Whalesbook
El Niño Fuels Demand Surge, Prices Dip
India's power sector faces a complex situation as electricity demand surges due to El Niño and strong economic growth. While ample supply keeps market prices down, there's a delicate balance between rising demand and a supply side still relying heavily on traditional fuels, despite expanding renewables. This impacts grid stability and investment strategy.
The El Niño Demand Surge and Market Paradox
Crisil Intelligence forecasts India's power demand to rise by 5.5-6.5% in fiscal year 2027, potentially reaching 1,815-1,825 billion units. The emergence of El Niño conditions from July is a primary catalyst, expected to boost cooling needs via higher temperatures and reduced rainfall. This climatic factor adds to steady economic growth, projected by agencies like Goldman Sachs to be around 6.8-6.9% in 2027. March's power consumption already hit a record 149 billion units, a 1.3% increase from the previous year. Correspondingly, the real-time electricity market (RTM) saw its volume surge by 41.7% year-on-year to 5,283 million units in March. However, this heightened activity occurred against a backdrop of falling prices. The average market clearing price (MCP) in the RTM declined by 10% year-on-year to ₹3.71 per unit. This divergence between volume and price suggests ample generation capacity to meet immediate demand spikes, likely bolstered by increased thermal output, even as renewable integration continues. El Niño is expected to boost power demand through higher cooling needs while weaker monsoons could cut hydro generation, forcing greater reliance on thermal and gas power.
Coal Power's Continued Role
Despite the rapid expansion of renewable energy capacity, which saw 50.9 GW added in fiscal year 2026, coal remains central to India's power generation. In March, coal-based generation increased marginally, lifting its share in the total generation mix to approximately 73%, up from the fiscal 2026 average of around 68%. Reports indicate that coal supplied nearly 79% of domestic energy in fiscal year 2025. This sustained reliance on coal is due to its flexibility in ramping up output to meet demand fluctuations and its role in providing grid stability that variable renewables currently cannot fully offer at scale. While renewable capacity is growing robustly, reaching 200 GW by October 2024 towards a 2030 goal of 500 GW, coal's dominance in meeting immediate demand, especially during peak seasons exacerbated by El Niño, is set to continue. Hydro and nuclear power also saw growth in March, increasing by 13.8% and 8.3% respectively, but their combined contribution is overshadowed by thermal sources.
Underlying Risks in India's Power Sector
The current supply abundance, shown by falling RTM prices, hides underlying risks. A key risk is India's heavy reliance on coal, which raises emissions and exposes the country to global price volatility for imported fuels used in thermal plants. While renewable energy capacity additions are strong, the grid needs greater flexibility, storage solutions, and transmission upgrades to effectively integrate these intermittent sources and manage demand surges driven by climate events like El Niño. Weak monsoons, a direct consequence of El Niño, could severely curtail hydro power generation, necessitating a greater call on thermal and gas-based plants, potentially leading to price spikes if supply constraints emerge. Furthermore, the financial health of distribution companies (DISCOMs) remains a persistent challenge, potentially hindering investment in necessary grid modernization and expansion. Execution delays in renewable projects and a government shift from deployment to industrial decarbonisation also need close monitoring.
Future Outlook for India's Energy Market
Economic forecasts suggest continued growth, with real GDP projected to be around 6.9% in 2026 and 6.8% in 2027 by Goldman Sachs, and 7.1% in fiscal 2027 according to Crisil. This growth will underpin robust electricity demand. Bernstein has raised its outlook for India's power demand growth for FY27, citing structural drivers and potential for a stronger second half, while also noting the increasing role of data centers. ICRA expects demand growth to rebound to around 5% in FY2027. Focus on manufacturing, industrial decarbonisation, battery storage, and carbon capture signals a more policy-driven energy transition. However, the sector must manage geopolitical uncertainties, commodity price swings, and climate risks like El Niño to ensure reliable, affordable power for its growing economy.