energies
Article
Financial Instruments to Address Renewable Energy Project
Risks in India
Gireesh Shrimali






Citation: Shrimali, G. Financial
Instruments to Address Renewable
Energy Project Risks in India. Energies
2021, 14, 6405. https://doi.org/
10.3390/en14196405
Academic Editor: Yuji Yamada
Received: 9 September 2021
Accepted: 4 October 2021
Published: 7 October 2021
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4.0/).
Energies 2021, 14, 6405. https://doi.org/10.3390/en14196405
Precourt Scholar, Sustainable Finance Initiative, Stanford University, Stanford, CA 94305, USA;
gireesh@stanford.edu; Tel.: +1-65-0353-8221
Abstract: This paper provides a summary of financial instruments to address two biggest risks to
renewable projects in India. These risks include the following: first, off-taker (or counterparty) risk,
which relates to payment delays by public-sector distribution companies to independent power
producers, which then impact project level cash flows in the domestic currency; second, currency
(or foreign exchange) risk related to currency fluctuations, which impact foreign investor level cash
flows in foreign currencies. This paper then describes multiple solutions for each of these risks,
using public funding mechanisms. For payment delays, the category of solutions is termed Payment
Security Mechanisms; whereas, for currency fluctuations, the category of solutions is termed Foreign
Exchange Hedging Facilities. The coverage in this paper shows the evolution of the solutions from
theory to practice over time. These solutions are likely to be applicable to other developing countries.
Keywords: India; renewable energy; project risks; off-taker risk; payment security mechanism;
currency risk; currency hedging facility
1. Introduction
1.1. India Has Ambitious Renewable Energy Targets
Electricity is a key driver of socio-economic development. To meet increasing elec-
tricity demand, the Government of India has been working to increase electricity capacity
addition targets in successive National Electricity Plans. According to the National Electric-
ity Plan, 2018 [1], the net energy requirement in India (accounting for savings on account of
demand side management, energy efficiency and conservation measures) is likely to vary
at a compounded annual growth rate (CAGR) of 6.18% between 2016–2017 and 2021–2022,
and a CAGR of 5.51% between 2021–2022 and 2026–2027. Similarly, the peak demand is
projected to grow at a CAGR of 6.88% between 2016–2017 and 2021–2022, and at 5.77%
between 2021–2022 and 2026–2027. In contrast, globally, electricity demand is forecasted to
grow at a CAGR of 1.9% per annum between 2015 and 2040 [2].
In addition to these energy supply goals, India also has renewable energy growth tar-
gets stemming from environmental goals. Under India’s Intended Nationally Determined
Contribution towards meeting the global climate change goals of limiting global warming
to within 2 degrees over 2005 levels, India has targeted 33–35% of emissions intensity
reduction of its GDP by 2030 over 2005 levels [3]. India will focus on achieving these
targets primarily by increasing the proportion of renewable energy sources in its electricity
generation mix to up to 40% by 2030. To this end, it has targeted 175 GW of renewable
energy capacity addition by 2022, which does not include large hydroelectric projects.
Considering both growing electricity demand and renewable energy targets, India
has adopted a generation planning approach, which includes the following: achieving
sustainable development, power generation capacity to meet demand, fulfillment of desired
operational characteristics such as reliability and flexibility, most efficient use of resources,
fuel availability, and the integration of renewable energy sources.
The National Electricity Plan of 2018 estimates that the total investment required for
generation capacity addition is INR 11.5 trillion for the period 2017–2022, which includes
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the funds required for renewable energy sources’ capacity addition, as well as the advance
action (i.e., expenditure incurred in advance of actual capacity deployment) on projects in
the period 2022–2027. The total investment required for the period 2022–2027 is estimated
to be INR 9.5 trillion but does not include advance action for projects coming up during
the period 2027–2032 [1]. Here, INR stands for the Indian currency, also referred to as the
Indian Rupee, and we typically use 1 USD = 70 INR unless specified otherwise.

1.2. Key Project Risks Are Counterparty and Currency

However, given the current policy and institutional environment in India, based on
our primary research, investors—both domestic and foreign—may find it hard to meet the
requirements due to multiple risks to utility scale renewable energy projects, including
the following: foreign exchange, off-taker credit (or counterparty), regulatory/policy,
etc. These risks are sometimes also referred to as barriers to deployment of renewable
energy projects in practice [4]; however, we have used the word “risk” to indicate investor
specificity. Addressing these risks would go a long way towards ensuring India’s renewable
energy goals receive the required level of investments. These risks are further explained in
Table 1, which provides a comprehensive list of the barriers that projects face in practice,
beyond high-level policy issues related to target setting as well as market design.

Table 1. Risks faced by investors in renewable energy projects in India [5].

Risk Brief Description

Foreign exchange risk
Off-taker credit (or counterparty) risk
Quality of renewable energy Projects
Lack of instruments for investment
Low returns compared to expectations
Limited availability of debt capital
Construction risk
Land acquisition issues
Transmission evacuation
Curtailment issues
Contract enforceability risk
Lack of trusted intermediaries
Limited understanding of sector
Regulatory/policy risk
Financing
Currency risk due to uncertain currency movements and high cost involved with market-based currency
hedging solutions. Currency risk is a major barrier to foreign investments in developing countries.
Currency crises, defined as a quick decline of a local currency, have triggered regional economic crises [6].
While all projects with foreign investments face currency risk, infrastructure projects are often exposed to
greater risk because of longer terms and difficulty in redeployment of assets, making exit difficult
for investors.
The risk that the buyer/off-taker will not fulfill its contractual obligations. It is a key contributor to the
overall credit risk of a power project.
The credit rating of the operational renewable energy assets may be low overall, leading to operational
assets not meeting investment criteria.
Lack of financial instruments (or pathways)—illiquid or liquid—to invest in renewable energy.
Renewable energy projects not being able to meet the risk-return expectations of investors.
Limited availability of debt capital due to capital market conditions, either domestically or internationally.
Completion
Risks related to increase in overall financing cost due to construction related issues—esp. due to delays in
construction due to permits.
Issues faced in land acquisition, esp. if there is no single window clearance in place, or if the time taken to
obtain clearances is high.
The lack of availability of transmission evacuation infrastructure, and time taken to obtains the clearances
and permits.
Operational
Wind developers may face this issue during high wind seasons when higher than expected generation
creates oversupply situations as well as congestion.
Drastic reduction in cost of renewable (e.g., solar) power generation may result in poor contract
enforceability in the long-term, given that the buyers may want to cancel older, more expensive contracts,
and move to newer, less expensive ones.
Others
Lack of trusted financial intermediaries, which allow indirect investments in projects via financial
vehicles (e.g., green bonds), may result in new and/or smaller investors staying away from the sector.
Many investors are not aware of renewable energy sector and, therefore, prefer to make investments in
mainstream asset classes.
The risks related to uncertainty in availability of incentive schemes, poor implementation of policies and
nonuniform policies across states.

