A 13-15% monsoon deficit has led to five consecutive months of falling hydro power generation in India. To prevent supply shortages, utilities have ramped up coal-based thermal power, creating new cost pressures for the energy sector.
India’s power sector is navigating a challenging period as the 2026 southwest monsoon recorded a 13-15% rainfall deficit, one of the weakest in over a decade. This lack of rain has significantly depleted reservoir levels, causing hydro power generation to decline for five straight months through September 2026. With water availability restricted, the country's conventional energy reliance has shifted abruptly toward coal-fired thermal power.
In September alone, thermal power generation surged by 18% compared to the same period last year. This increase was essential to bridge supply gaps, with nighttime power shortages reaching as high as 7.7 GW—a level exceeding the peaks seen during the summer heat wave. While this rapid switch to thermal energy has helped maintain grid stability, it has placed considerable pressure on coal logistics, with inventories at some plants thinning as demand remains elevated.
For investors, the situation creates a complex financial environment. Pure-play hydro operators face direct risks to profitability when water levels fail to meet targets, as fixed costs cannot be easily adjusted for lower output. However, some companies have shown resilience by diversifying their portfolio. For instance, NHPC reported a 7.22% year-on-year revenue increase in its second quarter of 2026, driven largely by the commissioning of new projects and expanded capacity that helped offset lower seasonal hydro generation.
The sector now faces several variables that market participants are watching closely. Higher supply constraints have already led to increased volatility in electricity prices on power exchanges. Additionally, with reservoir storage levels remaining below the 10-year average, there is ongoing uncertainty regarding water availability for the upcoming winter agricultural season. Investors will likely track how sustained reliance on thermal power affects fuel costs and whether reservoir levels show any recovery in the coming months, which remains critical for the sector’s operational margins.