G ETTING W ITH I T : Putting Momentum Behind the U.S. - India Nuclear Deal Vijay K. Sazawal, Ph.D....

GETTING WITH IT:Putting Momentum Behind the U.S. - India Nuclear Deal

Vijay K. Sazawal, Ph.D.

September 24, 2015

School of Advanced International Studies (SAIS)

Johns Hopkins University

Disclaimer: Opinions expressed by the author are solely attributable to him and not to any affiliated company.

INTERNATIONAL ATOMIC ENERGY CONSULTING

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PRESENTATION OUTLINE

Energy Scenario in India

Evolution of Nuclear Energy Program

Strategic Autonomy and Indian Exceptionalism

U.S. - India Civil Nuclear Agreement

Accomplishments and Outstanding Issues

Roadmap for Success

Concluding Remarks

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ENERGY SCENARIO IN INDIA

India is the 4th largest consumer of energy in the world. Its primary energy consumption grew by 6% in the last five years

India is the 3rd largest producer of electricity in the world, using thermal (70%), hydro (15%), renewables (13%) and nuclear (2%) energy sources

IMF estimates Indian growth rate in 2015-2016 will be around 7.5%, even as its mainly agrarian economy is slowly transforming to its full industrial potential

Climate change and population rise represent a paradigm shift for Indian planners:

India is among the top greenhouse gas polluters in the world. By 2020, the “big four” will be China (24%), U.S. (13%), EU (8%) and India (7%)

India’s population will exceed China’s in the next decade

India is making public commitments to increase its use of clean energies, including nuclear power

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FUTURE DEMAND FOR NUCLEAR POWER

Market Analysis – IAEA, EIA, WNA, Ux Consulting… Global Growth of nuclear power will be driven by non-OECD countries

2/3 of all new nuclear plants will be built in China, Russia, India and South Korea

BP Energy Outlook in 2035:

India’s energy production will rise by 117% while consumption will grow by 128%

India’s demand growth of 128% outpaces each of the BRIC countries as Russia

(+14%), China (+60%) and Brazil (+72%) all expand slowly

McKinsey India Report 2014:

India will be one of the energy import dependent large economies

Nuclear capacity will jump from 5.5GW (2% of total energy supply) to 23GW (7%) by

2030, and to 25% by 2050

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FUTURE DEMAND FOR NUCLEAR POWER

India’s nuclear energy program is planning to develop 63GW of nuclear power by

2030 based on filling up the deficit gap between energy supply and demand in

2050

India has 21 reactors in commercial operations, 6 under construction, 4 licensed to begin

construction, and another 6 in advanced stages of securing construction licenses

A recently completed analysis from a perspective of meeting India’s obligations to

reduce greenhouse gases, projects a need for about 125GW of natural uranium and low

enriched uranium reactors (as part of clean energy portfolio) by 2050

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EVOLUTION OF NUCLEAR ENERGY PROGRAM IN INDIA

India had the most advanced nuclear program in all of Asia until 1960’s

1944: Dr. Homi Bhabha sought funds from a non-governmental charity organization to set up an institute to conduct atomic research with the purpose of alleviating poverty and disease in India

1948: India, having gained freedom in 1947, established the Atomic Energy Commission (AEC), with Dr. Bhabha as its first chairman

1954: India announced its 3-stage nuclear program at a global conference inNew Delhi

Stage 1: Natural Uranium (and supplementary LEU) fueled reactors

Stage 2: Mixed Oxide (MOX) fueled reactors

Stage 3: Thorium fueled reactors

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EVOLUTION OF NUCLEAR ENERGY PROGRAM IN INDIA

1955: Designed the first industrial scale 1 MW reactor that began operations in 1956 using enriched uranium and technical support from UKAEA

1960: CIRUS, a 40 MW reactor, developed in partnership with Canada and the U.S. attains criticality

1963: India signed with General Electric and Bechtel for the first two LWR’s in Asia

1969: Tarapur 1 & 2 units (both BWR’s) began operations

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STRATEGIC AUTONOMY AND THE “INDIAN EXCEPTIONALISM”

India, having received its freedom following WW-II, did not take sides in the cold war era

India emerged as the leader and the voice of the Non-Aligned Movement (NAM) When President Eisenhower delivered the “Atoms for Peace” speech in the

UNGA in December 1953, India had begun embarking on its 3-stage nuclear program. Consequently, India publicly rejected those portions of Ike’s speech that dealt with control of uranium resources under selective countries and organizations

Nevertheless, India’s global leadership in the nuclear energy development was evident when the 1955 Geneva Conference, preceding the formation of IAEA, was chaired by the Indian representative