In particular, [5] finds that currency and off-taker (or counterparty) risks are the biggest
risks based on discussions with foreign investors, where these investors are asked to assign
scores out of 10 regarding risk. The investors included: Bank of America, Blackrock,
Generation Investment Management, EIG Partners, Goldman Sachs, Morgan Stanley,
Energies 2021, 14, 6405 3 of 19

Silverlake Kraftwerk, TIAA CREF, UC Regents, etc. Some of this information was used to
support the analysis in [5]. Table 2 indicates that currency and off-take risks are at least
twice as highly rated as other risks. The research by [5] also finds in a similar discussion
with domestic investors that off-taker risk is the top-rated risk for them. Therefore, given
that these risks are the highest rated risks for all investors, and by a wide margin, the focus
is mainly on these two risks in this paper.

Table 2. Scoring of risks faced by investors in renewable energy projects in India [5].

Risk/Barrier Score (Out of 10)

Currency 8.33
Off-taker 7.11
Regulatory/policy 3.89
Unfavorable returns 3.0
Transmission and evacuation 2.78
Land acquisition 1.78
Cost of capital 0.89
Availability of debt 0.78

Furthermore, [7] reports that follow-up discussions with investors verified these
findings. These investors included: Bank of America, Barclays Finance, Blackrock, Citibank,
Goldman Sachs, GE Capital, etc. These follow-up discussions further confirmed the earlier
findings related to the high importance of currency and off-taker (or counterparty) risks.
These findings have been verified by [8].

1.3. These Risks Can Be Partially Mitigated Using Publicly Funded Facilities
Given the focus on increasing renewable energy capacity, the Indian government
needs to recognize the role that counterparty and currency risk mitigation mechanisms
could play in expanding renewable energy capacity, and the rationale for creating such
mechanisms using public funding sources. This goes beyond recognizing the role that
policies can play in reducing investor risk perceptions [9]. These innovative financial
structures can ensure that renewable energy deployment happens at scale [10], via public–
private partnership [11].
For counterparty risk, there is an argument that the government should bear this risk
because it is due to the primary off-takers, the distribution companies (DISCOMs), that are
completely in the public domain. Further, there is an argument that government should
bear currency risk in some strategic situations (e.g., renewable energy in the context of the
Indian power sector); a key reason being that macroeconomic conditions are key drivers of
currency movements and related foreign exchange rates, and government policy, in turn,
influences macroeconomic conditions.
Thus, in what follows, designs of public funded counterparty and currency risk
mitigation mechanisms are explored, in Sections 1.4 and 1.5, respectively. In Section 2, we
provide the methods for calculating the sizing of facilities, whereas in Section 3 we provide
the results. In each of these sections, we cover two solutions each for the counterparty and
currency hedging risks. Finally, in Section 4, we summarize results, draw implications, and
suggest future work. Our working hypothesis is that such risk-mitigation mechanisms can
exist in practice, appropriate sizing is theoretically possible, and different methods may
result in providing a suitable range of public funding required.
Before proceeding further, we note that the paper is quite conceptual in nature and
builds on a significant body of work by the author [12–15], of which no direct precedent
exists in the literature, whether academic or in practice. The key contribution of this paper
is to bring these disparate pieces—some in academic literature and some in grey literature—
together in a cohesive manner. Furthermore, while some of the data may appear a little
dated, the issues and corresponding solutions are as relevant today as they were during
the original development of these financial instruments during the period 2015–2018 when
Energies 2021, 14, 6405 4 of 19

the original research was conducted. Therefore, the reader is encouraged to focus on the
conceptual aspects as much as possible, given that they are applicable to not only India but
also other developing countries.

1.4. Counterparty Risk Can Be Addressed Using Payment Security Mechanism (PSM)
The counterparty risk is related to the risk of non (or delayed) payment by the power
purchaser (also known as the off-taker) to the power producer. From a lender’s perspective,
this may result in the power producer missing the debt payments on the power project,
thus diminishing the credit quality of the project. The typical power purchasers in India
are the public-sector, state-level distribution companies, also known as DISCOMs.
Figure 1 shows the main components of power purchase, with arrows depicting the
flow of energy and money flowing in the reverse direction. In this structure, the main
problem lies with the DISCOMs who, due to their poor financial health, regularly delay
payments. While more recent data is available (Power Finance Corporation, 2019), the
overall situation has not changed much, and it is instructive to look at the DISCOM financial
situation from about 5 years ago (i.e., in 2014–2015), and its implications for solar auction
prices in 2015–2016 [16].

Figure 1. Flow of electricity.

During 2014–2015, the DISCOMs had booked cumulative losses on the order of INR
633 billion [17], for two reasons. The first is economic—the DISCOMs did not even recover
costs due to power tariffs being kept artificially low because of political pressures: in the
same year, the average cost of purchase of power for the DISCOMs was INR 5.20/kWh
whereas the average consumer tariff was INR 4.62/kWh. The second is operational; in the
same year, the aggregate transmission and commercial (AT&C) losses stood at 24.62% [17].
This poor performance resulted in a combined negative net worth of DISCOMs at INR
1164 billion as of 31 March 2015, with loans outstanding at INR 6730 billion, receivables
outstanding against banks at 92 days, and receivables outstanding against independent
power producers at 121 days. The receivables outstanding gap clearly indicates that power
producers are exposed to the risk of the poor financial health of the DISCOMs and the
consequent risk of delays and/or defaults in payment.
In fact, based on author conversations with industry stakeholders, state DISCOMs
have a history of delaying payments to independent power producers (IPPs) by up to
as much as 24 months. This poses a direct risk to the ability of IPPs to meet their credit
obligations and exposes debt investors to default scenarios. Based on our primary research,
this causes banks and other debt providers to limit their investment to the renewable energy
sector or otherwise raise the cost of debt provided due to the perception of higher risk.
The higher cost of capital available to the IPPs may have ultimately resulted in higher
power tariffs (Figure 2). This was evidenced in solar auctions in year 2015–2016, wherein the
PPA prices were lower when the well-rated National Thermal Power Corporation (NTPC)
was the off-taker. For example, a state auction held in Karnataka resulted in an average
price of INR 5.07 per kWh while a NTPC auction—also held in Karnataka—achieved a
price of INR 4.78 per kWh, equivalent to a saving of INR 0.29 per kWh [18].
Energies 2021, 14, 6405 5 of 19

Figure 2. Auction prices at recent auctions.

