New Delhi, Jan 19 (.) The share of thermal power in India’s electricity generation is set to fall below 70 per cent for the first time in the next financial year, driven by slower growth in power demand and a sharp rise in renewable energy generation, according to Crisil Ratings report released here on Monday.
Thermal power’s share is expected to decline to about 72 per cent in the current fiscal from nearly 75 per cent in FY2025, before slipping further below the 70 per cent mark next fiscal.
As a result, plant load factors (PLFs) of thermal power plants are projected to moderate to 64–66 per cent in both the current and next fiscal, compared with 69 per cent in the previous year.
Manish Gupta, Deputy Chief Ratings Officer, Crisil Ratings, said, “ Despite its declining share, thermal power remains crucial as grid absorption of RE is constrained by the intermittent nature of RE and the nascent adoption of energy storage solutions. This has sparked a revival in capex in the thermal power sector.”
“Furthermore, distribution utilities have begun entering into long-term thermal PPAs to ensure round-the-clock power supply. Thus, almost 85%2 of the 60 GW operational capacity held by independent power producers (IPPs) is now tied up (vs 79% at the end of last fiscal) through PPAs, providing improved revenue visibility and reducing volatility associated with the merchant market” Gupta added.
Power demand growth is estimated to slow to 1–2 per cent in the current fiscal due to an early monsoon and a relatively cooler summer. However, demand is expected to recover to 4–6 per cent in the next fiscal on a low base.
Despite this rebound, the compound annual growth rate in power demand over the two fiscals is expected to remain below 4 per cent, weaker than the 5.6 per cent growth recorded over the past five fiscals.
In contrast, renewable energy generation is projected to grow at a strong compound annual rate of 18–20 per cent over the current and next fiscal years.
This growth will be supported by renewable capacity additions of 75–85 gigawatts, backed by a robust pipeline of utility-scale projects and increased installations in the commercial, industrial and rooftop segments. Renewable energy is expected to meet most of the incremental power demand in the country during this period.
Despite the declining share of thermal power in the generation mix, the segment remains critical for grid stability due to the intermittent nature of renewable energy and the limited adoption of energy storage solutions.
This has led to a revival in capital expenditure in the thermal power sector, supported by a rise in long-term power purchase agreements (PPAs) signed by distribution utilities to ensure round-the-clock power supply.
Nearly 85 per cent of the 60 gigawatts of operational capacity held by independent power producers is now tied up through PPAs, compared with 79 per cent at the end of the previous fiscal. These agreements provide improved revenue visibility and reduce exposure to volatility in the merchant power market.
The PPAs typically follow a two-part tariff structure comprising capacity charges and variable charges. Capacity charges are fully recoverable if the normative plant availability factor is met, insulating a portion of cash flows from fluctuations in PLFs.
Around 40 per cent of the tied-up capacity operates under a cost-plus bidding structure, allowing complete pass-through of coal costs. For the remaining capacity awarded through competitive bidding, the impact of lower PLFs on operating cash flows is expected to be limited, as variable charges form a smaller portion of total cash flows.
An analysis of 26 independent power producers with a combined operational capacity of nearly 60 gigawatts—accounting for more than three-fourths of the country’s private thermal power capacity—indicates that financial risk profiles will remain stable despite moderation in PLFs.
Healthy cash flows have helped reduce leverage among rated independent power producers, with debt-to-Ebitda declining from about seven times in FY2020 to 2.2 times in FY2025.
However, renewed investments in thermal capacity are expected to push leverage modestly higher, peaking at around three times by FY2029, before normalising as new capacities are commissioned and begin generating cash flows.
“Buoyed by healthy cash flows, IPPs in our rated portfolio saw debt-to-Ebitda (leverage) decline from a high of 7.0 times in fiscal 2020 to 2.2 times in fiscal 2025. However, the revival in thermal capex by select players will slightly increase leverage, peaking at 3.0 times by fiscal 2029. Thereafter, it will normalise once new thermal capacities get commissioned and start generating cash flows” said Dushyant Chauhan, Associate Director of Crisil Ratings.
Most of the planned expansions are being undertaken by established players as extensions of existing capacities and are supported by tied-up offtake arrangements, lowering execution and revenue risks. Sustained cash flows are expected to ensure that debt servicing capabilities remain unaffected.
Crisil noted that its estimates remain sensitive to weather conditions, which could influence power demand, as well as to the pace of renewable energy capacity additions.
. SAS ARN