Why India Needs Longer Batteries The Patient Investor Runs Out Of Patience Daily Brief 493

TITLE: Why India needs longer batteries | The patient investor runs out of patience | The Daily Brief #493 CHANNEL: Markets by Zerodha DATE: 2026-06-24 ---TRANSCRIPT--- In today’s episode, we’ll break down two important stories. First, we’ll talk about India’s batteries getting longer, not just bigger. And then we’ll talk about the patient investor running out of patience. Welcome back to the Daily Brief by Zeroda, where we cut through the noise to help you understand what’s actually happening in the most important stories from business and markets. I’m your host, Axara, and today is Wednesday, 24th June. Coming to the first story. So between May and December last year, India let 2.3 terowatt hours of solar electricity go to waste because the grid had nowhere to put it. Nearly 40% of that waste came in October alone when the sun was strong, demand was soft, and the coal plants underneath the system simply couldn’t ramp down fast enough to make room. But you might already be familiar with the story because we’ve talked about the different versions of this problem countless times on the daily brief. Now the obvious response is to build storage and India has been trying to do that. The country added 4.6 gwatt hour of battery storage in the first 3 months of 2026 more than 9 times what it managed in the previous quarter taking its cumulative installed base to 5.9 g by March. That sounds like a breakthrough until you set it against the target. The central electricity authority reckons India will need 236 gawatt hour of batteries by 203132. So we have built in our entire history a little over 2% of the batteries we expect to reach within 7 years. So the gap is enormous and you probably already knew that too. But the more interesting story is hiding inside the engineering because somewhere in the last 18 months without much fanfare the kind of battery India bias has changed. Now the grid has stopped asking how many megawatts of battery do we need and started asking how many hours of stored sunshine do we need. So today we talk about that shift. And to see it you have to hold two numbers in your head at once. The first is power measured in megawatt or MW. It tells you how much electricity the battery can push out at any single instant. The second is energy measured in megawatt hours or MW. It tells you how long it can keep pushing before it empties. So divide the second by the first and you get duration. For example, a battery rated at 500 megawatt or 1,000 megawatt hours can deliver 500 megawatt for 2 hours. And the same battery can give 100 megawatt of power for 10 hours. Give it the same 500 megawatt of power but 2,000 megawatt hours of energy and it becomes a 4hour battery. So when India ran its first serious battery tenders, 2 hours was enough. But not anymore. And that’s because of the nature of solar power. See, through the day, the sun is still doing much of the work. Because solar is cheaper than coal, we buy most of the solar during that time and run coal plants at a minimum rate so that supply matches demand. So this also means that the more we install solar and rely on it during the day, the less coal we need and the lesser we keep those plants running. But after sunset, solar falls away to nothing within an hour, just as people get home and switch on lights, fans, air conditioners, and stoves. Demand climbs at the exact moment the cheapest source of supply disappears, and coal plants are left to fill the gap. But now they’re running at low utilization levels, and it’s hard to ramp them up quickly. So, for a couple of hours after sunset, the system is stretched. Now, a 2hour battery solves this problem tidily. It charges through the day when power is plentiful and cheap and then empties itself in that evening crunch period. And for the grid India had a few years ago that was enough. Solar was still small. So the evening crunch was short and shallow as coal plants were still carrying a lot of the burden in the evenings leaving only a modest peak. So that was the thinking behind SEC’s landmark March 2022 tender 500 megawatt for 2 hours. But a 2-hour battery was never a complete fix. It was a peak shaver only clipping the very tip of the evening and nothing beyond it. So if the shortfall ever ran longer than two hours, the battery was already empty. And that did eventually happen. The more we depend on solar, the longer we need batteries for. But then solar grew and the problem changed shape. The more we relied on solar, the less we leaned on coal and the longer the crunch got, which only meant we’d need more and longer batteries. As solar has crossed 100 gawatt, the evening peak has stopped being a single spike at all. It’s now an elevated zone stretching from roughly 5:00 p.m. to 11:00 p.m. in winter and 7:00 p.m. to past midnight in summer. A 2hour battery can only shave the steepest point of that zone and then it’s empty. A 4hour battery would be more suited to this problem. Now, this is also why