The long-term solution to off-taker risk lies in proper management—operational and

financial—of the DISCOMs, where states assume full responsibility for running the utilities
on sound commercial principles [19]. A comprehensive set of measures is required to do so,
including financial restructuring, tariff setting, revenue realization, subsidies’ management,
metering, and audit and monitoring. Recognizing this, in the past, the central government
has introduced many schemes for financial restructuring of DISCOMs, but none of them
have produced the intended outcomes [20].
The most recent example with some operational history is a financial restructuring
scheme called UDAY [21]. The scheme involved four initiatives: improving operational
efficiencies of DISCOMs; reducing the cost of power; reducing the interest cost of DISCOMs;
and enforcing financial discipline on DISCOMs through alignment with state finances. The
scheme aimed to achieve a reduction of average transmission and commercial (AT&C) loss
to 15% by 2018–2019 as well as a reduction in gap between average cost of supply and
average revenue realized to zero by 2018–2019. (Average transmission and commercial
(AT&C) losses refer to not only electrical losses due to transmission and distribution but
also commercial losses due to theft and nonpayment.) However, it is not clear if UDAY
has brought about the expected changes [22], and another scheme called ADITYA has been
announced as a follow on [23].
While a financial overhaul of DISCOMs is the necessary long-term solution to mitigate
off-taker risk, and efforts should continue, there are also short-term solutions that can help
drive renewable energy investments. Depending on the creditworthiness of the off-taker, a
liquidity facility and/or a sovereign guarantee could support the off-takers’ obligations [24].
This paper examines such a short-term solution, called a payment security mechanism
(PSM). A PSM is a standalone fund that is a form of guarantee that covers the risk of
payment delay in a power purchase agreement. The basic idea in a PSM is that this fund
pays the power producer in the event of a payment delay and recovers this payment from
the off-taker.
Recognizing the need for a PSM, the Indian government has proposed various PSM
schemes [25]. However, the designs of these PSM schemes have been opaque, and one
of the goals of this paper is to transparently investigate the theory behind PSMs. In this
context, multiple approaches to PSMs for solar projects may be possible in the near term,
as covered in Sections 2.1 and 2.2. The former is based on [14], whereas the latter is based
Energies 2021, 14, 6405 6 of 19

on [22]. The basic difference between these two schemes is that the former uses an expected
loss-based sizing approach whereas the latter uses a more direct approach for required
credit enhancement. Both show that the expected PSM size would be 10–20% of the initial
capital deployment in solar projects. This corresponds to a leverage, defined as the ratio
of private capital deployed to the public capital provided to support the publicly funded
facility, of 5–10. Note that 10% is equivalent to a leverage of 100%/10% = 10, and 20% is
equivalent to a leverage of 5.

1.5. Currency Risk Can Be Addressed Using a Currency Hedging Facility (FXHF)
It is found that, to achieve India’s renewable energy targets cost-effectively, more
debt is required at attractive terms—i.e., with reduced costs and extended tenors [26].
From debt perspective, high costs (more than 12%), short tenors (less than 10 years), and
variable rates (as opposed to fixed), end up increasing the cost of renewable energy in
India by 24–32% compared to renewable energy projects elsewhere [26]. The difference in
cost/terms of capital has not changed much over time and, therefore, this conclusion is
unlikely to change.
Foreign loans (e.g., in USD) appear attractive for Indian policymakers, given that
seemingly cheaper cost of capital (e.g., 5–7% USD), longer-term (12 years or more), and
fixed-rate foreign loans have the potential to not only reduce the cost of renewable energy
significantly but also reduce the cost of government support by making renewable energy
more competitive with fossil based-electricity [12,27]. This raises the question as to why
this issue cannot simply be fixed by developers borrowing directly in USD. The answer is
that when developers borrow in foreign currencies, they must then worry about foreign
exchange rate risk, as described below.
The reason that foreign exchange risk is an issue is that renewable projects earn
revenues in local currency (e.g., in INR), when financing a renewable energy project by
a foreign loan (e.g., in USD), the mismatch in the currency of debt obligations (i.e., USD)
and currency of revenue (i.e., INR) exposes the project to the risk of devaluation in INR
over time. This can result in reduced investments in the country due to currency risk,
necessitating the use of a currency hedge (or currency swap) with a third-party provider to
protect against these devaluations. A currency swap is an agreement to make a currency
exchange between two parties. The agreement consists of swapping principal and interest
payments on a loan made in one currency for principal and interest payments of a loan of
equal value in another currency. Borrowers can lock in currency swaps with a third-party
provider that takes the currency risk and charges a currency swap fee. These third-party
providers are typically from the private sector (e.g., commercial banks).
In India, market-based currency hedging solutions are not only limited in availability
(e.g., beyond 5-year tenors) but also have significant costs, increasing the final cost of debt,
and almost eliminating the benefit of seemingly cheaper foreign loans. Further, most of the
currency hedging in India happens in short-term (1 year or less) contracts, which makes
the market for longer-term currency hedging less liquid. This does not mean it is not
available at all. In fact, currency hedging contracts of up to 10 years may be available in the
Indian market. For example, the typical cost of currency hedging in India is around 7% per
year [28]; making completely hedged foreign loans as expensive as domestic loans—i.e., at
12–13% [26]. The difference in cost/terms of capital has not changed much over time and,
therefore, this conclusion is unlikely to change.
Further, depending on the credit risk of the borrower, based on primary research, an
additional credit-risk premium may increase the cost of currency hedging by another 100
basis points (bps), where 100 bps is equal to 1 percentage (%) point. Recall that the price
of a market-based currency hedge reflects three components: cost of managing currency
risk itself, cost of managing the credit risk of the counterparty, and margin for the currency
hedge provider. Credit risk is the risk that a party (e.g., a project developer) to the swap
agreement will default on its obligations. Currency swaps have high exposure to credit risk
as they involve the exchange of money (e.g., USD and INR) over an extended period. Since
Energies 2021, 14, 6405 7 of 19

a premium is charged for default risk, currency swaps lead to a double counting of credit
risk as the borrower (e.g., the project developer) already pays a credit risk premium for the
underlying debt to the creditor (e.g., a bank). Given that the debt provider and currency
hedge provider can be different parties, credit risk becomes priced into not only the debt
rate but also the price of the currency hedge.
Governments need to recognize the role that cheaper (and longer term) currency
hedging mechanisms could play in expanding renewable energy capacity; essentially, these
would enable the increased availability of cheaper, longer-term, fixed-rate debt to projects,
reducing their cost of capital, thereby reducing the delivered cost of renewable energy, and
making renewable energy more competitive.
The standard principle of risk allocation is based on allocating the risk to the party that
may be able to best manage it. For power projects, the parties that can bear the currency
risk are—the project developers, the government, or the customers. Project developers
often bear currency risk. Sometimes, currency risk is passed on to the consumers. However,
the government may be in a better position to bear currency risk as it can influence this risk.
Further, given that government policies can influence macroeconomic conditions, which
in turn are primary drivers of currency rates [29], there is an argument that governments
should bear currency risk in some strategic situations.
The Indian government has in the past offered currency protection. However, this
protection only applied to investments in roads and—most importantly—only in an event
of default. This still does not cover the much more likely situation that the project does
not default but the local currency depreciates significantly [30]. Given that governments
may be in the best position to bear (and respond to) currency risk, they can choose to bear
this risk in certain strategic situations, such as the deployment of renewable energy. In
the case of India, another strong argument for government-sponsored currency hedging
solutions is that bearing the currency risk for renewable energy today offsets the currency
risk the economy would have borne in future on purchasing imported fossil fuels that the
renewable energy would displace. This is particularly relevant for imported coal, which is
the marginal fossil fuel that additional renewable energy is likely to replace [31].
Given that currency depreciation is a direct consequence of macroeconomic conditions,
such as inflation, the long-term solution to control currency risk is to reduce inflation via
sound macroeconomic policy that, for example, targets disciplined government spending
and borrowing. However, controlling inflation may not always be possible in a fast-growing
economy such as India and, therefore, short-term fixes may be required.
Multiple solutions may be possible in the near term. One potential solution is to use a
structure where public money is used to provide a buffer against the risk of unexpected
currency movements (Section 2.3), beyond the risk of expected movements that are already
absorbed by the project developer. Another approach is to use market-based instruments
(e.g., swaps) as much as possible to provide a tail risk guarantee (Section 2.4), where the
project developer again absorbs the risk up to a certain threshold of currency devaluations.
These approaches have been previously covered in detail in [12,13], respectively.

2. Materials and Methods

2.1. Payment Security Mechanism: Approach 1 (Z-Scores)
Payment risk is similar to credit risk. Both are legal obligations; where credit risk
is directly related to the default risk in debt payments; payment risk is related to the
default risk in accounts payable. For this discussion, a simplifying assumption is made,
that defaulting on any legal obligation is equivalent, and hence the defaulting on debt
payments is the same as defaulting on accounts payable. This assumption can be further
defended on the grounds that both reflect an issue with the financial health of the off-taker.
This allows us to use existing techniques for creating contingent facilities for credit risk
management [32,33].
The framework for calculating the size of this contingent facility (i.e., PSM) uses
elements of credit guarantees, specifically the following: (1) the probability of default (i.e.,
Energies 2021, 14, 6405 8 of 19

the likelihood that default would occur); (2) exposure at default (i.e., the amount not paid
due to default); and (3) recovery after default (i.e., the percentage of exposure at default
that is eventually recovered) [32,33]. The next paragraph discusses how each of these
is calculated.
The probability of default is estimated using a modified version of the popular Z-score
methodology [34,35], which uses key financial characteristics of the firm in a linear function,
where the coefficients are derived from regression techniques on past data on default. Based
on typical delays and power purchase agreement legalities in India, the exposure at default
is estimated as the payment for one-year’s-worth of electricity produced at the contracted
per unit price. Finally, given that payments are always made eventually, the recovery after
default as 100% of the guaranteed payment after delay. Since the DISCOMs are public
sector entities, though they delay payments, they do not default due to regular bailouts by
the central government.
The focus is on an existing PSM for a central solar power aggregator that buys power
from multiple generators and sells power to multiple off-takers under the Jawaharlal Nehru
Solar Mission. The Jawaharlal Nehru National Solar Mission initially set a target of 20 GW
of solar power by 2022. This target was later revised to 100 GW of solar power by 2022
under the National Solar Mission. Recognizing that attracting investment for this target
would necessitate a PSM, the government of India allocated some funds; however, we show
that this amount was not enough. This existing PSM, from the Solar Energy Corporation of
India, for 750 MW of solar capacity, was capitalized at INR 1700 million by the government
of India. The expected size of this PSM—equal to the product of the probability of default
and the exposure at default—is retroactively estimated. For this purpose, a sample of
DISCOMs is selected representing the credit spread of all the DISCOMs [36].

2.2. Payment Security Mechanism: Approach 2 (Credit Enhancement)

As mentioned earlier, a Payment Security Mechanism is a standalone funded capital
reserve that provides working capital to its beneficiary projects in the case of payment
defaults by the DISCOMs. The aim of this section is to provide a framework for designing
a PSM to explicitly achieve the intended credit enhancement—to investment grade credit
rating (i.e., AA domestic)—in its beneficiary projects. Investment grade is the minimum
rating—AA domestic or BBB-international—at which most investors, especially foreign
investors, would invest. Typically, in India, this rating is enjoyed only by one off-taker—
NTPC. The basic idea is to make the investors to be as comfortable with the beneficiary
project’s off-taker (i.e., a DISCOM) default risk as they would be with an investment
grade off-taker.
Thus, the primary question is: How to size an efficient PSM for given project(s)
exposed to a given DISCOM as off-taker that can help achieve the intended credit enhance-
ment to investment grade? This essentially means sizing the PSM such that the probability
of default of the project becomes that same as it would be under an investment-grade
off-taker, such as the NTPC. In this process, intermediate questions are explored such as:
• How does one create a probability distribution for payables defaulted (i.e., delayed)
on by a given DISCOM?
• How does the probabilistic cash flow distribution, and consequently, the probability
of default of a given renewable energy project differ with and without a PSM of a
given size?
The payment security mechanism developed in this section builds on existing frame-
works for credit guarantees [14,33]. Such guarantees used in project finance are typically
for enhancing the credit quality of the underlying project by means of providing protection
against the defaults/delays in payment obligations due towards the project.
A stochastic methodology is used in this section, which is calibrated on empirically
derived proxies for past payment history. Using these proxies, the optimum PSM size is
derived, and the credit enhancement achieved for a project selling electricity to a particular
DISCOM. As part of the methodology, two component risk scenarios are examined:
Energies 2021, 14, 6405 9 of 19

• Scenario 1: The default by the project due to all risks outside of the specific counter-
party (i.e., the DISCOM) risk.
• Scenario 2: The default by the project due to the default/delay in payment by the
counterparty (i.e., the DISCOM) risk.
While more complex methods for assessing credit risk are possible, estimation of the
probability of default is usually a first step [37]. As a measure of credit risk, the probability
of default by the project is examined in two cases: (1) without the presence of payment
support (the base case), and (2) in the presence of a given payment security mechanism
(postintervention). For each, the probability of default of a project has a one–one mapping
with its credit ratings [20]. The underlying assumption is that, for project finance, credit
ratings are completely specified by the probability of default [38]. For this paper, Indian
domestic ratings are used, unless specified otherwise.
As mentioned above, the base case corresponds to the probability of default associated
with the credit rating of the project without the PSM, whereas the second one corresponds
to the probability of default associated with the target credit rating intended to be achieved
by the intervention (i.e., the PSM). The target credit rating of the project is what could be
achieved with an investment-grade off-taker, such as NTPC. The process below describes
how these probabilities of default are calculated.
A five-step process is used to arrive at the required size (in number of months of
payment obligations) of the PSM for a given DISCOM to achieve a target credit rating, as
expected by investors:
• Calculating the standalone probability of payment default by the DISCOM.
• In the event of payment default, determining the probability distribution of the
number of months of payment outstanding by the DISCOM. This is required for
Step #4.
• Calculating the probability of credit default for a sample renewable energy project
with the DISCOM without PSM support.
• Calculating probability of credit default for the sample renewable energy project with
the DISCOM with a PSM support for a fixed number of months of payment.
• Calculating the size of payment support (i.e., the PSM) to achieve the target reduction
in probability of default.

2.3. Currency Hedging Facility: Approach 1 (Risk Buffer)

In providing currency hedging solutions for renewable projects, the following ques-
tions need to be considered: first, what are the expected costs of providing such hedging
solutions? Second, how can the risks related to unexpected and extreme movements in
foreign exchange (FX) rates be managed? Third, what is the market risk premium for taking
these risks? Insights into these questions can be gathered by examining a government-
sponsored foreign exchange rate hedging facility (“FXHF”), as described below.
Under an FXHF, the government would provide project developers or off-takers a
currency hedging solution through a standalone fund that covers debt payments for un-
derlying hard currency (e.g., USD) loans. In this case, the government is not providing a
sovereign guarantee, but rather is pre-committing public money for creating a standalone
fund that can be used to provide cheaper currency hedging solutions. Typically, govern-
ments are averse to providing sovereign guarantees against their own currencies since that
amounts to taking positions against their own macroeconomic policies. As seen below,
the FXHF provides an indirect way to subsidize currency hedging without providing an
explicit (or direct) subsidy to the project developer.
The working of the FXHF for a local currency power purchase agreement (PPA) can
be explained as below. Under a local currency power purchase agreement, the project
developer borrows in foreign currency (i.e., USD) and therefore, the foreign exchange risk
exposure is borne by the project developer. In this case, the FXHF can enter a swap—via a
contract for differences—with the project developer.
Energies 2021, 14, 6405 10 of 19

Under a contract for differences, the two counterparties—FXHF and developers—

would sign a contract at a fixed (typically initial) foreign exchange rate and, over time,
exchange payments for the differences between the actual and the contracted foreign
exchange rates (see Figure 3). The frequency of this payment would be similar to the debt
payment obligations of the project developer.

Figure 3. Cash flows in a local currency PPA [12].

For example, assuming that the fixed rate is 1 USD = 63 INR, then, at fixed periods
when debt payments are due, if the foreign exchange rate is higher than 1 USD = 63 INR,
the FXHF would make a net payment to the project developer. This net payment is equal
to the difference of a variable payment (USD debt payments at the actual/current foreign
exchange rate on the day of settlement) from the FXHF to the developer and the fixed
payment from the developer to the FXHF (USD debt payments at the contracted foreign
exchange rate of 1 USD = 63 INR). In the reverse situation, if the foreign exchange rate is
lower than 1 USD = 63 INR, the project developer would make a net payment to the FXHF
in a similar way.
The final design of the FXHF would depend on the underlying mix of loans. Here,
an indicative analysis is provided based on assumptions from primary and secondary
research. It is assumed that the underlying USD loan is at 5.5% cost of capital and is for
10 years tenor. It is also assumed that the market cost of providing a 10-year USD to INR
currency swap would be 7 percentage points. That is, the eventually landed cost of capital
for the 10-year loan would be 12.5% (= 5.5% + 7%), if the currency swap is procured from
the market.

2.4. Currency Hedging Facility: Approach 2 (Tail Risk Guarantee)

When the INR interest rate is higher than the USD interest rate, risk-neutral and
rational investors should expect the INR currency to depreciate against the dollar by the
difference between the two interest rates. This way, borrowing at home and lending abroad
or vice versa produces a zero-excess return. This is known as the uncovered interest rate
Energies 2021, 14, 6405 11 of 19

parity (UIP) condition. There are currency hedging instruments available in the market
that are priced using UIP or one of its variants.
For example, based on primary research, a long-term INR–USD cross currency swap
costs around 750 basis points, which is priced based on parameters such as expected
long-term interest rate differential (UIP component), volatility risk (due to fluctuations
on UIP), liquidity risk (due to how shallow or illiquid the market is) and the cost of
regulatory risk (due to changing regulation) capital. The cost mentioned is the average cost
of principal plus interest commercial currency swaps. Hence, the market cost of currency
swap increases the cost of a dollar debt available at a rate of 4–5% to more than 12% (post
hedging) or nearly equal to the domestically available loans.
Further, depending on the credit risk of the counterparty (e.g., the project developer),
the additional credit risk premium is around 50 basis points which takes the cost of
currency hedging to ~800 bps. Counterparty credit risk is the risk that a party (typically
the buyer, i.e., the project developer) to the swap agreement will default on its obligations.
Cross-currency swaps have high exposure to counterparty credit risk as they involve
the exchange of notional amounts over an extended period. This risk increases with the
length of the contract and can become a major barrier for long-term currency swaps. Swap
providers assess the credit quality of the counterparty in determining whether to enter
into a swap agreement. Hence, a premium is charged for this default risk. In a way, this
leads to a double counting of credit risk as the counterparty already pays a premium for
the underlying debt to the creditor.
A commercially available cross currency swap is used as a reference to compare the
cost and benefits of the proposed FX Hedging Facility. A cross currency swap has three
different components of cost as shown in Table 3 out of which:
• The currency risk cost component can be directly subsidized, ignoring reduction in
cost due to diversification such as in a portfolio of currency.
• The counterparty credit risk and the liquidity risk cost components can be eliminated,
where counterparty credit risk is a measure of risk of the loss of the amount that
would not be recovered if a counterparty to a financial contract default in its payments,
and liquidity risk is being implicitly subsidized but for simplicity it is assumed as
eliminated here.

Table 3. Cost components of a commercial swap, in basis points (bps) [13]. Both currency risk and
counterparty credit risk components are derived from the cost provided by a commercial bank.

Cost of Currency Risk

Counterparty Liquidity Transaction Cost,
Currency = (Principal +
Credit Risk Risk Dealer’s Margin, etc.
Swap Interest)
~750 bps = 650 bps 50 bps 30 bps 20 bps

The FX Hedging Facility is an alternative currency hedging mechanism to the market

swap that incorporates components that aim to reduce the cost of currency hedging and
increase leverage of private investment by the user (e.g., the project developer) of the
facility, specifically through:
• A direct subsidy for FX tail risk by a donor, such as the Indian government, or even
other sources of subsidized capital such as family foundations.
• Elimination of the counterparty credit risk and liquidity risk.
• Passing on benefits to the user and/or donor if currency depreciation is lower
than expected.
It is assumed that a sample user (e.g., a project developer) operating in the clean
energy space and looking to raise foreign capital (e.g., the US dollar) wants a cheaper
currency hedging solution and is willing to enter a contract with an FX hedging facility for
a fixed FX depreciation rate of 4.5% per annum. The entity will absorb the FX depreciation
until 4.5% (p.a.). If the FX depreciation is less than 4.5%, say 3%, then the upside, i.e.,
Energies 2021, 14, 6405 12 of 19

1.5% will be transferred to the hedging facility. At the end of the hedging tenure, the
accumulated capital in the facility can be shared between donor and user, as structured at
the time of structuring the facility.
For the purposes of this paper, it is assumed here that such an upside will be retained
by the donor and, hence, the effective cost of hedging will be fixed for the user. Beyond
the FX depreciation of 4.5% per annum, a market-based FX tail risk guarantee will be used
to cover the FX risk till a pre-specific limit, which we assume to be at the 3-sigma (i.e.,
P99.7) level of the FX probability distribution, which is assumed to follow a geometric
Brownian motion process as explained in Section 2.3. Here, P99.7 means that there is 99.7%
probability that the INR–USD exchange rate would be 87.64 or lower in 2017. The FX Tail
Risk Guarantee will cover all losses due to currency risk till P99.7 levels (i.e., 3-sigma). It can
be assumed that a rational guarantor will not provide unlimited risk coverage. However,
the maximum guarantee coverage can be changed to any other level, for example P99.7,
based on the comfort of the guarantor and the investor. The rationale behind taking a 4.5%
per annum depreciation rate is discussed subsequently.
There can be several possible designs for the FX Hedging Facility to achieve the
mentioned risk coverage. One potential design, which is likely to work in India, is shown
in Figure 4. The project developer borrows from the foreign investor in foreign currency
(e.g., in USD) and pays the debt back in the same currency. In this transaction structure,
the project developer enters two contracts:
• One with the FX hedging facility to cover currency risk up until 4.5% annual FX
depreciation, and;
• The other with an FX tail risk guarantor (e.g., a commercial bank) to cover currency
risk beyond 4.5% till the P99.7 level.

Figure 4. Transaction Structure of the FX Hedging Facility [13].

The FX hedging facility will keep (i) the donor capital to pay the FX tail risk premium
upfront to the FX tail risk guarantor and will also hold (ii) the payment from the project
developer (which includes the upside, if any) as the risk capital.
Energies 2021, 14, 6405 13 of 19

As indicated in the structure, the equivalent annualized cost of currency depreciation

from 0% to 4.5% per annum will be paid by the project developer to maintain the risk
capital for the mentioned risk coverage. When compared to a commercial swap, this
annual depreciation rate of 4.5% translates into an annualized maximum cost of ~528 basis
points [13]. The maximum risk capital would be equivalent to the maximum cost of
hedging sourced from the project developer. The maximum cost to the project developer
= Total currency risk cost—FX tail risk cost (calculated in Table 4) = 650–134 = 516 bps
(~528 bps). This cost translates to a maximum depreciation of ~4.5% (p.a.). This is for
the cross validation of the pricing. Using standard finance principles, this cost is arrived
by calculating the annualized net present value—using the risk-free rate = 6.77% (Source:
Bloomberg), tenor = 10 years—of the difference between the debt service payment at 0%
and 4.5% per annum of FX depreciation and then dividing it with the notional size of the
debt transaction.

Table 4. Cost of the FX tail risk guarantee [13].

Foreign debt tenure 10 years

Guarantee coverage horizon 10 years
Risk coverage 4.5% (p.a.) to P99.7
Return in USD (after hedging) 4.50% (p.a.)
Annual guarantee fee (market cost) 134 bps

Beyond the FX depreciation of 4.5% per annum till the P99.7 level of depreciation, the
risk coverage will be provided by the FX tail risk guarantee. The FX tail risk guarantee
component will have two strike prices (i.e., INR–USD FX rate) in each of the 10 years, as
shown in Table 5. Strike prices are the future FX rate (INR–USD) at which the FX tail risk
guarantee will be exercised by the entity. The pricing of the guarantee depends upon these
strike prices. The first strike price is derived from the minimum depreciation rate of 4.5%
per annum and the second-strike price is derived from FX depreciation at the P99.7 level.
Note that the FX probability distribution in each year is given by the assumed geometric
Brownian motion process.

Table 5. Strike prices (INR–USD FX rate) for the FX Hedging Facility [13].

