Addressing Off-Taker Risk in Renewable Projects in India: A Framework for Designing a Payment Security Mechanism as a Credit Enhancement Device

This research paper proposes a theoretical framework for designing a Payment Security Mechanism (PSM) to mitigate counterparty credit risk for renewable energy projects in India. The authors define a PSM as a funded capital reserve providing interest-free working capital to projects when state-owned electricity distribution companies (DISCOMs) default on payments. Using a probabilistic methodology and a sample of eight DISCOMs, the paper estimates the size of payment support needed to enhance project credit ratings, concluding that while a PSM can improve ratings up to a BB level, it cannot achieve investment-grade status (BBB or higher) due to non-counterparty risks.

• Counterparty credit risk, specifically the risk of state-owned utilities delaying or defaulting on payments, can add up to 1.07% in additional risk premium to the cost of debt for Indian renewable energy projects and limits capital availability.
• The theoretical maximum credit enhancement achievable through a PSM is a BB rating. A target of BBB or higher is not possible because a project with zero counterparty risk still has a probability of default of 1.51% due to other risk factors, which corresponds to a BBB rating.
• Most sampled DISCOMs require payment support averaging 12 months of payments to achieve a BB rating, typically ranging from 8 to 17 months. This fund size represents approximately 10%-20% of the project's total capital expenditure, though this could be reduced to 6%-18% if DISCOMs provide a 3-month revolving letter of credit.
• Payment support needs vary significantly by DISCOM: Gujarat requires minimal support (1 month or less), and West Bengal requires no PSM to reach the BB limit. Conversely, Uttarakhand DISCOM showed an anomalous requirement of over 45 months, which the authors attribute either to poor performance or a lack of granular liability data in public reports.
• Previous government-sponsored PSMs (such as those under JNNSM Phase 1 and 2) had limited success due to a lack of transparency in design, unclear objectives, and a failure to account for the differing credit qualities of the DISCOMs procuring the power.

APA

Atal, V., Shrimali, G., & Singh, V. P. (2018). Addressing Off-Taker Risk in Renewable Projects in India: A Framework for Designing a Payment Security Mechanism as a Credit Enhancement Device. Climate Policy Initiative. https://www.climatepolicyinitiative.org/wp-content/uploads/2018/05/A-Framework-for-Designing-a-Payment-Security-Mechanism-as-a-Credit-Enhancement-Device-4.pdf

Chicago

Atal, Vinit, Gireesh Shrimali, and Vaibhav Pratap Singh. Addressing Off-Taker Risk in Renewable Projects in India: A Framework for Designing a Payment Security Mechanism as a Credit Enhancement Device. Climate Policy Initiative, 2018. https://www.climatepolicyinitiative.org/wp-content/uploads/2018/05/A-Framework-for-Designing-a-Payment-Security-Mechanism-as-a-Credit-Enhancement-Device-4.pdf.

Wikipedia

{{cite report |last1=Atal |first1=Vinit |last2=Shrimali |first2=Gireesh |last3=Singh |first3=Vaibhav Pratap |title=Addressing Off-Taker Risk in Renewable Projects in India: A Framework for Designing a Payment Security Mechanism as a Credit Enhancement Device |publisher=Climate Policy Initiative |date=May 2018 |url=https://www.climatepolicyinitiative.org/wp-content/uploads/2018/05/A-Framework-for-Designing-a-Payment-Security-Mechanism-as-a-Credit-Enhancement-Device-4.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{atal2018addressing, author = {Atal, Vinit and Shrimali, Gireesh and Singh, Vaibhav Pratap}, title = {{Addressing Off-Taker Risk in Renewable Projects in India: A Framework for Designing a Payment Security Mechanism as a Credit Enhancement Device}}, institution = {Climate Policy Initiative}, year = {2018}, month = may, url = {https://www.climatepolicyinitiative.org/wp-content/uploads/2018/05/A-Framework-for-Designing-a-Payment-Security-Mechanism-as-a-Credit-Enhancement-Device-4.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }