Assessing the Indo-US Deal on Civil Nuclear Cooperation

February 2007R1 - 07

NIAS Report

International Strategic and Security Studies Programme

Bangalore, India

NATIONAL INSTITUTE OF ADVANCED STUDIES

Managing Risks andOpportunities

Sonika GuptaArvind Kumar

S. Chandrashekar

Assessing the Indo-US Deal on Civil Nuclear Cooperation

IISc Campus, Bangalore - 560 012, IndiaTel: 2218 5000 Fax: 2218 5028Email: [email protected] [email protected]



© National Institute of Advanced Studies 2007

ISBN 81-87663-68-5

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Scaling up the existing 540 MWe PHWRreactors to 700 MWe and creating theinfrastructure to build eight additional 700MWe reactors.

Successfully commissioning the fastbreeder reactor and adding four additionalfast breeder reactors of 500 MWe each tothe one already under construction.

Import of six reactors of 1,000 MWe each.2

As we can see from the above projection, 6,000MWe out of the projected 20,000 MWe capacity for2020 will have to be met through import of 6 reactorsof 1,000 MWe each. While India currently hastwo 1,000 MWe reactors being built with Russiancollaboration at Koodankulam, the contractsfor these were concluded before the formation ofthe Nuclear Suppliers Group (NSG).3 The USwaived its objections to the sale of these reactorsas a special case. Any sale of new reactors toIndia will have to be governed by NSG guidelines.India may not be able to import any more reactorsfrom Russia or from any other country unless theNSG guidelines are changed under the Indo-USnuclear deal. This includes the four Russian reactorsfor Koodankulam agreed to during President Putin'srecent visit to India. If for some reason India doesnot reach agreement with the US, the nuclear power


There has been a lot of debate in India on the risksassociated with entering into civil nuclearcooperation with the US. The deal raises inter-related political, strategic and operational risks. TheHenry J. Hyde Act passed by the US Congress laysdown the legal framework within which the US mustnegotiate the bilateral 123 Agreement with India.1

This critical analysis of the Indo-US deal assessesthe risks associated with entering into this deal andsuggests strategies to manage these risks. Thisreport also contains two annexures. Annexure Ianalyses the major provisions of the Hyde Act.Annexure II examines the economic implications ofcreating and maintaining a strategic fuel reserve overthe lifetime of each imported reactor.

Building India's Nuclear Power Industry

Will the successful conclusion of the Indo-US nucleardeal help or hinder India's nuclear powerprogramme?

According to the Department of Atomic Energy(DAE), nuclear power will contribute 20,000 MWeof capacity to the Indian electricity grid by the year2020. The achievement of this target involves:

Completion of all ongoing 220 MWeand 540 MWe Pressurised Heavy WaterReactors (PHWR) projects.

1 The name 123 Agreement is derived from Section 123 of the US Atomic Act that deals with cooperation with other nations. India andthe US will enter into a bilateral agreement that will lay down the operational specifics of civil nuclear cooperation under this sectionof the Act.

2 Meeting the Demand Projection. Available at http://www.dae.gov.in/publ/doc10/pg50.htm3 The Nuclear Suppliers Group is an informal arrangement between the nuclear weapons States and a number of other countries that

controls the supply of nuclear fuel, materials , equipment and technologies to prevent the proliferation of nuclear weapons andnuclear weapon technologies to non-weapon States.

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may not pose any special problems, this size maystill not be sufficient for nuclear power to maintainits competitive position with other electricityalternatives. As long as the international communitylinked civil nuclear cooperation to India's weaponsprogramme, India did not have any choice. TheBush-Manmohan Singh Agreement and the recentlyenacted Hyde Act enable India for the first time inmore than thirty years to access global state-of-artreactor technologies. Indian companies in the privateand public sectors can set up joint ventures withcompanies from Russia, France and the US. If wenegotiate hard we may even be able to access somenon-sensitive high technology elements that canimprove the Indian industrial infrastructure to buildreactors of larger size that are comparable toreactors being built in other advanced countries. Therecent Chinese agreement with Westinghouseillustrates the possibilities that would open up to

Indian companies if the deal goesthrough.

For such international collaborationto take off it is essential that theIndian government amend theAtomic Energy Act and open up the

nuclear power industry to the private sector. Thereseems to be a view that given national securityconsiderations, nuclear power should reside solelyin the public sector. There is no doubt that thegovernment should exercise complete oversightauthority over all nuclear-related activities. It shouldalso have a critical role to play with respect toinitiatives related to R & D and new technologydevelopment. However, the operation of nuclearpower plants should be opened up for participationby the private sector either by themselves orin partnership with the public sector. Market forcesthat will emerge from the resulting competitionwill create an efficient, competitive and viablenuclear power industry in the country. International

The Indian government must

amend the Atomic Energy Act

and open up the nuclear power

industry to the private sector.

projections for the year 2020 will have to be reviseddownwards by 6,000 MWe to 14,000 MWe. Thiswould represent a direct economic loss to thecountry.

