New Energy: Nuclear Deals Mushroom in IndiaPublished: February 12, 2009 in India Knowledge@Wharton
On February 2, India signed an agreement with the International Atomic Energy Agency (IAEA) allowing United Nations oversight of 14 of its 22 civilian reactors by 2014. Considering the amount of brouhaha the original Indo-U.S. nuclear deal had caused -- it nearly brought down the Congress-led United Progressive Alliance (UPA) government in New Delhi -- the response was low key. "This ends 34 years of nuclear apartheid," said All India Radio. Very few people noticed.
Recent months have, however, seen a lot of action on the nuclear front. On January 26, at India's Republic Day function, the chief guest was Kazakhstan President Nursultan Nazarbayev. The Central Asian Kazakhstan, one of the independent republics of the former Soviet Union, has never been particularly high on India's radar, so the president's pride of place at the ceremonies caused some surprise. The explanation came a couple of days later when, at a press conference in Kazakh capital Almaty, Mukhtar Dzhakishev, president of Kazatomprom, the state-owned nuclear holding company, said that new Indian atomic power plants would use Kazakh uranium as fuel.
Nazarbayev's team is only one of a series of delegations that have been visiting India to seal nuclear deals. They cover a wide range both in terms of countries and offerings, from raw materials to equipment and fabrication skills. A couple of days after the IAEA deal, nuclear giant Areva of France signed an agreement with the Nuclear Power Corporation of India Ltd. (NPCIL) to provide India with six new-generation reactors. "This is just the beginning," says Anil Kakodkar, chairman of India's Atomic Energy Commission. "The deal is worth US$12.3 billion," adds NPCIL chairman and managing director S.K. Jain.
January was a hectic month. An 18-member delegation from the UK, headed by Lord Peter Mandelson, the British secretary of state for business, enterprise and regulatory reform, arrived in Delhi with executives of companies such as Rolls Royce, Urenco Enrichment, Thompson Valves and Weir Power. A Canadian delegation also visited India, led by minister of international trade Stockwell Day; it included representatives from Atomic Energy of Canada Ltd. (AECL), uranium supplier Cameco and SNC-Lavalin, a nuclear engineering firm. "Canadian companies are well positioned to capitalize on opportunities and to work with their Indian counterparts to meet the needs of India's civilian nuclear market," says Day. "India is very enthusiastic about using Canadian technology and resources to help build [its] nuclear energy capacity." Earlier, there had been visits from French, Japanese and Russian teams as well.
But stealing the thunder both in size and significance has been the U.S. commercial nuclear mission (which was to have visited India in December 2008, but was delayed because of the Mumbai terrorist attacks). It arrived in the country with 60 senior executives of 30 nuclear power companies. The delegation spoke to an array of Indian companies, including Tata Power, Heavy Engineering Corporation, Larsen & Toubro (L&T) and Punj Lloyd. "The robust presence here of the U.S. commercial nuclear industry, so soon after the unfortunate events in Mumbai, speaks of the commitment of our companies to partner with India in the coming nuclear renaissance," says Ted Jones, director for policy advocacy at the U.S.-India Business Council (USIBC). According to USIBC projections, Indo-U.S. nuclear cooperation could add up to US$150 billion over the next 30 years.
India can maximize its opportunity by getting some of the world's leading uranium suppliers or nuclear plant construction firms to compete with one another to offer the best terms, notes Jitendra Singh, a Wharton professor of management. "The opportunity is large, so I suspect this will happen," he says. The current economic slowdown could present India with an opportunity to negotiate long-term contracts at favorable prices and conditions to further its civilian nuclear program, according to Singh.
Some deals are in place. "We will develop long-term relationships and partnerships with industrial companies, design firms and academic institutions," Meena Mutyala, vice president of Westinghouse Electric Company told The Hindu, a national daily. The newspaper also quotes Brandon Bethards, CEO of Babcock & Wilcox Company: "We have world-class nuclear component manufacturing facilities and a strong commitment to safety, quality and performance. We recognize these are key tenets of India's nuclear programs and look forward to working with India as they begin to add more nuclear generation."
While NPCIL has taken the lead among public sector companies, L&T is racing ahead of its peers in the private sector. "L&T has signed an MoU (memorandum of understanding) with Westinghouse of the U.S. for work involving EPC (engineering, procurement, construction), manufacturing and construction activities for the AP1000 modular nuclear reactors which they intend to offer for Indian requirements," says M.V. Kotwal, L&T's senior executive vice president. "L&T has also signed an MoU with AECL of Canada. This covers the development of the Candu ACR 1000 heavy-water moderated reactor for the Indian market. Our company has been involved in discussions with other major players such as GE, Areva and Rosatom, which are likely to offer light-water reactors for the Indian nuclear program. This is because we are a potential participant covering project management, engineering, manufacturing and construction for any of the designs of nuclear reactors and can also play a cost-effective role in supplying critical nuclear equipment for projects outside India."
Kotwal says that exports are a distinct possibility. "One of the mandatory requirements for a company before it can export nuclear equipment is to have an 'N' (nuclear) stamp accreditation," he explains. "L&T is the only company in India to have been assessed and awarded both the 'N' as well as the 'NPT' (national pipe thread) stamps by ASME (American Society of Mechanical Engineers), covering design as well as manufacture. L&T can therefore supply equipment to other countries as well."
Other companies are also seeking collaborations with foreign firms, though specific agreements have not yet been announced. "HCC (Hindustan Construction Company) is well engaged in the recent development of the nuclear power industry in India," says Vinayak Deshpande, the company's president and chief operating officer. "Having built more than 50% of India's nuclear power capacity, HCC has been a market leader in the space of civil and structural works required for containment building and other auxiliaries. As the trade is likely to expand multifold, within and outside the country, HCC has been seeking domestic and international opportunities in partnership with global players recently seen visiting India. HCC, with its strong engineering background, will also seek active participation in domain specific engineering, testing and certification areas."
Analysts have already started to identify Indian companies that could benefit from this nuclear summer of cooperation. Fenil Maru, an equity advisor at ICICI, has a laundry list that includes L&T; HCC; the public sector Bharat Heavy Engineering ("It is looking for a tie-up and has been in talks with Alstom, GE Energy, Russia's Leningrad Metal Factory and Siemens"); the public sector National Thermal Power Corporation ("It is setting up a 2,000 MW nuclear plant" to be operational by 2012-2013); Areva Transmission & Distribution, a subsidiary of Areva of France ("It is looking at a plant for uranium mining and recycling"); Alstom Projects ("The company already makes nuclear reactors and rotors"); Rolta ("The Rolta-Stone & Webster joint venture provides reactor-building technology"); Gammon ("It has undertaken turnkey construction for nuclear projects"); ABB ("It makes components for power projects"); Anil Ambani's Reliance ADAG ("It plans to invest an additional US$2.4 billion in nuclear power capacity); Crompton Greaves; Walchandnagar Industries; Siemens; and Tata Power. As is evident from this list, several multinationals already have a presence in the country through subsidiaries, which they are likely to leverage.
How large can the nuclear power business become? Today, nuclear power constitutes just 4,100 MW or 3% of the country's energy needs. According to NPCIL's Jain, by 2032, India will have to increase this to 63000 MW, at a bare minimum. This translates to 40 new reactors worth US$80 billion.
"It is premature to provide specific numbers as details of the work involved cannot be discussed with any of the foreign companies pending clearances from their respective governments," says Kotwal of L&T. "An approximate assessment of the business potential available for Indian industry could be on the order of US$1.5 billion to US$2 billion a year after a couple of years." The USIBC is more optimistic with its expectation of US$5 billion a year.
Even more optimistic is an L&T white paper, which takes a broader view. "The Indo-U.S. nuclear deal will open two-way cooperation between India and the U.S. on key technologies in the areas of defense, nuclear energy, aerospace and aviation," says the paper. "This is a business mega-opportunity of more than US$200 billion."
It could reach that level if everything goes right, but chances are that plans may hit a speed-bump. The first problem is political. General elections are due in India, and a new government will be voted into office by the summer. Analysts predict that this is likely to be a coalition government supported by left-wing parties. They could jam the works since they have vowed to rework the Indo-U.S. nuclear deal. Even the opposition Bharatiya Janata Party (BJP) -- which could have a shot at forming the government -- vehemently opposed the deal when it was discussed in Parliament.