a piece of jargon called FDRE or firm and dispatchable renewable energy has started coming up in the energy transition conversation. It’s a kind of contract where buyers aren’t just paying for a vague annual quantity of green units. They’re paying for guaranteed power delivered in specific scheduled hours that match a discom’s demand. But you can’t make that promise with a 2-hour battery. You need a longer duration battery so that late evening demand is also met. So every FDR auction mechanically pulls developers toward 4 hours and beyond. So that’s probably why a 2025 study by the power foundation of India and UC Berkeley’s energy center talks about 2027 as the year when 4hour batteries become the dominant design. Now doubling the battery duration would mean that more energy is stored and hence it should be costlier than before, right? But it costs surprisingly almost the same on paper and understanding why requires looking into the tender data. So in a government power tender, developers put out their bidding prices at which they can provide a unit of electricity and the cheapest bid wins. So when a developer wins a solar plus storage auction, the headline number is a single tariff costing both the panels and the battery. Now to work out what the storage alone costs, you subtract a reasonable solar only price, say 2.5 rupees per unit, and whatever’s left is the storage adder. Now, two auctions in 2024 show us what the storage doubling costs. A July 2024 auction paired solar with a 2hour battery and it was awarded at rupees 3.41 per unit, which gives us an estimated storage adder of rupees.81 per unit. A December 2024 auction paired solar with a 4hour battery and cleared at rupees 3.52 which implies an adder of about 1 rupee. Doubling raised the final tariff by barely.19 rupees a unit. So this cost advantage was partially made possible because of a brutal collapse in battery prices. And what also helped was colllocating storage with solar so they share land and grid connections and the government’s viability gap funding that helped subsidize 43 gawatt hours of projects across two branches. But the flat tariff hides two things that don’t show up in the per unit number. The first is stress on the developer. A 4-hour project at the same power rating holds twice the energy which means twice the cells, twice the capex and a longer weight to earn it back. This is why India’s tender pipeline and its actual construction have come unstuck. Roughly 130 gawatt hours of projects were awarded in 2025 against barely 9 gawatt hours expected to physically switch on in 2026. Biders win at very thin tariffs already. Then a bigger asset puts them in the red. The second is the extra demand for cells itself. Every gawatt of 4our storage needs twice the volume of cells needed than what’s needed for a 2our system. And this turns the duration shift into a far larger bet on India’s capability to make those cells inhouse than the megawatt numbers suggest. Just as the country tries to scale its cell capacity from around 13 gawatt today toward 100 gawatt by 2027. Now there’s another reason longer duration storage is hard to finance because it doesn’t get rewarded with the revenue it probably can generate. So, a battery can in principle earn money several different ways at once. It can buy cheap midday power and sell it for higher in the evening. It can sell ancillary services which are split-second adjustments that keep the grid’s frequency steady. It can also earn money simply for being on standby during the hours the grid is most likely to fall short whether or not it actually discharges. So, if you find that odd, don’t because even coal plants make money this way. Now letting a single battery earn from several of these jobs simultaneously is called revenue stacking but India mostly doesn’t allow it. So here a storage project typically lives off one income stream its contract with SECI or a state distribution company. There’s no capacity market, no mechanism that pays a battery for standing ready and time of day price differences are thin. So making money through arbitrage isn’t a very viable option. Plus, the intraday gap between cheap and expensive power doesn’t cover costs on its own. So, the battery does multiple jobs for the grid, but only gets paid for one of them. Now, according to an analysis, BES’s projects would make 24% to 70% margins if such revenue stacking was made possible, vastly improving the viability of battery projects. But even 4 hours doesn’t finish the job. It covers the evening, but it still can’t turn the middle of the day into genuine nighttime power. As solar share of generation keeps climbing, the task becomes shifting bulk energy 6 8 even 10 hours forward. And here the modeling finds another boundary. Lithium ion batteries stay the cheapest option only out to roughly 4 to 6 hours of daily discharge. Beyond that, the economics start to turn and so does the choice of chemistry. So lithium ion is the incumbent and it keeps getting cheaper, but its weakness is structural. Power and energy are