Power System And Development Fund (PSDF), 2014

Policy Update
Purbaa Jagannath

Background

The power sector was not the only challenge in the early 2010s for India. New inter-State electricity flows were accompanied by fast growth, which revealed transmission deficiencies, insufficient voltage management, protection vulnerabilities and investments that were not always easily accommodated by traditional project financing methods. This was the purpose of establishing the Power System Development Fund (PSDF).

It is not a traditional centrally sponsored subsidy program but a regulatory fund that comes from the residual balances of certain power-system regulatory pools, and that is allocated to projects that are designed to help secure, improve the reliability, and increase the capability of the power system. CERC (Central Electricity Regulatory Commission) and established the PSDF under its 2010 regulations and the operationalisation of the PSDF was approved by Government of India in January 2014 and the CERC PSDF Regulations, 2014 was issued in June 2014.

The January 2014 framework provided the fund with a technical mandate. It could provide funding for strategic transmission systems identified by feedback from the Load Despatch Centre; reactive-power equipment (e.g. shunt capacitors, series compensators); protection schemes and pilot projects; and renewable and modernisation of transmission and distribution systems where appropriate to relieve congestion. Another development that was eligible was technical studies and capacity building, which were available as a part of the policy problem of collective action: a system-security investment can yield benefits to a number of utilities and consumers, even if it is not commercially appealing to one utility.

The structure of the fund’s finances was also unique. In accordance with the rules of 2014, the specified residual balances on the Congestion, Deviation-settlement, Reactive-energy and some transmission-related accounts could be transferred to PSDF and the scheme was administered and NLDC (The National Load Despatch Centre) was designated as the nodal agency for the fund.

What was important was how to channel this fund into technically viable projects without duplicating the other government initiatives, the ministry reported, noting that about ₹6,300 crore was available in the fund as of 31 December 2013. This concern was reflected in the institutional structure. The original model thus combined the three resources of regulation, evidence of operation and central technical attention as a basis for the release of funds and the granting of sanctions, rather than being a mere grant programme.

Functioning

PSDF does not use automatic grants, but selects projects and disburses funds. Projects need to be within the scope of eligible projects, need to be appraised and need to be sanctioned in the institutional process. This renders the fund a specific system-reliability tool.

The first pillar relates to congestion relief and strengthening of transmission. Electricity may be available locally, but it may not be able to reach another area due to transmission constraints. PSDF can provide funding for strategic transmission systems and/or renovation/modernisation when there is operational evidence that the network is congested and is limiting its capacity. Its second pillar is voltage and reactive-power management. Often less talked about than generating assets, shunt capacitors and series compensators and other reactive-energy equipment can bolster voltage control. Protection, measurement and system visibility is a third pillar. Although PSDF was not initially conceived as a digital-grid programme, it has always involved a technology component, such as the deployment of Phasor Measurement Units (PMUs).

Flexibility is the fourth pillar. Technical studies and capacity building can be funded when they help to advance the fund’s goals. In the Ministry’s experience in implementing the scheme in 2014, this flexibility was seen in the proposals received from different States and projects valued at ₹82.31 crore were approved as a result in Kerala, ₹164.06 crore in Rajasthan and ₹120.67 crore in West Bengal by December 2014. The policy model then developed. The March 2024 revised guidelines extended the existing roles of transmission, protection and reactive-power, along with adding explicit roles for monitoring and storage of renewables, while continuing the renewable-integration roles.

They are also introducing improved grant terms for the North-Eastern and certain hilly states and Union Territories as well. The outcome of this is a chain, regulatory charges provide the resource pool, technical institutions identify gap in the system, appraisal and monitoring committees prioritise the projects, NLDC/GRID-INDIA facilitates administration, and the eligible public entities implement the works. Its power is its targeting system-wide approach. The drawback is that all links rely on project readiness, procurement quality and implementation capability.

Performance

Project execution and system outcomes should be used to evaluate PSDF’s performance. The evidence suggests high levels of activity, but also that there is a significant gap between sanction and completion. As of the date of the Parliamentary review in 2025, 95 projects were completed, with a sanctioned grant of about ₹10,860.29 crore disbursed and 17 projects had been de-sanctioned, while the remaining projects are at various stages of execution.

