Introduction

This paper seeks to address factors that led to the Indo-US civil nuclear deal, initial expectations, how those expectations evolved over time, policy drivers that keep the two parties from reaching a rapid closure on the issue, and what it will take to make this deal a success.

Background

The subject of granting “various rights and privileges available to signatories of the Nuclear Non-Proliferation Treaty (NPT) even though India would remain a non signatory” has come up in bilateral discussions between the U.S. and India ever since the U.S. lifted partial sanctions that were imposed following Indian nuclear tests in May 1998. In fact, a “non-paper” on the subject was passed by Jaswant Singh to his interlocutor Strobe Talbot during a meeting in London following the re-election of the NDA Government led by Vajpayee in 1999. Nothing came of it then as Democrats in charge of the U.S. government knew that it would be nearly impossible for them to deliver a deal that very few, if any, in their party would support. Furthermore, Mr. Talbot and his colleagues believed that if India was given such privileges so should Pakistan as the rivalry between the two would otherwise intensify to the detriment of regional security.

The subject resurfaced during the Bush Administration that followed Mr. Clinton in 2001. Mr. Robert Blackwill, who served as a foreign policy advisor to President Bush during the 2000 election campaign as a member of the “Vulcans” (foreign policy advisory group led by Dr. Condoleezza Rice, who subsequently became the National Security Advisor to the new President), was made the Ambassador to India. Ambassador Blackwill saw a strategic value in creating a special friendship between the U.S. and India, and knowing India’s desire to re-engage in nuclear commerce, strongly advocated support for such a deal. However, his resignation as the Ambassador in 2003, followed by the Indian election in 2004, put the deal on a relative backburner until Dr. Rice became the U.S. Secretary of State in 2005.

As much as the Indian Foreign Service officials and the then foreign minister, Mr. Natwar Singh, wanted to push for such a deal, the political leaders in New Delhi were not so sure. Dr. Rice made the nuclear deal the centerpiece of the U.S. effort to build a fundamentally different relationship with India, hoping it would lead to some bilateral nuclear commerce that would benefit American companies but she saw its importance mainly in creating a friendly environment for selling U.S. military hardware to India, the country being among the largest importer of arms in the world. Prime Minister Manmohan Singh and the Congress Party leader, Sonia Gandhi, however led a fractious group of diverse political parties – from communists to regional heavyweights – and both were unsure if the deal would be approved by the Indian Parliament. Within India’s nuclear and security community, many saw the deal as a game changer, while an equal number of policy experts saw it as constraining the Indian “Swadeshi 3-stage nuclear program” intended to exploit to energy value of India’s abundant thorium, or infringing on Indian sovereignty and national security. The deal was eventually signed during Prime Minister Singh’s visit to Washington on July 18, 2005.

When the U.S. Administration made the deal public, it raised a lot of hue and cry among the American politicians as well. In particular, Congressman Henry Hyde, the powerful Chairman of the House Foreign Affairs Committee, was incensed that the Bush administration will make such an exception for India. He called Dr. Rice to his chambers, and once the anger subsided, the Congressman asked how many jobs the deal would create in the U.S. nuclear industry as that information would be his rationale for seeking endorsement of the deal from fellow Congressmen in the Committee and in the full House. Dr. Rice, and her supporting team in the U.S. Department of State, had not assessed the value of deal beyond its strategic implications, and therefore did not have such information. The request was passed on to the U.S. Department of Energy (DOE), but no such data existed there either. In fact, outside of some classified data related to India’s weapons program, there was only sketchy information available about India’s nuclear power program among the scientific community in the U.S. Perhaps because India was under rigorous sanctions until then, no effort had been made to collect such data.

In February 2006, Mr. David Garman, the DOE Under Secretary, attended a meeting at the U.S. India Business Council (USIBC) in Washington where he asked if the U.S. industry had any data indicating how many jobs will be created by a possible nuclear deal with India. But the industry was equally ignorant, and I being the only nuclear specialist on the USIBC team was requested by Ron Somers, head of the USIBC, to prepare such a report.