welded into the same cell. So the only way to add ours is to buy more complete cells. Now that’s fine at 2 or 4 hours, but for more you end up paying for an enormous stack of cells that discharges slowly just once a day. But this is where flow batteries get interesting. So in a flow battery, the energy doesn’t sit inside solid cells. It sits in tanks of liquid electrolyte pumped through a separate stack where the actual electrochemistry takes place. And the elegance is that power and energy are pulled apart. The stack sets the power and the tanks set the hours. If you want 10 hours instead of four, you can add cheap electrolyte and bigger tanks while keeping the stack the same size. So the cost of each additional R keeps falling, which is exactly why Flo’s case lives at the long end. But that also means it’ll do little for you in 2 to 4 hours. At the durations India is actually buying, flow is more expensive and less efficient and its costs sit above lithium even at 4 hours. Which is why for now the whole flow story in India is a handful of pilots. NTPC’s 3 megawatt hour venadium flow unit at its research center and a recent tender for a 100 megawatt hour system. much of it built by Electric, the country’s only maker of low batteries at meaningful scale, which our climate fund Rain Matter recently backed. And that’s the tension underneath all of this. The cheaper lithium gets, the longer a good enough 4 or 6hour lithium battery delays the jump to true long duration. So falling prices may not be solving India’s storage problem so much as postponing the harder version of it. India has at last started building. But the trouble is that the duration its grid needs keeps moving a step ahead of the batteries it’s buying. For all the sources mentioned in this video, don’t forget to check out our newsletter. The link is in the description. Coming to the second story, American public pension funds in theory are the perfect institution for patient capital. They know how much money they’ll have to pay and when years in advance. They are the one institution that should never have to sell their assets in a hurry. If you didn’t know any better though, you would think they were caught in a panic. Since 2022, they’ve been offloading their private equity investments at big discounts as though there’s a fire sale. Now, none of those investments had perceptibly failed. They were supposed to be a perfect match for a pension fund’s risk appetite. In fact, structured to create returns for those investors that could hold on indefinitely. But something has punctured that convenient fable. So when the economists Abu Sovonov and Lana studied over a thousand secondary sales of pension funds, they found a visible pattern. Somewhere after 2021-22, many pension funds became more likely to sell their PE holdings. Now on one level, this was a mathematical reaction. The American stock markets had fallen sharply between 2021-22 and as their public holdings bled value, these funds became far too concentrated in illlquid private markets. So they brought those allocations down to comfortable levels. But there’s a deeper story underneath. It was a glimpse of a system cannibalizing itself. So it marked a decadesl long drift where some of the world’s biggest pools of capital carrying the retirement savings of school teachers, firefighters, postal workers and the like were increasingly drained into illlquid opaque vehicles. Now the core idea of a pension is simple. Workers contribute a chunk of their savings locking them away for long periods of time. That money is put into long duration assets and many years later when those workers inch closer to retirement that locked money becomes their income. And there’s a symmetry to the arrangement. Workers need to be paid many years into the future. So longdated assets beget returns many years into the future and you just need to match the two. Now the archetype of this arrangement was the American defined benefits pension plan and these made hard promises to retirees backed by estimates of what their portfolios could generate. After the second world war lots of government employees moved to these funds and together governmentr run pension funds now hold nearly 7 trillion in assets. That money has certainly percolated India’s public and private markets as well. But there’s a problem. While you can promise a fixed payout many decades into the future, generating the money for it is another matter. Markets change their character too fast and it’s hard to squeeze a predictable return out of any instrument for that long. So back in the 1980s, if you were looking for predictable long-term returns, bonds were great. Government bonds offered sizable returns for almost zero risk, even briefly paying returns in excess of 15% that decade. In a time like that, US pension funds held close to 40% of their portfolios in bonds and other fixed income securities. But then rates fell sharply and funds had to turn to riskier securities. Many funds switched to equities and mutual funds instead. And this kept things