Global Economics

India's Nuclear Build-Out


If there is one thing that could trip up India's rapid economic ascendancy, it is a paralyzing energy crunch. To avoid that fate, the country desperately needs a major build-out of its nuclear reactor capacity (it kicks in only 3% of India's energy needs now), and that means access to international uranium supplies and reactor technology.

Indian power companies, not to mention global nuclear-reactor builders and suppliers, see vast potential. Yet it all hinges on a critical and highly contentious U.S.-India nuclear deal getting nailed down in Washington.

A possible breakthrough came on July 27, when the U.S. House of Representatives approved a U.S.-India nuclear pact under which the U.S. will provide India with fuel and reactor technology for its civilian nuclear program in return for extra safeguards imposed on India's nuclear weapons activities. This represents a significant win for India as it would get access to nuclear fuel supplies despite that New Delhi is not a signatory to the Nuclear Nonproliferation Treaty.

WIN-WIN SITUATION.The Bush Administration has pushed mightily for legislative approval of the deal, arguing that India deserves special treatment given its solid track record in not spreading nuclear weapons technology. A largely unspoken incentive, of course, is the huge commercial potential for U.S. companies such as General Electric (GE), nuclear fuel supplier US Enrichment (USU), and contractors and material suppliers such as Bechtel, Lockheed, (LMT) and Boeing (BA).

An estimated $60 billion in reactor and related supply contracts could be up for grabs in the coming decades if India's nuclear power industry gets access to international fuel supplies, investment, and expertise.

A U.S.-India nuclear deal still has some hurdles to overcome. The Senate hasn't yet considered the so-called United States and India Nuclear Cooperation Act of 2006. The Bush Administration faces stiff opposition from a bi-partisan group of U.S. legislators who think cutting India a break will outrage war-on-terror ally Pakistan and demolish global compliance among other countries that have signed the nuclear nonproliferation treaty at a time of great anxiety about weapons of mass destruction.

NEEDED INSURANCE.Another key issue crucial to U.S. companies, and still in need of resolution, is that India doesn't yet have a law that limits liability claims on private investors in the event of a nuclear plant accident or mishap—equal to the Price-Anderson Act in the U.S. No foreign company will bet big on India without that kind of assurance.

"We need that protection in order to operate," says Andy White, president and CEO of GE Energy's nuclear business. "India understands that it has to put a liability law in place." That will probably happen, but getting that and legislative approval in the U.S. will take another year or so, White predicts.

India clearly must reconfigure, expand, and diversify its energy industry. The country is already failing to meet its energy demands, and that is constraining economic growth. Without additional electricity power generation, New Delhi will have a tough time boosting annual gross domestic product growth to 10% by 2010, from around 8% now.

AGING FACILITIES.India's power ministry intends to add by the year 2012 another 100,000 megawatts to the country's current installed capacity of 130,000 megawatts. But even with India adding 60,000 megawatts of coal and thermal capacity, the country is unambiguously short the 400,000 megawatts it actually needs to sustain its rapidly growing economic activity, says Anil Ambani, chairman of Reliance Energy, one of India's top private power players. A big ramp-up in nuclear reactors would help close that gap.

India does have nuclear plants—about 16 of them and seven under construction, including two large ones and a fast breeder reactor. Some of them were built decades ago, are small-scale, and are administered by the federally run Nuclear Power Corp. And they've all been suffering from lack of modern technology as well as a fuel shortage, the result of sanctions imposed on India when it tested a nuclear device.

India's Atomic Energy Act prohibits private players from owning any nuclear plants, with the NPC or other government companies having a monopoly over them. So the industry has been stunted by lack of investment, capacity, and manpower. "We need to add more investment and more importantly, both the public and private sector must be involved," says Leena Srivastava, executive director of energy think-tank Tata Energy Research Institute.

PRIVATE PLAYERS.Assuming the U.S.-India deal goes through, India realistically won't start letting out international contracts for its nuclear build-out until the middle of 2007. And it will be seven years from now before the first unit of electricity from a new nuclear power plant is released. Still, the industry is eager, hopeful, and looking forward to a dramatic expansion.

Until the Atomic Energy Act is amended by India's Parliament to permit private players to have 100% ownership of new plants, the big beneficiary will of course be Nuclear Power Corp. (NPC). But industry execs expect the Act to be amended by year end, soon after the Senate approves the pact in Washington.

Right now, the NPC's current nuclear expansion plans will double capacity to 7,280 megawatts by 2012, with another 6,800 megawatts to be added after that. However, if the U.S.-India deal goes through—and NPC assumes it will—the company will be able to add another 15,000 to 20,000 megawatts of power to India by 2020, says Sudhinder Thakur, NPC's executive director for corporate planning.

PRESIDENTIAL VISIT.Already, the private players are readying for their entry. Reliance Energy (RELFF) and Tata Power, the two largest private power players in India, are both actively preparing for new business ahead. Reliance's V.K. Chaturvedi, director of its nuclear power initiative and former chairman of the NPC, says the company has done a considerable amount of advance work, keeping ready a team of 12, researching the different technologies for use, and sussing out the costs required.

Tata has also been preparing, and its top executive Ratan Tata has lobbied tirelessly for a deal with the U.S. ever since George Bush visited India for the first time back in March, and both sides agreed to explore a historic nuclear energy tie-up (see BusinessWeek.com, 3/2/06, "Jewel in the Crown"). "Today, we are vulnerable to the impact of crude oil on gas, to foreign exchange rates, to availability of resources," he told shareholders at the company's annual meeting on Aug. 1.

Another big beneficiary would be Larson & Toubro, an engineering and construction firm that has had a virtual monopoly on building India's nuclear plants, mostly heavy water reactors. A nuclear industry expansion would give a big boost to L&T's future growth. With an eye on the $60 billion opportunity, Madhukar Kotwal, L&T's director for heavy equipment, sees big opportunities in the construction of light water reactors that India will likely use. He says the company "could get up to 25% of that business."

Foreign players are likely to get a piece of that action, too, though the competition will be fierce, much as it is in China, where some 30 new reactors are expected to be built by 2020 (see BusinessWeek.com, 10/3/05, "Reactors? We Will Take Thirty, Please").

Paris has already started wooing India, hoping that France's Areva Group will profit from any future nuclear reactor business. Other foreign companies such as Mitsubishi Heavy Industries, Russia's Atomstroyexport, and Siemens (SI) of Germany will also be in the hunt. "We will see who gets what share," says GE's White. This much seems certain: If India gets to realize its civilian nuclear industry ambitions, get ready for a real free-for-all.


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