A little over a decade back, the Indian power sector looked like one of the most interesting investing opportunities. Expectations of high growth, huge power deficits and grand government plans for multiple ultra-mega power projects (UMPP) attracted large investments from Indian business houses and international private equity giants.

But then, the sector got short-circuited. Everything that could go wrong, went wrong — lower than forecast economic growth, overzealous bidding for projects, significant currency depreciation and higher interest rates that resulted in project costs going way out of budget, lack of fuel supplies, and discom issues. All combined, resulted in a massive outage in the sector for over a decade. Many projects ended up unviable and landed in bankruptcy courts. From its earlier peak in 2008, the BSE Power index was down by 60 per cent by January 2020 (prior to the Covid crash) compared to the Sensex rise of over 100 per cent.

However, post the Covid crash of March 2020, the sector has seen a significant turnaround. From Covid lows of 1331 the BSE Power Index is up 247 per cent as against Sensex gains of 120 per cent. The index even crossed its 2008 peak in August 2022. What has been driving this optimism in the sector? It can be attributed to many factors — supportive fiscal/monetary policies driving economic growth, shakeout in the sector resulting in strong players emerging stronger and weak ones getting weeded out.

Decoding the sizzles and fizzles of thermal power genco stocks  Decoding the sizzles and fizzles of thermal power genco stocks  

There are reasons now to believe the worst may be over for the sector.  But what does the future look like? While it is anybody’s guess how the near term will play out, given prospects of the global economic slowdown, trends in commodity prices (coal, gas etc), and market volatility, the long-term prospects appear brighter now. With thermal power remaining the mainstay (70 per cent of current power generated in the country) and the large thermal gencos (except Adani Power) aggressively diversify into renewables as well, here are the factors to consider before zeroing in on them.

PPA/Tariffs and fuel supplies

Thermal power gencos generally sell electricity by way of long-term Power Purchase Agreements (PPAs) or through short-term arrangements such as auction-based bilateral agreements (up to one year) and power trading platforms (up to 11 days). Majority of power is sold through long-term PPAs of around 25 years to distribution companies. Higher the capacity tied up with long-term PPAs, higher is the revenue visibility.

To have seamless power generation, it is necessary for companies to have sources for fuel procurement (coal, gas and lignite), which might include fuel supply arrangements (FSAs) with Coal India and its subsidiaries, procure through captive mines, or e-auction in merchant trading platforms. Lack of such arrangements in the past led to certain companies resorting to an expensive option — imported coal. For instance, of a total 195.03 MT of coal, around 87 per cent of NTPC’s coal comes through annual contracted quantity under FSA with Coal India, while the rest is from captive mines, bridge linkage and importing. Long-term FSA ensures fuel availability and helps in inventory management. Companies also have plants dependent on imported coal.

Profitability is mainly reliant on what sort of tariffs they get on their PPAs. Tariff determination here can broadly be classified into two types — cost-plus based and competitive bidding based. For cost-plus based PPAs, tariff comprises fixed capacity charge on plant availability (measured by PAF) and energy (variable) charge. Plant can recover 100 per cent of the fixed charge with post-tax project ROE of 15.5 per cent over and above costs at normative levels, provided plant is technically available more than 80-85 per cent with sufficient fuel in stock.

Further, companies can earn incentives if they achieve PLFs more than 85 per cent. Fuel (energy) cost can be allowed depending on efficiency levels. For instance, majority of NTPC’s installed capacity earns tariff on cost-plus basis on account of which the company has stability in earnings and cash flows. However, the case is not the same with competitive based tariff as all the costs can’t be of pass-through nature while certain components might have escalation clause. There have been instances when aggressive bidding led to unprofitable projects. For instance, Tata Power emerged as the lowest bidder at tariff of ₹2.26 per kwh for Mundra’s imported coal-based UMPP of 4 GW. Further, it acquired 30 per cent stake in Indonesia-based coal mines for its coal supplies. However, due to changes in mining regulations in Indonesia, the cost of fuel rose and consequently, it became difficult for Tata Power to run the Mundra plant profitably.

Tariffs earned by selling power on merchant trading platforms like IEX and PXIL exposes companies to volatility in earnings as tariffs can vary on a daily basis. For instance, as per an ICRA report, after remaining high in the range of ₹8-10 per unit during June end quarter, the spot tariffs have moderated to ₹3-3.5 per unit.

Ideally, gencos should sell majority of power via long-term PPAs backed by long-term FSAs. Having plants as close to the (coal) pit-head as possible is also a differentiating factor in cost competitiveness. A small merchant trading component can help companies generate opportunistic profits, but this cannot be the mainstay as it can lead to volatile earnings.


