Thermal power investments set to double to Rs 2.3 trillion by FY28
MUMBAI: Investments to set up thermal power generation units are likely to double to Rs 2.3 trillion over the three fiscals through 2028, compared with the preceding three financial years, as the government has renewed its focus on the sector to help meet the growing energy demand and the resultant base-load power requirement.
During the past three fiscals, private companies accounted for only 7-8% of capital investments to augment capacities. But in the coming three years, private capex into this sector will contribute nearly a third, with central and state undertakings accounting for the balance, Crisil Ratings said in a report Wednesday.
The government has set a target of at least 80 gw of thermal capacity addition by fiscal 2032. Of this, nearly 60 gw has either been announced, or is in various phases of implementation, with private developers taking up nearly 19 gw, which will be operationalised only after fiscal 2028.
According to Manish Gupta, deputy chief ratings officer at Crisil Ratings, energy demand is expected to log a compound annual growth 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, and wind is concentrated from May to September—thermal power remains critical to meet the base-load demand consistently.
After a hiatus of almost 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 the rest are in various stages of finalization, clearly indicating the intention of discoms to sign up for thermal power on a long-term basis, mitigating offtake risk.
According to Gautam Shahi, a director with the agency, the discovered PPA tariffs for the new thermal projects are around Rs 5.5-5.8/unit and based on a two-part structure where fixed tariff averages 60-65% of the total tariff and the remaining is a pass-through of the cost of coal. This results in an internal rate of return of 15%, ensuring financial viability of investments, provided projects are commissioned on time.
To this end, land availability is not a challenge as 15 gw of the 19 gw of private projects are brownfield. These also have evacuation infrastructure. Also, while fuel supply agreements are expected to be signed closer to their commercial operations date, the risk remains low.
According to the coal ministry, production is planned to rise by over 100 million tonnes this fiscal on a base of 1,041 mt in FY25, aligned with the government's aim to cut import dependence, and this ramp-up is adequate to meet the incremental coal demand for power sector for the next three fiscals.