Singh says he is "puzzled by the Indian left-wing political parties." Describing their ideologies as "intellectually bankrupt," he says the best outcome would be if in the upcoming elections, the winner gets a clear majority, "so that it is possible to avoid the dysfunctional dynamics of coalition formation between partners who do not see eye to eye on many issues."
Several critics believe that future opposition to the nuclear treaty will be ineffective. "I do not think any new regime in India or the U.S. would go back on the deal," says Shivanand Kanavi, who is writing a book on India's nuclear program and is the author of Sand to Silicon, a book on the digital revolution. "Basically, the Indo-U.S. deal was the key that was necessary to open doors globally for nuclear trade with India. The bilateral deals that have been signed with France, the U.S., Russia and Kazakhstan have proven that. The Left had objections to the deal with the U.S. but later claimed it had no problems with deals with other countries. Since then, not much has been heard from them on the subject. I do not see any post-election problem if a coalition involving the Left comes to power. The BJP had claimed that it would renegotiate the deal. But it, too, has not said much on the subject recently."
"I do not feel a reversal is likely," says Kotwal of L&T. Adds Vasant Natarajan, professor in the department of physics at the Bangalore-based Indian Institute of Science (IISc): "The current climate seems to be that being part of this nuclear clique is somehow strategic for India and I don't see any Indian government having a fundamentally different outlook. As a policy of course one can always reverse it, but once we sign some agreement to buy a reactor we can't go back on it."
No Silver Bullet
The second issue is that the nuclear deal is not an instant solution that will immediately increase energy supply. According to Kanavi, "The Areva agreement is just the beginning of a new project. The site has been identified as Jaitapur near Ratnagiri, on the coast of Maharashtra, but the size of the reactor, the price and the subcontracts to be outsourced to Indian companies have to be worked out. Areva has a proven design for the 1,000 MW pressurized water reactor. However, it is also touting a new 1,600 MW design. Which one NPCIL will finally choose remains to be seen. There are pros and cons for both options."
Kanavi notes that GE-Hitachi and Westinghouse are still a long way from signing any reactor supply agreements. "The reasons are twofold," he explains. "Areva and Rosatom [of Russia, which has just signed a deal for fuel supplies] are backed by sovereign guarantees on lifetime fuel supplies as well as indemnity. The U.S. companies being privately owned do not enjoy that luxury. Moreover, the 123 agreement between India and the U.S. does not give India pre-consent for reprocessing. Thus there is still work to be done by both the governments for U.S. companies to become serious players."
On another front -- raw materials -- the picture is clearer. "With the sanctions being lifted, there are enough low enriched uranium (LEU) suppliers for power projects," says Kanavi. "In fact, this embarrassment of riches is driving the department of Atomic Energy to think innovatively about using LEU in its pressurized heavy-water reactors, thereby achieving a high burn rate and greater power. On the whole, the worldwide downturn might give India a great opportunity to be tough negotiators for both uranium supplies as well as reactors. In the drive for job creation, we might get some very attractive financing options as well."
Whatever the immediate attractions, the opposition to nuclear power is not going to go away overnight. True, even the Leftists have seen a new light. For all the public criticism, the Left government in West Bengal, which has been ruled by the Communists for more than 30 years, wants a nuclear unit in the state. But others view nuclear energy with suspicion.
"I am not in favor of nuclear energy because it is expensive, and it also does not make a lot of sense for a country like India which does not have a large supply of uranium and other inputs," says Natarajan of IISc. "We will always be beholden to the suppliers. If they decide to turn off the tap one day, for whatever reason -- political or economic -- we will be stuck. Every country is going to look after its own interests. If the U.S. has any strategic interest in this region, it is because they want to ensure their supply of oil from the Middle East or have a counterbalance to China. Any time that India does not agree with the U.S., they will just turn off the tap. In the nuclear supply group, every country in a sense is a U.S. ally. I don't see any country which will be willing to counterbalance U.S. interests and take India's side through thick and thin. In fact, signing the Indo-U.S. deal is almost like signing a worldwide deal because everyone will toe the U.S. line."
Singh argues that it is "overly simplistic" to describe nuclear power as being expensive. "A different way of asking this question would be to factor in the total costs of thermal power from coal, for instance, by including the costs of its environmental impact," he says. "I am confident that such a calculation will show nuclear power in a much better light." Singh further asks if India isn't "already beholden to the oil-exporting nations. The imagined alternative is a false, autarchic fantasy which has little place in today's world. Would such critics rather see India go the way of Cuba, Angola or North Korea?"