India’s Nuclear Power Programme

I knew it was not going to be easy to explain the unique Indian nuclear power program and its future prospects to an audience unfamiliar with the rationale and progress of the nuclear program in India. The general expectation in the U.S. is that since India is a developing country with surging growth rates, it would require insatiable amounts of energy, including nuclear power, to meet growing demands in electricity. However, India’s nuclear power program is not geared to match immediate power needs of the country. India has an exquisitely planned 3-stage nuclear program which would result in nuclear contributing 25% or more electricity to the national electric grid by 2040 and beyond, utilizing indigenously designed and built nuclear reactors using India’s abundant thorium fuel supply. The overarching program is currently in stage 1 for power production (and deeply engaged in research and development of stages 2 & 3), which is contributing miniscule amounts of power, about 2.5% of the total electricity demand to the national grid, produced mainly from indigenously designed and built pressurized heavy water reactors (PHWR’s). Any near-term expansion of the stage-1 program would happen only if it technically supported the 3-stage program in order to ensure an optimum balance in fuel supply, reprocessed fuel, nuclear waste, and cost.

Indeed, technical experts in the Indian nuclear program had concluded by the mid-1990’s that eight (8) imported light water reactors (LWR’s) would be required during the stage 1 to supplement the planned construction of indigenous PHWR’s in order to generate sufficient spent fuel for reprocessing and subsequent use in fast reactors (stage 2) and thorium reactors (stage 3). Subsequently, the Union Cabinet approved purchase of eight imported reactors by the Department of Atomic Energy (DAE).

When I wrote the paper for the USIBC in February 2006, I made it clear that the Government of India had given clearance to DAE to enter into contracts for up to eight foreign reactors, two of which were already under construction at Kudankulam, two additional imported reactors were planned to be built at the same site, and India was in serious negotiations with the French to procure two reactors to be sited at Jaitapur. Since six out of the eight imported reactors were already accounted for, that left open the possibility that India could buy two reactors from the U.S.

My report caused great consternation among the corporate community in the U.S. who were expecting huge reactor orders from India. Numbers like $100 billion in projected reactor sales were being tossed around in the USIBC and my report was unceremoniously shelved.

However, my report did draw the attention of Dr. Rice, who found it perfect for the article she wrote to “sell” the U.S.-India deal to the U.S. public and the U.S. Congress. Writing an op-ed piece in the Washington Post on March 13, 2006, she stated that, “…. Third, our agreement is good for American jobs, because it opens the door to civilian nuclear trade and cooperation between our nations. India plans to import eight nuclear reactors by 2012. If U.S. companies win just two of those reactor contracts, it will mean thousands of new jobs for American workers.”

As much as Dr. Rice saw the future of the new bilateral relationship with India mostly in strategic terms tied to defence sales, intelligence sharing, and a balancing act against the Chinese, the U.S. nuclear vendors began to express their unhappiness at the deal and wanted India to purchase additional foreign reactors. This was the time when the U.S. Congress had to approve a measure to grant an exception to India in order for the two countries to sign the civil nuclear “123” Agreement. There was a great degree of diplomatic and commercial pressure put on India to “come through” on its pledges and commit to purchase of additional reactors since the U.S. was single-handedly helping India to re-enter the global civil nuclear commerce.

The relief came in terms of a new analysis completed by the DAE in the summer of 2008, which was made public at the IAEA General Conference in Vienna in September 2008. The new analysis indicated that without additional LWR imports, India will have a deficit of 412 GWe by 2050 even after all other fuel sources like coal, hydroelectric, renewables, hydrocarbons, etc. are accounted for. But if 40 GWe in LWR’s are imported immediately (by 2020), it would have a “multiplier effect” of providing sufficient reprocessed fuel for stages 2 and 3 of the nuclear program and would wipe out the entire deficit predicted without imports in 2050. It seemed more like an empirical analysis given that the country lacked capacity building to ensure such mammoth expansion of nuclear power in just 12 years, but it provided the logic for subsequent planning within DAE.

