1. INTRODUCTION
Back in December 2015, the Government of India amended the Atomic Energy Act, 1962 (the "Act"), enabling the Nuclear Power Corporation of India Limited (the "NPCIL") to form joint ventures with public sector undertakings ("PSUs").1
Previously, the NPCIL was largely responsible for the design, construction, commissioning and operation of nuclear power plants (along with another state owned entity, Bhavini, which implements the fast breeder reactor program) and the amendment to the Act was intended to stimulate the expansion of India's nuclear power generating capacity in the medium to long term through the joint venture model.
The Atomic Energy (Amendment) Act, 2015 (the
"Amendment Act")2 essentially
expanded the definition of "Government
Company" in the Act to include a joint venture formed
between NPCIL and a PSU.
This article considers the implications of the Amendment Act, assesses its impact over the year since the Act was amended and more importantly, puts it into context of the estimated capital costs of a nuclear build out.
2. KEY HIGHLIGHTS OF THE AMENDMENT ACT
2.1 Government Company
Under the Act, a "Government Company" was defined to be one in which at least 51 (fifty one) per cent of the paid-up share capital is held by the Central Government. Why this expressly excluded participation by PSUs, or for that matter, the private sector, is puzzling.
The Amendment Act expands the definition of "Government Company" to include companies where the whole of the paid up share capital is held by one or more Government Companies and whose articles of association empowers the Central Government to constitute its board of directors.
The Statement of Objects and Reason attached to the amendment bill (introducing the Amendment Act) comments on the previous definition of a Government Company. It states that the Act precluded a Government Company from entering into joint ventures with other PSUs for the reason that any joint venture formed by two PSUs may not necessarily be subject to the control of the Central Government as a shareholder.
In this context, it should be noted that NPCIL was incorporated as a company in the year 1987 with the object of undertaking the design, construction, operation and maintenance of atomic power stations in accordance with the Act. The Central Government wholly owns NPCIL and it is administered by the Department of Atomic Energy.
It is interesting to note that the NPCIL website has a section on joint ventures, listing three existing joint ventures with NALCO,3 Indian Oil and NTPC,4 all with the purpose of setting up nuclear power projects for harnessing nuclear energy for the generation of electricity on a commercial basis.
These joint ventures were incorporated in March 2012, April 2011 and January 2011 respectively. It is evidence to reinforce the point made at the beginning of this section, that the current Act did not expressly prevent the creation of joint ventures.
Notwithstanding our analysis above, the intention of the Amendment Act must therefore have been to expressly authorize PSUs to participate in joint ventures with NPCIL (or Bhavini), or potentially, with each other and perhaps to the exclusion of NPCIL (and Bhavini).
2.2 Cancellation of Licenses
The Amendment Act further inserts a provision for the cancellation of licenses in case the licensee ceases to be a Government Company.
Under the Act, a license is required for the acquisition, production, use, export and import of any plant designed for the production and development of atomic energy or research. The Amendment Act states that any license granted for such operations shall be cancelled if a licensee ceases to be a Government Company.5
The implications of this provision will become particularly relevant in the context of the Government of India's future disinvestment program as it gradually privatizes its PSUs by issuing or selling equity to the market. In the event that two PSUs form a joint venture to develop a nuclear project, any future dilution of their share capital or the selling of a controlling stake by the Government of India would trigger a license termination.
3. STRUCTURING JOINT VENTURES IN THE NUCLEAR INDUSTRY
Joint ventures between two or more parties work well in projects where any one particular party is otherwise unwilling to bear the entire risk of the project and where no single party has the expertise or resources to undertake the project entirely on its own. Nuclear projects are perhaps the best example of the challenges thrown up for a single project developer and essentially, since very few entities have the ability to take onto its balance sheet the risks associated with a nuclear power project, the government has, historically, lead the way.
Nuclear projects are capital intensive and construction takes considerably longer than other energy generating assets. Unique to the sector are the substantial back-end costs in decommissioning at the end of the lifecycle of the asset and the complexities in disposing waste. Because of the specialist nature of the technology, supply chains are limited, with little flexibility in sourcing alternative components.
As with all joint ventures, pooling resources and capabilities, comes hand in hand with sharing rights and obligations, requiring a mechanism to manage the relationship between themselves on a number of matters. Deadlock and reputational risk are perhaps the two most common risks parties expose themselves to across all joint ventures, and while the former can often be effectively managed, the latter poses significant risk.
So what risk factors do nuclear power projects conjure up for their participants? Firstly, the development phase of the project leads inevitably to the question of how are we going to fund it? Nuclear power projects require enormous amounts of capital expenditure (as discussed below in more detail) meaning that it's essentially impossible to finance it through just equity. The size of the lending required means that lenders too, need to manage their exposure, essentially leading to large consortiums of lenders, requiring careful orchestration by complex finance documentation.
Long construction periods generally translate to extended term loan repayment schedules and the added complexity of using advanced technology (sometimes for the first time) leads to developmental risk and the likelihood of teething problems. Because of the complexity and single point of responsibility, turnkey EPC type contracts are difficult to execute (on the basis that few, if any, contractors have the entire experience skill set to execute the entire project on their own).
So how do project development joint ventures tackle these problems? Firstly, each party needs to be very clear about the role that it wishes to play and the risks that it is prepared to accept. Broadly, it's possible to delineate joint venture partners into 2 (two) categories, namely strategic investors and financial investors. The former normally pitch for projects on the basis of a long-term goal, integrating or expanding business competence, venturing into new areas of expertise, complementary to, or able to leverage, its existing expertise. The second type of investor is more concerned with the financial return it can expect, with cash-flow and exit options dominating its thinking.
In the context of PSUs in India, it is fairly clear that entities such as NPCIL, BHEL, ONGC and Indian Oil Corporation are the public sector parallel to private sector strategic investors. Other PSUs, such as Indian Railways would have on the face of it, no relevant expertise or experience to bring to the table and it is also highly likely that such PSU's will be providing finance and therefore, a parallel to private sector financial investors.
Almost all large-scale project development is executed through a ring fenced special purpose vehicle, which is normally an incorporated limited liability company. Recourse to shareholders is generally limited to their equity contributions and the lenders' recourse is often limited to the assets and revenues of the project. Given the risks associated with large-scale and capital intensive projects of this nature, it is highly likely that shareholders will need to commit to equity shortfall funding to the extent that there are, for example, cost-overruns.
Each participant must therefore have a thorough understanding of its potential contingent obligation to commit further equity (normally pro rata to its existing holding) should any future trigger events occur. In the event that equity contributions are staggered over time, then wise lenders would normally request a parent company guarantee for the shareholder obligation, or otherwise, a bank letter of credit.
As with any other joint venture, setting out the decision making process between the parties is a crucial consideration. What decisions will be taken through a simple majority? What, if anything, are considered to be reserved matters, requiring the consent of all the shareholders? How will decisions about the budget and financing be taken? What will happen in the case of a deadlock in decision-making? These issues are fairly well trodden ground and can normally be effectively structured through tried and tested joint venture provisions.
Equity transfer is another key consideration for any joint venture partners and it's highly likely that lock in periods and the identification of eligible transferees are going to form part of these agreements. To a certain extent, we should acknowledge the rather limited and artificial market that nuclear power projects operate in, amplified by the lack of potential private sector participation. In this limited market therefore, it's foreseeable that the potential number of transferees will be limited to handful of PSUs for some time to come.
4. NEW JOINT VENTURES?
India currently has 21 nuclear projects operating across the country, generating an estimated 5.8 GW of electricity out of a total of approximately 300 GW of installed capacity as of May 2016.6 This accounts for just 1.8 per cent of total generating capacity. Five nuclear projects are scheduled to complete in 2017, adding a further 3.8 GW, taking the total installed capacity to 9.6 GW.
If the current Government's plan to generate 25 per cent of its electricity through nuclear power by 2050 is to be realized, then some commentators suggest that this would require installing up to 200 GW of nuclear capacity, which many believe to be an extremely aggressive target. Even the now defunct Planning Commission's most optimistic projection anticipates just 80 GW by 2047 should the Government invest on a heroic basis.7
Looking back over capacity addition over the last 6 years, perceived risks with India's civil nuclear liability law and the necessity to plug into an international nuclear liability and supplier agreement framework has resulted in the installation of just 1 GW of light water reactor ("LWR") capacity. Granted, with much of the international framework now in place, time scales should improve in the future, though there is a greater policy question over the costs of imported reactor technology and a diffuse supply chain.
