A new Centre for Science and Environment report warns that outdated thermal power contracts are hindering India's energy transition. These long-term agreements force consumers to pay fixed costs for coal plants even as solar energy use rises, creating financial inefficiencies. The findings highlight the urgent need for contract reforms to improve grid flexibility.
The Centre for Science and Environment (CSE) released a report on August 25, 2026, highlighting that outdated power purchase agreements (PPAs) are creating significant challenges for India's transition to renewable energy. These long-term contracts, which define the terms of electricity supply between generators and distribution companies, were created during a period of frequent power shortages and have not kept pace with the current shift toward solar and wind energy.
The core issue identified is the rigidity of these contracts. Traditionally, thermal power plants were designed to provide 'baseload' power, meaning they ran constantly to meet a steady demand. Because of this, contracts included fixed payments to ensure the plants could recover their costs. However, as solar energy capacity has grown, the energy grid now requires power plants that can ramp up or down quickly depending on sunlight levels. When solar generation is high, coal plants are often asked to reduce their output. Despite running for fewer hours, these plants are still entitled to their full fixed payments under the old contract terms.
This mismatch creates a financial burden. Consumers effectively end up paying higher prices because the fixed costs of coal capacity remain high, even when the actual electricity generated is lower. The CSE report examined data from eight states and found that 6.1 gigawatts (GW) of power capacity is tied to long-term contracts that extend to 2040 and beyond. This 'generational lock-in' restricts the ability of the power sector to adopt more flexible and potentially cheaper energy sources.
Distribution companies (DISCOMs), which are responsible for purchasing and distributing power, continue to face financial pressure. These rigid contractual obligations limit their financial flexibility and can prevent them from optimizing their power procurement costs. The report suggests that because many of these assets and distribution companies are government-owned, there is an opportunity to negotiate changes to these agreements rather than relying on legal battles or waiting for the contracts to expire.
The CSE study recommends updating the standard power purchase agreement model to incorporate requirements for operational flexibility and performance during different energy demand cycles. It also calls for state-level reviews to ensure that procurement portfolios are aligned with a modern, low-carbon energy system. For investors and energy stakeholders, the key monitorable will be potential regulatory changes or state-level policy updates that could trigger the renegotiation of these legacy contracts. Such reforms would be essential to reducing system-wide costs and improving the financial health of the power distribution sector.