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

Farooquee, Arsalan Ali and Shrimali, Gireesh (2016): Driving Foreign Investment to Renewable Energy in India: A Payment Security Mechanism to Address Off-Taker Risk.

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Abstract

India’s ambitious renewable energy targets of 175 GW by 2022 will require significant foreign investment. A major issue facing foreign investment in India is offtaker risk or the risk of the public sector distribution companies (DISCOMs) being unable to make payments on time for the procurement of power. Ultimately, this will require long-term financial structural fixes for DISCOMs, some of which are currently under consideration. However, in the short-term, one solution is a government-supported payment security mechanism to build investor confidence. In this paper, we develop a framework, in order to enable assessment of an existing payment security mechanism. We built our framework using elements of credit and financial guarantees – probability of default, exposure at default, and recovery after default. We applied the framework to estimate the size of payment security mechanism involving a central aggregator during JNNSM Phase 2, Batch1. We estimated this size to be INR 4160 million or INR 5.55 million/MW, or less than 10% of capital costs, but more than 2.5 times the size of a previously proposed facility. In other words, the existing facility did not provide adequate coverage of off-taker risk.

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