Despite record-low renewable energy tariffs, several states have entered long-term thermal power purchase agreements (PPAs) at significantly higher tariffs of ₹5.38 (~$0.059)-₹7.27 (~$0.079)/kWh, reflecting concerns over supply security, baseload requirements, and renewable intermittency.

In recent months, several states have signed multiple power purchase agreements for coal-based thermal power.

In September 2025, Bihar signed a PPA for a 2.4 GW ultra-supercritical coal project at Pirpainti in Bhagalpur district with a tariff of ₹6.075 (~$0.067)/kWh. A month later, Assam cleared a 3.2 GW coal project at ₹6.30 (~$0.069)/kWh.

Similarly, Madhya Pradesh’s 3.2 GW Mahan project in Singrauli, developed by the Adani Group, has a discovered tariff of ₹5.83 (~$0.064)/kWh and is under regulatory scrutiny.

Distribution companies (DISCOMs) in Maharashtra, Madhya Pradesh, and West Bengal have awarded 4.5 GW of coal-based projects under long-term PPAs, with tariffs discovered well above ₹5 (~$0.054)/kWh.

Tariffs for these projects are significantly higher than those for standalone solar, wind, and even firm and dispatchable renewable energy (FDRE).

In recent years, winning FDRE bids have ranged from ₹4.35 (~$0.047) to ₹6.75 (~$0.074)/kWh, and the discovered tariffs are gradually declining.

In NHPC’s 1.2 GW FDRE auction in 2024, the lowest discovered tariff was ₹4.37 (~$0.048)/kWh.

The DISCOMs’ Case for Coal

For DISCOMs, thermal PPAs offer long-established contracting structures and operational familiarity. Operating in a constrained financial and regulatory environment, predictability is a critical consideration for utilities.

Thermal power offers predictable generation patterns and established payment mechanisms, reducing perceived risk.

Commenting on this trend, Bharat Sarda, Senior Manager, Business Development at JSW Energy, noted that although hybrid and storage-backed renewable solutions are gaining traction, their current scale, storage duration, and cost structures limit their ability to fully substitute firm supply.

“Long-term thermal PPAs are often contracted to address anticipated capacity shortfalls, retirement of aging generation assets, and near- to medium-term system reliability needs. In many cases, these procurement decisions are also influenced by delays in transmission expansion, balancing infrastructure, and the operational readiness required to integrate high levels of variable renewable energy,” he said.

“The DISCOMs opting for thermal PPAs is less an economic decision and more a consequence of risk aversion. Many DISCOMs continue to rely on legacy thermal-centric planning models, prioritizing perceived firmness over actual system cost optimization,” said Manish Khare, Managing Director at Khare Energy.

Despite the rapid growth of renewable energy, the government plans to add 100 GW of new coal-fired capacity over the next six to seven years. However, existing and under-construction coal capacity already exceeds the coal requirement projected for 2030.

Long-term coal PPAs lock DISCOMs into procuring relatively expensive thermal power, limiting their ability to fully utilize lower-cost renewable generation.

Speaking in favor of cheaper renewables, Kishor Nair, Chief Executive Officer at Avaada Energy, said, “The historical argument that solar and wind cannot meet peak demand belonged to the early phase of renewable deployment. Hybrid projects and battery-backed solutions have fundamentally altered the equation internationally. Solar-wind hybrids smooth generation profiles. Storage provides dispatchability. Pumped hydro enables bulk and multi-day balancing. Then we have a round-the-clock (RTC) renewable energy supply, which is now technically viable and commercially competitive. Yet procurement thinking in many DISCOMs remains anchored to a 20th-century framework: thermal equals reliability.”

Locking into 25-year thermal PPAs at ₹6.64 (~$0.073)/kWh when renewable RTC solutions are available for less than ₹5 (~$0.054)/kWh reflects risk aversion – not cost optimization. In fact, renewable RTC solutions provide a ‘real’ PPA tariff for 25 years, as thermal procurement costs are about 70% driven by variable fuel costs, which are liable to increase year over year, adding a double burden to India’s import bills.

“The real issue is institutional comfort.”