Currently, India is operating 18 pressurized heavy water reactors ("PHWRs") with a total installed capacity of 4.46 GW. According to projections by the Indian think tank, the Observer Research Foundation, PWHR capacity could reach 20 GW by 2050.8
In India, four engineering companies dominate the nuclear plant-manufacturing sector, namely L&T, Walchandnagar Industries, BHEL and the Godrej Group, but it should be noted that India's current domestic manufacturing capability only covers the supply chain for up to 700 MW PHWRs. Foreign reactors require foreign supplier agreements and manufacturing and supply chain constraints are going to play an important consideration in policy choices.
Currently, only France, China, Russia and Japan have the manufacturing technology to make large, third generation reactors with a capacity greater than 1 GW. Westinghouse currently sources it reactor vessels for its AP 1000 reactor from Japan and therefore, the India-Japan nuclear deal in November 2016 was a critical part of the jigsaw for the future supply of such reactors to any future Indian project using this technology.
Looking at nuclear projects currently being implemented across the world, it is clear that imported third generation technology is facing severe construction delays and cost over-runs. The European pressure reactor ("EPR"), a third generation pressurized water reactor, developed by Areva at the Olkiluoto project in Finland, is running almost 10 years late and 3 times over budget with total project costs estimated to be over € 8.5 billion.9
China is currently constructing two EPRs at Taishan in Guangdong province. Construction began in 2009 on two 1,750 MW reactors. They are yet to reach completion seven years later. The expected commission date is now scheduled for late 2017.
Assuming that these reactors commission later in 2017, although costs are much lower than in Finland, the two EPRs in China are still expected to cost approximately USD 8.7 billion (which is approximately INR 60,000 Crore). That would give a reactor cost of approximately INR 30,000 Crore (USD 4.35 billion) equating to nearly INR 17 Crore (approximately USD 2.5 million) per MW.
The estimated project cost for the Jaitapur nuclear power plant in Maharashtra, comprising 6 1,650 MW EPR reactors designed by Areva (totaling 9,900 MW) is estimated to be approximately USD 15 billion (working out to be approximately USD 3 million per MW of installed capacity).10 Contrastingly, statistics suggest that each MW of power generated by a PHWR reactor is an average of INR 8.5 Crore (approximately USD 1.26 million). There appear to be no official statistics in the public domain for the equivalent cost of EPR or Westinghouse AP 1000 reactor technology.11
Recent press reports suggest that the Government of India's civil nuclear strategy is to push the development of LWR projects to entities formed through joint ventures.12 This technology is substantially cheaper than EPR technology and historic estimates suggest that capital costs per MW are approximately INR 7.2 Crore (approximately USD 1.05 million).
NPCIL is reported to be currently working on plans to bring into operation 16 new reactors with a total capacity of 16,100 MW. With NPCIL reported to have approximately INR 12,000 Crore (approximately USD 1.76 billion) of surplus funds to invest, and each of its three existing joint venture partners having approximately INR 10,000 Crore each to invest (approximately USD 1.46 billion),13 equity contributions to future nuclear power projects could tally up to INR 43,000 Crore (approximately USD 6.3 billion).
Attracting financing is vital for a sustained push to develop India's nuclear program, though it remains to be seen what proportion of that financing is going to come from equity and what will come from debt. Taking into account classic project financing debt to equity ratios of 3:1, joint ventures developing nuclear power projects with equity contributions of approximately USD 6.3 billion could potentially attract debt financing of up to USD 18.9 billion (totaling approximately USD 25.2 billion).
While this may sound like quite a large sum of money, perspective is necessary. The under construction 5,600 MW Barakah nuclear power project in the United Arab Emirates received project financing reportedly to the tune of USD 24.4 billion,14 and if we assume that the total project cost is in the region of USD 30 billion, costs per MW amount to approximately USD 5.3 million.
Given the estimated capital costs for projects in India cited above, USD 25 billion could potentially provide up to 20,000 MW of installed capacity using PHWR technology or 8,400 MW of installed capacity using EPR technology (or a mix of the above).
