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Updated: June 21, 2013 00:15 IST

Repeating Enron in Jaitapur

Suvrat Raju
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The tariff of Rs. 4 per unit of electricity is unrealistic unless the government subsidises the cost of the first two Areva reactors by Rs. 22,000 crore

More than a decade after Enron’s collapse, its legacy continues to haunt Maharashtra. In 2006, the Dabhol power project was restructured into the Ratnagiri power project with public subsidies that, by some estimates, amounted to Rs. 10,000 crore. The project has led a troubled existence and in March this year it announced that it may have to stop servicing its outstanding debt of Rs. 9,000 crore because of a problem with its fuel supply. In spite of this reminder of the continuing long-term costs of sweetheart deals to attract foreign investment in the power sector, a team from the Indian atomic energy establishment left for France last week to repeat the same mistakes.

Problem with design

The French company Areva, just like Enron, has been promised a contract for six European Pressurized Reactors (EPRs) by executive fiat, bypassing a competitive bidding process. The reactors will be set up in Jaitapur, which is also in Ratnagiri. No one knows the exact extent of this give-way, because no EPR has been commissioned anywhere in the world. Areva started construction on its first EPR in Finland in 2005, with a promise to complete the reactor by 2009, at a price of just over €3 billion. After eight years, the reactor is still incomplete but cost estimates have ballooned to €8.5 billion —almost thrice the original figure. Areva has various excuses, but similar delays and cost increases in the second EPR under construction in its own country point to a more fundamental problem with the EPR design.

There is little public data about the EPRs being built in China, but these prices are consistent with those proposed for EPRs in Britain and indicate that each Indian reactor may cost as much as Rs. 60,000 crore. So, the price of the two reactors that the government hopes to commence in the Twelfth Plan period will equal the total plan outlay on science and technology including the departments of Space, Science and Technology, Biotechnology, and research labs throughout the country.

What does this imply for consumers? In 2010, the then CEO of Areva, Anne Lauvergeon, told this newspaper that the tariff would be “below the Rs. 4 figure.” More recently, Areva suggested that this “tariff holds true,” except for small escalations because of the delay in operationalising the project.

Both Areva and the Nuclear Power Corporation of India (NPCIL) have doggedly refused to explain the origins of this number. In the same 2010 interview, Lauvergeon said that “I am not going to give you the details … it is not for me to give the price if the customer does not want to give it.” The government has also refused to divulge information in meetings with local activists or even in response to parliamentary questions, where it has fallen back on the story that the final price is still under negotiation.

However, it is possible to independently estimate the cost of electricity using a study on the economics of imported reactors that the government produced in preparation for the India-U.S. nuclear deal. This was later updated and published by NPCIL.

When M.V. Ramana and I applied this framework to the Jaitapur reactors, in a paper for the Economic and Political Weekly, we concluded that the true cost of electricity is likely to be almost four times as high as what the government claims. The figure of Rs. 4 per unit comes from a combination of unrealistic assumptions and a revenue model that provides massive public subsidies to the project.

The single most important factor in determining the tariff is the capital cost of the reactor. The government claims that the Indian EPRs will be cheaper because construction forms “about 40 per cent of the total cost.” Estimates suggest that construction costs in India are about 60 per cent lower than Europe. So, under best case conditions, the government could hope for about a 25 per cent reduction in the total cost.

However, the capital cost assumed in the government’s study is not 25 per cent lower, but literally 25 per cent of the figure for European reactors! It is this assumption of an unrealistic capital cost that underpins the Rs. 4 figure.

The study also reveals how the government plans to set out an exceedingly generous revenue model for the project. For example, it assumes that the project will have access to long-term debt at an interest rate of only 6 per cent. This is inconsistent with the serious concerns about the project’s viability. Moreover, since the yield on 10-year Indian Government bonds has been consistently higher than 7 per cent, even the full backing of the government will not bring the rate down to this level in the open market. So, the government will have to arm-twist public sector banks or itself provide a long-term loan to the project at this throwaway rate.

Another subsidy is built into the government’s plan to inject equity during the first few years of construction. In the government’s revenue model, this money will sit idle for more than a decade until the reactor becomes operational. Assuming, optimistically, that the EPRs are constructed as fast as the Kudankulam reactors, this delay will bring the government’s return on equity down from the advertised rate of 14 per cent to an effective rate of only 7.7 per cent. Further delays, which are likely, will reduce this further.

When these parameters are corrected, and combined with a realistic estimate of the cost of fuel, the government’s own methodology leads to a first year tariff of Rs.15 per unit, even without including transmission and distribution costs. Obviously, this cannot be passed on to consumers, and so the state will have to subsidise the electricity. To bring the tariff down to Rs. 4 will require a subsidy of Rs. 22,000 crore each year for the first two reactors. This “Areva-subsidy” is a quarter of India’s entire food subsidy bill.

There are other serious questions about the project. For example, Areva’s reluctance to accept even a small amount of liability is in sharp contrast to its unscientific claims that it has precisely computed the probability of a serious accident in an EPR, and found it to be once in 1.6 million years.

But the economics of this project are so appalling that it is possible to separate these issues and even the broader question of the role of nuclear energy in India. Even the nuclear establishment accepts, as WikiLeaks revealed, that the “NPCIL [has] paid a ‘high’ price”. The justification for the project cannot be Maharashtra’s electricity shortage either since at this price it is possible to find several alternative solutions to that problem.

Jairam Ramesh admitted that for the government, the “venture is significant not just from an energy generation but also from a strategic point of view.” Anil Kakodkar, former chairperson of the Indian Atomic Energy Commission, explained that India had to “nurture” French “business interests” because France helped India when it wanted access to international nuclear markets.

