VGF

What Is VGF?

Viability Gap Funding (VGF) is a one-time capital grant from the Government of India designed to bridge the financial gap between what a solar project costs to build and what the market (specifically DISCOMs) is willing to pay for the power it generates. When the tariff discovered through competitive bidding falls below the level needed for a commercially viable project, VGF steps in to make the numbers work.

VGF is not a recurring subsidy. It is a single upfront payment disbursed at project commissioning (sometimes split across milestones like commissioning plus performance verification). The developer receives the grant, builds the plant, and then sells power at the lower tendered tariff for the full 25-year PPA term. The combination of upfront VGF and long-term PPA revenue delivers an acceptable project IRR for the developer while keeping electricity costs low for consumers.

Important: VGF is a project-finance support mechanism, not an ongoing revenue stream. It reduces the developer’s effective capital outlay, improving project returns without increasing the per-kWh cost to DISCOMs and consumers.

The VGF mechanism was extensively used in Indian solar between 2015 and 2020, supporting an estimated 2 to 4 GW of capacity through SECI tenders. However, as competitive bidding drove solar tariffs down to Rs 2.00-2.50/kWh without subsidy, the need for VGF diminished. In 2024-2026, most SECI tenders clear without VGF support, though the mechanism remains available for specific situations where it adds value.

VGF is administered by MNRE through SECI in specific tenders. Each tender defines the ceiling VGF amount, the tariff cap, and the disbursement milestones. Developers bid the lowest VGF they need, and the lowest bids win, similar to how conventional reverse auctions award projects based on lowest tariff.

Why VGF Matters

1. Enables Low-Tariff Capacity Addition: Without VGF, some solar projects in high-cost locations or during periods of elevated module prices would not be viable at the tariffs DISCOMs can afford. VGF unlocks this capacity.

2. Protects Consumer Tariffs: Because VGF is a capital grant rather than an ongoing tariff adder, consumers pay only the low PPA tariff. The government’s one-time VGF payment does not inflate long-term electricity bills.

3. Supports Policy Goals: India’s 500 GW non-fossil fuel target by 2030 requires rapid capacity addition. VGF accelerates deployment in periods when market tariffs alone cannot support the required build rate.

4. Reduces Developer Equity Burden: VGF effectively reduces the developer’s equity requirement. A Rs 1 crore per MW VGF on a Rs 5 crore per MW project reduces the developer’s capital need by 20%.

5. Encourages Competitive Bidding: VGF tenders use competitive bidding for the grant amount, ensuring efficient developers who need less support win. This drives cost discipline across the industry.

6. Complements Other Mechanisms: VGF works alongside ISTS charge waivers, accelerated depreciation, and 80-IA tax holidays to create a comprehensive support framework for solar deployment.

7. De-Risks Early Market Development: In emerging solar markets or new segments (like floating solar, agrivoltaics), VGF can de-risk early projects until costs decline and track records build.

8. Fiscal Discipline: Unlike open-ended feed-in tariffs, VGF is a defined, budgeted grant. The government’s fiscal exposure is capped at the tendered VGF ceiling.

How VGF Works

Step 1: Tender Announcement

MNRE, through SECI, announces a solar tender with:

• Defined capacity (e.g., 500 MW)
• Ceiling tariff (the maximum PPA tariff)
• Maximum VGF per MW (the ceiling grant)
• Eligibility criteria for bidders

Step 2: Competitive Bidding

Developers submit bids specifying the VGF amount they require per MW to deliver the project at the ceiling tariff. Unlike conventional auctions where developers bid the lowest tariff, VGF auctions award to the lowest VGF bid.

Example:

• Ceiling tariff: Rs 2.50/kWh
• Maximum VGF: Rs 1.00 crore/MW
• Bidder A: Rs 0.80 crore/MW
• Bidder B: Rs 0.65 crore/MW
• Bidder C: Rs 0.90 crore/MW
• Winner: Bidder B (lowest VGF)

Step 3: PPA and VGF Agreement Execution

The winning developer signs:

• A PPA at the ceiling tariff with the power off-taker
• A separate VGF agreement specifying the grant amount and disbursement milestones

Step 4: Project Development

The developer arranges project financing (term loan plus equity), procures equipment, and constructs the plant. The VGF reduces the equity requirement but does not replace debt.

Step 5: VGF Disbursement

VGF is typically disbursed in milestones:

• Milestone 1 (50-70%): Upon successful commissioning and COD certification
• Milestone 2 (30-50%): After 6-12 months of demonstrated performance

Some tenders disburse 100% at commissioning. The specific schedule is defined in the VGF agreement.

