The Agreement for Cooperation between the Government of the United States of America and the Government of India (123 Agreement), which will allow U.S. nuclear suppliers to trade with India for the first time since 1974, passed comfortably in the Senate last Wednesday (86 for, 13 against). The Bush Administration has hailed it as a virtually “done matter.” U.S. Congressional approval removed the last significant barrier to the signing of the 123 Agreement, following the approval of India’s nuclear inspection plan by the International Atomic Energy Agency (IAEA) on August 1, 2008, and the waiver granted to India to participate in global nuclear commerce by the 45-member Nuclear Suppliers Group (NSG) on September 6, 2008. 

As three years of U.S.-India diplomatic efforts on the nuclear deal approach fruition, players on all sides are gearing up to participate in India’s nuclear future.  Starting this week, India will begin negotiations with a short list of companies with the hopes of building reactors as early as next year.  However, before these new commercial relationships can kick-off, India must first sign a safeguards agreement with the IAEA. Additionally, proposed changes to the domestic laws of both countries in upcoming months will play a large role in mapping the synergies for commerce and energy that are contemplated by the 123 Agreement.

The 123 Deal

The U.S.-India 123 Agreement envisions full civil nuclear energy cooperation between the U.S. and India, in areas including R&D, technology transfer on industrial and commercial scales, the development of nuclear buffer stocks, and the supply of nuclear material and equipment.  The 123 Agreement requires efficient authorization processes relating to trade, industrial operations and nuclear material movement between the two countries.  It also reaffirms the U.S.’s commitment to guard India against any disruption of nuclear fuel supplies.

India’s Proposed Integrated Energy Policy

At last week’s meeting of India’s Planning Commission (the governmental unit that formulates plans for India’s economic and growth strategies), Prime Minister Manmohan Singh reviewed a draft Integrated Energy Policy for India (IEP).  An expert committee headed by Planning Commission member Kirit S. Parikh (Energy) prepared the draft two years ago by to ensure consistency across various energy sources, energy security, R&D, environmental concerns and energy conservation.  The Prime Minister stressed the importance of energy pricing as a component of the IEP, in order to effectively incentivize both the efficient use of energy and investments in expanding India’s energy supplies.  The IEP: (i) encourages co-ordination between the various sector-specific energy ministries; (ii) seeks market-determined energy pricing; (iii) suggests the imposition of energy taxes on a “polluter pays” principle, in order to reflect externalities and attain environmental objectives; (iv) encourages the acquisition of energy assets abroad; and (v) proposes a common appellate tribunal and sector-specific regulatory bodies.

The draft IEP will be revised to incorporate atomic power into India’s energy mix, by inter alia, calling for the acquisition of uranium assets abroad as well as the creation of domestic buffer stocks of uranium.  The IEP will come before the Cabinet for approval later this month, and once approved, will lay the general principles to be followed by various ministries in petroleum/natural gas, coal, power, water resources, renewable energy, finance, and atomic energy.

Changes in Indian Laws Are Needed for Private Players and Foreign Investment

In light of the large capital investments that will be required to set up nuclear plants in India, the Indian government will likely amend India’s Atomic Energy Act of 1962 to allow the entry of private players in the generation of nuclear power.  Changes to India’s policies regulating Foreign Direct Investment (FDI) into India are also probable, as the current regulations forbid foreign investments in atomic energy. The modalities for allowing private players to enter the field still need to be determined, and may take the form of tariff-based bidding procedures, public-private participation, or state-ownership with private players receiving build-operate-transfer contracts. 

Proposed Changes to U.S. Laws - The Thorium Energy Independence and Security Act of 2008

With India’s meager uranium supply, but vast indigenous thorium resources, any long-term nuclear strategy must be based on thorium.  Senator Orrin Hatch (R-UT) and Senator Harry Reid (D-NV), the Senate Majority Leader, did not overlook this when they introduced the “Thorium Energy Independence and Security Act of 2008″ into Congress last week.  The bill amends the U.S. Atomic Energy Act of 1954 to provide for thorium fuel cycle nuclear power generation, citing as amongst thorium’s comparative benefits its proliferation-resistance and low waste properties. The measure, allocating $250 million over five years, authorizes the establishment of a regulatory office for the use of thorium and provides for the recommendation of incentives for nuclear reactor operators in the United States and foreign countries to use thorium in nuclear power generation, in lieu of other fuels.

Nuclear energy presently comprises only 3% of India’s installed generation capacity and only 8% of energy consumption in the U.S.  A signed U.S.-India 123 Agreement and the probable resulting changes to both U.S. and Indian domestic laws and policies are bound to change the role nuclear energy plays in the overall energy mix of these two countries.

For further information about this topic, please contact Akin Gump.