India’s long-term power purchase agreements (PPAs) for coal-based thermal power need urgent reform as the country’s electricity system undergoes a rapid shift towards renewable energy, according to a new study by the Centre for Science and Environment (CSE).
The report, Beyond Baseload: Reforming Thermal PPAs for India’s Energy Transition, is based on a nationwide Right to Information (RTI) survey that received responses from eight states. It finds that existing thermal PPAs, many of which were designed during an era of power shortages and high coal utilisation, are increasingly out of step with the requirements of a power system with rising renewable energy penetration.
“India’s electricity sector is undergoing a fundamental structural transition. Installed solar capacity has increased and generation has gone up. Solar today contributes one unit for every seven units of generation from coal (as compared to every 19 units of coal in 2019-20). The role of coal is steadily shifting from continuous baseload generation towards a flexible balancing resource that supports renewable energy integration,” says Sunita Narain, Director General, CSE.
She adds: “While this transition has altered how coal plants operate, the commercial contracts that govern them – the PPAs – have not changed. They need to evolve simultaneously to enable seamless energy transition.”
The study argues that the growing share of solar generation is reducing the need for coal plants to operate continuously, particularly during daytime hours. However, fixed capacity payments under existing PPAs continue irrespective of actual utilisation, potentially increasing the effective cost of electricity for consumers.
“What our report — Beyond Baseload: Reforming Thermal PPAs for India’s Energy Transition — shows is that as India’s installed non-fossil-based capacity moves upwards of 50 per cent, the contractual framework governing tariff and operations needs redesign to avoid financial costs to consumers alongside environmental gains,” says Parth Kumar, Programme Manager, Sustainable Industrialisation unit, CSE.
Kumar adds: “The financial consequences of long-duration PPAs are not merely theoretical. Extending these contracts simply shifts the burden into a longer commitment, resulting in a substantially higher cumulative payout by DISCOMs”.
Long-term contracts create financial lock-in:
According to the CSE study, existing regulations classify PPAs exceeding five years as “long-term”, despite substantial differences between contracts of moderate duration and those extending for 25 years.
The survey covering 67.1 GW of contracted capacity across eight states found that 6.1 GW is tied up through contracts extending until 2040 and beyond. CSE says such arrangements can provide investment certainty for generators but may restrict DISCOMs as the electricity system changes and thermal utilisation declines.
The study estimates that extending a benchmark coal PPA from 11 years to 25 years can reduce the annual capacity tariff by 70-114 paise per kWh. However, the longer tenure more than doubles the cumulative payout by consumers because fixed costs are spread over a substantially longer period.
The report also highlights the financial burden associated with fixed costs. A new greenfield coal plant can cost around Rs 11.5-13 crore per MW, with projects typically financed through a 30:70 equity-debt structure. Under the existing PPA framework, generators can receive annual returns of 8-15 per cent on these costs, creating significant long-term payment obligations for DISCOMs.
CSE also points to the “toll-gate effect”, under which PPAs can continue generating fixed-capacity payments and equity returns even after project debt is generally retired within 10-12 years.
Rising solar generation and surplus coal capacity:
The study says increasing solar generation is creating a growing mismatch between the operational requirements of the grid and the traditional baseload model of coal-fired power.
CSE estimates that net surplus coal capacity could reach up to 80 GW during periods of high solar generation. Such capacity could remain under-utilised while DISCOMs continue to meet contractual fixed-cost obligations.
The report further warns that long-term fuel supply agreements (FSAs) can compound the problem by locking utilities into coal procurement commitments even as thermal plant utilisation changes.
“Existing PPAs lack performance-linked standards for efficiency and emissions, insulating generators from market-based performance signals. This report builds on our earlier work on decarbonising coal-based thermal power, which identified the variations in performance and looked for pathways to resolve it. It provides legal pathways for reform, including renegotiation and contractual restructuring, and concludes by proposing a Modernised Thermal PPA Framework with suggestive clauses and policy recommendations to better align future PPAs with India’s changing power system,” says Kushagra Goyal, Senior Research Associate, Sustainable Industrialisation, CSE.
CSE calls for PPA restructuring:
The report recommends that the existing model PPA be updated to incorporate operational efficiency, emissions intensity and differentiated requirements for solar and non-solar hours.
It also calls for mandatory periodic reviews of thermal power portfolios by DISCOMs and power corporations to assess whether existing contracts continue to match changing system requirements.
CSE proposes the development of standard frameworks for voluntary renegotiation and negotiated exits, with compensation restricted to genuine unrecovered costs. It also recommends reviewing uniform annual availability factors so that capacity payments more closely reflect actual system requirements.
Another recommendation is to introduce measurable efficiency and emissions benchmarks into thermal contracts and reward better-performing, lower-emission plants through mechanisms such as Merit Order Dispatch preference or performance-linked payments.
The study cites the Tata Mundra Ultra Mega Power Project as an example of how even competitively bid PPAs under Section 63 can be amended through mutual agreement, suggesting that negotiated contractual adaptation could provide a practical route for addressing changing commercial circumstances.
Nivit K Yadav, Programme Director, Sustainable Industrialisation, CSE points out that India’s power sector is in a unique position to make this change because majority of our coal capacity is government-owned and so are the discoms. Mutually negotiated amendments offer a faster, more collaborative pathway than waiting for contracts to expire or for protracted legal disputes.
The CSE study concludes that modernising thermal PPAs is necessary not only to reduce the financial burden on consumers but also to facilitate greater renewable energy integration and ensure that long-term contractual arrangements remain aligned with India’s evolving electricity sector.
(Based on CSE briefing)
(Image source: Wikimedia Commons)
