Rating agency projects 44 GW capacity addition in FY2026 while state electricity boards face mounting debt burdens.
28 May 2025 | 1245 Views | By Angitha Suresh
India's electricity demand is expected to grow at 6-6.5% annually over the next five years, driven by electric vehicles, data centers and green hydrogen production, according to credit rating agency ICRA. This represents an acceleration from the 5% growth rate achieved over the past decade.
The rating agency projects ...
This is an Autocar Pro Plus article. Subscribe to continue reading.
India's electricity demand is expected to grow at 6-6.5% annually over the next five years, driven by electric vehicles, data centers and green hydrogen production, according to credit rating agency ICRA. This represents an acceleration from the 5% growth rate achieved over the past decade.
The rating agency projects power demand growth of 5-5.5% for the current fiscal year ending March 2026, lower than expected GDP growth of 6.5%. ICRA attributes this to early monsoon onset and expectations of above-average rainfall, which typically reduces cooling demand and agricultural power consumption.
Electric vehicles, data centers and green hydrogen facilities are expected to account for 20-25% of incremental electricity demand between FY2026 and FY2030. Three-wheelers are leading EV adoption, followed by two-wheelers, electric buses and passenger vehicles. Green hydrogen capacity is expected to scale up gradually due to higher costs compared to conventional hydrogen production.
Generation capacity additions are projected to reach a record 44 GW in FY2026, up from 34 GW in FY2025. Total installed capacity will approach 520 GW by March 2026. Renewable energy will contribute the majority of new capacity, while thermal power plants will add 9-10 GW. The thermal segment has over 40 GW under construction currently.
Thermal power plant load factors are expected to remain steady at 70% in FY2026, compared to 69.5% in the previous year. Coal stock levels at domestic power plants have reached a five-year high of 20 days as of May 21, 2025, following improved supply and slower thermal generation growth.
The power sector faces structural challenges in the distribution segment. State electricity distribution companies recorded gross debt of Rs 7.4 trillion as of March 2024, up from Rs 6.6 trillion the previous year. This debt was primarily used to clear dues to power generators and fund operations amid continued losses.
Despite loss-making operations, tariff increases approved for FY2026 remain limited across most states. ICRA expects the cash gap for distribution companies to remain high at 35 paise per unit in FY2026. The agency maintains a negative outlook for the power distribution segment due to inadequate tariff adjustments and ongoing operational losses.
Average spot power prices in the day-ahead market moderated to Rs 4.4 per unit in FY2025 from Rs 5.2 per unit in FY2024, reflecting slower demand growth and higher generation capacity. These price levels are expected to continue in FY2026 due to improved coal availability and stable supply conditions.
The government is encouraging new thermal power projects to ensure adequate buffer capacity despite the renewable energy push. This is reflected in fresh project announcements by public and private power producers, along with long-term power purchase agreements being tendered by state utilities after a decade-long hiatus.
Progress on smart metering programs and timely implementation of fuel cost adjustment mechanisms will be critical for improving distribution company finances, according to ICRA. Currently, only 19 out of 28 states have issued tariff orders for FY2026 as of May 2025.
The power sector outlook reflects India's broader economic transformation as the country seeks to balance growing energy needs with sustainability goals while addressing persistent financial challenges in the electricity distribution system.