Thermal power's share in India's generation to drop by 500 bps next fiscal

Thermal power: India’s power generation landscape is set for a significant shift, with the share of coal-based (thermal) power expected to decline by over 500 basis points to approximately 67 per cent by the next fiscal year. This marks a substantial change after the thermal power share had consistently risen over the past five years, increasing from around 69 per cent in fiscal 2020 to 73 per cent in fiscal 2024. 

The growth in demand during this period, which averaged around 7 per  cent annually, was primarily met by thermal power generation. However, the landscape is now shifting as renewable energy (RE) capacity sees a strong surge, driven by government initiatives and a global push towards greener energy sources.

Manish Gupta, Senior Director at CRISIL Ratings, explained, "The trend is set to reverse with the share of thermal power expected to fall to around 67% by fiscal 2026. For the first time, we will see incremental growth in renewable energy generation, at a robust 20 per cent, outpacing the overall power demand growth, which is projected at 5-6 per cent over fiscals 2025 and 2026." This anticipated growth in RE capacity is significant, with more than 50 GW expected to be added by fiscal 2026, bolstered by strong government support. Despite operating at relatively lower plant load factors (PLFs), this surge in RE capacity is expected to drive the overall decline in thermal power’s share in the generation mix.

Thermal Plants to Maintain Healthy Load Factors 

Despite the anticipated decline in their share of the generation mix, thermal power plants are expected to maintain healthy PLFs, projected to stay above 65 per cent by fiscal 2026. This is a slight decline from the 69 per cent PLF recorded in the last fiscal year, but it underscores the ongoing reliance on thermal power to meet India’s base load requirements. Thermal power remains crucial for managing the intermittent nature of renewable energy sources, particularly given the current lack of sustainable large-scale energy storage solutions.

Moreover, the decline in thermal PLFs is expected to be marginal due to the limited addition of new thermal capacities. Existing plants will continue to be crucial in meeting almost half of the incremental annual power demand in the near to medium term. This sustained demand, combined with the stability of domestic coal supply, will help maintain healthy operating cash flows for thermal power producers.

Thermal power producers are also expected to maintain strong credit profiles, supported by healthy cash accruals and significantly reduced debt levels. CRISIL Ratings’ analysis of approximately 33 GW of private coal-based capacities indicates that these players are well-positioned to weather the upcoming changes in the power generation landscape.

Approximately half of these capacities operate under a tariff model that ensures full recovery of fixed costs—including operational and maintenance expenses, interest on loans, depreciation, and a fixed return on equity—as long as the plants meet required normative availability levels. This is not expected to be a challenge, given the conducive domestic coal supply, which currently meets over 92 per cent of the power sector's demand. Furthermore, the variable cost, primarily the cost of coal, is a pass-through under this tariff model, providing additional financial stability.

Ankit Hakhu, Director at CRISIL Ratings, highlighted that the business risk profiles of thermal players remain comfortable despite the expected marginal decline in PLFs. “These companies have strategically reduced their debt by 25 per cent over fiscals 2021 to 2024, positioning themselves well for the future. With limited capital expenditure requirements and strong cash flows, we expect debt levels to remain in check, further supporting the credit profiles of thermal power players,” Hakhu added.

Potential Risks and Future Outlook

While the outlook for thermal power producers remains positive, there are potential risks that could impact the sector. Prolonged monsoon seasons, for instance, could affect coal availability, potentially disrupting the supply chain for thermal plants. Additionally, the timely payment by counterparties, particularly state distribution companies (DISCOMs), remains a critical factor to monitor, as delays could strain cash flows.

Looking ahead, as India continues to transition towards a more sustainable energy mix, the role of thermal power will evolve. While its share in the generation mix is set to decline, thermal power will remain a key component of the energy landscape, particularly in ensuring grid stability and meeting base load requirements. The strong financial positioning of thermal power producers, combined with robust domestic coal supply and government support, will ensure that these players continue to operate effectively in the changing energy environment.