The share of thermal power in India’s electricity generation is expected to fall below 70 per cent for the first time in the next financial year, driven by slower demand growth and a sharp increase in renewable energy capacity, according to Crisil Ratings.

Thermal power’s share is projected to decline to around 72 per cent in the current financial year (FY26) from about 75 per cent in FY25. Plant load factors are also expected to moderate to 64–66 per cent in FY26 and FY27, compared with around 69 per cent in the previous year.

Despite the declining share, thermal power continues to play a critical role in the power mix due to limitations in grid absorption of renewable energy, which is intermittent, and the still early-stage adoption of energy storage solutions. Manish Gupta, Deputy Chief Ratings Officer at Crisil Ratings, said these factors have led to a revival in capital expenditure in the thermal sector, even as renewables account for the bulk of incremental capacity additions.

Crisil noted that power distribution utilities are increasingly entering into long-term thermal power purchase agreements to secure round-the-clock supply. About 85 per cent of the 60 GW operational capacity held by independent power producers is now contracted through PPAs, up from 79 per cent at the end of the previous financial year. This has improved revenue visibility and reduced exposure to the merchant power market. These contracts typically follow a two-part tariff structure, ensuring recovery of fixed costs if normative availability levels are met, while many also allow full pass-through of coal costs.

Power demand growth is expected to slow to 1–2 per cent in the current financial year due to an early monsoon and a relatively cooler summer. However, demand is projected to rebound to 4–6 per cent in the next financial year, aided by a low base. In contrast, renewable energy generation is expected to grow at a compound annual rate of 18–20 per cent across the current and next financial years, supported by capacity additions of 75–85 GW. This expansion is likely to meet most of the incremental electricity demand.

Dushyant Chauhan, Associate Director at Crisil Ratings, said improved cash flows have led to a sharp reduction in leverage across the rated thermal power portfolio in recent years. He noted that debt-to-Ebitda levels declined to around 2.2 times in FY25 from nearly seven times in FY20. Leverage is expected to rise modestly and peak at about three times by FY29 as new thermal capacities are commissioned, before stabilising thereafter.