stable for a while as American markets kept climbing higher between 1982 and 2000. But naturally this approach was riskier and this is why through the 1980s many companies slowly moved the risk to employees. So instead of guaranteeing defined benefits they pushed workers into programs like the 401k where workers fortunes were linked to the market. India has been trying to move from the old pension scheme to the NPS for the same reason. Now, public sector unions fought for the old scheme to remain and prevailed. And this was also politically convenient since it cost a politician nothing to promise a pension scheme whose payments were a future headache. But where would the money come from? While one looked for answers, an accounting hack kept the ship running. So pension funds that promise defined benefits essentially fix a figure for how much they have to pay retirees far into the future and then work backwards from there. That gives them how much cash they had to hold today to get to that number. So for these calculations, they set estimates for what they expect their portfolio will earn in between. But crucially, you don’t have to account for how much risk you’re taking in your balance sheet. your books can reflect how much return you expect without even needing to show the potential downside. So this creates a weird incentive. It turns optimism into an accounting choice. So imagine you had to pay 1,000 rupees 20 years from now. If you put your assets into bonds that would definitely yield 3% a year, you would need rupes 554 in assets today. If you put it in real estate and private equity, that might probably earn 7% a year and you’ll only need rupes 258. Who knows that downside could never occur and dealing with that probability is tomorrow’s problem. This could become a problem for you later on. But for today, the riskier option looks better until it wasn’t. So in the year 2000, the dotcom bubble burst. Stocks fell and many pension funds linked to equity saw a hole blown through their asset base. But they were still expected to pay out the same amount in the future. So if they wanted to fix the equation, it only made sense to be more optimistic about your accounting. Now what that meant is that the most rational choice for a fund strategist was to shift to more risk, not less. There was now a serious case to invest in alternative assets and they came with huge downsides, but crucially they promised better returns than anything public markets could offer. The real liftoff came with the 2008 financial crisis. On one hand, the crisis destroyed the funding ratios of these pension funds and while their future liabilities stayed in place, equities cratered. Worse still, to deal with the crisis, the government turned on the spending spigot. Risk-free rates stayed near zero for a decade, and it paid nothing to lend to the government. Funds were left with fewer assets and no safe options to plug the gap. Now, in an ideal world, you’d either cut down the benefits you promised or ask workers to increase the size of their contributions. But both options were politically toxic, especially when the public was already upset with the economy. So the best looking option a fund had was to create even riskier portfolios promising even better returns. As the economists Andonov Bower and Kramers found by 2010, public pension funds assumed they would earn approximately 2% more returns per year than corporate pension funds that were investing in the same market. Nearly 3/4s of their portfolio was now in risky assets. And the more underfunded a pension fund was, the more likely it was to take higher risk. Simultaneously, the crisis also created more alternative assets their money could go in. Take private credit. As banks turned risk averse and slashed their lending to mid-market companies, private credit funds stepped in. These and others like it became a new avenue for pension funds to go deploy their money, slowly transforming into major markets in their own right. As the financial markets clawed their way out of the crisis, public pension funds saw their identity change. They no longer saw long-dated bonds as the answer to their future liabilities. As Beano, Leang, and Siri found by the late 2010s, less than a quarter of their portfolio was invested in fixed income securities. Their equity allocation also had fallen below half. Meanwhile, 30% of their portfolios now sat in alternative assets. This was in part a story of accounting rules and the risks they permitted. Now, to be clear, this didn’t actually translate cleanly into better returns. In fact, the returns from PE were comparable to those from the broader public markets, and some funds, even accounting for the extra risk they took on, did offer slightly better returns on average. But much of that difference was eaten up by fees and there was little added advantage to investing in them. But there were some weirder things fueling this boom. As our boss Bhuven loves to say, so much of finance is a matter of monkey see monkey do. So the move to alternatives