Share Of Thermal In Power Generation To Drop Below 70% Next Fiscal: CRISIL
Having said that, the increase in signing of power purchase agreements (PPAs), which provide better cash-flow visibility, and a healthy outlook for long-term base load power demand are driving a revival in capital expenditure (capex) in thermal power.
This, in turn, will increase leverage for thermal power producers over the next 3-4 years. However, sustained healthy cash flows and controlled debt levels (despite an increase in borrowings to fund capex) will keep their credit profiles stable.
Growth in power demand is expected to decelerate to 1-2% this fiscal because of an early monsoon and a relatively cool summer but rebound to 4-6% next fiscal on a low base. Despite this, the compound annual growth rate (CAGR) will be less than 4% over this fiscal and next, weaker than the 5.6% over the last five fiscals.
In contrast, RE generation is poised to log a CAGR of 18-20% over this fiscal and next, driven by 75-85 gigawatt (GW) of RE capacity additions amid a robust pipeline of utility projects and a ramp-up in commercial and industrial and rooftop additions. This will result in RE meeting most of the incremental power demand in the country.
Says Manish Gupta, Deputy Chief Ratings Officer, Crisil Ratings, “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.”
These PPAs have a two-part tariff structure, comprising capacity charges and variable charges.
This structure ensures full recovery of capacity charges if the normative plant availability factor is achieved, thereby insulating certain cash flows from PLF volatility.
Regarding variable charges, about 40% of the tied-up capacity is under a cost-plus-bidding structure, allowing for complete pass-through of coal costs. Therefore, any decline in PLFs will not impact the financial risk profiles of IPPs.
For the remaining capacities under competitive bidding, moderation in PLFs will only have a minor impact on operating cash flows3. This is because the extent of PLF moderation is limited and variable charges, after accounting for coal cost, form a relatively smaller portion of operating cash flows.
Our analysis of 26 IPPs with a combined operational capacity of nearly 60 GW, forming more than 75% of the private thermal power capacity in the country, indicates as much.
Says Dushyant Chauhan, Associate Director, Crisil Ratings, “Buoyed by healthy cash flows, IPPs in our rated portfolio4 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.”
Most of these expansions are being undertaken by established players as an extension of their existing capacities and are backed by tied-up offtakes, thereby lowering implementation risks. With sustained and strong cash flows, the debt servicing ability of these players will not be impacted.
The estimates are sensitive to weather conditions, which may impact power demand, and to pace of RE capacity additions.
Published on:
22 January 2026
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