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A new report by Ember and Climate Trends indicates India's rapid renewable energy expansion, particularly solar, is putting significant economic pressure on coal power. This shift is changing coal's role in the energy mix and presenting challenges for grid operators, utilities, and distribution companies dealing with complex balancing acts, evolving PPA structures, and the financial implications of underutilized coal plants.
A recent analysis from energy think tank Ember and Climate Trends highlights that India's renewable energy sector is experiencing unprecedented growth, primarily driven by solar power additions. The country added 25 gigawatts (GW) of solar capacity in 2024, with projections for another 25 GW by October 2025. This surge is largely due to developers accelerating projects to capitalize on an expiring inter-state transmission system (ISTS) waiver.
The rapid deployment of renewables is fundamentally altering the operational landscape for coal power plants. The average plant load factor (PLF) of coal stations has declined to approximately 66 percent and is forecasted to drop to 55 percent by FY32, according to the National Electricity Plan's outlined renewable and storage expansion. Traditionally designed for steady baseload power, coal plants are increasingly required to adjust their output (ramp up and down) to manage fluctuations from solar generation, especially during peak demand periods.
This transition poses significant challenges, particularly concerning energy storage. With less than 1 gigawatt-hour (GWh) of operational battery storage currently available in India, states often depend on coal procurement to meet peak demand. This dynamic creates a competition between coal and renewables for demand coverage, complicating long-term energy planning.
Distribution companies face growing financial strain. Many are bound by long-term coal power purchase agreements (PPAs) that commit them to high fixed charges for plants that might operate less than half the year. Ember's analysis reveals that the effective cost of coal power can increase significantly when underuse is factored in, as fixed costs are spread over fewer electricity units, potentially rising from Rs 4.78/kWh to about Rs 6/kWh.
Furthermore, new coal capacity is becoming more expensive due to advanced technologies and emission controls, increasing fixed costs. Some developers are reportedly structuring these costs to remain competitive on energy charges, which could escalate long-term expenses for buyers.
However, states are beginning to explore innovative solutions. Gujarat is trialing flexible procurement with variable-speed pumped storage. Rajasthan has secured record-low tariffs for standalone battery energy storage systems. Madhya Pradesh has tendered solar-plus-storage systems designed for high availability.
States are also exploring shorter PPAs and tariff structures that incentivize performance during high-demand periods. The report emphasizes that India is navigating a critical phase of its energy transition, aiming for a reliable, low-cost, renewable-heavy power system. This objective is achievable, but requires significant reforms in grid management, market design, and planning.
The report concludes that the shift away from coal is primarily driven by the cost competitiveness and deployment speed of renewables, rather than solely by policy mandates. The key challenge for policymakers is to ensure that regulatory and procurement frameworks evolve at a pace that matches the sector's rapid transformation.
Impact
This news has a high impact on the Indian stock market, particularly affecting companies in the energy sector, including those involved in coal mining, power generation, and renewable energy development and deployment, as well as infrastructure and utilities. Investors will be watching the financial health of utilities, the growth trajectory of renewable energy companies, and government policy shifts.
Rating: 8/10
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