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

The paper addresses the financial risk in India's renewable energy sector caused by the poor financial health of state-owned electricity distribution companies (DISCOMs), which can add up to 1.07% to the cost of debt. It defines a Payment Security Mechanism (PSM) as a funded capital reserve providing interest-free working capital during default events. The authors propose a five-step stochastic methodology to determine the optimal PSM size required to achieve specific credit rating enhancements for projects. Applying this to eight sample DISCOMs, the study finds that most require approximately 12 months of payment support to reach a BB rating, typically representing 10%-20% of a project's total capital expenditure. The paper concludes that the maximum credit enhancement achievable through a PSM is a BB rating, as other non-counterparty risks limit further improvement to BBB or higher.

• Counterparty credit risk from state-owned utilities delaying or defaulting on payments can increase the cost of debt for Indian renewable energy projects by as much as 1.07% of additional risk premium.
• The theoretical maximum credit enhancement a PSM can provide is a BB rating; achieving a BBB rating or higher is not possible through a PSM alone because other risk factors beyond counterparty credit risk must be mitigated.
• Most sample DISCOMs require an average of 12 months of payment support to enable associated projects to achieve a BB rating, with a range of 8-17 months for most entities.
• The required fund size for a PSM typically equals 10%-20% of the project's total capital expenditure, though this could be reduced to 6%-18% if DISCOMs provide a revolving letter of credit for 3 months of payment.
• Payment support needs vary significantly by DISCOM: Gujarat requires minimal support (1 month or less), West Bengal requires no PSM to reach the BB limit, while Uttarakhand shows an anomalous requirement of over 45 months.

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} }