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India’s rapid shift towards renewable energy is changing how the country’s electricity grid operates, but the contracts governing much of its coal-fired power capacity have barely changed. A new study by the Centre for Science and Environment (CSE) warns that long-term thermal power purchase agreements (PPAs) could increasingly lock electricity distribution companies into paying for coal-fired capacity even as renewable generation reduces the need to run those plants continuously. The study, based on a nationwide RTI survey covering eight states, argues that reforming these contracts is essential to integrate more renewable energy while avoiding unnecessary costs for consumers.
India’s power system is changing, but coal contracts are not
India’s electricity system is moving away from the model for which many existing thermal PPAs were designed. Coal plants were traditionally contracted to provide relatively steady baseload electricity, but the rapid expansion of solar power means demand for coal generation can fall sharply during sunny daytime hours before rising again in the evening.
CSE Director General Sunita Narain said India’s electricity sector is undergoing a fundamental structural transition, with coal increasingly shifting from continuous baseload generation towards a more flexible role that supports renewable energy integration. However, she said the PPAs governing coal plants have not evolved alongside this change and need to do so.
The shift is already visible in India’s power mix. CSE says solar generation has increased substantially, with solar now contributing roughly one unit for every seven units of generation from coal, compared with one for every 19 units in 2019-20. India also reached 50% non-fossil installed power capacity in November 2025, five years ahead of its original 2030 target, according to CSE.
Long-term PPAs can leave consumers paying for underused coal capacity
One of the biggest problems identified by the study is the mismatch between falling utilisation of some coal capacity and the fixed payments built into long-term contracts. As solar generation rises during the day, coal plants may need to reduce their output, but distribution companies can remain responsible for recovering fixed costs under existing PPAs.
CSE describes this as a “low utilisation cost trap”. A coal plant that once operated at around 80% capacity throughout the day may increasingly need to reduce generation when solar power is abundant, while its fixed costs continue to be recovered through electricity tariffs. The result can be a higher effective cost for consumers even when the plant is producing less electricity.
The survey also found that almost all the thermal capacity covered by responses from the eight states is tied to long-duration PPAs. CSE argues that the current regulatory definition, which treats contracts longer than five years as “long-term”, does not adequately distinguish between moderately long contracts and commitments lasting 25 years or more. 25-year contracts could more than double cumulative consumer payouts
The study highlights the financial consequences of extending thermal contracts. According to CSE, extending a benchmark coal PPA from 11 years to 25 years can reduce the annual capacity tariff by around 70 to 114 paise per kWh because fixed costs are spread over a longer period.
But the lower annual payment comes with a much longer commitment. CSE says the cumulative payout by consumers can more than double when the contract is extended from 11 to 25 years. The study argues that this creates a situation in which a seemingly cheaper annual tariff can ultimately result in a much larger financial obligation.
The problem becomes more significant because power plants can continue receiving fixed-capacity payments after their project debt has typically been repaid. CSE describes this as the “toll-gate effect”, in which long-term PPAs can continue generating fixed payments and equity returns for years after the original debt-financing period has ended.
67.1 GW surveyed, with 6.1 GW locked in beyond 2040
The RTI-based survey covered 67.1 GW of thermal capacity across eight states. Of this, CSE found 6.1 GW contracted until 2040 or beyond, creating long-term commitments for a power system that is undergoing rapid structural change.
The study also estimates that rising solar generation could leave as much as 80 GW of coal capacity as net surplus during the daytime, when solar output is at its highest. Such capacity may remain underused while still generating fixed contractual costs for distribution companies and ultimately consumers.
CSE says the experience of Brihanmumbai Electric Supply and Transport Undertaking (BEST), which has a five-year PPA with an existing coal plant, demonstrates that shorter-duration contracting is possible rather than merely theoretical.
CSE calls for PPAs to be redesigned for a renewable-heavy grid. The study does not call for an immediate abandonment of thermal power. Instead, it argues that contracts need to reflect the changing role of coal in a grid increasingly supplied by renewable energy.
CSE recommends updating model PPAs to include provisions for operational efficiency, emissions intensity and different requirements during solar and non-solar hours. It also calls for periodic reviews of thermal contracts by distribution companies and power corporations, along with frameworks allowing voluntary renegotiation or negotiated exits where circumstances have changed.
The organisation further recommends revisiting uniform annual availability requirements so that thermal capacity payments are more closely aligned with actual system needs, while introducing measurable efficiency and emissions benchmarks that reward better-performing plants.
The study’s broader argument is that India’s energy transition is no longer simply about adding renewable capacity. As solar and other non-fossil sources take a larger share of the electricity system, the contracts, tariffs and operating rules governing conventional power will also need to adapt. Without that change, CSE warns, India could end up paying for a coal-heavy system that is increasingly out of step with how the grid actually operates.
References:
https://www.cseindia.org/beyond-baseload-reforming-thermal-ppas-for-india-s-energy-transition-13215
https://www.pib.gov.in/PressReleasePage.aspx?PRID=2250039
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