Currently, India's largest reactor is the 540 MWereactor that has recently become operational.Current plans of the DAE envisage further increasingthe size of these reactors to about 700 MWe andcreating the necessary infrastructure to replicatethese reactors in larger numbers. It may not bepossible to build reactors larger than 700 MWe inthe near future because of the current industrialconstraints in the country. Typical state-of-art plantsfrom various members of the NSG (including France,Russia and the US) all have sizes that are at least1,000 MWe. Several countries have plans to buildeven larger sized reactors going up to about 1,600MWe.

Nuclear power plants are capitalintensive. A large nuclear plantrequires higher initial capitalinvestments than the investmentsrequired for a comparable size coalor natural gas plant. They, like manyother alternative power sources, also offer technicalpossibilities for achieving significant economies ofscale. Scaling up by reducing the investment costsper MW of electricity produced, makes nuclearpower more competitive with electricity producedfrom coal or natural gas. While nuclear power plantshave the disadvantage of high upfront investmentcosts, they do have a significant advantage in termsof low operating costs. Therefore, power from plantsof larger capacity will be cheaper than power fromplants of smaller capacity.This explains the globaltrend towards larger reactors.

From the Indian viewpoint, while the scaling up ofthe indigenous reactors from 500 MWe to 700 MWe

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constraints facing the nuclear power industry in thecountry. The availability of uranium with higherenrichment levels at lower prices will improve theoperational efficiencies of the installed nuclearcapacity. The deal will also allow Indian entities toimport reactors into the country. Such imports arecrucial if India wants to realize the target of 20,000MWe of nuclear power by 2020. With some planningthis capacity can be increased to about 30,000 MWeby 2020. The deal also provides India with anopportunity to bridge the technology gap in reactorsize to make the Indian nuclear power industrymore competitive both in the domestic and globalmarketplace. These are clear tangible short andmedium-term economic benefits that the deal willbring to the Indian nuclear power industry.

The question that many critics ofthe deal have raised however doesnot relate to the short or medium-term economic impact of the deal.Many people think that thewidespread use and diffusion ofuranium based technologies that

would happen as a consequence of the deal woulddelay or hinder India's logical transition into a thoriumfuelled nuclear energy economy. Some haveextended this argument to state that the USintentions in backing the deal is to make sure thatIndia's emerging nascent capability in this vital areais eliminated through the forces of market power.How valid are these fears?

The three phase Indian programme involves a logicaltransition from an initial uranium fuelled start towardsa nuclear power industry that is largely fuelled bythorium. Since India has very large reserves ofthorium, the development of technologies thatfacilitate its widespread use in Indian reactors makesboth economic and strategic sense. This approachalso involves an intermediate fast breeder

collaboration between companies in the nuclearfield will also increase economic inter-dependencebetween India and its foreign partners in civil nuclearcooperation. This will act as a stabilizing force incase of any political downturns that might threatenthe deal.

Apart from the above mentioned technologicalpossibilities, joint ventures between Indian andforeign companies will also increase electricityproduction. If the Indian government can quicklybring about the necessary changes in the Indianlegal and regulatory framework, new large reactorscould add capacity to the Indian power grid. Evenwith very conservative assumptions we believe thatat least ten additional reactors with a capacity of1,000 MWe each can be made operational bythe year 2020. This addition of 10,000MWe to the nuclear capacity is atangible benefit to India under thedeal. This may not happen if Indiadoes not finalise the bilateralarrangements with the US.

There is also little doubt that India faces a seriousuranium shortage for expanding its domestic nuclearpower base at least in the short term. This fuelconstraint may also affect the operational efficienciesof Indian nuclear power plants. The deal will makeavailable uranium fuel with higher enrichment levelsat lower prices. This will definitely have a positiveimpact on the operation of Indian nuclear powerplants. While we have not been able to quantifythis benefit, it is our belief that a five to ten percentimprovement in operational efficiency is feasible.Given the recurrent nature of power shortages inthe country this is quite significant. More importantlythese benefits can be realized quite quickly.

We can clearly see from these arguments, that theIndo - US nuclear deal nullifies many of the major

The availability of uranium with

higher enrichment levels at

lower prices will improve the

operational efficiencies of the

installed nuclear capacity.

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technology step that is essential for establishing theviability of the thorium route.

There can be no doubt that the R&D and technologydevelopment related to the three phase Indianprogramme is essential to preserve crucial optionsnecessary for meeting India's energy needs in thepost 2020 period. Mastery over technologies thatenable India to use its vast reserves of thoriumshould be a key component of India's strategy forenergy security. However, these decisions are purelyinternal Indian decisions. Any fears that US has aMachiavellian mala fide plan to derail the three phaseIndian programme may be singularly misplaced.Thorium based technologies are yet to be proven inthe commercial market place. They will emergeas a consequence of R&D and technologydevelopments that are currently underway. It isthe job of the Indian political and scientificestablishments to preserve, protect and grow thesecapabilities so that commercialtechnologies relevant to Indian needsemerge during the transition period.Rather than worrying about USintentions behind the deal, Indiandecision-makers should directlyaddress issues related to accelerating India'stransition to the thorium cycle. There is no doubtthat the sooner we achieve these breakthroughs thebetter off we will be in terms of energy security. Theother question we should be asking is whether wecan advantageously use the deal and our statusas a responsible power with advanced nuclearcapabilities to accelerate our thrust towards thethorium cycle.

