Driving Foreign Investment to Renewable Energy in India: A Payment Security Mechanism to Address Off-Taker Risk

The paper argues that off-taker risk—specifically the risk of delayed payments from state-level public sector electricity distribution companies (DISCOMs)—deters foreign investment in India's renewable energy sector. While the Indian government has implemented payment security mechanisms (PSMs) under the Jawaharlal National Solar Mission (JNNSM), the authors contend these lack transparency and are inadequate in size. To address this, the authors develop a framework based on credit and financial guarantees, utilizing probability of default (PD), exposure at default (EAD), and recovery after default (RAD). Applying this framework to the Solar Energy Corporation of India (SECI) for JNNSM Phase 2, Batch 1, the authors estimate a required PSM size of INR 4160 million (INR 5.55 million/MW), which is more than 2.5 times the size of the existing INR 170 crore facility. The document concludes that transparent, adequately sized PSMs are essential to mobilize foreign capital and efficiently use public funds.

• Foreign investors in India's renewable energy sector are primarily deterred by currency risk and off-taker risk, the latter being the risk that a power buyer will not fulfill contractual obligations.
• Off-taker risk in India is characterized by payment delays rather than total default, as the government provides implicit guarantees for public sector distribution companies (DISCOMs), which are often in poor financial health.
• Existing payment security mechanisms in India, such as those used in the Jawaharlal National Solar Mission (JNNSM), have failed to attract significant foreign interest due to a lack of transparency and perceived inadequacy in risk coverage.
• The authors developed a methodological framework for calculating the size of a payment security mechanism using the formula: Size = Probability of Default (PD) * Exposure at Default (EAD).
• Applying the proposed framework to the Solar Energy Corporation of India (SECI) for JNNSM Phase 2, Batch 1, the authors estimated the required payment security mechanism size to be INR 4160 million (or INR 5.55 million/MW).
• The estimated required fund of INR 4160 million is more than 2.5 times the size of the INR 170 crore facility previously proposed by SECI, indicating the existing mechanism was insufficient to cover off-taker risk.

APA

Farooquee, A. A., & Shrimali, G. (2016). Driving Foreign Investment to Renewable Energy in India: A Payment Security Mechanism to Address Off-Taker Risk. Climate Policy Initiative. https://www.climatepolicyinitiative.org/wp-content/uploads/2016/04/Driving-Foreign-Investment-to-Renewable-Energy-in-India_Technical-Report.pdf

Chicago

Farooquee, Arsalan Ali, and Gireesh Shrimali. Driving Foreign Investment to Renewable Energy in India: A Payment Security Mechanism to Address Off-Taker Risk. Climate Policy Initiative, 2016. https://www.climatepolicyinitiative.org/wp-content/uploads/2016/04/Driving-Foreign-Investment-to-Renewable-Energy-in-India_Technical-Report.pdf.

Wikipedia

{{cite report |last1=Farooquee |first1=Arsalan Ali |last2=Shrimali |first2=Gireesh |title=Driving Foreign Investment to Renewable Energy in India: A Payment Security Mechanism to Address Off-Taker Risk |publisher=Climate Policy Initiative |date=April 2016 |url=https://www.climatepolicyinitiative.org/wp-content/uploads/2016/04/Driving-Foreign-Investment-to-Renewable-Energy-in-India_Technical-Report.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{farooquee2016driving, author = {Farooquee, Arsalan Ali and Shrimali, Gireesh}, title = {{Driving Foreign Investment to Renewable Energy in India: A Payment Security Mechanism to Address Off-Taker Risk}}, institution = {Climate Policy Initiative}, year = {2016}, month = apr, url = {https://www.climatepolicyinitiative.org/wp-content/uploads/2016/04/Driving-Foreign-Investment-to-Renewable-Energy-in-India_Technical-Report.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }