The country’s energy transition initiatives and the need to meet the growing power demand are driving transformation in the power sector. Growing renewable energy capacity and expanding transmission and distribution infrastructure underscore the need for continued investment in the sector. Looking ahead, the sector is poised for significant capital inflows, especially in storage, grid modernisation and smart metering, which are critical to sustaining its growth trajectory. Leading financiers share their views on the sector’s performance, key challenges and the future outlook…
What is your assessment of the power sector’s progress during the past year? What is the current investor sentiment with respect to the power sector?
R. Balaji
Power is vital for infrastructure and crucial for the economic growth and welfare of nations. Historically, power demand lagged behind GDP growth, but from 2021 to 2024, demand surged, reflecting strong consumption patterns. In financial year 2024, power demand increased by 7.4 per cent, driven by the El Niño phenomenon and an 8.2 per cent GDP growth. The Indian government has worked to transform the power sector from a state of shortage to a surplus position through the development of a national grid, improved distribution and universal electrification.
In the first quarter of financial year 2025, demand rose by 11 per cent year on year due to heatwaves and 6.7 per cent GDP growth. India’s power generation is diverse, encompassing conventional sources (coal, gas and nuclear) and renewables (solar and wind).
Recent developments include:
- Renewable energy: India’s solar capacity reached 81.81 GW and wind capacity 45.89 GW as of March 2024, with significant additions driven by the goal of 500 GW of non-fossil fuel capacity by 2030.
- Policy initiatives: New policies, such as the production-linked incentive scheme, have boosted domestic solar panel and battery manufacturing.
- Distribution reforms: Initiatives like the Revamped Distribution Sector Scheme (RDSS) aim to improve the financial health of discoms.
- Energy access: The focus on universal electrification has improved rural access, though challenges remain in supply consistency.
- Coal dependency: Coal remains a major part of the energy mix, posing risks during peak demand.
- Transmission enhancements: A unified grid allows for efficient power transfer, improving rural power availability significantly.
- Carbon neutrality goals: India aims for net-zero emissions by 2070, leading to the exploration of financing options for greener transitions.
Overall, while India’s power sector has made strides, it must continue to innovate and invest to address infrastructure and sustainability challenges.
The sector continues to face challenges related to infrastructure, the financial health of discoms and balancing energy security with sustainability. Ongoing innovation and investment are essential for future growth. Investor sentiment is generally positive, driven by:
- Renewable energy growth: Strong interest in solar and wind due to ambitious targets and governmentincentives.
- Policy support: Various government policies, including the National Energy Policy, enhance infrastructure development and business conditions.
- Private sector participation: Increased involvement from private companies fosters competition and innovation.
- Technological advancements: Improvements in energy storage and smart grids boost efficiency and reliability, attracting investment.
- Regulatory reforms: Ongoing reforms create a more stable investment climate.
PFS, an infrastructure finance company, continues to maintain a positive outlook on the power sector. The company’s focus is on sustainable infrastructure and renewable projects, which align with the government’s vision of a clean and green society. PFS has been a pioneer in established and emerging green infrastructure finance sectors like renewable energy. As of June 30, 2024, almost 40 per cent of the company’s portfolio constitutes the renewable and transmission sectors. The focus will continue to be on long-term sustainable infrastructure funding.
Kumar Bibhu
For the power sector in India, 2023-24 was an eventful year in many ways. The overall power generation grew around 6 per cent across all sources. Solar remained the primary driver of capacity additions, contributing 15 GW (around 58 per cent of the total capacity addition in 2023-24). However, it was the renewed focus on thermal generation that gained attention as the Government of India announced plans to add 80 GW of new thermal capacity by 2031-32. This move can be partly attributed to the rapid increase in demand. While capacity and generation showed healthy growth, they were outpaced by rising demand. Peak demand rose by around 13 per cent from around 216 GW in 2022-23 to around 243 GW in 2023-24. The demand growth is driven by several factors such as hot weather, resilient economic activity, higher penetration of residential end-use appliances, manufacturing growth and emerging power applications such as electric vehicles and hydrogen. The initiatives taken by the government helped distribution utilities reduce their overall aggregate technical and commercial losses to around 15 per cent. However, it is still higher than the global standards. Improvements were also seen in payables for power purchases and billing efficiency. The rapid roll-out of smart meters under the RDSS will further improve efficiency, making a significant impact on the sector.
Avinash P. Rao
The power sector has fired on all cylinders across demand, supply and capacity addition. Over the past year, the markets have reacted positively to sector stocks, indicating positive investor sentiment. This, along with a record number of renewable energy bids issued by central government nodal agencies and the strong interest from domestic and international investors in these auctions, further reflects the positive outlook for the sector.
What are the sector’s unaddressed issues and concerns?
