INSIGHT by Gireesh Shrimali, University of Oxford; Labanya Jena, Climate Policy Initiative. Views are personal and do not represent that of our employers.

© Gireesh Shrimali

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Risk Mitigation Instruments for Scaling Solar

Developing countries are facing an investment gap of $2 trillion in their green energy transition. Vanilla debt and equity investments by public institutions (e.g., development banks) will not be enough to bridge this investment gap.

A better use of public capital is the catalysis of risk mitigation instruments, using concessional capital by donor countries as well as development banks that can address the challenges faced by private financiers.

© Labanya Prakash Jena

The common risks for the renewable energy sectors across developing countries are political and currency. In addition, there are credit and payment delay risks related to counterparties.

Various risk mitigation instruments have already been deployed by multilateral institutions, but their effectiveness needs to improve. In this context, it is imperative to learn from successful example, and scale/replicate them.


| Political risk

The Multilateral Investment Insurance Agency (MIGA) of the World Bank Group (WBG) provides political risk insurance (PRI). However, there are challenges to scale up MIGA PRI including inflexibility, cumbersome processing, lack of continuity in client relations, and long processing times.

As a promising example, due to simplicity and flexibility, is the PRI by the Africa Trade Insurance Agency (ATI). However, ATI requires higher reinsurance capacity to scale, which can be developed via the engagement of private reinsurers as well as donor capital taking first loss positions. This PRI also needs to be replicated in other regions.


| Currency risk

The International Finance Corporation (IFC) currency hedge is a solution. However, it is expensive. In addition, it is not clear whether IFC solutions are available to smaller businesses in all developing countries. These drawbacks indicate risk aversion as well as lack of flexibility.

As a promising example, due to wider applicability, is the currency hedging by The Currency Exchange (TCX). However, TCX is limited by its balance sheet. It is important to strengthen TCX balance sheet through concessional finance, enabling them to enter additional markets, and bring cost down via diversification.


| Payment-delay risk

India’s Payment Security Mechanism (PSM) for utility-scale solar and Regional Liquidity Support Facility (RLSF) in Africa are two notables. RLSF is quite attractive as it not only has zero upfront fees but also includes a transparency tool to track payments in real-time.

Both instruments need concessional capital to boost balance sheets of sponsors, such as the Solar Energy Corporation of India (SECI) and ATI. Scaling them can attract reinsurance which can offer diversification benefits from risk pooling.


| Credit risk

Asian Development Bank (ADB) introduced a partial credit guarantee (PCG) In the early days of solar energy in India. However, the instrument was not successful due to high cost, cumbersome process, inflexibility, and lack of awareness.

IFC also offers a PCG, primarily supporting local currency financing, but it does not get enough attention despite being quite effective in attracting private capital. This PCG need to become a core product offering, with reduced complexity.

A notable example is the credit guarantee mechanism (CGM), focusing on rooftop solar sector in India. It was designed as a combination of a PSM as well as a PCG, while keeping in mind underlying credit profiles. The design showed that leverage of approximately nine was possible. However, CGM is not yet implemented.


| Pooled risks

Common Risk Mitigation Mechanisms (CRMM) was designed for mitigating multiple risks – political, currency, and off-taker. The main idea was that CRMM would take care of these risks together for projects at the time of bidding and offload them to existing providers – e.g., MIGA and TCX.

However, CRMM did not come to fruition due to multiple reasons: competition with existing instruments, lack of action by the implementing agency, mistrust across parties, lack of concessional capital, and lack of project pipeline. CRMM can be resurrected as robust pipelines develop.


Several existing risk mitigation instruments must be scaled/replicated as quickly as possible while ensuring the lowering of transaction costs, improving operational efficiencies, and incentivizing using. This will require concessional capital to bolster the capital base of existing providers, such as ATI and TCX. Donor countries and multilateral institutions must lead from the front.


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| brief bio

Gireesh Shrimali is the Head of Transition Finance Research at Oxford University. Previously, he was a Research Fellow at Stanford University and a Director at Climate Policy Initiative. He has taught at Johns Hopkins University as well as the Indian School of Business. His research is on the catalytic role of finance in getting to the 2C climate target. He also focuses on ESG issues, such as climate risk and net zero transitions. He holds a PhD from Stanford University, an MS from the University of Minnesota, and a BTech from the Indian Institute of Technology. Prior to his academic career, he has over nine years of industry experience.

Labanya Prakash Jena is a Senior Manager at CPI, based in Delhi. He leads the Center for Sustainable Finance (CSF) program. Labanya Prakash Jena has a rich and diversified experience of over 18 years in financial services, nonprofit institutions, technical assistance in international development, and academia. He holds a Master’s Degree in Economics and is a CFA Charter holder, from CFA Institute. Labanya is also a doctoral scholar at XLRI, Jamshedpur, working in different areas of Climate Finance. He is a Certified Expert in ESG and Impact Investing from the Frankfurt School of Finance and Management.


All opinions expressed are those of the author and/or quoted sources. is an independent and neutral platform dedicated to generating debate around ESG investing topics.