A more worrisome issue that critics of the deal haveraised relates to India's rights to reprocess spentfuel that is supplied to India under the deal. Howshould India deal with the issue of reprocessing inthe proposed 123 agreement with the US?

The Indian three phase programme involvesreprocessing the spent fuel from the uranium fuelledfirst phase reactors and breed them in the secondphase reactors to more effectively use the availablefuel base. Hence, India sees reprocessing as acrucial step in the closed fuel cycle chain of activities.Countries like France and Russia also believethat reprocessing the spent fuel and using it in otherreactors is important from economic as well as wastemanagement considerations. Opinion in the US isdivided, not on the principle of reprocessing, butrather on the economics of reprocessing.

What is more relevant for the Indo-US nucleardeal however are the provisions in the Hyde Actthat bar the transfer of reprocessing technology toIndia. The Hyde Act also clearly stipulates that thespent fuel from Indian reactors cannot be sent backto the US.

The Hyde Act only prohibits thetransfer of reprocessing technologyto India. It does not bar thereprocessing of the spent fuel withIndian technology in an Indianreprocessing plant or with some

other technology in other foreign plants as along asthe reprocessing facility is under IAEA safeguards.If India prefers to reprocess spent fuel in an Indianfacility it has several options. It can choose to placeone of its existing facilities under safeguards or itcan build a new facility and place it under safeguards.Alternatively, it can negotiate to reprocess the spentfuel in an unsafeguarded reactor that will be underIAEA safeguards only during the period ofreprocessing of the spent fuel. The spent fuel couldalso be sent to some other facility located elsewherefor reprocessing. If private companies set up reactorsthey may chose to reprocess the spent fuel or storeit depending on their perceived economics. In the123 Agreement, India should try to retain the right

The Hyde Act does not bar the

reprocessing of the spent fuel

under IAEA safeguards.

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of India to use all these options. If the deal goesthrough, spent fuel will be available for reprocessingand use in about five years time. India should havein place a concrete plan to use this fuel optimally toadvance both its R&D and operational capabilities.

Critics of the deal argue that the Hyde Act whichlinks civil nuclear cooperation to nonproliferationconcerns will limit India's strategic autonomy. Willthe deal get into trouble in case India carries out anuclear weapons test? How can India manage therisk of disruption of fuel supply in the case of suchan eventuality?

The Hyde Act outlines the conditions under whichthe US will be legally bound toabrogate the deal. These conditionsare (a) nuclear detonation by India(b) violation of MTCR, NSGguidelines, or IAEA safeguards byIndia under the nuclear civilcooperation agreement. It is alsopossible that the deal may be abrogated for politicalreasons if Indo-US relations go into a tailspin.

A nuclear detonation by India is the most seriousand likely scenario under which the deal might beabrogated. India may decide to test due to technicalor political reasons. For example, if the US resumestesting for a new generation of nuclear weapons,China, India and Pakistan may all need to followsuit. Another reason for India to resume testing wouldbe if the international situation changes and Chinaor Pakistan test to upgrade their deterrent. Indiawould then need to respond. It can also be arguedthat a third country connives with India's adversariesto initiate tit-for-tat nuclear tests forcing the

abrogation of the deal. Under all of thesecircumstances, the US would be legally bound toabrogate the deal. It is however, possible that in caseIndia is responding to a nuclear test by either Chinaor Pakistan, the US might not be opposed to anIndian test as a reaction.

India should keep open the option for conducting anuclear test and not commit to anything further thana voluntary moratorium. To protect its right to testIndia could include in the 123 Agreement a rebussic stantibus clause.4

Assuming that the US would be legally bound toabrogate the deal in response to an Indian nuclear

test, what strategies can Indiaadopt in the long, medium and shortterm to minimize the impact onIndia?

The Hyde Act is a US domestic lawthat is binding on US companies

doing business with India. One way to minimize theimpact of any sanctions in the case of a weaponstest is to ensure that all contracts that India entersinto are not directly with wholly owned US companiesbut with those that are in joint venture or alliancewith companies in other countries.

The other option is to spread the risk and negotiateagreements with other countries like France andRussia which are not subject to US law. In anincreasingly global world, mergers and acquisitionsare almost daily occurrences. Who owns what is adynamic phenomenon. Managing this efficiently mayprovide some legal leeway to India for managingthe situation arising from a weapons test. However,

4 A tacit condition attached to all treaties to the effect that they will no longer be binding as soon as the state of facts and conditionsupon which they were based changes to a substantial degree. A complete exposition of the clause is available at http://law.enotes.com/wests-law-encyclopedia/rebus-sic-stantibusIn India's case this would mean a change in the global or regional strategic environment requiring an Indian test as a response.

