatment as capital subsidy matters for depreciation.
Track MNRE notifications for any new VGF-based tenders. The mechanism may be revived for specific applications.
For non-VGF tenders, focus on competitive tariff bidding rather than relying on VGF support.
Standards and references
VGF is administered by MNRE through SECI in specific tenders. Each tender has its own VGF guidelines, ceiling amounts, and disbursement milestones. The Ministry of Finance and the Cabinet approve significant VGF allocations as part of the annual budget.
Related glossary terms
- Levelised Cost of Energy
- Power Purchase Agreement
- Feed-in Tariff
- IRR
- CAPEX Model
- MNRE
- National Solar Mission
Key takeaways
Viability Gap Funding (VGF) is a one-time grant from the Government of India that bridges the gap between a solar project’s required tariff for commercial viability and the tariff DISCOMs are willing to pay. VGF was used extensively in 2015 to 2020 SECI tenders to support 2 to 4 GW of solar capacity. Recent tenders use VGF less frequently because competitive bidding has compressed solar tariffs to viable levels without subsidy. The mechanism remains available for specific applications where it adds value but is no longer the primary policy lever for solar deployment in 2026.