Step 6: PPA Operations

The plant operates for 25 years, selling power at the tendered tariff. The developer’s returns come from:

• PPA revenue (tariff × generation)
• Plus the upfront VGF grant (reducing effective capital cost)

Visual Explanation

Real-World Example

SECI 750 MW VGF Tender (JNNSM Phase-II, Batch-III)

In 2015-2016, SECI issued a 750 MW solar tender under the JNNSM Phase-II Batch-III framework with VGF support.

Tender Parameters:

• Capacity: 750 MW (multiple lots)
• Ceiling tariff: Rs 4.43/kWh
• Maximum VGF: Rs 1.00 crore/MW

Bidding Outcome:

• Discovered VGF: Rs 0.50 crore to Rs 1.00 crore per MW across different lots
• Winning developers included major IPPs and PSU entities

Project Economics for a 100 MW Winner:

Without VGF:

• Project cost: Rs 500 crore
• Tariff: Rs 4.43/kWh
• Annual generation: 180 million kWh
• Annual revenue: Rs 79.7 crore
• O&M and debt service: Rs 65 crore
• Pre-tax profit: Rs 14.7 crore
• Project IRR: ~13%

With VGF (Rs 0.75 crore/MW = Rs 75 crore):

• Effective project cost: Rs 425 crore
• Same revenue and O&M
• Pre-tax profit: Rs 14.7 crore
• But equity deployed is lower
• Project IRR: ~16.5%

The VGF improved project IRR by 3.5 percentage points, making the project bankable and attractive to equity investors. Consumers paid only Rs 4.43/kWh, lower than the Rs 5-6/kWh that might have been needed without VGF.

Technical Specifications / Benchmarks

Benefits / Advantages

• Enables Low Tariffs: VGF allows projects to deliver power at tariffs below what would otherwise be viable, benefiting DISCOMs and consumers.
• One-Time Fiscal Cost: Unlike ongoing subsidies, VGF is a single budgeted payment with no long-term fiscal drag.
• Competitive Discovery: Bidding for lowest VGF ensures efficient developers win and taxpayer money is used optimally.
• No Ownership Dilution: Developers retain 100% project ownership and control; VGF is a pure grant.
• Reduces Equity Burden: Lower effective capital cost means developers can build more capacity with the same equity pool.
• Supports Policy Targets: VGF accelerates capacity addition during periods when market forces alone are insufficient.
• Complements Other Incentives: Stacks with Accelerated Depreciation, 80-IA, and ISTS waivers for comprehensive project support.
• De-Risks New Segments: Can support emerging applications (floating solar, agrivoltaics) until costs and track records mature.
• Transparent Process: SECI tenders with published VGF ceilings and competitive bidding ensure transparency.
• Consumer Protection: Low PPA tariffs are locked in for 25 years, protecting consumers from fuel price volatility.

Limitations / Drawbacks

• Disbursement Delays: Government grant disbursement involves verification, paperwork, and bureaucratic processes. Delays of 6-18 months are common, straining developer cash flow.
• Milestone Complexity: Performance verification milestones add uncertainty. If the plant underperforms in the verification period, partial VGF may be withheld.
• Tax Ambiguity: The tax treatment of VGF (whether it reduces asset basis, is taxable income, or is exempt) has evolved over time. Developers need chartered accountant guidance.
• Reduced Depreciation Basis: VGF reduces the written-down value of the asset for depreciation purposes, partially offsetting the Accelerated Depreciation benefit.
• Limited to Specific Tenders: VGF is not universally available. Only projects winning VGF-supported SECI tenders can access it.
• Competitive Disadvantage: Developers bidding VGF tenders compete on grant need rather than pure efficiency. Less efficient developers may be priced out even with VGF.
• Fiscal Burden: While one-time, large VGF programmes require significant budget allocation, competing with other government priorities.
• Market Distortion Risk: Heavy VGF use can distort price discovery, making it harder to assess true market tariffs.
• Current Irrelevance: With tariffs at Rs 2.00-2.50/kWh without VGF, the mechanism has limited applicability in 2026.
• Documentation Burden: VGF claims require extensive documentation, commissioning certificates, performance data, and compliance verification.

Comparison Section

Applications

Utility-Scale Solar Tenders (SECI): VGF was primarily used in SECI utility-scale tenders between 2015 and 2020. Projects like CPSU Phase-I (1 GW) and JNNSM Phase-II Batch-III (750 MW) used VGF to deliver capacity at affordable tariffs.

Defence and Institutional Solar: Some defence solar installations and government building solar projects used VGF to overcome budget constraints while delivering clean energy.

PM-KUSUM Component A: Certain decentralised solar plants under PM-KUSUM Component A received VGF support to improve farmer economics and accelerate rural solar deployment, alongside the broader KUSUM Yojana subsidy mechanism available to individual farmers.

Floating Solar Pilots: Early floating solar projects with higher CAPEX than ground-mount used VGF to bridge the cost gap and build operational track records.

