Merchant Power Firms Add Risk Amid Cooling Prices, Early Monsoons: SBI Caps

Merchant power producers in India may face increasing financial pressure as erratic cooling demand, driven by weather volatility, disrupts traditional consumption patterns, according to a new report by SBI Capital Markets (SBI CAPS).

The report, titled “Merchant Power – Can It Handle Bouncy Cooling Demand?”, highlights that power demand in the first quarter of FY2025-26 (Q1FY26) fell 1.5% year-on-year—marking the first non-COVID contraction in Q1 since FY2016—as unseasonal and widespread rainfall curbed summer temperatures.

Around 60% of days in Q1FY26 experienced above-normal rainfall, while only 12 days recorded both high temperature and humidity—conditions typically associated with elevated electricity use for cooling. The muted demand trend poses a risk for high-cost merchant players that rely on peak-time spot market participation to maintain returns, the SBI CAPS report said.

“Given the volatile nature of weather-driven demand, this could pressure the financials of high-cost players in lean years,” the SBI Caps report noted. “These players often depend on opportunistic merchant market play to salvage their return on equity (RoE).”

New Peak Hours Point to Storage Need

The SBI CAPS report also flagged a shift in peak pricing periods on power exchanges. Unlike in previous years, the highest spot prices are no longer observed during traditional morning and evening peaks, but rather between 8 PM and midnight. This time slot sees rising cooling loads coinciding with the rapid drop-off in solar generation.

In May 2025, supply during these late-night hours fell short of demand by an average of 10%, with some intervals witnessing deficits of up to 90%. In contrast, during daytime solar generation hours (7 AM to 5 PM), supply exceeded demand by 2.8 times. These imbalances underscore the urgent need for battery storage to better integrate variable renewable energy (VRE), SBI Caps said.

RE Share Rising, But Grid Bottlenecks Remain

While annual power capacity additions continue at a healthy ~30 GW pace, largely driven by solar, the report noted that utility-scale solar deployment may have plateaued. Upcoming tenders are increasingly load-oriented, including firm dispatchable and round-the-clock (RTC) models, reducing the share of pure solar bids, the SBI CAPS report said.

Despite capacity growth, renewables’ share in actual power generation remains in the low teens, SBI Caps said, though it is expected to rise in the coming years with the adoption of high-capacity factor bifacial modules, a rebound in wind capacity, and grid-scale storage.

In a sign of policy transition, the government recently launched a 30 GWh tranche of its viability gap funding (VGF) scheme for standalone battery energy storage systems (BESS), with incentives capped at ₹1.8 million/MWh—down from ₹2.7 million/MWh in the earlier phase. The move could raise storage tariffs by about 10%, but falling battery costs may help absorb the impact.

Transmission Lags, Credit Growth Risks for FIs

Transmission constraints continue to impede renewable integration, with several projects stranded for lack of connectivity. Some developers are now exploring decentralised storage-backed microgrids to bypass T&D hurdles, the report said.

On the financial side, major lending institutions could face slower credit growth in the medium term. Key distribution-sector reform schemes such as RDSS and LPS are nearing completion, and renewable project lending has yet to scale up sufficiently to offset declining DISCOM credit.

“While the funding ecosystem remains vibrant, and policy support strong, the report highlights that the industry’s ability to navigate increasingly complex demand and supply dynamics will be crucial—especially for merchant power players,” SBI Caps concluded.