The share of thermal power in India's electricity generation is set to drop below 70% for the first time next fiscal, driven by slower growth in power demand and a sharp rise in renewable energy (RE) output, Crisil Ratings said Monday.
Thermal's share is expected to ease to about 72% this fiscal from nearly 75% in fiscal 2025, before slipping below the 70% mark next year.
As a result, plant load factors (PLFs) for thermal power plants are projected to moderate to 64-66% this fiscal and next, from 69% in fiscal 2025.
Despite the decline, a pickup in long-term power purchase agreements (PPAs) and a healthy outlook for base-load demand are reviving capital expenditure in the thermal segment.
While this will push up leverage for thermal power producers over the next three to four years, steady cash flows and controlled debt levels are expected to keep credit profiles stable.
Power demand growth is likely to slow to 1-2% this fiscal due to an early monsoon and a relatively mild summer, before rebounding to 4-6% next fiscal on a low base. Even so, demand growth over this fiscal and next is expected to average below 4%, weaker than the 5.6% recorded over the past five fiscal years.
In contrast, RE generation is forecast to grow at a compound annual rate of 18-20% over the same period, supported by 75-85 GW of capacity additions. A strong pipeline of utility-scale projects and rising commercial, industrial and rooftop installations will allow renewables to meet most of the incremental power demand.
"Despite its declining share, thermal power remains critical as the grid's ability to absorb renewable energy is constrained by the intermittent nature of RE and the nascent adoption of energy storage solutions," said Manish Gupta, Deputy Chief Ratings Officer, Crisil Ratings. "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% 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," he said.
About 85% of the 60 GW operational capacity held by IPPs is now tied up through PPAs, up from 79% at the end of last fiscal, improving revenue visibility and reducing exposure to merchant market volatility.
Most PPAs feature a two-part tariff structure, with capacity charges and variable charges. Capacity charges are fully recoverable if normative availability levels are met, insulating cash flows from PLF volatility. Around 40% of the tied-up capacity follows a cost-plus structure, allowing full pass-through of coal costs, limiting financial risk even if PLFs decline.
For capacity awarded through competitive bidding, the impact of lower PLFs on operating cash flows is expected to be marginal, as variable charges form a smaller portion of overall cash flows.
An analysis of 26 IPPs, representing over 75% of private thermal capacity in India, shows leverage improving sharply in recent years.
"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," said Dushyant Chauhan, Associate Director, Crisil Ratings.
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, he said.
Most expansions are being undertaken by established players, backed by long-term offtake arrangements, limiting execution risks. With strong and sustained cash flows, their debt-servicing ability is expected to remain intact.
The projections remain sensitive to weather conditions affecting power demand and the pace of renewable capacity additions, Crisil added.
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)
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