Non-realisation of billed amount, years of mounting losses due to tariff order delays and insufficient increase in tariffs on sale of power to end-customers despite costs passed on by gencos have adversely affected the financial health of state distribution companies (discoms). They are currently plagued by humongous debts and dues to gencos. Delayed payments by discoms creates working capital issues for gencos which, in turn, leads to inadequate procurement with respect to normative availability requirements of coal as advance payment is supposed to be made over there. For instance, NTPC was owed about ₹27,000 crore by state gencos as of FY22. As per Central Electricity Authority (CEA), on account of the cash crunch created by such a situation, certain stressed thermal gencos had to resort to short-term loans with rates as expensive as 12-13 per cent, which can further burden their financials.

Of course, there have been attempts to resolve these issues. For discom-related issues, fallback options exist in the form of letters of credit, termination of PPA contract and merchant base selling are available. However, lack of PPA can lead to termination of FSA, creating fuel security issues for the companies. To address discom financials and genco receivable issues, in June 2022, the Power Ministry notified amended late payment surcharge (LPS) rules to liquidate discom dues on EMI basis to ensure payment discipline. Eight States opted to clear dues on their own, five took loans from PFC and REC  — and those flouting rules and deadlines have been barred from transactions on the power exchange. But timely and adequate tariff revisions are critical to sustainably improve the financials of discoms. It remains to be seen to what extent changes in LPS rules help thermal power gencos.

Decoding the sizzles and fizzles of thermal power genco stocks  Decoding the sizzles and fizzles of thermal power genco stocks  
Renewable strategy

In line with the Government’s target of altering the energy mix to usher in 50 per cent of non-fossil fuel capacity by 2030, major thermal gencos have started foraying into green energy space with aggressive capex plans. Tata Power appears frontrunner in this space as it is slowing its capex in thermal and has ventured into  renewable businesses such as EV charging, solar micro grids, rooftop solar and solar EPC. Its renewables subsidiary even attracted investment of close to ₹4,000 crore by monetising a 11.43 per cent stake. JSW Energy has announced its target of increasing installed capacity from 4.8 GW to 10 GW with a 61 per cent share of renewables by 2030. Further, the company has ventured into Battery Energy Storage System. NTPC currently has 2.5 GW of renewable capacity but around 5.3 GW of capacity is under construction. It targets renewable capacity of around 60 GW by 2032. It aims to transfer its renewable assets to newly incorporated subsidiary NGEL and monetise stake of 10-20 per cent by H2FY23. Torrent Power has about 1 GW of renewable capacity which it aims to increase to around 5 GW in the next 3-4 years. Adani Power doesn’t seem to have any renewable plans, rather such projects are supposed to be carried out by the group’s other arm, Adani Green.

It needs to be noted that when it comes to capacity utilisation, renewables fares much worse than thermal power gencos. Substantially higher capacity is required in renewables to match the power generated by a thermal plant.

Companies’ financials and key takeaways

The biggest thermal player NTPC seems to have the most stable financials backed by regulatory cost-plus PPAs, long-term coal linkages and 60 per cent of plants located at pit-heads. However, unlike other companies, NTPC has less room for opportunistic profits from merchant tariffs. JSW Energy has seen an increase in portion of PPA-based capacity, including 35 per cent of pithead plants. It earns cost-plus tariffs which led to strong margins coupled with good cash position and low debt. However, the stock’s valuation looks stretched as strong fundamentals and its renewable strategy already seem priced in.

Adani Power has seen volatility in earnings with 25 per cent of its capacity exposed to merchant tariffs and issues on the materialisation of coal due to logistical issues. The situation seems to be improving for the company, thanks to favourable factors such as imported coal pass-through, better coal materialisation from FSAs and clearing of dues by discoms. Tata Power runs an integrated model in the power space, wherein thermal power generation accounts for close to 30 per cent of revenue while the rest comes from transmission, distribution, renewables and coal mining. Tata Power’s profitability is lately aided by invoking of Section 11 which has temporarily allowed its imported coal-based Mundra plant a pass-through of fuel costs till December 2022. This was not allowed earlier.

Further, its coal mining business in Indonesia is also generating profits owing to increasing coal prices. The spike in company’s valuation in recent times has been on account of its renewable strategy and temporary relief for Mundra. However, there remains uncertainty on future fuel cost pass-through for Mundra. Torrent Power is a gas-based generation company with the distribution segment also contributing to revenues. While its financials are backed by regulatory cost-plus based arrangements, untied capacity and low PLFs remain challenges.

Ultimately, to make a choice, investors can check how much of gencos’ thermal capacity is tied up with long-term PPAs and FSAs for revenue visibility and whether major costs are pass-through under their tariff arrangements. Capacity availability and utilisation, proximity of coal-based plants to coal mines and the renewable strategy are also factors to consider in stock choices. Except NTPC, other gencos have seen major spike in their valuations on account of their renewables strategy and other factors. It seems that for majority of gencos, the positives are already priced in while for NTPC, monetisation of renewable arm can be a catalyst for further upside.