In 1956, the “Washington Group” (developing the IAEA Statute) co-opted India as a core member in order to attract NAM membership in IAEA. India successfully argued its objections to formation of a de-facto uranium cartel and rejected requirements to have IAEA take custody of excess plutonium

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STRATEGIC AUTONOMY AND THE “INDIAN EXCEPTIONALISM”

In 1965, India was a member of the eight non-aligned nations that drafted the5 principles for the NPT, and later member of Eighteen Nation Committee on Disarmament (ENCD) involved in the creation of NPT

In 1967, a year before the NPT was signed, India announced that it will not sign the NPT, calling it discriminatory. Nevertheless, India committed to abiding by its principles

In 1974, India conducted a nuclear test, calling it a peaceful nuclear explosion (PNE), allowed under Article V of the NPT

In November 1975, the U.S. called a secret meeting in London to discuss ways to plug loopholes in the global civil nuclear commerce and impose sanctions against India. The “London Club” added members, linked with IAEA in 1978, and became known as the Nuclear Suppliers Group (NSG)

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U.S. - INDIA CIVIL NUCLEAR AGREEMENT

2000: President Clinton completed a very successful 5-day visit to India, acknowledging that India is destined to become a major global economy in the next millennium

2001: Incoming President Bush appointed Professor Robert Blackwill as the new Ambassador to India. Professor Blackwill headed the “Vulcans” who once advised the President that included Condoleezza Rice, the new NSA

2002: U.S. - India High Technology Cooperation Group established 2003: India made its nuclear weapon doctrine public 2004: U.S. and India established the “Next Steps in Strategic Partnership” (NSSP) as

an expression of improving bilateral relationship 2005: U.S. announced a pathway for “full” civil nuclear cooperation with India

during Indian Prime Minister’s visit to Washington 2006: The Henry Hyde Act (HR 5682) was passed by the U.S. Congress granting

India an exemption from certain requirements of the U.S. Atomic Energy Act (AEA), allowing the signing of the “123 Agreement” with India. This agreement was negotiated but not signed until other formalities, imposed by HR 5682, were completed

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U.S. - INDIA CIVIL NUCLEAR AGREEMENT

2008: India and IAEA agreed to “India-Specific” Safeguards and Additional Protocol requirements. This was followed by NSG granting exemption to India allowing it to participate in global civil nuclear commerce. Subsequently, the U.S. Congress passed a new bill authorizing bilateral civil nuclear commerce with India (HR 7081)

2008: India provided an official letter of commitment to the U.S. Government that India will provide two sites to U.S. nuclear reactor suppliers to build nuclear reactors in India. The letter also stated Indian requirements that had to be met in order to buy such reactors, but this part of the letter was mostly ignored by all U.S. participants

2009: India announced two nuclear site locations for U.S. nuclear reactor suppliers. Westinghouse was assigned a site in Gujarat, and General Electric was assigned a site in Andhra Pradesh

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2008 COMMITMENT LETTER FROM THE INDIAN GOVERNMENT

India will offer two nuclear plant sites to American nuclear vendors without any global tendering to build nuclear power units at two sites generating up to 10 GW or more, provided technical and commercial terms meet Indian requirements for affordable power

India will complete the separation of its civil and military nuclear programs as per the schedule agreed previously with the U.S. Government, and implement the India-specific Additional Protocol as agreed with the IAEA on August 1, 2008

India will pass a Parliamentary law on the nuclear liability regime consistent with the Convention on Supplementary Compensation (CSC) for nuclear damage

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INDIAN NUCLEAR LIABILITY LAW

The Bill was introduced in the Parliament on May 7, 2010 (“Bill 19 of 2010”) at which time its contents became public. Soon thereafter the local media claimed that an official of the U.S. Embassy in New Delhi was attempting to modify a sentence in the Bill. This awkward public disclosure led the Government to send the Bill to the Parliamentary Standing Committee on Science & Technology on May 13 which subsequently held public hearings and made further changes to the Bill

The new Bill (“Bill 38 of 2010”) was submitted to Parliament on August 19, 2010 The Civil Liability for Nuclear damage Act (CLNDA) was passed after

acrimonious debate and pandemonium by both Houses of Parliament. It became a law on September 21, 2010. Subsequently, the CLNDA Rules, 2011 (“Rules”) was published in the Gazette of India on November 11, 2011

India took the position that CLNDA is consistent with CSC, and its IAEA Ambassador signed the CSC Treaty in Vienna on October 27, 2010

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The U.S. Government, supported by the U.S. nuclear suppliers, disagreed that CLNDA was consistent with CSC, and among the various discrepancies noted, the following two stuck out as especially controversial:

