Rigid long-term thermal PPAs (power purchase agreements) are putting India’s energy transition at risk, says new CSE study

RTI-based nation-wide survey shows that modernising thermal PPAs not only essential for improving cost efficiency and facilitating RE integration, but also for ensuring long-term contractual arrangements remain aligned with India's evolving electricity sector  

Download the report Beyond Baseload: Reforming Thermal PPAs for India’s Energy Transition click here

New Delhi, August 25, 2026: Power purchase agreements (PPAs) – the contract under which a power producer or generator agrees to supply electricity to a buyer or distributor (such as state power corporations) – need to be reformed urgently if India is serious about transitioning to renewable energy sources. An RTI (Right to Information)-based survey conducted by Centre for Science and Environment (CSE) that received responses from eight states has exposed the anomalies in the existing PPA system. 

“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.” 

CSE recently released its new report based on its survey and study, at a national dialogue of experts and stakeholders held in New Delhi. Parth Kumar, Programme Manager, Sustainable Industrialisation unit, CSE echoes Narain: “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.” 

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”. 

What has the CSE study found

1. Disconnect between what the grid needs today and what PPAs offer: Most thermal PPAs continue to reflect an era of power shortages and high coal utilisation, with payments, operational obligations and risk allocation designed around sustained baseload operation. The ground reality is different -- as RE penetration increases, there is a growing disconnect between evolving grid requirements and legacy contractual structures. 

2. Low utilisation cost trap: Rising adaption of solar is leading to daytime under-utilisation of coal capacity; but fixed-cost obligations remain, inflating the effective cost of electricity for consumers. For example, a coal plant that earlier operated at 80 per cent capacity throughout the day, may need to significantly reduce its output during periods of high solar generation. However, its fixed costs would still need to be recovered, increasing the overall cost borne by consumers. 

3. Long-term lock-in: Existing regulatory categorisation treats all PPAs exceeding five years as “long-term”, despite significant differences in financial exposure, contractual lock-in and system-planning implications between moderate-duration and 25-year contracts. In the eight states which responded to the CSE survey, almost all the capacity is tied to long-duration PPAs, whicb provide investment certainty but can become restrictive as the power system evolves, locking DISCOMs into payments even as coal utilisation declines. 

4. The PPA tenure trade-off: Extending a benchmark coal PPA from 11 to 25 years lowers the annual capacity tariff, creating a saving of 70 to 114 paise/kWh; but this tariff saving reduction more than doubles the cumulative consumer payout. The lower annual tariff is achieved by spreading fixed costs over a longer period. However, extending the PPA from 11 to 25 years essentially means consumers remain committed to these payments for much longer, resulting in a cumulative payout that more than doubles. 

5. Fixed costs, multiplied returns: A greenfield coal plant today can cost around Rs 11.5-13 crore per MW to build, financed through a 30:70 equity-debt mix. Under the existing PPA model, generators are assured annual returns of 8-15 per cent on these costs. This means the financial burden on consumers can far exceed the initial cost of building the plant and reasonable returns. While the high fixed payments provide revenue certainty for generators, they can lock DISCOMs into substantial long-term obligations, even if the plant’s utilisation falls over time. 

6. Future locked in via present PPAs: Within the 67.1 GW of RTI-based survey across eight states, 6.1 GW of capacity contracted until 2040 and beyond, creating a generational lock-in for a power system that is rapidly changing with the expansion of renewable energy. Brihanmumbai Electric Supply and Transport Undertaking (BEST) was the only DISCOM with a five-year PPA, and that too with an existing coal-based thermal power plant, indicating that shorter-term contracting is a viable alternative. 

7. Substantial daytime surplus coal capacity: Rising solar generation has reduced the daytime operational requirement for coal. CSE’s analysis says net surplus coal capacity could reach up to 80 GW, leaving a large amount of capacity under-utilised when solar generation is high – which again ultimately increases the cost burden on consumers. 

8. The toll-gate effect: Even after project debt is typically retired within 10-12 years, long-term PPAs can continue to generate fixed-capacity payments and equity returns for the remaining contract period, creating a prolonged payment obligation beyond the originally invested amount and reasonable level of returns 

9. Fuel supply agreement lock-in: FSAs can create a second layer of commercial lock-in by embedding long-term coal supply commitments alongside thermal PPAs. FSA commitments should be aligned with PPA reform and changing thermal utilisation. 

10. PPA renegotiation as a plausible pathway: The CSE survey and report cites its case study of the Tata Mundra UMPP, which demonstrates that even competitively bid Section 63 PPAs can be amended through mutual agreements, demonstrating the potential for negotiated contractual adaptation to changing commercial circumstances. 

Major recommendations

Kushagra Goyal, Senior Research Associate, Sustainable Industrialisation, CSE, says: “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.” 

The report lists the following major recommendations:

1. Update the model PPA: Incorporate provisions for operational efficiency, emission intensity, and differentiated solar vs non-solar hour requirements.
2. Mandatory portfolio reviews: DISCOMs/power corporations should periodically assess thermal contracts against evolving requirements.
3. Establish renegotiation principles, The concerned authorities need to develop standard frameworks for voluntary renegotiation and negotiated exits, limiting compensation to genuine unrecovered costs.
4. Differentiate availability factors to align thermal capacity payments more closely with actual system needs by reviewing uniform annual availability factors.
5. Incentivise efficient, low-carbon thermal generation, by establishing measurable efficiency and emission-intensity benchmarks within contracts and incentivise better-performing thermal units through Merit Order Dispatch preference or performance-linked mechanisms. 

Nivit K Yadav, Programme Director, Sustainable Industrialisation, CSE points out that 

For more on this, please connect with Souparno Banerjee: souparno@cseindia.org, 9910864339.