Year 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Strike price @4.5% (p.a.) 71.04 74.24 77.58 81.07 84.72 88.53 92.51 96.67 101.02 105.57
Strike price @P99.7 87.64 96.54 105.01 113.38 121.80 130.37 139.13 148.13 157.42 167.01

3. Results and Discussion

3.1. Payment Security Mechanism: Approach 1 (Z-Scores)
For the supported capacity (750 MW) of the existing payment security mechanism
and based on the realistic assumption that the exposure at default is 12 months, the size
of the payment security mechanism is estimated as less than 10% of capital costs of the
solar power deployed, but at almost three times the size of the existing payment security
mechanism deployed by the government [14]. That is, these results indicate that the existing
provision for a payment security mechanism may not have been adequate in covering
the risk of delayed payment from DISCOMs and highlight the need to use analytically
rigorous approaches.
However, this PSM solution (based on expected loss sizing) does not assess the impact
such a PSM would have on the credit ratings of the covered projects, or alternatively, the
size of the PSM needed to achieve the desired credit enhancement (e.g., from BBB to AA).
Additionally, this solution also misses a crucial piece of analysis comparing the expected
benefits of such a facility with the cost of maintaining such a pool of capital. A sizing
that considers the differential credit quality of DISCOMs would ensure a fair and efficient
allocation of capital. We examine such an approach next in Section 2.2.
Energies 2021, 14, 6405 14 of 19

3.2. Payment Security Mechanism: Approach 2 (Credit Enhancement)

Using this methodology, the indicative number of months of payment support, needed
to be provided by a PSM to ensure that a project with a given DISCOM (as the off-taker)
would achieve a target credit rating, is calculated. These results are enumerated in Table 6
for eight representative DISCOMs. An “N/P” result indicates that it is not possible for a
PSM of any size to achieve the given credit rating, i.e., even by eliminating the counterparty
credit risk completely, such a rating may not be achieved.

Table 6. DISCOM-wise table of size of Payment Support Needed to achieve target credit ratings [15]. “N/P” indicates PSM
is not needed/cannot achieve the target rating. MoP stands for Ministry of Power.

West Bengal Gujarat Eastern AP Chamundeshwari

(MoP Rating B) (MoP Rating A+) (MoP Rating A) (MoP Rating A)
Target Credit Payment Sup- Target Credit Payment Sup- Target Credit Payment Sup- Target Credit Payment Sup-
Rating port Needed Rating port Needed Rating port Needed Rating port Needed
AA N/P AA N/P AA N/P AA N/P
A N/P A N/P A N/P A N/P
BBB N/P BBB N/P BBB N/P BBB N/P
BB N/P BB 1 months BB 8 months BB 17 months
B N/P B 0 months B 6 months B 16 months
C N/P C N/P C 4 months C 14 months
Uttarakhand Southern AP Chattisgarh Northern AP
(MoP Rating A+) (MoP Rating B+) (MoP Rating B) (MoP Rating B+)
Target Credit Payment Sup- Target Credit Payment Sup- Target Credit Payment Sup- Target Credit Payment Sup-
Rating port Needed Rating port Needed Rating port Needed Rating port Needed
AA N/P AA N/P AA N/P AA N/P
A N/P A N/P A N/P A N/P
BBB N/P BBB N/P BBB N/P BBB N/P
BB 62 months BB 11 months BB 12 months BB 13 months
B 57 months B 10 months B 11 months B 12 months
C 45 months C 7 months C 9 months C 10 months

Some key insights and possible explanations are below. First, in this sample, the
maximum possible credit rating that a PSM can help achieve is BB. It is found that a project
with NTPC as the off-taker (i.e., with zero risk of credit default) has a probability of default
of 1.51%, which corresponds to a BBB rating. Therefore, given that DISCOMs have higher
credit risk than NTPC (the highest credit rated off-taker), projects facing varying levels of
DISCOM default risk would naturally have credit ratings of BBB or worse. Since a PSM,
however sizeable, will not completely negate the risk of off-taker default, it is rational that
the maximum credit enhancement that can be affected using a PSM would be one band
below a BBB rating, i.e., BB.
Second, it is found that most DISCOMs require moderately high payment support.
Barring the outliers discussed above, the rest of the DISCOMs require 8–17 months payment
support for associated projects to achieve a domestic BB rating. On average, it was found
that these DISCOMs need about 12 months’ worth of payment support, which is consistent
with the assumption in Section 2.1. This translates to a PSM fund size equivalent to
approximately 10–20% of the total capital expenditure of the project being supported; that
is, the PSM size calculated in Section 2.1 is at the lower end of this estimation, and an
expected loss-based sizing approach, while simple, may underestimate the size of the PSM
required. The size requirement for this fund may be further reduced to 6–18% of the capital
expenditure by requiring the DISCOM to furnish a revolving letter of credit of 3 months’
payment, thus off-loading part of the cost of payment support to the DISCOMs.
Energies 2021, 14, 6405 15 of 19

3.3. Currency Hedging Facility: Approach 1 (Risk Buffer)

Starting with the first question: What are the expected costs of providing such hedging
solutions? Analysis reveals that the expected cost—or the average cost across all potential
outcomes represented by a probabilistic model—to provide a 10-year currency hedge via
the FXHF is approximately 3.5 percentage points per year [12]; 50% below market rates,
bringing the developer cost of capital to 9% (= 5.5% + 3.5%). In the context of a probabilistic
model, the expected (or average) cost means a statistic that is higher than 50% of the
potential cost outcomes and lower than the other 50%. This (i.e., 3.5%pts) is what the FXHF
would charge the developer for providing the currency hedge.
However, governments should be aware of the risk exposure of the FXHF due to
unexpected currency movements. That is, they should be aware of what will happen to the
FXHF if the Indian currency depreciates more than the expected value in an extreme way.
The FXHF would need to manage this risk; a risk that is typically managed by market.
This brings up the second question: How can the risks related to unexpected and
extreme movements in foreign exchange rates be managed? One way to protect against
this risk, and to ensure that the FXHF does not default, is to use a capital buffer, which is
essentially a funded facility managing the risk of currency fluctuations.
Based on the analysis in [12], for the FXHF to achieve India’s current sovereign
rating of BBB- (i.e., to have the same default probability), the cumulative capital buffer
requirement for 10 years would be almost 30% of the underlying loan amount; that is, with
a leverage of approximately 3. The basic idea is to enable investors to view this investment
as being as good as investing in the government of India’s securities. The government of
India is rated at BBB- from a global perspective, which is also considered investment grade,
which is the minimum rating that a lot of investors would invest in. The basic steps behind
this analysis are as follows:
• Calculate the fixed yearly INR payments by the developer to the FXHF based on the
initially contracted (and fixed) FX rate. Denote this time series of payments by “A”.
• Forecast the USD-INR FX rate, using a typical probability distribution that follows a
geometric Brownian motion process. Create histograms for each year from year 1 to
year 10.
• Calculate the variable yearly INR payments by the FXHF to the developer based on
the expected values of forecasted FX rates. Denote this time series of payments by “B”.
• The difference time series (i.e., C = B − A) is the expected net payment from the FXHF
to the developer. Calculate the net present value (NPV) of “C” at the government’s
cost of capital, denoted by “D”.
• Find an annuity on the original loan whose NPV is equivalent to “D”. The implied
rate on this annuity is the expected cost of the hedging provided by the FXHF—i.e.,
FXHF expected cost.
The government should also be aware that the expected cost of the FXHF of 3.5 per-
centage points does not consider the market cost of a capital buffer—i.e., the risk-premium
that the market would place on taking the risk of unexpected and extreme movements in
foreign exchange rates and maintaining this capital buffer.
This brings up the third question: What is the market risk premium—i.e., the differ-
ence between what the market would charge vs. what the FXHF is charging—for taking
currency risks? Using foreign exchange option pricing theory [39], the risk-premium can
be calculated as 2.76 percentage points, which largely accounts for the difference between
the cost of currency hedging in the market and the expected cost of the FXHF [12]. The
basic idea is to find 10 pairs of call and put options, one for each year, that hedge the
currency risk. The market cost of the currency hedge is, essentially, the net present value
of the difference of these option pairs. That is, this result confirms that the government is
indirectly subsidizing the FXHF by keeping the capital buffer but not charging for the risk
it mitigates.
In closing this subsection, a relevant question is whether other solutions are possible
with higher leverages. A potential solution to avoid such large public commitments is to use
Energies 2021, 14, 6405 16 of 19