Right of recourse by an operator against a supplier (Section 17b)

Admissibility of claims against the supplier under statutes other than CLNDA (Section 46)

The liability issue remained unresolved until 2014, and in fact at one point the diplomatic relationship between India and the U.S. became tense. However, after India elected a new Prime Minister in 2014, he agreed with the U.S. President to set up a Contact Group which held a number of meetings in Washington, London, Vienna and New Delhi, with the President announcing on January 24, 2015 in New Delhi that after receiving detailed legal briefings from Indian lawyers, the two countries had resolved the matter

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It was however recognized that the U.S. Government could not speak for U.S. Suppliers, and it was up to the industry to decide whether to enter the Indian civil nuclear market or not

India, for its part, reiterated that any outstanding legal issues and concerns could be taken up in the contract negotiations and discussed as part of the “Techno-Commercial Offer” (TCO)

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TECHNO-COMMERCIAL OFFER (TCO)

A key objective of contract negotiations with a pre-selected supplier is to develop a TCO to establish economic viability of a project

(Viability – “able to be done,” or “worth doing” – MacMillan Dictionary)

Letter from Foreign Secretary, Government of India, to the Undersecretary of State, U.S. State Department, September 10, 2008:

“… It is the intention of the Government of India and its entities to conclude discussions with US nuclear energy firms and conclude agreements …. on the basis of mutually acceptable technical and commercial terms and conditions that enable a viable tariff regime for electricity generated.”

The Joint Statement issued by President Obama and Prime Minister Singh in New Delhi on November 8, 2010:

“They reiterated their commitment to build strong India-U.S. civil nuclear cooperation through participation of the U.S. nuclear energy firms in India on the basis of mutually acceptable technical and commercial terms and conditions that enable a viable tariff regime for electricity generated.”

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TECHNO-COMMERCIAL OFFER (TCO)

The joint Communiqué between the U.S. Secretary of State and the Indian Foreign Minister in New Delhi on July 19, 2011:

“They reiterated their commitment to build strong India - U.S. civil nuclear cooperation through the participation of the U.S. nuclear energy firms in India on the basis of mutually acceptable technical and commercial terms and conditions that enable a viable tariff regime for electricity generated.”

TCO is a three-stage process:

Project Overnight Cost

Project Completion Cost

Project Viability Assessment

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KEY CHALLENGES IN IMPLEMENTINGTHE 2008 U.S. - NUCLEAR DEAL

“Separation Plan” by India identifying a schedule by when India had to open previously closed nuclear sites to IAEA safeguards and inspection – done

“Additional Protocol”, negotiated and ratified by India with IAEA – done Peaceful use assurances by the Indian entities to NNSA under “810

Requirements” to authorize U.S. nuclear suppliers to share information for design and licensing reviews by the Indian utility and regulator – done

“Administrative Arrangements” under the 123 Agreement – done Assurances and verifications required by the U.S. Commerce Department for dual

use exports – “mostly done” Nuclear Liability – issue resolved by the two governments, U.S. suppliers still

assessing Techno-Commercial Offer (TCO) – U.S. suppliers demurring, India losing

patience

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KEY CHALLENGES IN IMPLEMENTINGTHE 2008 U.S. - NUCLEAR DEAL

Nuclear Liability – issue resolved by the two governments, ratification by India to be completed; U.S. suppliers continuing assessments

Nuclear Liability – India Nuclear Insurance Pool (INIP) established, subscribing of policies and premium amounts for three categories of policy holders pending

Techno-Commercial Offer (TCO) – U.S. suppliers demurring, India losing patience. Land acquisition becoming a highly political issue in India, with civil society and public demanding timely use of lands earmarked for industrial purposes

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COST OF ELECTRICITY – “VIABLE TARIFF”

International Energy Agency (IEA) and the Nuclear Energy Agency (NEA), both based in Paris, issued a report on August 31, 2015 on projected cost of nuclear power generation:

Nuclear will cost from a low of 2.9¢/KWh under most favorable conditions (including a low discount rate) in UAE in 2020 to 13.6¢/KWh in U.K. under guaranteed “strike price” in 2023

Tariff in India’s indigenously designed and constructed reactors are in the range of2.7 ¢/KWh (Rs 1.75) to 4.2 ¢/KWh (Rs 2.8)

In China, the National Development and Reform Commission, set a uniform tariff rate of 7.5¢/KWh in 2013 for all nuclear power output

EdF, the French utility, is required to sell up to 25% of its nuclear power output to rival European utilities and in 2014 charged 4.7¢/KWh

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COST OF ELECTRICITY – “VIABLE TARIFF”