Back-room deal

This is an admission of an unsavoury back-room deal. However, a moment’s reflection also brings out the circularity of this argument. France supported India’s efforts because it wanted to sell reactors to India. Why should the country return this self-centred help by paying through its nose?

There is a simple but significant political aspect to this entire issue. It is clear that this deal and the concomitant negotiations to purchase reactors from American companies are being driven by pressure from the Prime Minister’s Office. The reason that negotiations with Areva have taken on an urgent note is because the government’s prospects in the next elections are uncertain. If the next dispensation does not have the same ideological commitment to imported nuclear reactors, these deals may flounder.

Our system concentrates enormous financial powers in the hands of the executive. However, just because the government has the power does not mean that it has the right to rush into a deal that could bleed the country for years to come.

(The author (suvrat.raju@gmail.com) is a physicist associated with the Coalition for Nuclear Disarmament and Peace. The views expressed are personal)

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Great piece of analysis. Thanks a lot for explaining the dynamics so clearly. I wonder though if the CAG or independent body doesn't verify the estimates before moving forward with the deal, even if it has to be secretive? Has anyone tried the RTI for getting information on the deal?

from:  Srini Viswanathan
Posted on: Jun 22, 2013 at 13:33 IST

Author has brilliantly put the statistics of this gamble called Areva. What is the point of buying reactors at such a steep price, then subsidize them and in the long term this is the price a common man has to pay.

from:  Rajesh Bhattad
Posted on: Jun 21, 2013 at 15:50 IST

Sure seems another scam in the offing.

Why not preemptively go for a comprehensive evaluation of the project by
a combination of financial, technical and audit experts?

Such an evaluation can be submitted to a relevant committee of the
Parliament and let Parliament take a final decision.

from:  Sachi Mohanty
Posted on: Jun 21, 2013 at 15:42 IST

such a case seems to be the fate of alomost all indian deals.

It starts with a small, manageble cost then the estimated cost rises to peak of mountains, be it Power Plant or CWG.

It is the public money that ultimately goes into the pockets of these foriegn investers.
A time and cost bound policy framework is needed to fix the loop holes in such deals.

from:  Pravin Kumar
Posted on: Jun 21, 2013 at 15:36 IST

We have't learnt a thing from our mistakes done in the past. Because
of the perks and kick backs attached with the decision.

We Indians take things for granted and our justice delivery system is
very very slow and held to ransom by clever Lawyers, looking for loop
holes in the law and helping the crooks.

Indias per capita consumption is much less and even after 6 decades,
many villages don't know what electricity means????

Still we dont want to charge realistic price for the usage, like our
water bills

from:  sathyan
Posted on: Jun 21, 2013 at 10:51 IST

"However, the capital cost assumed in the government’s study is not 25 per cent lower, but literally 25 per cent of the figure for European reactors!''
If this is how the powerful bureaucrats and politicians carry on with their Math, then even the gods cannot save this country. When one person (or institution) called CAG tries to dissect these deals, he is chided for overreach and his opinion is labelled 'presumptions'.

from:  Vijay A
Posted on: Jun 21, 2013 at 10:06 IST

Unless electricity tariff is based on fair cost of production there cannot be any development and supply of reliable and adequate electricity .With out power there cannot be any industrial growth and improvement in standard of living.We have to differentiate between cost of production and affordable tariff. India has one of the lowest tarrif resulting in power shortages . When power supply is not there , tarrif has no meaning

from:  Akhil C Rae
Posted on: Jun 21, 2013 at 09:41 IST

Insightful... It's true, planning should be done in such a way that next government should not regret...

from:  Abhijeet Lele
Posted on: Jun 21, 2013 at 09:16 IST

Despite whatever experts like Drs. Suvrat Raju, A. Gopalakrishnan, Udaykumar and M.V.Ramana may write, this government and its predecessors have refused to justify the purchase of nuclear power plants by public discussion, even in parliament. Clearly the only explanation is that Indian leaders and their hawk advisers are determined to have control over nuclear materials for their weapons programme. The key unanswered question is whether nuclear weapons increase Indian defence capability or decrease it? Unsustainable military expenditure greatly contributed to bringing down the Soviet Union, though it had a fraction of India's population and a much higher per capita income. A political resolution of border issues may be better in Indian interests than military posturing.

from:  vithal rajan
Posted on: Jun 21, 2013 at 08:13 IST

This article makes a compelling argument to take a hard look at the cost and pricing as well
as inherent delays and risks in the new technology. The government and the nuclear
establishment for their own political and self-serving reasons will ignore the warning to the
detriment of the country's interest. Recall how in the less risky endeavor of CWG, the
government overruled its own minister who raised concerns over extravagant spending
before the project was implemented.

from:  Ramakrishnan
Posted on: Jun 21, 2013 at 07:55 IST

If the Rs 4 per unit of power @ Jaitapur's proposed nuclear power
plant is unrealistic, what do we have to say about the power to be
produced from all those proposed Solar power plants which will have an
initial cost of anything between Rs 8 to 12 per unit? And this cost is
only going to increase given that Indian rupee is sinking against US
Dollar ....

The message is clear - you can endlessly debate on the dangers of
nuclear power, the threat due to global warming, the undesirable
nature of hydro electric power plants etc etc, but the fact of matter
is that electricity is not going to be cheap. But electricity is
absolutely essential for modern civilization. And this is also a
commodity which we believe should be given free to some segment of
society (farming)... how do we resolve this contradiction?

from:  Ramki
Posted on: Jun 21, 2013 at 07:47 IST

Great article to reveal the true information. 22,000 crore being wasted, which can be invested in renewable energy research to produce cheap and safe power!!

from:  Balaji
Posted on: Jun 21, 2013 at 01:07 IST
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