As of 31 March 2025, GRID-INDIA has 209 approved projects with a sanctioned amount of ₹16,502.23 crore. The figures illustrate that PSDF has grown from a small pilot to a sizable infrastructure financing mechanism—cumulative transfer from regulatory pool accounts were at ₹20,776.68 crore and cumulative disbursement to project entities were at ₹11,337.27 crore.

The figures also illustrate why it is important to keep financial availability and sanction and disbursement apart. An approved commitment is a sanctioned project, and the money released is a disbursed amount, but neither of these alone indicates that an asset is operational or that the anticipated reliability benefit has emerged. Simply a difference between the amount of money transferred and the amount disbursed is not necessarily a sign of waste as projects may be multi-year and releases may be phased in. It does, however, put monitoring of project readiness and implementation at the core of project performance.

The annual budgetary pattern shows continued policy relevance. The Outcome Budget provided ₹1,000 crore for PSDF in 2023-24 and ₹1,200 crore in 2024-25. The 2025-26 approved outlay was ₹1,100.08 crore. For 2026-27, the outlay is ₹1,102.62 crore and the framework links PSDF expenditure to grid-scale battery energy storage through PSDF-supported VGF, with a target of 30 GWh of financial closure/Letter of Award placement.The policy emphasis has therefore shifted without eliminating the fund.

Figure 1. PSDF financial pipeline as of 31 March 2025. Source: GRID-INDIA Annual Report 2024-25 and Ministry of Power/Parliamentary reporting.[11][12]

Figure 1 presents the financial pipeline at March 2025, while Figure 2 shows the annual outlay trajectory. The two visuals together indicate a fund with a large cumulative financing role and a continuing annual allocation, but not one whose success can be measured by expenditure alone.

Figure 2. Annual PSDF financial outlay, 2023–24 to 2026–27. Source: Union Budget Output-Outcome Monitoring Frameworks.

The physical scale also needs context. By December 2024, India’s 220 kV-and-above transmission system comprised about 4.92 lakh circuit kilometres of lines and 12.97 lakh MVA of transformation capacity, with inter-regional transfer capability of 1,18,740 MW. PSDF’s role is therefore targeted: it should address high-value system constraints rather than be expected to finance the entire national network.

The biggest problem with performance is in the measurement of outcomes. The public reporting is more robust regarding sanctions and financial releases than congestion hours off, voltage improvement, fault clearing performance or outage reductions and/or avoided system costs. The next step in the process with PSDF is to move from asset accounting to outcome accounting.

Impact

The effect of PSDF is best seen in terms of system reliability, institutional capacity and the evolving economics of grid investment.

PSDF can be applied at the system level to solve failures that have a high impact on the system, yet are not very visible: transmission congestion, reactive-power deficiencies, and inadequate protection. The investments can contribute to reliability even if they are not seen by the consumer. A purely commercial project test is not enough due to the value being spread out amongst generators, Transmission Licensees, distribution utilities and consumers.

The fund also finances information quality of grid operations. As India integrates more of variable renewable generation, the role of PMUs, telemetry and communication systems grows in significance as it becomes crucial to maintain situational awareness. Renewable integration and storage are added to PSDF in the later stage, linking to a wider shift away from a generation and transmission expansion model, and toward a more flexible electricity system.

It has a significant effect on its institutional level. Technical appraisal, monitoring and coordination of PSDF between CERC, MOP, CEA, GRID-INDIA/NLDC, regional committees and utilities are required. It thus provides a framework which allows operational evidence to be translated into investment decisions. This makes the fund, in part, an institutional instrument and not only a financing instrument.

The expansion of storage demonstrates the transformation. The MOP has approved a VGF scheme of ₹5,400 crore for setting up 30 GWh of BES capacity in June 2025, which is different from the congestion, protection and reactive power focus of the original 2014 VGF initiative, but does fall within the overall scope of the fund to support investment in the necessary grid components to ensure security and reliability.

Attribution should, however, be wary. India has increased the capacity as well as reliability of its transmission grid through various programmes and investments by the utilities. Nationwide benefits from the PSDF can’t be traced solely to PSDF. It is most powerful if it is associated with a clearly specified system constraint; it is less effective if the improvements are considered to be national and not evaluated project by project.