India should keep open the

option for conducting a nuclear

test and not commit to anything

further than a voluntar y

moratorium.

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one should assume that in spite of these measuressanctions will be imposed at least for some time onIndia in case of a nuclear test.

Regardless of the timing of an Indian nuclear test,the following risks with regard to nuclear cooperationwill have to be managed by India to minimize theimpact of any sanctions.

Ongoing investments in the nuclear power industrywill have to be protected. One of the ways to protectcommercial interests would be:-

To try and negotiate a guarantee in allcommercial contracts that sanctions should notapply to nuclear reactors that areoperational or under construction.Such a clause would lay thefoundation for a mutually beneficialrisk management option forboth foreign companies and theIndian power sector.

India can protect the physical nuclear powerinfrastructure built under the deal by mandatingthat ownership of reactors should be Indian. Thiswould bring all nuclear reactors operating in Indiaunder the purview of Indian law and precludeany unilateral or precipitate action by the US.

The Indian government can take insurance onthe nuclear power sector to absorb the financiallosses that may arise out of the abrogation ofthe deal. This would be over and above thestandard commercial risk management optionsentered into by Indian and foreign companies.

The above measures will, of course, not provideguarantees against disruption in power supply.However, this risk too can be managed as discussedbelow.

The aftermath of the Pokharan II tests would seemto indicate that the period of sanctions on commercialIndian entities would not be for more than one ortwo years. This period is likely to come down aseconomic interdependence between the Indiannuclear industry and the global industry increases.The Hyde Act stipulates that fuel supply to Indianreactors would take care of "reasonable reactoroperating requirements." India should negotiate tomaximize this definition while negotiating the 123agreement.

The Prime Minister in a statement to Parliament hasindicated that under the deal India will build astrategic reserve of fuel for each imported reactor

over its lifetime. As the Hyde Actcurrently stand there is nopossibility of building this'strategic reserve' of importedfuel from the US. However, thisdoes not prevent India frombuilding this reserve fromalternate sources. India can

adopt a contractual template clause that ensuresthat every imported reactor is required to beaccompanied by a minimum reserve of fuel asspecified by India. Explicit mention of these possiblearrangements need not be reflected in the 123Agreement. India has the leeway to negotiate withother members of the NSG to secure fuel over andabove normal reactor operating requirements. This,however, could be contingent upon the degree ofUS influence on these potential supplier states. TheHyde Act stipulates that the US should not "seek tofacilitate or encourage the continuation of nuclearexports to India by any other party if such exportsare terminated under United States law."

While the 123 Agreement should not prevent Indiafrom building up a strategic reserve of nuclear fuel,India should try to assess the implications of the

While the 123 Agreement

should not prevent India from

building up a strategic reserve

of nuclear fuel, India should try

to assess the implications of the

costs of such a reserve on the

cost of electricity generation.

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costs of such a reserve on the cost of electricitygeneration. Our analysis of the costs of the reserveindicates that if the reserve has to last the lifetime ofa reactor, which is currently about 30-40 years, Indiawould need to invest approximately one billiondollars per 1,000 MWe reactor in procuring andstoring fuel. This will add at least $150 million a yearto the operating costs of each reactor and makenuclear power economically unviable. Indiaobviously, cannot afford to ignore completely thequestion of a strategic reserve either. However, thevolume of its strategic reserve must be guided byboth economic and political considerations.

From an analysis of inventory holdings of somenuclear power plants in the US, it would appear thatthe standard inventory held by most nuclear powercompanies would cater to their fuelrequirements for about two years. Itwould appear therefore, that over andabove this standard inventory, Indiamay need some additional safetyfactors in case sanctions extend tomore than two years. A two to threeyear inventory will not add appreciably to the cost ofpower. However, a thirty or forty year inventory mayadd significantly to the cost of power. While Indiashould aim for its right to build a strategic reserve,the actual stockpile of fuel for each reactor shouldbe governed by the economics of power generation.Annexure II analyses the economic impact of astrategic fuel reserve over the lifetime of importedreactors to make the point that a lifetime reserve offuel will make nuclear power generationuncompetitive in India.

To further minimize the risk of fuel supply disruption,India must negotiate in the 123 Agreement aStatement of Principle that guarantees Indiaadequate time to switch suppliers in case the dealis abrogated by the US. A similar Statement of

Principle must be included in all commercialcontracts with regard to fuel supply as a generalproviso for all supplier States and companies tospread the risk of fuel supply disruption.

During the period between signing of the deal andits possible abrogation, all Indian reactors classifiedas civilian under the Separation Plan, could workwith imported fuel. This will release some fuel forbuilding up an additional reserve from indigenoussources. Since this fuel would be required for powergeneration if India does not sign the deal, it shouldbe possible to divert some of it to a reserve withoutslowing down India's strategic programme.