R. Balaji
Addressing the following issues is vital for attracting investment and ensuring a sustainable power supply in India. Despite progress in India’s power sector, there are certain challenges that need to
be tackled.
- Enhance the financial health of discoms: State discoms face significant liquidity issues, with overdue payments to power generators rising from Rs 760 billion in March 2020 to around Rs 1 trillion by June 2020, exacerbated by Covid lockdowns. The central government introduced a Rs 1.35 trillion relief package to help discoms clear dues, tied to specific reform measures.
- Grid infrastructure upgradation: Current grid systems struggle to integrate renewable energy, leading to curtailment and stability challenges.
- Addressing peak power demand: Strategies to ensure that electricity supply meets peak consumption levels will be essential.
- Infrastructure bottlenecks: Delays in developing transmission infrastructure hinder project timelines for renewable installations and industrial operations.
- Hydro projects: Large hydro projects face delays due to land acquisition issues, environmental clearances and local protests in states such as Himachal Pradesh and Uttarakhand.
- Access and reliability: While electricity access has improved, these are many rural areas that still lack reliable supply and quality service.
- Complex tariff structures: Price-based bidding for renewables adds complexity, creating challenges for tariff stability and long-term planning. Variations across states complicate national energy strategies.
- Technological gaps: Slow adoption of advanced technologies, like smart meters, hampers efficiency and customer engagement.
Kumar Bibhu
Rise in power demand: India’s power demand is expected to rise significantly, reaching about 2,300 BUs by 2030. There is a need to increase supply to keep pace with this rapid increase in demand. Further, diurnal and seasonal variations can only be addressed through appropriate balancing of the power mix, involving thermal, renewables, storage, etc. As demand surges, the challenges of balancing the grid will become even more critical.
Challenges in smart meter installations: Of the 222 million smart consumer meters sanctioned across the onboarded states, only around 13.6 million have been installed as of September 2024, as per the National Smart Grid Mission dashboard. Rapid smart meter roll-out is key to improving the overall commercial viability of the sector and preparing it for the next set of reforms.
Transmission bottlenecks: The increase in generation capacity will also require a corresponding expansion of transmission capacity. However, with huge generation capacities being planned, the availability of adequate transmission capacity is becoming a challenge. A faster implementation of planned transmission capacities, supported by a modern digital backbone, is the need of the hour.
Avinash P. Rao
The financial health of state-run off takers remains a matter of concern. While there are strong regulatory safeguards protecting investor interests, consistent improvement in the financial health of off takers is key to the sustainability of the power sector.
What is the investment outlook for the sector in the next one to two years?
R. Balaji
The investment outlook for India’s power sector leading up to 2026 is optimistic, driven by several key factors:
- Renewable energy targets: The government aims for 500 GW of renewable capacity by 2030, attracting significant investment in solar and wind.
- Government initiatives: Policies like the National Solar Mission will enhance investor confidence.
- Private sector participation: Increased involvement from private players and international investment will continue as the sector opens to competitive bidding.
- Green financing: A focus on sustainable financing and green bonds is making capital more accessible for renewable projects.
- Innovative financial instruments: Instruments such as infrastructure investment trusts will help monetise projects, while credit enhancement and deepened bond markets can improve funding flows.
- Technological advancements: Investments in smart grids and energy storage will modernise the sector and attract tech-oriented investors.
- Market reforms: Regulatory reforms aimed at stabilising discom finances and improving tariffs are essential for attracting investment.
- Energy transition: A global shift towards cleaner energy will drive investments in renewables and low carbon technologies.
Despite challenges, positive policy support and funding opportunities provide a favourable outlook. The Ministry of Power’s budget for financial year 2025 has increased by 14 per cent to Rs 865.44 billion, with 77 per cent expected from internal resources. Capital expenditure on infrastructure and reforms to strengthen transmission and distribution networks are expected to boost power demand, projected to
grow at a CAGR of 5-7 per cent from 2025 to 2029, surpassing the historical growth rate.
Kumar Bibhu
The investment outlook for India’s power sector is likely to remain promising over the next one to two years. While past investments were primarily focused on renewables, in the coming years, investments in the central and state sectors are expected to increase. Further, there has been a strong emphasis on creating storage capacities, and investment is expected to flow into this segment, particularly in pumped storage projects. Additionally, smart metering activities are likely to attract significant investment. The enhanced generation capacity will also require corresponding transmission/distribution infrastructure. Moreover, the modernisation of the grid will remain a priority, with significant capital flow to enhance grid reliability and flexibility, facilitating the integration of renewable energy sources. Therefore, the short- to medium-term investment scenario for India’s power sector
is positive.
Avinash P. Rao
Given the economic growth of our country and the resulting growth in demand for electricity, alongside the government’s target to achieve 500 GW of renewable energy capacity by 2030, the investment outlook for the sector, especially the generation and transmission segments, seems extremely positive.