Based on the new DAE analysis, and following the exception granted to India by the Nuclear Suppliers Group (NSG) on September 6, 2008, the Indian government sent a letter to the U.S. government (at the urging of then U.S. Ambassador, David Mulford) on September 10, 2008, affirming following key points:

• India will offer two nuclear plant sites to American reactor vendors without any global tendering allowing them to build nuclear plants in India amounting to 10GWe or more, provided technical and commercial terms are acceptable to both parties and result in affordable power
• India will complete the separation of its civil and military nuclear programs as per the agreed schedule, and implement the India-specific Additional Protocol as agreed with the IAEA on August 1, 2008
• India will develop its nuclear liability regime consistent with the Convention on Supplementary Compensation (CSC) for nuclear damage

This letter, unfortunately, created unintended consequences.

American vendors, noting that India had committed to buy U.S. reactors without competition, reacted differently than what India’s nuclear operator, National Power Corporation (NPCIL) had hoped for. Neither of the two vendors paid attention to the requirement that the tariff generated from the plant had to meet specific guidelines of the Central Electricity Board. Indeed, it is for that very reason NPCIL has created a business model where the plant designer/technology provider enters into an open “teaming arrangement” (as against a “prime-subcontractor” relationship) with NPCIL to work jointly, allowing NPCIL to bring its experience in value engineering, reforming supply chain efficiencies, reducing contingencies with discrete fixed-cost subsystem packages, etc., to be incorporated in the foreign designed plant to be built in India. But one of the U.S. vendors insisted on using its own business model which gave NPCIL diminished capability to explore ways and means of streamlining hardware and management costs quoted by the vendor. The second nuclear vendor decided to market in India its first-of-a-kind reactor, contrary to the Indian practice of requiring a foreign plant be licensed by the home country’s nuclear regulator and be already constructed or in substantial stages of completion elsewhere before it can be built in India. I am not sure how such a plant will be judged for establishing a viable tariff regime.

On the other end, India failed to fully comprehend the overwhelming influence of litigation and legal judgments that shape American business decisions. The commitment to pursue the CSC liability regime was made, in my view, without a full understanding of American sensitivities. In hindsight, it would have been easier for India to have signed to the Vienna Convention as Indian lawmakers are familiar with a long-standing Indian association with the IAEA, and such an approval would have received Parliamentary approval with minimal review. CSC could have been considered at some later stage in the future. There are presently two global nuclear liability regimes supported by the IAEA. The European law (“Joint Protocol”) is inconsistent with the U.S. domestic liability law called the Price-Anderson Act, whereas the U.S. law is consistent with the CSC. The U.S. has initiated a large diplomatic offensive to sign countries without a liability law to the CSC, and its insistence on the CSC is not directed only at India.

India passed a historic civil nuclear liability law in 2010, and Rules for implementing the Act were published in 2011. The U.S. government and American vendors deemed the law unsatisfactory and have been seeking a change in the law. India contends that the law is consistent with the CSC since Article XII.2 of the CSC allows harmonization of the CSC with domestic laws under certain conditions. The Indian government has repeatedly stated that it is willing to work with U.S. vendors “to develop mutually acceptable solutions to this issue within the four corners of its domestic liability law.” There is currently an impasse in this matter, and continuing discussions between the two sides have failed to resolve this matter until now. Meanwhile, one of the two U.S. nuclear vendors still does not meet Indian statutory requirements to sell its proposed Generation III+ reactor in India.

Delays in reaching a closure on the liability issue is also affecting other contiguous issues dealing with Administrative Arrangements under the 123 Agreement, and on a related issue dealing with the determination by the National Nuclear Security Administration (NNSA) to place India in an authorization category for a case-by-case approval for nuclear “810” technology transfer to India. Experience with a scant few “810” technology transfer approvals for India indicates that the process is laborious and time consuming. Establishing even a limited design and hardware supply chain in India for U.S. nuclear vendors is mostly impossible at this time.

India has completed its obligations under the Separation Plan ahead of the December 2014 deadline, and ratified the IAEA India-specific Additional Protocol in June 2014.

