Thermal power makes a comeback after decade-long freeze amid demand surge, policy shift

After a decade of red signal flagging to new projects, India's thermal power sector is making a big comeback, as realities force the Government to take a U-turn and change policies to promote fossil-fueled coal, lignite and gas-fired power plants, to meet India's growing future electricity demand.

India's total installed capacity grew from 305 gigawatts (GW) in 2015–16 to 476 GW as of June this year. Of this, 240 GW or just over half is thermal, 110.9 GW is solar, and 51.3 GW of wind power. In the last decade, renewable energy capacity grew more than threefold to reach 232 GW from 75.52 GW in March 2014. While solar capacity grew from 2.8 GW to 108 GW, wind energy capacity more than doubled from 21 GW to 51 GW. Compared to this, the thermal capacity addition was only 72 GW, from 168 GW in 2014 to 240 GW,  as ongoing projects were allowed to be completed, and new projects were not encouraged.

Return of new coal plants

That is changing. Generation planning studies carried out by the Central Electricity Authority (CEA) on electricity demand by the year 2031-32, estimated that to meet the base load requirement in 2032, India will require 283 GW of coal and lignite-based installed capacity. Considering this, the Government in April last year suggested setting up an additional minimum of 80 GW coal-based capacity by 2031-32, entailing an expenditure of a minimum Rs. 6,67,200 crores, calculated at an estimated capital cost of Rs 8.34 crores per MW for new coal-based thermal capacity.

Capacity addition is already happening. Coal-based power capacity recorded a net increase of 2,843 MW out of 13,495 megawatts (MW) added during Q1, 2025, driven by project completions across multiple states. These included projects like Khurja Super Thermal Power Plant Unit 1 (660 MW) of THDC India in Uttar Pradesh, Panki Thermal Power Station Unit 1 (660 MW) in Uttar Pradesh, Yadadri Thermal Power Station Unit 2 (800 MW) in Telangana and Bhusawal Thermal Power Station Unit 6 (660 MW) in Maharashtra.  

At present, nearly 60 GW has either been announced or is in various phases of implementation, with private developers taking up nearly 19 GW. 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 fiscals, says a recent Crisil Ratings estimate. 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.

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. Capital expenditure over the three fiscals through 2025 was Rs 1.1 lakh crore, including 4 GW of projects acquired through the National Company Law Tribunal (NCLT) route.

Availability of land may not be a big challenge, as 15 GW out of the 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, says Crisil.

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 the power sector for the next three fiscals.

Dependence on thermal to continue

Though investments in renewable energy sources will continue for achieving net-zero targets, thermal power will remain the bulwark for meeting base load requirements and ensuring grid stability. Though thermal power accounts for just over half the installed capacity in India, nearly 75 per cent of the power production is still met through fossil power.  

“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,” says Manish Gupta, Deputy Chief Ratings Officer, Crisil Ratings.

Experts say the share of thermal power generation will continue to be above 60% even by 2032, despite large capacity additions in renewable power. Rating agency ICRA says the all-India thermal plant load factor (PLF) level is expected to remain flat at 70.0% in FY2026 against 69.5% in FY2025, given the healthy growth in generation expected from the renewable sources and 9-10 GW capacity addition expected in the thermal segment in FY2026.

Electricity demand is expected to grow by 6.0-6.5% over next five years, driven by electric vehicles, data centres and green hydrogen segments, says ICRA. Despite the massive build-out in renewables, conventional thermal power will still make up 16% of global capacity additions to 2050 to support system reliability, says a S&P Global Commodity Insights.

FDG exemption

Now policy support is also coming for thermal project developers. In a recent directive, the Environment Ministry exempted the majority of India’s thermal power plants from installing flue gas desulphurisation (FGD) systems, which cut polluting sulphur dioxide (SO2) emissions. The government has withheld a 2015 notification mandating all coal plants to install FDGs in plants located within 10 kilometres of cities with a population of more than one million. As of August 2024, only 39 out of 537 plants have installed the FGD units.  The decision is projected to save a substantial ₹19,000 crore to ₹24,000 crore in annual tariff expenses, translating to a saving of ₹0.17 to ₹0.22 per unit of tariff, says CareEdge Ratings.