Other Sectors
Thermal investments seen doubling to Rs 2.3 lakh crore in 3 fiscals
Rollout of long-term power purchase agreements to ensure viability of investments
Investments to set up thermal electricity generation capacities will double to Rs 2.3 lakh crore over the three fiscals through 2028, compared with the preceding three fiscals1, because of renewed focus on the segment to help meet India’s growing demand for energy and base load power requirement.
In the preceding three fiscals, private companies accounted for only 7-8% of the investments. On expanded investment levels over the next three fiscals, private companies will contribute nearly a third, with central and state public sector undertakings accounting for the balance.
The government has set a target of at least 80 GW of thermal capacity addition by fiscal 2032. At present, nearly 60 GW has either been announced, or in various phases of implementation, with private developers taking up nearly 19 GW2.
Majority of the private capacities will be operationalised only after fiscal 2028, given that these involve long construction periods. While the majority of these are brownfield expansions involving low implementation risks, timely delivery of equipment - mainly of boilers and turbines - remains monitorable, given limited supply capacity and substantial build-up of orders at major manufacturers. Other risks related to offtake, fuel and tariff adequacy remain low.
Says Manish Gupta, Deputy Chief Ratings Officer, Crisil Ratings, “Energy demand is expected to log a compound annual growth rate of ~5.5% to ~2,000 billion units by fiscal 2028. Nearly 70% of the incremental demand will be met by renewable sources. However, with renewable energy being intermittent - solar is available only during daytime, while wind is concentrated from May to September - thermal power remains critical to meet the base load demand consistently.”
After a hiatus of 9-10 years, distribution utilities of four states have rolled out 25-year thermal power purchase agreements (PPAs) to private sector generators. Of the ~19 GW of private projects under implementation, PPAs have been tied up for 6.1 GW and for the larger portion of the balance, these are in various stages of finalisation. This clearly indicates the intention of distribution utilities to sign up for thermal power on long-term basis, thereby mitigating offtake risk.
Says Gautam Shahi, Director, Crisil Ratings, “The discovered PPA tariff for the new thermal power projects is around Rs 5.5-5.8 per unit and is based on a two-part structure where fixed tariff averages ~60-65% of the tariff and the remaining is a pass-through of coal cost. This results in an internal rate of return of ~15%, ensuring financial viability of investments, provided projects are commissioned in a timely manner.”
To this end, availability of land is not a challenge as ~15 GW out of ~19 GW of private projects are brownfield. These also have evacuation infrastructure, but system strengthening will be necessary to handle higher energy output, which is expected to be implemented by the time these capacities are operationalised.
Also, while fuel supply agreements (FSAs) are expected to be signed closer to their commercial operations date, the risk remains low. As per the Ministry of Coal, production is planned to rise by over 100 MT this fiscal on a base of 1,041 MT in the previous fiscal, aligned with the government’s aim to cut import dependence. This ramp-up is adequate to meet India’s incremental coal demand for power sector for the next three fiscals.
The ongoing capex in thermal power is being funded by both public and private sector lenders in a standard debt-to-equity ratio of 70:30. A few major private companies are expected to rely on lower debt because of strong internal accruals and balance sheets, which would keep leverage under control. Notably, these projects are being undertaken by established developers, which is expected to keep implementation and financial risks in check.
Overall, while investments in renewable energy sources will continue for achieving net-zero targets, thermal power will remain the bulwark for meeting base load requirement and ensuring grid stability.
1 Capital expenditure over the three fiscals through 2025 was Rs 1.1 lakh crore
2 Including ~4 GW of projects acquired through National Company Law Tribunal (NCLT) route.
Analytica