Thermal Power in India: Value Chain, Economics and Companies to Track
India is rapidly adding solar, wind and energy-storage capacity. But when the sun goes down, renewable generation falls or electricity demand suddenly increases, a large part of the power system still depends on thermal power.
This creates an important distinction for investors:
Thermal power’s share in installed capacity is declining, but its importance in electricity generation and grid reliability remains much higher.
In the first article of this series, we mapped the complete power-sector value chain—from generation and transmission to distribution, equipment, trading and storage.
We will now break down each sub-sector separately, beginning with thermal power—the largest part of India’s electricity-generation system.
Data cut-off: 4 September 2026.
What is thermal power?
Thermal power plants produce electricity by converting heat into electrical energy.
The heat may come from different fuels. Therefore, thermal generation can be divided into four main categories:
1. Coal-based power
Coal is burned to produce steam. The steam rotates a turbine, which drives a generator and produces electricity.
Coal remains the most important thermal fuel in India and continues to supply the majority of the country’s electricity.
2. Lignite-based power
Lignite is a lower-grade form of coal. Lignite plants are generally located close to the mines because transporting lignite over long distances may not be economical.
NLC India is one of the most visible listed companies operating across lignite mining and power generation.
3. Gas-based power
Gas plants can start and change their output faster than many coal plants. This makes them useful for meeting peak demand and balancing renewable energy.
However, their utilisation depends heavily on domestic gas availability and imported LNG prices. India has meaningful gas-based capacity, but much of it remains underutilised because fuel can be expensive.
4. Diesel-based power
Diesel has a very small share in India’s utility-scale electricity system. It is generally used for backup generation or in remote areas and is not a major power-sector growth theme.
Capacity share and generation share tell different stories
As of 30 June 2026, India had approximately 548.9 GW of installed electricity-generation capacity.
According to the Central Electricity Authority, fossil-fuel capacity stood at approximately 251.5 GW, representing around 45.8% of the total installed capacity.
The fossil-fuel capacity included:
- Coal: 224.2 GW
- Lignite: 6.6 GW
- Gas: 20.1 GW
- Diesel: 0.6 GW
But installed capacity does not tell us how much electricity each source actually generates.
According to the Ministry of Power’s FY2025-26 review, India generated approximately 1,845.9 billion units of electricity during FY2025-26.
Coal-based plants generated approximately 1,250.2 billion units, or around 67.7% of total generation.
Therefore:
Fossil fuels represent less than half of India’s installed capacity, but coal alone still produces more than two-thirds of its electricity.
This is why investors should never analyse the power sector using installed-capacity data alone.
Understanding the thermal-power value chain
Thermal power is not just about owning a generating plant. It is supported by a much wider business ecosystem:
Coal mining → transportation and logistics → boilers and turbines → EPC and construction → power generation → transmission → operations and maintenance → emission-control equipment → ash handling
Every part of this chain has different revenue drivers.
Fuel suppliers
Coal India and captive or commercial mine operators supply coal to thermal plants. Their economics depend on production volume, coal pricing, mining costs and transportation infrastructure.
Logistics providers
Coal must be transported through railways, merry-go-round systems or ports. A plant located near a coal mine can have a cost advantage over a distant or imported-coal-based plant.
Equipment and EPC companies
Companies such as BHEL, Thermax and ISGEC supply boilers, turbines, generators and other plant equipment. Their earnings depend on order inflow, project execution, margins and working-capital collection.
Power generators
Generators convert fuel into electricity and sell it through regulated tariffs, long-term Power Purchase Agreements or short-term and merchant markets.
Operations and maintenance companies
Companies such as Power Mech Projects provide erection, maintenance, mining and operating services to thermal plants.
Therefore, the thermal investment opportunity is wider than power-generating companies alone.
How does a thermal-power company make money?
The most important factor is not simply how many megawatts a company owns. The real question is:
Under what contract does the company sell electricity?
There are three broad revenue models.
Regulated or cost-plus tariff
The regulator permits recovery of approved fixed costs and fuel costs, subject to availability, efficiency and operating norms.
This model generally offers better cash-flow visibility, but regulatory approvals and DISCOM receivables must still be monitored.
Long-term competitively bid PPA
The tariff and risk allocation are determined through the Power Purchase Agreement.
Investors must check whether fuel-cost escalation, changes in law and environmental expenditure can be passed through to the buyer.
Merchant or short-term power sale
Power is sold through exchanges or short-term contracts.
Merchant plants can benefit when electricity prices rise, but their earnings can also be volatile. High electricity prices mean little if coal costs rise faster or the plant is unavailable.