slowly became a self-perpetuating story. Many fund managers were simply keeping up with industry standards. And as Begganau and her co-authors found, every time a pension plan’s peers increased their alternative allocation by 10%, the fund would shift its own allocation up by approximately 5%. But arguably the biggest advantage PE funds came with was their lack of transparency. While public markets had similar returns, they were repriced every second. A fund would constantly have to mark its equity portfolio to the market and adjust for every drop. This added a lot of volatility. But a private fund stake on the other hand would be marked periodically using models, comparables, and manager judgment. Its actual value was unknowable. But on paper, its value barely moved. And that took away most of the volatility. So to a pension fund, it was as though they were buying an extremely stable asset with equity-like returns, even if this was just an illusion of how often its price was calculated. Meanwhile, in the background, a pension fund’s worst nightmare was coming true. Its contributors were growing older. Every year saw more retirees drawing their money out while fewer workers contributed to its coffers. As the economists Antonov Jansen and RA found by 2023, the average public pension fund had turned net cash negative. Each year, they now bled out roughly 2.4% of their assets. Outflows like this have to be met with liquid cash. Paper holdings and notional returns can’t suffice. But by now, public pension funds had thin cash buffers. Cash, treasuries, and other liquid securities made up just 9% of their holdings, and the rest of their assets would take time to liquidate. And moreover, their sale could end up being negotiated to a discount. Back when funds studiously matched the duration of their assets and liabilities, they could afford the illquidity premium on some assets given just how long they were invested for. But by now they had structurally morphed into something else. They were now structurally cash hungry institutions paying out more than they received. And this was how things looked when after CO 19 stocks and bonds fell together. The opaque private markets on the other hand hadn’t updated their valuations for the fall. And as everything else dropped in value, mathematically their private market exposure looked exaggeratedly large. So the sell-off was a release valve meant to release pressure off a system already at the brink. But while that may have soothed immediate pressures, the structural problem remains. The world’s biggest pools of capital are underfunded, a fact that is hidden under opaque assets that hide the extent of the problem. And according to some estimates, these funds are approximately 4.6 $6 trillion short of what they’ve committed to pay if you account for all of it properly. So when their payments come due, chances are they wouldn’t liquidate these opaque assets and the risk will shift instead to wider markets which have assets that are easier to unload. There those losses will land on the portfolio of everyone. Now, this assumes that private markets themselves don’t see a violent turn. And as we’ve discussed before, that is a live risk which could puncture the books of public pension funds. The effects of that could branch out to everything those giant pools of capital have touched, including your own portfolio. Now, none of this comes from an individual act of carelessness. It has many roots. labor rights, declining populations, accounting rules, financial crisis, zero interest rates, professional envy, and more. Collectively, though, they’ve created the ultimate irony. Institutions built to hold safe assets indefinitely have morphed into those that might sell opaque assets in a panic. Now coming to the tidbits. India has extended the bidding deadline for deep water oil and gas blocks for the sixth time since the round was launched in February 2025. The government has extended bidding windows in order to attract foreign investors. The straight of hormones crisis has only accelerated the need for domestic oil and gas production. Coming to the next tidbit, Moody’s has flagged that India faces a huge credit exposure to water management because of poor infrastructure, groundwater depletion and fragmented governance. We received the highest riskiest rating of five on the same from the agency and we also received a physical climate risk category of four reflecting heat stress and volatile monsoons. Coming to the final tidbit, Hindustan Inc. has signed an MOU with Advantec Associates and Aero Eagle Automobiles to explore the use of hydrogen fuel in underground mining applications. By its own admission, it’s the first company to do so. This is part of a larger decarbonization strategy on the company’s part to reach net zero by 2050. That’s all the news I have for you. Thank you so much for watching and see you in the next one. Disclaimer, this content is forformational purposes only. None of the stocks, brands, or products mentioned are recommendations or endorsements.