There are, however, new perspectives evolving within the U.S. Government in regards to the liability issue. Recent thinking within the U.S. Government was mentioned by the Assistant U.S. Secretary of State for South Asian Affairs, in testimony in the U.S. Senate Foreign Affairs Committee on July 16, 2014 when she stated that, “While we have not yet had detailed discussions with the new government in New Delhi on the way forward on civil nuclear cooperation, we believe that there may be an opening to address nuclear liability issues either through a legal framework or through other frameworks that can help create more surety on what the application of liability might be, so that it is not unlimited liability as the companies are rightly concerned.”

While the primary U.S. reactor vendors are insistent on a legislative fix, a flexible approach such as proposed by the U.S. Department of State opens possibilities for other options especially for sub-tier suppliers who, based on a case-by-case risk-benefit analysis, may find non-legislatives fixes to the equally effective in ensuring proper indemnification for their products and services with a broader appeal to serve the growing Indian nuclear market in addition to primary American nuclear vendors. However, creation of a sound nuclear liability insurance program by India is absolutely important in that case.

Finally, nuclear power is capital intensive and hence very expensive. Some countries are reconsidering whether to buy nuclear reactors or look at alternatives. The low price of electricity (and in India the price is among the lowest) puts additional pressure on nuclear vendors to reshape their business models and marketing strategies to meet customer needs. The traditional American business model used by American utilities and reactor vendors cannot and will not serve new and developing markets overseas. The mantra of “affordable power” places a burden on both owner-operator and nuclear vendors to demonstrate their collective ability/plans to meet consumer expectations on tariff, because without a customer there is no sale – whether or not the vendor selection is made competitively or by invitation. India has an envious record of being among the three countries (along with South Korea and China) that can put up a domestic nuclear plant at a much lower than average global overnight construction price. It would be unwise for the U.S. nuclear vendors not to adjust their business model in India, and for the U.S. government not to create an India specific “810” technology transfer regime that will maximize the use of local manufacturing supply chain, intellectually bright manpower, and access to other quality resources.

In closing, I am reminded of the brief statement that the Prime Minister made during his maiden visit to the Bhabha Atomic Research Centre (BARC) on July 21, 2014, stating that “Growing international nuclear cooperation is a welcome development, provided such projects can be timely, meet techno-economic viability and safety standards, and such partnerships result in substantial technology transfer.” I believe the two sides can reach a satisfactory closure with a better understanding of the situation and by being flexible to accommodate each other’s redlines.

In the end, there is no reason why the Indo-U.S. nuclear deal cannot be a shining example of successful cooperation between the two great nations.

APPENDIX

Timeline - Indian Three Stage Civil Nuclear Program and the Indo-U.S. Nuclear Deal

Prime Minister’s visit to BARC on 21^st July:

• Three-fold increase in nuclear power at the end of 13^th 5-yr plan, as planned
• Growing international cooperation is a welcome development, provided such projects can be timely, meet techno-economic viability and safety standards, and such partnerships result in substantial technology transfer
• Not to ignore self-reliance in the nuclear fuel cycle and proceed full steam with commercial utilization of thorium

India’s “Swadeshi nuclear fuel cycle”- The amazing vision of Dr. Homi Bhabha:

• 1939: Bhabha denied re-entry into U.K.; plans for harnessing the power of atom without government (British colonial power) support
• 1948: Free India constituted the Atomic Energy Commission (AEC), Bhabha selected as its first Chairman reporting directly to the PM
• 1954: India announced its plan to harness the power of atom by maximizing utilization of its abundant thorium reserves; the program is directly at odds with key elements of the U.S. President’s speech at the UNGA on 8^th December 1953
• 1955: Unfettered access to the PM ensured that the Indian 3-stage indigenous nuclear development program is viewed synonymous with Indian leadership of NAM; Bhabha chaired the Geneva Conference preceding the formation of IAEA
• 1956: India co-opted in the “Washington Group” to canvass for IAEA membership in NAM; India successfully argued against the creation of a uranium cartel and the centralized storage of plutonium to enhance IAEA membership
• 1965: India joined the ENAC to propose principles for the NPT being considered
• 1968: India announced in UNGA that it will not sign the NPT
• 1970: NPT comes in force; India excluded from the 1971 Zangger Committee