Not Applicable (2026): Most current SECI utility-scale tenders, commercial rooftop solar, residential PM Surya Ghar installations, and industrial captive solar do not use VGF because competitive tariffs are already viable.

Industry Standards & Regulations

MNRE VGF Scheme Guidelines: Define the framework for VGF allocation, including eligibility, bidding process, disbursement milestones, and compliance requirements.

SECI Standard Bidding Documents: Each VGF tender has specific bidding documents defining the ceiling tariff, maximum VGF, evaluation criteria, and contract terms.

Cabinet Committee on Economic Affairs (CCEA): Major VGF allocations require CCEA approval, ensuring fiscal oversight and alignment with national priorities.

Ministry of Finance Budget Allocation: VGF funding comes from the MNRE budget approved by Parliament. Annual budget documents specify VGF allocations.

Income Tax Act Treatment: VGF is treated as a capital subsidy, reducing the cost basis of the asset for depreciation. Specific treatment depends on current tax law and accounting standards.

CERC/SERC Tariff Regulations: While VGF is a central mechanism, state regulators set the wheeling, banking, and open access terms that affect project viability alongside VGF.

India-Specific Context

India’s solar VGF story reflects the broader maturation of the country’s solar market:

2015-2018: Heavy VGF Usage: During this period, solar tariffs were Rs 4-6/kWh, module prices were higher, and lender confidence was building. VGF was essential to bridge the gap between DISCOM affordability and project viability. SECI tenders regularly allocated hundreds of crores in VGF.

2019-2021: Transition Period: As module prices fell and competition intensified, discovered tariffs dropped to Rs 2.50-3.00/kWh. VGF was still used selectively but at lower amounts per MW.

2022-2026: Minimal VGF Usage: With tariffs at Rs 2.00-2.50/kWh and sometimes below Rs 2.00/kWh, most projects are viable without VGF. The mechanism is available but rarely needed. The government’s focus has shifted to PLI for manufacturing and PM Surya Ghar for residential rooftop.

Gujarat Context: Gujarat’s solar parks (Charanka, etc.) hosted some VGF-supported projects in the 2015-2018 period. Today, Gujarat’s excellent solar resource and established infrastructure mean new projects rarely need VGF. Heaven Green Energy’s Gujarat projects achieve viability through competitive EPC execution and optimal design rather than grant dependence.

Future Potential: VGF may be revived for specific applications like agrivoltaics, offshore wind-solar hybrids, or storage-integrated solar where costs are currently above market-clearing tariffs.

Future Trends

Selective Revival for Emerging Segments: As India explores agrivoltaics, floating solar, and solar-plus-storage, VGF may be selectively deployed to de-risk early projects in these segments until costs decline.

Hybrid Project VGF: Solar-wind and solar-storage hybrid projects have higher CAPEX than standalone solar. VGF could support hybrid tenders if discovered tariffs cannot cover the additional cost.

Green Hydrogen Linkage: Solar projects dedicated to green hydrogen production may access VGF or similar capital support as part of India’s National Hydrogen Mission.

State-Level VGF: While central VGF through SECI has declined, some states may introduce state-level viability gap mechanisms for distributed solar or rural electrification.

Results-Based Financing: Future support mechanisms may shift from upfront VGF to results-based financing where payments are tied to verified generation, reducing fiscal risk.

Carbon Credit Integration: VGF-supported projects may generate carbon credits, creating an additional revenue stream that reduces future VGF dependence.

Common Mistakes & Misconceptions

• Treating VGF as Ongoing Revenue: VGF is a one-time grant, not a 25-year revenue stream. Project economics must be modelled accordingly.
• Underestimating Disbursement Complexity: VGF release involves milestone verification, government processes, and documentation. Delays of 6-18 months are common.
• Assuming All SECI Tenders Include VGF: Most current tenders do not. Developers must verify VGF availability before bidding.
• Confusing VGF with PLI: PLI supports manufacturing; VGF supports project deployment. They target different stakeholders and policy goals.
• Treating VGF Amount as Fixed: VGF is bid-discovered in competitive tenders. The actual amount varies by project efficiency and market conditions.
• Ignoring Tax Impact: VGF reduces asset depreciation basis, partially offsetting the tax benefit. Model the net effect with a chartered accountant.
• Overlooking Disbursement Risk: If commissioning is delayed or performance verification fails, partial or full VGF may be forfeited.
• Assuming VGF Replaces Debt: VGF reduces equity requirement but does not eliminate the need for project debt. Lenders still require standard security and covenants.
• Neglecting Maintenance of Records: VGF claims require extensive documentation. Poor record-keeping can lead to disbursement denial.
• Bidding Too Aggressively: Bidding zero or minimal VGF to win may leave insufficient margin for cost overruns, risking project failure.