In addition, along with the above measures that aredesigned to mitigate the immediate impact of

sanctions, India must adopt a broadbased long term strategy with theUS and other major powers toexpand its economic relations withpotential partners for civil nuclearcooperation. To ensure that the USdoes not take any unilateral

measures to abrogate the deal, India must activelyencourage investment by US companies in theIndian nuclear and power industry. Over the mediumand long term, this will ensure that company tocompany level collaboration on both sides willfacilitate speedy resolution of any political disputesbetween the two sides.

Civil nuclear cooperation is only one part of a largerrelationship that India must build with major powersto ensure that it creates mutual trade and investmentdependencies that can act as shock absorbers forany potential downturn in relations leading to anabrogation of the deal. US-China relations are agood example in this regard. US's growing threatperception from China is offset by the growingeconomic relationship between China and the US.

Civil nuclear cooperation is only

one part of a larger relationship

that India must build with major

powers.

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achievement of US objectives in Iran, there isnothing in the Hyde Act that binds India to anyspecific course of action with regard to Iran.In case the 123 Agreement does contain aprescription binding India's foreign policy optionsto US interests in Iran, it would be whollyunacceptable to India.

It has also been argued that the reportingrequirement mentioned in the Hyde Act with regardto Iran may be used by the US at a later date toarm-twist India into following a policy congruent withthat of the US. However, the reporting requirementdoes not require the US administration to abrogatethe deal with India in case India's foreign policy onIran runs contrary to US interests. The reportingrequirement only empowers the US Congress to getinformation from the administration about the levelof cooperation between India and the US on mattersrelating to foreign policy. It is an internal US processthat has no legal bearing upon the Indiangovernment or the conduct of civil nuclearcooperation. Reporting to Congress is a requirement

in the US that the President mustfulfill. It is the right of the Congressto be in the know about mattersrelating to US foreign policy.The Executive, however, is thedominant actor in the formulation

and implementation of US foreign policy, a factclarified by President Bush after he signed theHyde Act. As argued above, unless the bilateralagreement links the working and continuation of thecivil nuclear cooperation to specific Indian actionswith regard to Iran, there is little ground for arguingthat the deal would legally constrain theindependence of Indian foreign policy with regardto Iran.

Currently, the US and India have broadly the samegoals with respect to controlling the proliferation of

Irrespective of the possibility of detonation by India,India should take the following measures to ensureits energy security in the long run.

Accelerate India's three stage nuclearpower programme to maximize utilization ofIndia's thorium reserves and reducedependence on imported sources ofnuclear fuel.

Speed up indigenous exploration andexploitation of uranium in India.

Independence of Indian Foreign Policy

Will entering into the Indo-US nuclear deal increasethe risk of additional constraints on theindependence of India's foreign policy?

The question of independence of India's foreignpolicy has invited strident criticism from the Leftparties and others who oppose the deal. The mainthrust of this opposition derives from Section103(b)(4) of the Hyde Act that statesthat it shall be the policy of the UnitedStates to "secure India's full andactive participation in United Statesefforts to dissuade, isolate, and ifnecessary sanction Iran for its effortsto acquire weapons of mass destruction including anuclear weapons capability and the capability toenrich uranium, or reprocess nuclear fuel, and themeans to deliver weapons of mass destruction."Under Section 104(c)(G) the President of the US isalso required to report to Congress and provide "adescription and assessment of the specificmeasures that India has taken" to fulfill the aboveobjective.

Unless the 123 Agreement stipulates that Indo-USnuclear deal will be conditional on India's support to

There is nothing in the Hyde Act

that binds India to any specific

course of action with regard to

Iran.

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Weapons of Mass Destruction (WMD). In fact,under its WMD Act India is committed to containingand preventing the proliferation of WMDs regardlessof the conclusion of the Indo-US nuclear deal.Even though there is congruence in broad goalsof containing the spread of WMDs, it is possiblethat India and the US may differ on the modalitiesof achieving this objective. In such a case, doesthe nuclear deal impose any constraints onIndia's options? At the legal level, unless the 123Agreement specifically mentions such acondition, India is under no constraint to followUS diktats.

In spite of these legal niceties the US could stillarm-twist India to toe its line. Doesentering into the deal make Indiamore or less vulnerable to USpressure?

Currently, relations between Indiaand the US are dominated by theUS; although over the last fifteenyears, the relationship is steadilymoving toward a more equitable one. In the transitionperiod which India is currently going through,it is dependent on the US for many things includingtrade and investment. This makes India vulnerableto US pressure regardless of whether Indiasigns the deal or not. This is a risk that thepolitical and the foreign policy establishmentwill have to manage with or without the deal. Sincethe nuclear deal is being signed during this'transition' period, it is subject to these associatedrisks. However, the nuclear deal also providesIndia with political and economic opportunities formoving Indo-US relations to a higher level ofinterdependence at a faster pace. As economicrelations become the driver of Indo-US relations,US leverage to politically arm-twist India is likelyto diminish.

What are the opportunities India willforgo if it chooses not to sign the deal?