Emerging Issues

The first challenge is the capacity to implement. Technical appraisal is not quite done, however; delays during procurement, right-of-way restrictions, changes, contractor performance and utility level capability can delay projects. If projects take too long to be operational, a fund designed to address operational needs becomes ineffective.
Financial governance is second. The CAG noted that in March 2019, the Ministry raised ₹1,018.12 crore via the private placement route without taking into account the recommendation of NLDC to raise funds in stages. It concluded that this led to wastage of funds in parking them in banks at lower rates and cost it the public exchequer by ₹11.17 crore, which proves how crucial cash-flow planning is to project selection.
Third is additionality. There are several schemes in India for strengthening transmission, distribution, renewable evacuation, storage, system modernisation. PSDF should therefore be used to fund interventions which have a clear system security rationale, and are not more appropriate to other programmes. Otherwise, accountability can be undermined by overlapping schemes.
Technological change is fourth. The life cycles for PMUs, communication systems, control technologies and batteries vary. Multi-year projects can experience technology obsolescence, and procurement should be looking for performance, interoperability, upgrade and cybersecurity — not just a simple buying hardware approach.
Cybersecurity and data governance rank fifth. Communication networks, software and physical lines and substations are all part of modern grid infrastructure. With telemetry and monitoring services supported by PSDF, cyber resilience needs to be considered a part of grid reliability, not a stand-alone IT problem.
It is the changing definition of reliability that is the sixth. As more solar and wind resources are deployed, the system needs to deal with spatial and temporal variability. The interactions between storage, forecasting, flexible resources, reactive-power support/advanced control are becoming more common. PSDF’s new eligibility applies to this transition, but also demands more complex appraisal.
Lastly, there is poor outcome measurement. A credible evaluation should demonstrate the impacts of a project on congestion hours, transfer capability, voltage performance, protection reliability, outage indicators, and/or the renewable/storage capacity it facilitates. Otherwise the sanctions and amount of rupees distributed can be measures of success and not indicators.

Way Forward

Shifting the evaluation of PSDF from spending/summary to outcomes is the first priority. For each sanctioned project a set of baseline and post-completion metrics should be in place, including congestion hours, transfer capability, voltage performance, fault clearing time, telemetry coverage, outage indicators and the renewable/ storage capacity made possible by the project.
Second, selection of projects should be based on more stringent additionality and urgency criteria. Interventions must be strategically important, having an operational rationale, and not better achieved through another government scheme or ordinary utility funding, and must be prioritised by PSDF. The goal is to provide system value, not projects sanctioned.
Thirdly, financial statements should be more closely tied to project milestones. A method of phasing financing based on procurement, physical progress and verified milestones keeps cash flows low while providing certainty of funding for the project.
Fourth, PSDF should be a “disciplined tool” of the energy-storage transition. The following attributes should be considered in evaluating a storage proposal: location, duration, cycling, response time, services to the grid, renewable curtailment avoided, and resources available in the same system. VGF should therefore be linked to explicitly defined services and performance requirements for the grid, as provided by PSDF.
Lastly, cybersecurity and interoperability should become project attributes. From the procurement stage include authentication, encryption, secure updates, access controls, incident reporting, vendor accountability and data portability in communication, telemetry, PMU and control-system projects.
Sixth, Regional differentiation should be maintained but with capacity building. Higher grants should be accompanied by technical support for DPR preparation, procurement and project management, in order to take into account differences in terrain, utility finances and project costs in the North-Eastern and hilly states.
Seventh, the feedback loop between grid operations and investment should be enhanced through the operational role of GRID-INDIA/NLDC and CEA. Load Despatch Centres need to provide regular evidence of congestion, protection, telemetry, voltage issues to be captured in a standardised way to be used for project appraisal. Independent post-completion evaluations should be conducted for large projects as well.The trajectory from 2014 to 2026 shows a policy instrument adapting to a changing electricity system. It began with congestion, voltage management, protection and transmission modernisation and later expanded to renewable integration, telemetry and energy storage. Its continuing relevance depends on preserving that underlying principle while making the conversion from regulatory resources to reliable infrastructure more measurable, timely and financially disciplined.

