India's power sector is poised for a significant turnaround, with a projected recovery in electricity demand expected in 2026. This follows a period of notable underperformance driven by weak consumption trends throughout 2025, according to a new analysis by financial firm Jefferies.
Monsoon and Industrial Slump Dampen 2025 Demand
The report highlights a subdued year for the sector in 2025. Power demand remained flat year-on-year between April and November 2025. Analysts attribute this stagnation to two primary factors: extended monsoon rains and sluggish industrial output.
The excessive rainfall during the monsoon months had a dual effect. It reduced residential demand for cooling appliances like air conditioners. Simultaneously, it decreased the need for irrigation and water pumping in the agricultural sector, a major power consumer. Jefferies points to historical precedent, noting that power demand growth in India is typically weak in years of above-average rainfall, such as fiscal years 2008 and 2014, when it rose by a mere 1 to 2 per cent.
Consequently, the firm has revised its demand growth estimate for the fiscal year 2026 downward to 2 per cent, from an earlier projection of 4 per cent.
Renewable Sector Feels the Ripple Effect, Thermal Gains Focus
The stagnation in overall power demand has created a ripple effect, slowing momentum in the renewable energy segment. While renewable energy awards were robust at 41 GW in fiscal year 2025, the pace of signing new Power Purchase Agreements (PPAs) decelerated sharply to just 8.7 GW between April and November 2025.
State Electricity Boards have been delaying these signings, leaving a substantial 44 GW of PPAs currently unsigned. Adding to the challenges, delays in securing transmission connectivity have emerged as a critical bottleneck for new projects.
In contrast, thermal power continues to be emphasized for grid stability. The Ministry of Power has increased its thermal capacity addition target to 97 GW for the period between fiscal years 2024 and 2035, up from the previous goal of 80 GW. Jefferies underscores that thermal generation remains essential to meet base load demand. Currently, 36 GW of thermal capacity is under construction, with 23 GW already awarded and another 24 GW in the pipeline.
Medium-Term Recovery Driven by Multiple Factors
Despite the current slowdown, the Jefferies report expresses optimism for a medium-term rebound. It expects demand growth to recover to healthier levels of 5 to 6 per cent. This anticipated recovery is linked to several key drivers:
- Normalization of weather patterns after the unusually heavy 2025 monsoon.
- A pickup in industrial activity and economic output.
- The rising penetration of consumer durables, especially cooling products like air conditioners and refrigerators.
Long-term growth for the sector will be supported by a 10 per cent compound annual growth rate (CAGR) in capital expenditure, alongside the expansion of new-age power consumers like large data centers and the electric vehicle ecosystem.
The report concludes that while immediate prospects for valuation improvements in power sector companies remain dim until demand fully recovers, the overall outlook hinges on a return to normalized consumption patterns. The sector's fundamentals are set for a revival, driven by economic growth and infrastructural investments.