A report by the Centre for Research on Energy and Clean Air (CREA) projects that coal capacity could rise to 119% of 2024 levels by 2030, while coal generation declines to around 98%, pushing plant load factors down to nearly 51.8% and increasing the risk of stranded assets.

 Renewables Offer a Natural Choice

Meeting India’s 500 GW non-fossil capacity target by 2030 means there is no room for coal capacity addition between now and 2030, even if power demand growth picks up in the coming years.

Addressing the argument that renewables cannot meet peak demand, Nair said this concern was valid in the early years of large-scale renewable deployment. However, the landscape has changed significantly. Hybrid projects combining solar and wind, along with battery energy storage systems and pumped hydro solutions, have enhanced the ability to provide a more stable and predictable supply.

“Long-term thermal PPAs effectively defer accountability. They allow DISCOMs to postpone difficult but necessary reforms such as grid modernization, demand forecasting, flexibility procurement, and storage integration. While thermal PPAs offer short-term operational comfort, they lock consumers into structurally higher costs for decades,” Khare noted.

According to CREA, in 2025, thermal and nuclear showed a decline in generation of 4% year-over-year (YoY) and 2% YoY, respectively, while large hydro and renewable energy grew by 15% YoY and 22% YoY, respectively.

“Modern renewable projects are equipped with synchronous condensers, harmonic filters, FACTS devices, and, when clubbed with battery storage, can provide ‘inertia’ to the grid that the thermal plants have long been lauded for. Thermal PPAs include variable and fixed costs, with escalations built into the tariff,” Nair added.

RTC renewable power is available for a levelized tariff for 25 years. The renewable power tariffs on the generation schedule of thermal will work out much cheaper than thermal, even on an RTC basis.

Nair emphasized that grid readiness and transmission infrastructure are important enablers of high renewable penetration. In regions where transmission capacity or grid flexibility is constrained, utilities may opt for thermal procurement as a near-term solution due to its ease of dispatch and predictability.

“However, India’s long-term energy strategy clearly emphasizes synchronized investments in renewables, storage, and grid modernization. Strengthening transmission networks and deploying flexible resources will be essential to fully realise the cost and sustainability advantages of renewable energy.”

Annual renewable additions continue to accelerate, and year over year, a greater share of total demand is met by solar, wind, and hydropower. Battery storage capacity is also expanding rapidly and will further strengthen system reliability over the next few years.

The National Power Portal data shows that the thermal sector’s plant load factor (PLF) increased from 68% in CY 2023 to 70% in CY 2024, before falling to 66% in CY 2025.

India recorded its highest-ever annual solar capacity addition in the calendar year 2025, installing 36.6 GW, a 43% increase over the 25.6 GW added in 2024, according to Mercom India’s recently released Q4 and Annual 2025 India Solar Market Update Report.

The Way Forward

Looking forward, Nair said the state DISCOMs should issue technology-agnostic tenders to meet their power requirements and do away with sourcing power from coal-based projects at a higher tariff as a base option on the same terms (fixed tariff).

“The focus should now be on scaling these solutions through well-designed tenders, clear dispatch mechanisms, and strong payment security structures. Technically, renewable energy supported by storage can increasingly address peak demand reliably and cost-effectively,” he said.

“Renewable-plus-storage contracts, although increasingly competitive, are relatively new and require adjustments in forecasting, scheduling, and regulatory oversight. Over time, as more projects demonstrate performance and stability, procurement preferences are likely to diversify toward flexible renewable solutions,” Nair opined.

It is time for DISCOMs to consider various options for using renewable power on an RTC basis.

As the DISCOMs continue to opt for thermal power, state regulatory bodies are, however, subjecting such procurements to tighter scrutiny amid the expansion of renewable capacity.

In a significant ruling in November last year, the Rajasthan Electricity Regulatory Commission questioned coal procurement and rejected a petition by the state-owned power trading company to procure 3.2 GW of coal-fired thermal power, saying the proposal is inconsistent with the state’s renewable energy policy framework.

While the existing and under-construction thermal power projects are already sufficient to meet non-solar-hour demand, the rise in renewable generation and the gradual surge in energy storage deployment make the case for new coal capacity additions much weaker.