References

1. Press Information Bureau. (2014, January 2). Scheme for operationalization of Power System Development Fund. Government of India. https://www.pib.gov.in/newsite/PrintRelease.aspx?relid=102262

2. Central Electricity Regulatory Commission. (2014, June 9). Central Electricity Regulatory Commission (Power System Development Fund) Regulations, 2014. Government of India. https://cercind.gov.in/current_reg.html

3. Press Information Bureau. (2014, February 19). Power System Development Fund (PSDF). Ministry of Power, Government of India. https://www.pib.gov.in/newsite/PrintRelease.aspx?relid=103924

4. Ministry of Power. (2019). Power System Development Fund (PSDF): Annexure III. Government of India. https://powermin.gov.in/sites/default/files/webform/notices/Annex-I-to-VII.pdf

5. Press Information Bureau. (2014, December 4). Grants to States under PSDF. Ministry of Power, Government of India. https://www.pib.gov.in/newsite/PrintRelease.aspx?relid=112594

6. Central Electricity Regulatory Commission. (2019, August 28). Central Electricity Regulatory Commission (Power System Development Fund) Regulations, 2019. Government of India. https://www.cercind.gov.in/2019/regulation/151-Gaz.pdf

7. Ministry of Power. (2023, July 4). Continuation of Scheme for Operationalization of the Power System Development Fund (PSDF) for the 15th Finance Commission cycle from FY 2021-22 to FY 2025-26. Government of India. https://erpc.gov.in/wp-content/uploads/2023/11/Agenda_209_OCC-1.pdf

8. Ministry of Power. (2024, March 12). Revised Guidelines/Procedure for Disbursement of Funds from Power System Development Fund (PSDF). Government of India. https://erpc.gov.in/wp-content/uploads/2025/07/229th-OCC-Agenda.pdf

9. North Eastern Regional Power Committee. (2024, September). Notification of revised guidelines for PSDF fund disbursement. Government of India. https://nerpc.gov.in/wp-content/uploads/2024/09/Agenda-for-29th-NETeST.pdf

10. Central Electricity Authority. (2024). Annual report 2023-24. Ministry of Power, Government of India. https://cea.nic.in/

11. Standing Committee on Energy, Lok Sabha. (2025, March). Demands for Grants (2025-26) of the Ministry of Power (Fourth Report). Parliament of India. https://sansad.in/getFile/lsscommittee/Energy/18_Energy_4.pdf?source=loksabhadocs

12. GRID Controller of India Limited. (2025). Annual report 2024-25. Ministry of Power, Government of India. https://grid-india.in/

13. Government of India. (2023). Output-Outcome Monitoring Framework 2023-2024: Power System Development Fund. Union Budget. https://www.indiabudget.gov.in/budget2023-24/doc/OutcomeBudgetE2023_2024.pdf

14. Government of India. (2024). Output-Outcome Monitoring Framework 2024-2025: Power System Development Fund. Union Budget. https://www.indiabudget.gov.in/budget2024-25/doc/OutcomeBudgetE2024_2025.pdf

15. Government of India. (2025). Output-Outcome Monitoring Framework 2025-2026: Power System Development Fund. Union Budget. https://www.indiabudget.gov.in/doc/OutcomeBudgetE2025_2026.pdf

16. Government of India. (2026). Output-Outcome Monitoring Framework 2026-2027: Power System Development Fund. Union Budget. https://www.indiabudget.gov.in/doc/OutcomeBudgetE2026_2027.pdf

17. Press Information Bureau. (2025, June). Government approves VGF scheme for 30 GWh of battery energy storage capacity with support from Power System Development Fund. Government of India. https://www.pib.gov.in/PressReleasePage.aspx?PRID=2248342

18. Comptroller and Auditor General of India. (2021). Report No. 16 of 2021: Compliance audit observations—Ministry of Power. Government of India. https://cag.gov.in/webroot/uploads/download_audit_report/2021/Report%20No.%2016%20of%202021_E%26SM_English_PDF%20A-061c1b9cbe2d147.22751655.pdf

About the Contributor

Purbaa Jagannath is an intern with IMPRI, currently pursuing her master’s in Social work at Tata Institute of Social science, Mumbai. Her research interests lie in social science, governance, and social issues.

Acknowledgements

The author extends sincere gratitude to the IMPRI team for their guidance and support along with the reviewers Ayan Bordoloi and Ambika Sharma for their valuable feedback and insights.