Key Takeaways

• VGF is a one-time capital grant from the Government of India bridging the gap between solar project cost and viable tariff.
• Administered by MNRE through SECI, VGF was extensively used in 2015-2020 to support 2-4 GW of solar capacity.
• Developers bid the lowest VGF they need in competitive tenders; the lowest bids win the capacity allocation.
• VGF is not ongoing revenue: it is disbursed at commissioning (sometimes in milestones) and reduces effective project CAPEX.
• Tax treatment: VGF is treated as capital subsidy, reducing the asset’s depreciation basis. Consult a chartered accountant for specifics.
• Current relevance (2026): Minimal, because competitive bidding has driven tariffs to Rs 2.00-2.50/kWh without subsidy.
• VGF vs PLI: VGF supports project developers (demand side); PLI supports manufacturers (supply side).
• Disbursement delays of 6-18 months are common due to government verification processes.
• Future potential: VGF may be revived for emerging segments like agrivoltaics, floating solar, and solar-plus-storage.
• Professional guidance from solar policy consultants and chartered accountants is essential for VGF bidding, structuring, and compliance.

Frequently Asked Questions

What is Viability Gap Funding? VGF is a one-time grant from the Government of India that subsidises the capital cost of a solar project, bridging the gap between the project’s commercial viability and the tariff DISCOMs are willing to pay. Used in specific SECI tenders to make low-tariff projects economically feasible.

When is VGF used? When the discovered tariff in a reverse auction is below the level needed for project viability. Government subsidy via VGF makes up the difference, allowing capacity addition at lower long-term cost to DISCOMs and consumers.

How is VGF different from a feed-in tariff? Feed-in tariff is an ongoing per-kWh payment to the generator over the PPA life. VGF is a one-time capital grant at the start of the project. The two serve different policy purposes.

Who pays VGF? The Central Government, typically through the MNRE budget. VGF is disbursed to the developer through SECI on milestone basis (commissioning, performance verification).

How is VGF amount determined? Through competitive bidding in SECI tenders. Bidders propose the VGF amount they need to deliver the project at the tendered tariff. The lowest VGF bid wins.

Are recent solar tenders using VGF? Most recent SECI utility-scale solar tenders have not used VGF because discovered tariffs have been competitive without it. VGF was more common in 2015 to 2018 when solar tariffs were higher and DISCOMs were more cost-constrained.

Does VGF affect project ownership? No. VGF is a grant. The project remains under the developer’s ownership and operation. The grant simply reduces the developer’s effective capital outlay.

What tariff levels typically need VGF? When tendered tariffs are at Rs 2 per kWh or below, VGF may be needed for projects in less favourable conditions. Higher tariffs (Rs 2.50 plus) usually do not need VGF support.

Is VGF taxable? VGF received by a developer is treated as a capital subsidy and reduces the cost basis of the asset for depreciation purposes. Specific tax treatment depends on accounting standards and current tax law.

How is VGF different from PLI? PLI (Production Linked Incentive) is for manufacturers based on production volume. VGF is for project developers to bridge capital cost. PLI supports the supply side (manufacturing); VGF supports the demand side (project deployment).

Has VGF supported significant capacity? Yes. Multiple SECI VGF-based tenders between 2015 and 2020 supported 1 to 3 GW of solar capacity. The mechanism has since been used less frequently as competitive bidding produces lower tariffs without subsidy.

What is the maximum VGF per MW? Specific to each tender. Past VGF schemes have ranged from Rs 50 lakh to Rs 1.5 crore per MW. Modern tenders rarely use VGF at significant scale because competitive bidding has compressed solar tariffs.

Related Resources

• PM Surya Ghar Complete Guide
• Solar Payback Period Guide
• OPEX vs CAPEX Solar Models
• Solar EPC Services
• Commercial Solar Solutions
• Solar Calculator

Related Glossary Terms

• Levelised Cost of Energy
• Power Purchase Agreement
• Feed-in Tariff
• IRR
• CAPEX Model
• MNRE
• National Solar Mission
• JNNSM
• Reverse Auction Solar
• ISTS Charges
• CERC
• SERC
• Payment Security Mechanism (PSM)
• Escrow Account in Solar

Sources & References

• MNRE VGF Scheme Guidelines and Implementation Framework
• SECI Standard Bidding Documents for VGF-Based Solar Tenders
• Cabinet Committee on Economic Affairs (CCEA) Approval Records for Solar VGF
• Ministry of Finance, Government of India, Annual Budget Allocations for MNRE
• Central Electricity Regulatory Commission (CERC) Tariff Regulations
• State Electricity Regulatory Commission (SERC) Orders on Solar Tariffs
• Income Tax Act 1961, Treatment of Capital Subsidies
• Comptroller and Auditor General (CAG) Reports on Solar Scheme Implementation
• Parliamentary Standing Committee on Energy Reports
• Institute of Chartered Accountants of India (ICAI) Guidance on Solar Project Taxation