The sun is shining on thermal power companies. Here’s why

Thermal power companies—long facing a negative outlook because of India's clean energy push—have seen their credit ratings improve in recent months, on the back of surging demand for short-term contracts for firm power, or electricity guaranteed to be available at all times.

As of 2024-25, 79% of the thermal power companies covered by Care Ratings had a credit rating of A- or higher, up from 67% in 2021-22.

Adani Power Ltd, Jindal Power Ltd, NTPC Ltd, Sasan Power Ltd, Prayagraj Power Generation Co. Ltd and Tata Power Co. Ltd are among the companies that received favourable rating upgrades from multiple agencies in the past 12 months.

The rating agency attributed this improvement to better pricing from the sale of power in the short-term market, the availability of adequate fuel supply, and, in certain cases, the change of promoters when companies were acquired out of bankruptcy court.

Back in vogue

To be sure, grid imbalances stemming from the rising share of renewables, which are not considered a firm energy source, are driving the surge in demand for coal-based power.

Due to solar power's cyclical nature, there is often a surplus of electricity when the sun shines the brightest and a shortfall during non-solar hours. To bridge this gap, distribution companies have been procuring coal-based electricity through short-term agreements or power exchanges.

“Many thermal power companies do not have long-term power purchase agreements (PPA) and are selling power in short-term and mid-term markets, including on power exchanges at lucrative prices,” said Sabyasachi Majumdar, senior director, Care Ratings.

The average price of thermal power in the short-term market rose to about ₹5.8 per unit by 2023-24 from ₹3.2 in 2019-20, showed data provided by the rating agency.

Many thermal power companies have utilized the higher income to reduce their debt, further helping their ratings.

The favourable outlook also reflects a shift in the Indian government's stance—it is aiming to add thermal power capacity to handle the base load power demand. It targets the addition of 80GW of incremental thermal demand by 2031-32.

India added just about 18GW of thermal capacity between 2020-21 and 2024-25, a fraction of the 55GW in the preceding five years. Most of the thermal capacity addition in recent years came from state-run companies, with private companies nearly stopping all investments.

The key reason for slowing investments in thermal power was a lack of long-term PPAs from state governments, which prioritized renewable power.

New investments

Now, since new long-term PPAs for thermal power are making a comeback, investments could reach as high as ₹2.3 trillion between 2025-26 and 2027-28, 2X the amount invested in the preceding three years, according to a July estimate of Crisil Ratings.

Private companies are also heavily investing in the sector. Adani Power announced in August that it would invest $3 billion to build a 2.4GW thermal power plant in eastern Bihar. This will be the largest private-sector thermal-power project in the country in the past decade.

Tata Power is also open to acquiring coal-fired power plants or expanding the capacity of its existing units, its managing director Praveer Sinha said in an interview in August. However, it will refrain from investing in greenfield thermal power plants.