India's power sector has achieved significant milestones in renewable energy expansion while grappling with persistent structural challenges that require urgent policy attention in the upcoming Budget 2026. The sector's growth trajectory shows promise with non-fossil fuel-based energy capacity reaching 250.64 GW as of December 2025, supported by various government initiatives and budgetary allocations.

Policy Successes and Current Achievements

Several government schemes have demonstrated notable success in democratizing energy access across different consumer segments. The PM Surya Ghar Muft Bijli Yojana and PM-KUSUM initiatives have effectively extended solar energy benefits to retail and agricultural consumers, contributing to the sector's renewable energy expansion.

The Battery Energy Storage Systems (BESS) sector has received substantial policy support through viability gap funding schemes. The government has allocated ₹9,100 crore to support 43.2 GWh of storage capacity, with plans to scale this to 47 GW by 2032. Additionally, Budget 2025 introduced the Revamped Distribution Sector Scheme (RDSS) and a conditional 0.5 percent GSDP borrowing allowance, though implementation has shown limited progress.

Critical Financial Challenges in Distribution

The distribution sector continues to face severe financial distress that threatens overall sector stability. The financial health of distribution companies (discoms) has deteriorated significantly, creating systemic risks across the power value chain.

This financial crisis has created severe liquidity constraints for Independent Power Producers (IPPs) and prompted judicial intervention. The Supreme Court has emphasized the importance of cost-reflective tariffs and directed that regulatory assets be capped at 3 percent of aggregate revenue requirement (ARR), with existing assets to be liquidated within specified timeframes.

Transmission Infrastructure Bottlenecks

Transmission capacity development is struggling to keep pace with generation capacity additions, creating potential grid stability concerns. Despite ambitious planning, execution has fallen short of targets across multiple parameters.

The transmission sector has planned over 191,000 circuit kilometers of transmission lines and 1,270 GVA of capacity between 2022-23 and 2031-32. However, implementation faces significant challenges:

• Substation capacity addition was 33% below planned targets during April-January FY25
• Persistent delays due to right-of-way constraints and environmental approvals
• Coordination challenges among multiple agencies and states
• Prolonged litigation affecting project timelines

Storage Market Development Needs

The energy storage sector requires enhanced policy focus to meet India's growing renewable integration requirements. The Central Electricity Authority (CEA) has projected substantial storage capacity needs that current commitments cannot adequately address.

While BESS deployment has received policy attention, concerns remain about insufficient cost reflectiveness in tender responses and the need for stronger ancillary services market development.

Budget 2026 Recommendations

Industry experts suggest several priority areas for Budget 2026 to address these structural challenges effectively:

Financial Sector Reforms:

• Refinancing mechanisms for legacy discom debt linked to verifiable performance improvements
• Direct subsidy payments to consumers rather than through discoms
• Acceleration of regulatory reforms including the Electricity Bill 2025

Infrastructure Development:

• Dedicated platform for transmission project approvals similar to PM Gati Shakti
• Enhanced focus on indigenous battery manufacturing capabilities
• Establishment of nuclear energy zones near industrial clusters for captive power applications

The recent passage of the SHANTI Act 2025 for nuclear sector reform provides encouragement, though implementation of key frameworks including tariff mechanisms and capacity building remains pending. Budget 2026 represents a critical opportunity to deliver foundational reforms encompassing financial discipline, regulatory harmonization, and infrastructure acceleration to ensure the power sector's sustainable growth trajectory.

A potential rollback of restrictions on Chinese firms bidding for Indian government contracts may have limited impact on India's power and transmission sector, according to Amit Anwani, Research Analyst at PL Capital. He expects any easing of the five-year-old curbs to be selective rather than a blanket opening of the sector.

A Reuters report indicated that India's finance ministry is considering scrapping restrictions imposed in 2020 following a deadly clash between Indian and Chinese troops. These measures required Chinese bidders to register with a government committee and obtain political and security clearances, effectively barring them from competing for government contracts estimated to be worth $700.00 billion to $750.00 billion.

Industry Structure Transformation Since 2020

Anwani highlighted that the power and transmission sector has undergone significant structural changes since the restrictions were implemented. The private sector has narrowed considerably in terms of new capacity addition, with most recent large orders coming from government and state-owned entities.

Before 2020, several private power producers had relied heavily on Chinese suppliers for equipment. However, this dependence has reduced sharply due to concerns around critical technologies and national security considerations.

BHEL's Strong Order Position

BHEL has demonstrated robust performance with strong order inflows over the past two and a half years. The company's order book has crossed ₹2.00 lakh crore, providing substantial execution visibility.

Anwani noted that even if Chinese imports increase marginally, BHEL already has execution visibility due to orders secured in the last 24 months. The market is primarily focused on the company's execution capabilities, margin performance, and balance sheet health.

Transmission Sector Implications

The transmission segment has shown some market reaction to reports of possible policy easing. Companies such as ABB India and Siemens India have expressed concerns that higher competition could impact margins if restrictions are relaxed.

However, Anwani expects limited overall effect, particularly given that 40.00% to 50.00% capacity addition is planned over the next two years. The sector has already invested heavily in capacity and capital expenditure, which may cushion any competitive impact.

Strategic Sectors Likely Protected

Anwani emphasized that strategic and security-sensitive sectors are likely to remain outside the scope of any relaxation, consistent with previous approaches in power, telecom, and related areas. The real impact of any policy change will depend on the specific details of government notifications and the extent of actual easing implemented.

The analyst stressed that more clarity is needed before drawing firm conclusions on sector-wise impact, as the effectiveness of any policy change will ultimately depend on the exact notification details and implementation scope.