CRISIL Predicts Lower Thermal Share In Generation Next Fiscal

CRISIL Ratings, in a sectoral report has predicted a drop of over 500 bps (basis points) in share of thermal plants in India’s power generation by next fiscal. The prediction is based on expectations of stronger addition of renewable energy (RE) capacities of as much as 50 GW over the next two years.

These are expected to pull down thermal’s share to ~67% by next fiscal after rising continuously in the past five through fiscal 2024. Yet the plant load factor (PLF) of thermal plants will remain healthy because of limited capacity addition. The report comes even as India’s rising coal consumption for powering its thermal plants has been vexing climate researchers worldwide, as along with China, the country has struggled to offer the kind of declining trajectory or plateauing many hoped to see.  Power demand that has risen faster than expected has sent thermal plant PLF’s spiking, even as fresh renewable capacities have barely managed to fill the incremental demand, forget replacing core demand.

According to CRISIL, for thermal power producers, healthy PLFs and moderating cost pressures due to robust domestic coal supply will support operating cash flows, which, along with reduced debt levels, will result in comfortable credit profiles for thermal players.

The share of thermal power in overall power generation had increased to 73% in fiscal 2024 from ~69% in fiscal 2020. This was mainly because the growth in demand (at ~7% during fiscals 2021-2024) was being met largely by thermal generation. RE and other sources (nuclear, hydel, biomass) clocked just ~3% compound annual growth rate during this period.

Says Manish Gupta, Senior Director, CRISIL Ratings, “The trend is set to reverse with the share of thermal expected to fall over 500 bps to ~67% by fiscal 2026. For the first time, we would see incremental RE generation growth (at 20%) will be higher than the overall power demand growth of 5-6% over fiscal 2025 and 2026. This is because a strong government push has led to a significant step-up in RE capacity addition of more than 50 GW in the next two years by fiscal 2026, which, although operating at relatively lower PLFs, will outpace thermal generation growth over the period.”

The PLFs of existing thermal plants will see a marginal fall but will remain healthy at more than 65% by fiscal 2026 compared with 69% last fiscal. This is because, thermal power is needed to meet almost half of the incremental annual power demand over near to medium term. This, along with limited capacity addition, will lead to continued dependence on the existing thermal capacities. Furthermore, thermal power will remain important for meeting the base load requirements due to the intermittent nature of RE capacity and absence of sustainable storage solutions.

CRISIL’s study was based on ~33 GW of private coal-based capacities rated by CRISIL Ratings.

Around half of these capacities are under a tariff model which ensures full recovery of fixed costs, such as operational and maintenance expense, interest on loan, depreciation as well as a fixed return on equity, so long as the plant is available to operate above required normative levels. This is not expected to be a challenge because domestic coal supply, which is the key parameter for maintaining the required availability, is conducive. Domestic coal production, which meets over 92% of the demand from the power sector (rest is via imports), will be sufficient for domestic power requirements. Also, in this tariff model the variable cost (primarily the cost of coal) is a passthrough.

For the remaining capacities, the impact on operating cash flows from lower PLFs will be marginal. This is because the decline is expected to be small and cost pressures are easing owing to coal getting cheaper. Additionally, inventory levels are better and domestic coal supply is improving, all of which will provide a cushion to earnings.