The Indo-US nuclear deal has de facto recognisedIndia's nuclear weapons programme. Under theSeparation Plan, India is free to develop, stock anddeploy nuclear weapons. The recognition of Indiaas a "responsible state with advanced nucleartechnology" provides India a unique status facilitatingIndia's participation in global nuclear trade andR & D. If India chooses not to go into the nucleardeal, this unique status will be immediatelywithdrawn. The nuclear deal is the only politicalinitiative that has taken India closer to beingrecognized internationally as a nuclear weapon

State. This is a window ofopportunity that will not beavailable if India does not concludethe deal.

If India does not sign the deal, itstands to lose out considerably inincreasing its power generationcapacity in the next 10-15 years.

According to official projections, the indigenous Indianuclear power programme will have an installedcapacity of 20,000 MWe by 2020. Out of this 6,000MWe is slated to be met by imported reactors. If thedeal does not go through this target is notachievable. However, if the deal does go through,India may be able to raise its installed nuclearcapacity to about 30,000 MWe by 2020.

The Indo-US nuclear deal opens doors forIndian participation at international researchand development project like ITER and the GlobalNuclear Energy Partnership (GNEP). India couldutilize the opportunities offered by civil nuclearcooperation to enhance research and developmentin Indian nuclear science. This can be facilitatedthrough joint research and development in nuclear

The Indo-US nuclear deal has

de facto recognised India's

nuclear weapons programme.

Under the Separation Plan, India

is free to develop, stock and

deploy nuclear weapons.

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engineering. India could also identify and buy criticalresearch technologies. For example, Indianparticipation in the GNEP could facilitate theaugmentation of nuclear R & D in India and reducedependence on the US for technology in the longrun. These opportunities would not be available toIndia without the deal.

India will most probably face economic sanctions ifit conducts a nuclear test. These sanctions will beimposed irrespective of whether India has or doesnot have an agreement with the US on civil nuclearcooperation. The Indo-US agreement on civil nuclearcooperation will increase the interdependencebetween the Indian and global nuclear industries.The duration of the sanctions is therefore likely tobe much less if India and the US agree to cooperate.On the other hand, if India does not sign the deal,the sanctions period is likely to be of longer duration.By going ahead with the deal India will create astrong lobby of nuclear power companies in the USthat will advance Indian interests in case of a crisistriggered by an Indian nuclear weapons test.

The foreign policy of any country is inherentlyconstrained by its political, economic or militarypower. The question India has to answer is whetherthe nuclear deal is likely to increase or diminishIndia's political, economic and military clout. Onbalance, it would appear that the deal will augmentrather than decrease India's stature in the globalarena. The nuclear deal while having manageablepolitical risks associated with it, offers India theopportunity to become a more important globalplayer.

The nuclear deal provides India with opportunitiesto increase India's nuclear power generationcapability. It also gives de facto recognition to India'snuclear weapons programme and facilitates Indianparticipation in global nuclear energy trade and

research. In case India decides not to enter into thedeal, it stands to lose much more than what it maygain.

If India aspires to become a great power, it mustengage with the US and learn how to work with itwithin the framework of its national interest. Whilethis path is not without risks, any alternative routemay not enable India to reach this goal.

Recommendations

1. India should amend its Atomic Energy Act toallow for private participation in building,owning and operating nuclear reactorsin India.

2. Introduce investment protection clauses inall contracts with all suppliers after theconclusion of the 123 Agreement.

3. Ensure that the physical infrastructurecreated in the Indian nuclear industry isprotected through appropriate legal meansagainst any unilateral actions from outside thecountry.

4. Examine the possibilities of providing additionalinsurance protection to the Indian nuclearpower industry.

5. Negotiate a Statement of Principle in the 123Agreement as well as with other supplier statesthat provides for sufficient lead times to switchsuppliers in case of possible disruptions in fuelsupplies.

6. India should actively promote its researchand development of new technologies to

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enable speedy transition towards an eventualthorium based fuel cycle.

7. In the 123 Agreement, India should protectall its options with regard to reprocessingspent fuel. At the same time, an environmentaland economic assessment of reprocessing ofspent fuel is necessary to take the decision infavor of reprocessing or storage.

8. India needs to spread the risk of the economicimpact of a possible abrogation of the deal bymaking sure that it is not overwhelminglydependent on any single supplier country.

9. The above approach must, however, bebalanced by ensuring participation by US

companies so as to create a lobby in the USthat would promote the cause of India's nuclearindustry.

10. Negotiate a maximal definition of a"reasonable reactor operatingrequirements" in the 123 Agreement. IdeallyIndia should pitch for a definition that is closerto the concept of strategic reserve as definedby the PM.

11. Operationally, however, the quantum of thestrategic reserve must be governed byeconomic considerations to keep nuclearpower competitive with other sources ofpower.

* The authors would like to acknowledge valuable inputs by Dr. K. Santhanam towards writing ofthis report.

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Nuclear Detonation: The Hyde Act is clear thatexploding a nuclear explosive device by India wouldterminate Indo-US Nuclear Cooperation. India,however, is not bound by any legal requirementto not detonate or to go beyond its unilateralmoratorium. It would be unrealistic to expect adomestic US legislation to explicitly allow an Indiannuclear test. It is for India to decide the benefits andrisks of such action. The issue of nuclear detonationis related to the India's energy security and theissue of fuel supply assurance which India mustsatisfactorily address if it enters into the deal.