What determines profitability?
Five operating factors matter the most:
- Fuel security: Does the plant have a domestic coal linkage, captive mine or dependence on imported coal?
- Fuel-cost recovery: Can higher coal and transportation costs be passed on to the buyer?
- Plant efficiency: Modern supercritical and ultra-supercritical plants generally consume less coal per unit of electricity than older plants.
- Availability and utilisation: A plant must be available when required. However, higher utilisation creates value only when the selling price covers fuel and operating costs.
Receivables and working capital: Delayed payments from distribution companies can weaken cash flow even when accounting profit looks strong.
Why will thermal power remain important?
Solar generation is strongest during the daytime, but electricity demand continues after sunset. Wind and hydro generation can also change with weather and seasonal conditions.
Thermal plants are therefore required to supply electricity during:
- Evening peak-demand hours
- Periods of low renewable generation
- Seasonal demand spikes
- Grid emergencies
- Delays in storage or transmission projects
The CEA Generation Adequacy Plan projects approximately 315 GW of coal capacity by FY2035-36, alongside major expansion in solar, wind and storage.
Coal’s percentage share may decline, but its absolute capacity may still increase.
The future role of thermal power will also change. Plants will increasingly have to reduce generation during strong solar hours and increase output during the evening peak.
This means the future winner may not be the plant that simply runs continuously. It may be the plant that can operate efficiently, flexibly and reliably.
Which listed companies participate in thermal power?
The following companies provide different forms of exposure:
- NTPC: India’s largest thermal generator with a largely regulated and long-term contracted business model.
- Adani Power: India’s largest private thermal generator, with domestic and imported-coal assets and a large expansion pipeline.
- Tata Power: An integrated utility with thermal generation, renewable energy, transmission and distribution businesses.
- JSW Energy: Expanding across thermal generation while simultaneously building renewable and energy-storage capacity.
- NLC India: An integrated lignite and coal-mining company with mine-mouth power-generation assets.
- CESC: Combines thermal generation with regulated electricity-distribution operations.
- Torrent Power: Operates gas and coal-based generation along with a significant distribution business.
Other value-chain companies include Coal India, BHEL, Power Mech Projects, Thermax and ISGEC Heavy Engineering.
These companies cannot be compared only by total capacity. Their fuel arrangements, contracts, plant efficiency, debt and business diversification are very different.
The names mentioned above are for sector education and value-chain mapping—not stock recommendations.
Major risks investors should track
Thermal power is essential, but it is not a risk-free business.
Important risks include:
- Rising coal, LNG and transportation costs
- Imported-coal price volatility
- Delays in project construction
- Higher interest during construction
- Weak payment behaviour of DISCOMs
- Environmental-compliance expenditure
- Lower plant utilisation as renewable energy and storage expand
- Higher maintenance from frequent ramping and low-load operation
- Regulatory intervention in tariffs or merchant electricity prices
Older and inefficient plants without secure fuel or cost pass-through may face greater pressure than modern and well-contracted assets.
The correct research hierarchy
While analysing a thermal-power company, investors should follow this order:
Contract and cost recovery → fuel security → plant efficiency and availability → balance sheet and project execution → transition positioning
Thermal power should not be viewed as a simple “coal demand” story.
The better opportunity may exist in companies that combine secure fuel, efficient plants, strong PPAs, reliable operations and disciplined capital allocation.
Final conclusion
India is not choosing between renewable energy and thermal power in the near term.
It is building renewable capacity to supply cleaner energy and maintaining thermal capacity to provide reliability when renewable output is unavailable.
Thermal power’s share in the overall capacity mix will likely decline, but efficient and well-contracted plants can continue to play an important role in India’s electricity system.
The real investment question is not:
“Will India continue using coal?”
The better question is:
“Which plants can generate reliable cash flow while the electricity system becomes more renewable and flexible?”
Coming next in the Power Sector Series
In the next article, we will analyse the Hydropower sub-sector—including large hydro, small hydro and pumped-storage projects.
We will explain its business model, growth drivers, risks and the listed companies participating in different parts of the value chain.
Follow the complete Power Sector Series for evidence-based and easy-to-understand sector research.
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Karan Vijayvargiya
SEBI-Registered Research Analyst
SEBI Registration No.: INH000025470
BSE Enlistment No.: 7030
Disclaimer: This article is published solely for education and sector research. It is not a stock recommendation, investment advice, an offer or a promise of returns. Investments in securities markets are subject to market risks. Please review all relevant documents and perform independent due diligence before investing.