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

This technical paper examines off-taker risk in India's renewable energy sector, specifically the risk that public sector distribution companies (DISCOMs) will fail to make timely payments. The authors propose a transparent methodological framework for government-sponsored payment security mechanisms (PSMs) to attract foreign investment, arguing that existing mechanisms lack transparency and adequate risk coverage.

• India's renewable energy target of 175 GW by 2022 requires significant foreign investment, but investors are deterred by currency risk and off-taker risk. 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).
• DISCOMs in India are in a precarious financial state, with collective debt reaching INR 3.04 trillion and losses of INR 2.52 trillion as of 2014. This financial instability increases the cost of capital for projects where DISCOMs are the off-takers compared to projects with financially sound off-takers like the National Thermal Power Corporation.
• Existing payment security mechanisms in India, such as those used in the Jawaharlal National Solar Mission (JNNSM), have failed to attract significant foreign interest. This is attributed to a lack of transparency regarding the frameworks used to estimate fund sizes and a perception that the coverage is inadequate.
• The authors developed a methodological framework for payment security mechanisms based on credit and financial guarantees, utilizing three primary elements: probability of default (PD), exposure at default (EAD), and recovery after default (RAD).
• Applying this framework to the Jawaharlal National Solar Mission (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). This is more than 2.5 times the size of the INR 170 crore facility previously proposed by the Solar Energy Corporation of India (SECI), suggesting the original facility provided insufficient risk coverage.
• While a payment security mechanism is a viable short-term solution (for the next five years), the long-term solution (beyond ten years) requires a comprehensive financial overhaul of DISCOMs, including financial restructuring, tariff setting, and improved revenue realization.

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} }