Exelon recently disclosed that cost of producing electricity at its operating nuclear plants in Illinois range from a low of 3.3¢/KWh (for dual units) to a high of 3.9¢/KWh (for single units)

Kudankulam 1-2 units in India will provide electricity at 6.5¢ /KWh (Rs 4) DAE has set a target tariff for Indian nuclear power plants in 2021 at around

10¢/KWh (Rs 6.5) India and Russia recently signed an agreement for the purchase of two new

reactors (Kudankulam 3-4) at a price that that will allow NPCIL to sell electric output at a price of around 10¢/KWh (Rs 6.50)

Discussions with the French and American nuclear suppliers are proceeding with indications that serious negotiations with at least one party has yet to begin

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ROADMAP FOR SUCCESS

Looking at the KK-3/4 contract, the target overnight cost of construction has to be around $3200/kW to result in levelized cost at busbar of around 10¢/KWh

This price is significantly higher than that offered by western reactor vendors

Pathway to success is challenging, but not impossible Use the “KK model” for negotiations – meaning that the TCO is developed in an open,

cordial and team relationship between the parties equally committed to achieving the final goal

Allow Indian nuclear plant designers to streamline western designs, incorporating value engineering and design optimization that India has demonstrated in many high technology areas

Consider significant localization of the supply chain in India that will provide two tangible benefits, (a) costs of Indian produced components will come down, and(b) shift some of the firm, fixed manufacturing to NPCIL, along with its associated contingencies

The cost of capital is a key component of the levelized price of electricity produced. A consortium approach that manages to the tap best possible state loan guarantees and financing is necessary. Two new global banks, AIIB and NDB, were recently launched in which China and India are the largest shareholders

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ROADMAP FOR SUCCESS

Finally, NPCIL has to examine its own financial model to ensure that its assumptions related to the ROI, assumed capacity and availability factors, plant life and taking advantage of standardization under a multiple unit construction contract, etc. are sufficiently innovative and challenging from an owner/operator’s perspective. The burden of achieving target performance and price goals must be equitably distributed

India has repeatedly affirmed publicly that remaining legal and T&C’s can be addressed during contract negotiations with an aim of successful closure

Most of all, serious negotiations for the TCO must begin in earnest without delay. The ball is in the U.S. nuclear supplier’s court

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FLASHBACK: THE 5TH ANNUAL NUCLEAREXPORT CONTROL SYMPOSIUM

The symposium was held in Washington, D.C. on February 10, 2014

Various agencies of the U.S. Government (Departments of State, Energy, Commerce, NRC) and representatives from leading American nuclear suppliers attended

I mentioned “5 Myths” about the Indian Civil Nuclear Program

1. “Indian Nuclear Liability Law is the most severe obstacle to consummating a commercial contract between U.S. nuclear suppliers and NPCIL”

2. “India has no intention to award commercial contract to U.S. nuclear reactor vendors”

3. “India favors Russian nuclear vendor over all other international nuclear suppliers”

4. “India will import foreign nuclear reactors only if severe political and diplomatic pressure is put on India”

5. “India has to buy foreign reactors at some time or the other because it needs additional reactors to meet its power consumption needs”

Bottom line: It is time to make the move...

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CONCLUDING REMARKS

India can be both a partner and a customer

The U.S. and India are developing strong strategic ties and collaborating on a wide spectrum of programs ranging from national security to energy security

India is becoming a hub for innovation, value engineering and low cost manufacturing. Indian moon mission cost one-tenth of NASA’s comparable project

NPCIL is one of the most successful vertically integrated nuclear companies in the world. It builds standardized 700 MW PHWR’s for under $2000/KW. Its financial books are audited per western standards

India has a cumbersome bureaucracy, and any supplier (domestic or foreign) has to be patient, sincere, flexible, and creative in order to be successful

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CONCLUDING REMARKS

The 10th Anniversary celebration of the U.S. - India nuclear deal was held in Washington on July 13, 2015

Vice President Biden: “The historic civil nuclear deal was a vote for India and just not for civil nuclear cooperation”

Assistant Secretary Biswal: “Over the next 10 years, India will need to provide 400 million of its citizens with reliable energy”

In Closing

“If you want to travel fast, go alone. If you want to travel far, go together”

“It is no longer about what we can do for India, it’s about what we can do with India, what we can do together”

American nuclear reactor suppliers and NPCIL have to get the TCO discussions on a fast track and bring contract negotiations to a successful closure soon. Otherwise, a momentous opportunity will be lost

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G ETTING W ITH I T : Putting Momentum Behind the U.S. - India Nuclear Deal Vijay K. Sazawal, Ph.D....

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