Transfer of Technology: The Hyde Act does notallow for transfer of reprocessing, enrichment andproduction of heavy water technologies to India.India is, however, free to reprocess spent fuel undersafeguards. This has led many in India to argue that"full civilian cooperation" has been denied to India.

Section 104(d)4 as explained in the Section bySection Analysis accompanying the Hyde Act, statesthat "Section (104)(d)(4) regulates US Cooperationwith India on the areas of uranium enrichment,reprocessing and heavy water production. Under theAtomic Energy Act, such cooperation is not restrictedbut agreements for cooperation must specify if suchcooperation is to take place. . . In 1999 when theUnited States Government opted to expand US-Australian nuclear cooperation to allow forcooperation in the SILEX uranium enrichmentprocess, an amended agreement was submitted toCongress for approval. The conferees intend thatshould any such cooperation with India be

Annexure - I

Henry J Hyde United States - IndiaPeaceful Atomic Energy Cooperation Act of 2006

Analysis of Major Provisions

contemplated, either the original agreement forcooperation would specify that such cooperation isauthorized or a subsequently amended agreementwould be submitted to the Congress."

This is not to argue that India would have access tocurrently prohibited technologies but that there isspace for India to negotiate for amendment of thecurrent Act to enable access to them. Such aprecedent exists in the US. This is however, aninterpretation and also assumes that the politicalapproval for transfer of technology would beforthcoming in the US Congress This would mostprobably also require closer alignment of India'sstrategic goals with that of the US.

Nuclear Fuel Supply: The Act does not provide for"a strategic reserves of nuclear fuel over the lifetimeof India's reactors" as mentioned in the PM'sStatement in Rajya Sabha on 17th August 2006. TheAct only provides for fuel reserve "commensuratewith reasonable reactor operating requirements."The definition of "reasonable reactor operatingrequirements" is not specified. While it does notassure India lifetime supply of fuel, it also does notprevent India for negotiating for the maximumpossible reserve during the contractual negotiations.

Fallback Safeguards: Fallback Safeguards refersto an US end-use monitoring program to be put inplace in case the IAEA is unable to implement itssafeguards agreement with India because of budgetor personnel constraints. This clause has beensoftened in the final version of the Act. Fallback

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safeguards will take effect in the event that the IAEAis unable to implement its safeguards agreementwith India. This provision seeks to assure thenonproliferation lobby in the US that in case thecurrent international nuclear regulatory regimeimplemented by IAEA is threatened, weakened orbecomes defunct, the US will have the legal right tomonitor India's safeguarded facilities.

Iran: "Statements of Policy" section of the Act saysthat it shall be the policy of the United States to"secure India's full and active participation in theUnited States efforts to dissuade, isolate and ifnecessary sanction and contain Iran for its efforts toacquire WMDs, including a nuclear weapons

capability and the capability to enrich uranium orreprocess nuclear fuel, and the means to deliverweapons of mass destruction."

There is also a reporting requirement on the USPresident to inform Congress about the "specificmeasures India has taken to fully and activelyparticipate in the United States and internationalefforts to dissuade and isolate and if necessarysanction Iran"

Neither the "Statements of Policy" nor the reportingrequirements are binding on India. India can chooseto align with the international efforts to resolve theIran issue under the aegis of the UN.

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The amount of enriched uranium (enriched to about4.5%) required for operating a 1,000 MWe reactor(with a burn up of 50 Gigawatt days per tonne ofinitial heavy metal, a 90% capacity utilization factorand a thermal to electrical conversion efficiency of33%) is about 20 tonnes.5

Current prices of uranium (long term contract prices)in the international market are approximately $1770per kg.6 Spot prices will be much higher.

The cost of uranium fuel per year for a 1,000 MWeplant with the above characterization isapproximately $35 million.

If each reactor that is bought under the Indo-USagreement comes along with a life time stock of fueland if the lifetime of the reactor is thirty years, eachreactor would require about 600 tonnes of enricheduranium fuel. The total cost of the inventory wouldbe about $1.05 billion per each 1,000 MWe reactor.

Even if we assume that we do not buy any furtherfuel since we have a large inventory and we can rundown that inventory without any danger of sanctions,additional operating costs are going to arise becauseof inventory holding costs.

If the commercial lending rate is about 15% thenthe interest charges will be an added burden on theoperating costs associated with nuclear power. Inthe first year of operation this interest charge canbe as much as $159 million though as the inventory

Annexure - II

Implications of a Strategic Fuel Reserve over thelife time of a1,000 MWe reactor

depletes the interest cost would come down to$ 5.31 million toward the end of life of the reactor.

The additional cost to nuclear power because of thislifetime holding of a strategic reserve can now beestimated for the first year of operation.

About 7.88 billion KWh of electricity can be producedby a nuclear plant with the above specifications.