a structure where public money is used to provide protection against currency devaluation
in particular range, via a market-based instruments such as currency options [13], as
discussed in Section 2.4. This approach shows that much higher leverages (up to 10) for
public money can be achieved.

3.4. Currency Hedging Facility: Approach 2 (Tail Risk Guarantee)

Table 4 shows the parameters and cost of FX tail risk guarantee based on the equiva-
lence premium principle [40], and using the market-based option pricing model [39]. In
actuarial science, under the equivalence principle, the premium is determined such that
the expected size of the future loss is zero. The FX tail risk guarantee component is thus
envisaged as a guarantee product which can operate outside the purview of Securities and
Exchange Board of India (SEBI) regulation thereby allowing entities other than commercial
banks to provide such a guarantee; hence the cost of the guarantee fee was estimated using
the equivalence premium principle. However, to validate the pricing, a market-based
option pricing method is also used, as discussed below.
To summarise, the developer pays the annual payments equivalent to 528 bps to the
hedging facility to maintain the risk capital for FX depreciation from 0–4.5% p.a. This
is a reduction of 30% from a commercially available FX swap. From 4.5% to P99.7 of
FX depreciation, the FX tail risk guarantor provides the risk coverage and is paid the
guarantee premium of 134 bps by the donor capital upfront through donor capital as a
direct subsidy [13].
As shown in Table 3, the market cost of currency risk is 650 bps. Based on above calcula-
tions, the cost of currency risk in an FX tail risk guarantee transaction is 528 + 134 = 662 bps,
which is quite close to the market cost of managing currency risk, i.e., 650bps. Hence, our
pricing is not violating the efficient (market) pricing hypothesis.
It can then be shown that this donor capital achieves a leverage of 9 [13], i.e., approxi-
mately three times higher than the leverage obtained under the previous scheme that uses
an explicit risk buffer (Section 2.3). The increased leverage comes from the observation that
the donor capital just covers the price of the currency hedge between 4.5% to P99.7 of FX
depreciation, as opposed to supporting the risk buffer itself.

4. Conclusions
This paper provides a summary of financial instruments to address key risks to
renewable projects in India. These risks include the following: first, payment delays
by distribution companies to independent power producers, which impact project level
cash flows in the domestic currency; second, currency fluctuations, which impact foreign
investor level cash flows in foreign currencies.
Multiple solutions are then described for each of these risks, using public funding
mechanisms. For payment delays, the category of solutions is termed as Payment Security
Mechanisms (PSM); whereas, for currency fluctuations, the category of solutions is termed
as Foreign Exchange Hedging Facilities (FXHF). The coverage shows the evolution of the
solutions from theory to practice over time. These solutions are likely to be of value to
other developing countries, given that they may face similar risks [41].
In case of PSMs, two solutions are explored, one based on Z-scores to cover the
expected loss, and another based on direct credit enhancement to have the underlying debt
rated at the highest level possible. In the former case, the size of the PSM is found to be
less than 10% of capital costs of the solar power deployed; whereas in the latter case, the
size of the PSM is found to be 10–20% of capital costs of the solar power deployed. Thus,
independent of the method used, the size of the PSM can be significant, from a low of 10%
to a high of 20%, with corresponding leverages of 5–10. Note that 10% of public capital
requirement with respect to private capital refers to a leverage of 10, whereas 20% refers to
a leverage of 5.
In the case of FXHFs, two solutions are again explored that are fundamentally different.
The first one is based on creating a contingency buffer to directly absorb tail FX risk,
Energies 2021, 14, 6405 17 of 19

whereas the second one focuses on absorbing certain tranches of FX risk while utilizing
market available FX swaps. It is found that the leverage, i.e., the amount of private capital
deployed per unit of public capital committed, varies in the range 3–9, with the lower
number corresponding to the first scheme and the higher number corresponding to the
second scheme.
The implications of our results are manifold. First, they advance applied theory.
Second, these results provide concrete recommendations on the sizing of various funded
facilities that could address key risks to renewable energy projects. Third, they suggest that
policymakers utilize public money to fund these facilities, while appropriately structuring
them in consultation with various stakeholders, such as ministries and financial institu-
tions. Finally, we acknowledge that these solutions are applicable to broader international
contexts, given that counterparty and current risks are commonly the biggest risks that
investors face, in particular in developing countries.
We acknowledge that our proposed solutions are not the final word. The limitations
of our work include issues around the availability of trusted data. Thus, we believe that
our results can be improved via the application of more reliable data. Furthermore, other
methods may be applied to the sizing problems at hand, and corresponding results could
be compared with ours. Finally, a lot more work needs to be conducted to implement these
schemes in practice.

Funding: This research received no external funding.

Institutional Review Board Statement: Not applicable.
Informed Consent Statement: Not applicable.
Data Availability Statement: Not applicable.
Acknowledgments: The authors acknowledge the support of colleagues, such as Arsalan Farooquee,
Vaibhav Singh, and Vinit Atal, who contributed to various related papers.
Conflicts of Interest: The authors declare no conflict of interest.

Abbreviations
AT&C Aggregate technical and commercial
CAGR Cumulative aggregate growth rate
DISCOM Distribution company
FX Currency
FXHF Currency hedging facility
GDP Gross domestic product
INR Indian Rupee
IPP Independent power producer
PSM Payment security mechanism

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