India’s 3-stage program is thorium-centric and program’s scope and schedule has been affected by many challenges in implementing the first-of-its-kind approach:

• 1965: Stage 1, which started with RAPP-1 operations, is initially hampered by limited uranium resources and Zangger/NSG restrictions, is now paced by capacity building and need for additional and accelerated plutonium stockpile based on cutting edge research and modelling in thorium fuel cycle by BARC
• 1985: Stage 2 phase was initiated with operation of 40 MW Fast Breeder Test Reactor; 500 MW Prototypic Fast Breeder Reactor (PFBR) is expected to begin operations in 2014 (after a 2-year delay)
• 1996: Stage 3 phase initiated with operation of world’s only 30 kW U-233 (derived from thorium) fuelled reactor; design of 300 MW Advanced Heavy Water Reactor (AHWR) completed and site selection is underway
• 1998: Import of foreign light water reactors (LWR) planned to shorten Stage 1 period; initial research indicated that 8 imported LWR’s are needed and received approval from the Cabinet, a reassessment indicates it could be as many as 40
• 2025: Domestic LWR program operational to supplement or replace purchase of imported LWR’s to provide needed spent fuel quantity for generating reprocessed reactor fuel for Stages 2 and 3 programs
• 2035: Technological challenges indicate that Stage 3, utilizing India’s abundant thorium, will not be fully commercialized until at least until 2035 or beyond. With proper planning for capacity building, fully indigenous Stage 3 may meet about 25% to 50% of electricity demand, resulting in a dramatic reduction in greenhouse gases, and high reliability in assured fuel supply and energy security

Advent of Indo-U.S. nuclear cooperation:

• 1954: USA promoted “nuclear diplomacy” as part of the Cold War; India was a leading beneficiary, and the first Indo-U.S. “123 Agreement” was signed in 1956
• 1963: Indo-U.S. agreement for “turnkey” construction of Tarapur 1&2 reactors (TAPS) signed; U.S. contractually required India to buy only U.S. nuclear fuel and put the plant under IAEA safeguards; TAPS connected to electricity grid in 1969
• 1974: Indian nuclear test triggered U.S. sanctions, including stoppage of TAPS fuel supply; NSG was set up in a secret meeting in London in April
• 1975 to shut out India from global nuclear commerce
• 1978: The U.S. NNPA came into force; All prior 123 Agreements required renegotiation of bilateral civil nuclear agreements that are now very restrictive

A new chapter begins in the Indo-U.S. nuclear cooperation:

• 2005: U.S. announced plans to grant “full” civil nuclear energy cooperation
• 2006: U.S. Congress granted India exception from NNPA; new 123 negotiated
• 2008: India agreed to buy U.S. reactors without global tendering, PROVIDED the mutually acceptable terms and conditions would result in a viable tariff regime for electricity generated
• 2008: India Specific IAEA Safeguards finalized; NSG exception for India granted; New Indo-U.S. 123 Agreement finalized
• 2009: India announced two nuclear sites for American nuclear vendors in Chhayamithi Virdi in Gujarat and Kovvada in Andhra Pradesh
• 2010: Nuclear Liability Law passed by the Indian Parliament
• 2011: Rules pertaining to the new liability law submitted to the Indian Parliament and published in the official Gazette
• 2013: Westinghouse and NPCIL signed an “Early Works Agreement” prior to the visit of PM to the U.S.
• 2014: Westinghouse completed initial tasks under the EWA and is reimbursed for its services by NPCIL
• 2014: U.S. Government shows flexibility in resolving the liability issue, U.S. nuclear vendors however adamant; lost in the fog of corporate media buzz: the price of electricity to Indian consumers

(The author is an atomic industry expert. The author presented this paper at a talk by him at the VIF on Progress and Challenges Related to India’s nuclear deal, on August 8, 2014)

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Published Date: 24^th September 2014, Image source: https://prabaharan.files.wordpress.com
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the Vivekananda International Foundation)