The argument that the U.S. supports India's civilian nuclear program because it wants a counterbalance to China is also misguided, according to Singh. "Why is it in India's interest to look this gift horse in the mouth? In today's geopolitical reality, with only one superpower in the world, it is in India's interests to constructively engage with the U.S. across as many fronts as make sense," even as it protects its own strategic interests. Singh favors nuclear energy also because he believes India doesn't have the option to build thermal, coal-fired power plants to cover its power deficit in the next few decades. Also, the environmental costs could be "staggering," he says.
Big Business or Bust
Natarajan is skeptical for other reasons, too. "I don't see it as a big business opportunity for Indian companies because we do not have an indigenous supply of raw material," he says. "India is not a big producer of uranium and that is why our main investment is around thorium, which is available in plenty in India. That is important from a long-term view. If we can develop this [thorium] cycle or something which gives us an indigenous supply of raw material, there may be a business opportunity. But as things stand now, Indian companies can at best be collaborators and do marketing. This will be like any activity where one is a local agent. I won't call it a big business opportunity." (Thorium is not being ignored, however. Infrastructure company Punj Lloyd and the U.S.-based Thorium Power signed an MoU in December to form a 50:50 joint venture to explore commercial nuclear power opportunities. The proposed investment is US$1 billion.)
India's nuclear summer is only part of a global mosaic. With crude prices shooting through the roof last year -- they have come down now -- the nuclear option is being reviewed. "Increasing global consensus is in favor of setting up nuclear power plants for energy needs, especially in view of ever-rising oil and gas prices, depletion of oil reserves, the global warming caused by traditional thermal power plants and demonstration of safe and reliable performance of nuclear plants in the past two decades," says the L&T white paper.
"There are reasons to believe that there will be a nuclear renaissance in the next couple of decades," says Kanavi. "Global warming and carbon concerns have encouraged positive attitudes regarding nuclear power. The large reactor manufacturers have started investing in manufacturing capacity once again. The Bush administration had announced certain incentives for nuclear power. Accordingly, there are 20 proposals in the U.S. However, the Obama administration's policy is yet to be spelled out. The technology has evolved incrementally in the interim. No radical new design has come up due to the slowdown after Three Mile Island and Chernobyl."
Mumbai-based business magazine Business India points out that the financial motive has been a key factor in the slowdown in nuclear energy activity. "As many as 103 nuclear power plants were built across the U.S. between 1963 and 1973, after which no new ones have been erected," says the magazine. "Grossly overbuilt on expectations of runaway energy requirements, nuclear power became uneconomical when this did not materialize, especially because of uncertain licensing procedures for investments. In the UK, too, the last nuclear power station to have been built was Sizewell B in Suffolk, erected between 1988 and 1995. But the Gordon Brown regime decided to end this 20-year hiatus by approving a new generation of reactors to help balance high carbon generating power systems. Ten nuclear stations are likely to be built, at a cost of US$2.4 billion each."
"The attitudinal change that is happening even in Europe towards nuclear power is evident from the recent decision by Sweden to order two large reactors," says Kanavi. "Sweden is one of the most environmentally conscious countries and, in a referendum, had totally ruled out nuclear power decades ago."
China has also increased its nuclear generation targets. It currently has 11 civilian reactors with a capacity of 8.6 gigawatts (GW). The earlier plan was to bolster this by 2GW a year to reach 40GW by 2020. In March 2008, the State Energy Bureau raised the number to 50GW. In June, the China Electrical Council projected a target of 60GW. More recently, the National Energy Administration has been talking about 70GW by 2020. That plan still awaits government approval.
Such arguments fail to convince the skeptics, though. "Global interest in nuclear energy is probably because, in the short term, the greenhouse gas emission from nuclear power plants is almost negligible compared to a coal-fired plant. Global warming and greenhouse gas emission are important issues in the energy market," says Natarajan of IISc. "The long-term solution for a country like India or a continent like Africa is solar power, simply because we get so much sunlight. The developed countries are not thinking along these lines because they don't get the sunlight that we do. If we invest in solar power, we can be world leaders in this field. We should plan our future on something that we can be sure about. The sun is not going to stop shining because the political climate changes."