On the demand side, proposed tariffs for off-take from reactors suggest substantial challenges ahead and raise questions as to whether the revenues will be sufficient to service scheduled payments of debt. NPCIL will need to keep tariffs down to compete with renewable energy and fossil fuels.
Foreign-sourced reactors are projected to sell power currently at least twice as expensive as some solar power projects, increasing the difficulty of scaling up nuclear power and with the recent winning tariff bid for the REWA solar project in Madhya Pradesh at an all-time low or INR 2.97 per kWh,15 it is difficult to see how nuclear can successfully scale and finance scheduled payments of debt.
A recent press release by the Department of Atomic Energy seems to suggest that NPCIL is exploring joint venture relationships with ONGC and Indian Railways,16 but with over a year passing since the Amendment Act, little tangible progress appears to have been made. Arguably, India's civil nuclear liability law has dampened the interest of foreign contractor's in India's LWR program and the formation of PSU joint ventures seems to indicate a potential shift in strategy, that India will leverage its cash rich PSUs to develop indigenous technology.
5. CONCLUSIONS
It's interesting to note that the press release issued by the Department of Atomic Energy accompanying the Amendment Act, stressed the need to meet the additional funding requirements for the future expansion of India's nuclear power program. The implication is that quite a substantial amount of the funding for nuclear projects is going to come from the equity reserves of PSUs. That said, it remains to be seen how debt financing is going to be procured and what debt to equity ratios will be projected by public and potentially private sector banks. As we've seen from the analysis above, committed equity the equivalent of USD 6.3 billion will raise just under a further USD 19 billion on a debt to equity ratio of 3:1, procuring an estimated 8,400 MW of EPR technology or 20,000 MW of PHWR technology.
While the Amendment Act paves the way forward for the existing joint ventures between NPCIL and NTPC, Indian Oil and Nalco respectively (and potentially others to follow), the question of policy choices between indigenous or foreign reactor technology and the associated costs are of paramount importance. The choice of technology and the arbitrage in costs will continue to restrict the policy maker's choice, not just because of funding constraints, but also because of the need to build out a stable and reliable supply chain.
With limited resources available and the cost of other sources of renewable energy dropping considerably, the question of funding expensive nuclear projects remains the elephant in the room.
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Footnotes
1. Press Information Bureau, Government of India, Department of Atomic Energy. Retrieved from http://pib.nic.in/newsite/PrintRelease.aspx?relid=136697
2. The full text of the amendment is set out in the following link http://dae.nic.in/writereaddata/ae_amend_2015_0116.pdf
3. http://npcil.nic.in/pdf/press_09nov2011_01.pdf
4. http://npcil.nic.in/pdf/press_27apr10.pdf
5. Clause (1A) and (1B) of Section 14 of the Atomic Energy (Amendment) Act, 2015 reads as follows:
"(1A) No license under sub-clause (c) of clause (ii) of sub-section (1) shall be granted to a person other than a Department of the Central Government or any authority or an institution or a corporation established by the Central Government, or a Government company.
(1B) Any license granted to a Government company under sub-section (1) shall stand cancelled in case the licensee ceases to be a Government company and, notwithstanding anything contained in any other law for the time being in force, all assets thereof shall vest in the Central Government free from any liability and the Central Government shall take such measures for safe operation of the plant and disposal of nuclear material so vested in it, as may be necessary in accordance with the provisions of section 3."
6. http://www.orfonline.org/research/the-future-of-nuclear-energy-in-india/
7. India Energy Security Scenarios 2047." Planning Commission. Online Tool
8. http://www.orfonline.org/research/the-future-of-nuclear-energy-in-india/#_edn12
9. http://www.reuters.com/article/areva-finland-tvo-idUSL5N18N3K5
10. https://en.wikipedia.org/wiki/Jaitapur_Nuclear_Power_Project
11. See Table 2 'Cost of Nuclear Power Construction in India' http://www.orfonline.org/research/the-future-of-nuclear-energy-in-india/#_edn12
14. http://www.bakermckenzie.com/en/newsroom/2016/10/nuclear-development-programme/
16. http://pib.nic.in/newsite/PrintRelease.aspx?relid=153720
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