India’s Thermal Power Share to Fall as Renewables Rise

India's thermal power sector is projected to see a notable reduction in its share of electricity generation, with a decline of over 500 basis points (bps) expected in the upcoming fiscal year. This shift is primarily attributed to a substantial increase in renewable energy (RE) capacities, including solar and wind power.

As a result, the share of coal-based (thermal) power in the national energy mix is anticipated to drop to approximately 67 percent by the next fiscal year, reversing the previous upward trend observed over the past five years through fiscal 2024. This was revealed by the global analytical firm, CRISIL Ratings in its latest report.

The report said, despite this decline, thermal plant load factors (PLFs) are expected to remain robust, benefiting from limited new thermal capacity additions and continued demand for reliable power generation. In fiscal 2024, the share of thermal power in overall electricity generation increased to 73 percent from around 69 percent in fiscal 2020.

This rise was driven by a substantial growth in energy demand, which averaged approximately 7 percent annually between fiscals 2021 and 2024. During this period, the growth in thermal generation outpaced other sources of power, including renewable energy (RE), nuclear, hydel, and biomass, which together experienced a modest compound annual growth rate (CAGR) of around 3 percent.

According to Manish Gupta, Senior Director at CRISIL Ratings, “The trend of increased thermal power share is set to reverse, with the share of thermal power expected to decrease by over 500 bps to about 67 percent by fiscal 2026. For the first time, incremental growth in RE generation, projected at 20 percent, will exceed the overall power demand growth rate of 5-6 percent over fiscal 2025 and 2026. This change is driven by a significant government push to expand RE capacity, with over 50 GW of new RE capacity slated for addition by fiscal 2026. Although this new capacity will operate at relatively lower PLFs, it will outpace the growth in thermal generation over the same period.”

The PLFs of existing thermal plants are expected to see a slight decline but should remain healthy, above 65 percent by fiscal 2026, compared to 69 percent in the previous fiscal year. This is because thermal power will continue to play a crucial role in meeting approximately half of the incremental annual power demand in the near to medium term. The existing thermal capacity will remain essential for base load requirements due to the intermittent nature of RE generation and the current lack of sustainable storage solutions.

Despite the anticipated minor decline in PLFs, the business risk profile of thermal power operators will remain stable, as highlighted by CRISIL Ratings’ analysis of approximately 33 GW of private coal-based capacities. Around half of these capacities operate under a tariff model that ensures full recovery of fixed costs, including operational and maintenance expenses, loan interest, depreciation, and a fixed return on equity, as long as the plants meet normative operational levels.

This stability is supported by a favourable domestic coal supply situation, which meets over 92 percent of the demand from the power sector, with imports accounting for the remainder. The variable costs, primarily coal, are also pass-through in this tariff model. For the remaining capacities, the impact of lower PLFs on operating cash flows is expected to be minimal. This is due to the relatively small anticipated decline in PLFs and the easing of cost pressures as coal prices decrease. Improved domestic coal supply and better inventory levels will further cushion earnings.

Ankit Hakhu, Director at CRISIL Ratings, notes, “While the impact of reduction in PLFs on the business profiles of thermal players is expected to be limited, these companies have positioned themselves well by materially reducing debt down 25 percent over fiscals 2021 to 2024 and have healthy cash flows and support from government-driven schemes for the power sector such as LPS and Aatmanirbhar. Debt levels are expected to remain in check with limited capex requirements for these plants, supporting the credit profiles of the players.” 

However, the outlook for the sector remains sensitive to factors such as prolonged monsoons, which could impact coal availability, and the timely payment by counterparties, which remains a key consideration.