The additional cost with a lifetime strategicreserve would be a cost of 1.92 cents per KWhproduced. In rupee terms this would translate intoan additional cost of approximately 90 paise per KWhat current prices. Given that electricity prices todayis about Rs.2.50 per KWh this extra inventory holdingcost will increase the price of electricity per unit byabout 33% and erode the competitive position ofnuclear power.

The table overleaf indicates the impact of a lifetimestrategic reserve over a thiry year period on the costof nuclear electricity. We can see that a thirty yearinventory of enriched uranium will add about 90 paiseto the cost of each unit of electricity. On the otherhand, if we have an inventory of only one or twoyears the additional cost incurred would only bebetween 3 and 6 paise per unit of electricity at currentprices.

Clearly, if we want to completely negate the impactof possible US sanctions, the inventory holdingshould be for the lifetime of the reactor. The

5 "The future of Nuclear Power - an Interdisciplinary MIT Study" Massachusetts Institute of Technology, 2003, available at http://web.mit.edu/nuclearpower/

6 "The Economics of Nuclear Power" Briefing Paper 8, at http://www.uic.com.au/nip08.htm

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economic implications of mitigating this political riskwould, however, make nuclear electricity moreexpensive and erode its competitive position withrespect to other sources of power.

What should be the optimum inventory given thatthese political risks have to be managed in theIndo-US nuclear deal?

Our assessment, based on some cases of valuationof nuclear power plants in the US, indicate thatthe typical fuel inventory held by nuclear powercompanies in the US are for roughly two years. Aswe can see from the following table a two yearinventory may only add about 6 paise to the cost ofa unit of electricity.

Experience from the past would suggest that themaximum period of sanctions may be one or twoyears. To make sure that there is no major impacton power production we may want to keep aninventory for one additional year. This three yearinventory will add about 10 paise to the cost of aunit of power. This may not affect the competitiveposition of nuclear electricity in a big way. Ouranalysis would suggest that anything above fiveyears of inventory may erode the competitiveposition of nuclear power.

In case negotiations with the US get sticky withrespect to the definition of "reasonable reactoroperating requirements" a case can be made outfor at least a two to three year inventory as necessaryfor the operations of nuclear plants in India. Whilewe want to negotiate for the maximum position of alifetime strategic reserve we can see from thisassessment that such an approach does not makemuch economic sense.

Our assessment has not included the additionalcosts of storage and security that holding theinventory will entail. This will add further to thecosts.

An easier way to deal with this issue is to makesure that the US stake in the nuclear powerindustry in India becomes significant. In such asituation pressure from the US industry on theUS government will help in reducing the periodof sanctions. This diplomatic and politicalmanagement of the risk may be more appropriatethan working on a lifetime supply of nuclearfuel.

This assessment is based largely on a study onnuclear power carried out by MIT.

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Table 1

Cost of Holding Lifetime Inventory of Nuclear Fuel(1,000 MWe Imported Nuclear Power Plant)

Electricity produced inBillion KWh per 1,000MWe reactor per year

YearEnriched uranium

inventory in tonnes forfull life of reactor

Inventory holdingcosts at 15% inMillion dollars

Additional cost perKWh in paise

1 7.884 600 159.3 90.922 7.884 580 153.99 87.893 7.884 560 148.68 84.864 7.884 540 143.37 81.835 7.884 520 138.06 78.806 7.884 500 132.75 75.777 7.884 480 127.44 72.748 7.884 460 122.13 69.719 7.884 440 116.82 66.68

10 7.884 420 111.51 63.6511 7.884 400 106.2 60.6212 7.884 380 100.89 57.5913 7.884 360 95.58 54.5514 7.884 340 90.27 51.5215 7.884 320 84.96 48.4916 7.884 300 79.65 45.4617 7.884 280 74.34 42.4318 7.884 260 69.03 39.4019 7.884 240 63.72 36.3720 7.884 220 58.41 33.3421 7.884 200 53.1 30.3122 7.884 180 47.79 27.2823 7.884 160 42.48 24.2524 7.884 140 37.17 21.2225 7.884 120 31.86 18.1826 7.884 100 26.55 15.1527 7.884 80 21.24 12.1228 7.884 60 15.93 9.0929 7.884 40 10.62 6.0630 7.884 20 5.31 3.03

Calculations assume - burn up of 50 Gigawatt days per tonne of initial heavy metal, a 90% capacityutilization factor and a thermal to electrical conversion efficiency of 33%.

IISc Campus, Bangalore - 560 012, IndiaTel: 2218 5000 Fax: 2218 5028Email: [email protected] [email protected]



International Strategic &Security Studies Programme

The International Strategic & Security Studies Programme at NIAS promotes

and conducts research that addresses the strategic and security concerns of

India. It has over the years carried out a number of studies in technology

dominated areas of international security - nuclear weapons and missiles. NIAS

has also facilitated exchange of knowledge and views between interested groups

working around the globe on issues related to international security. The

programme focuses on the region with a special emphasis on China and Pakistan.

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Assessing the Indo-US Deal on Civil Nuclear Cooperation

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