Mr. Chairman and Members of the Committee, I am pleased to appear before you this morning – the one-year anniversary of the Joint Statement concluded by President Bush and Prime Minister Singh – to discuss India’s expanding role in the global energy market and the important energy cooperation taking place between the U.S. and India.

President Bush placed energy security high on his agenda from the beginning of his first term and that commitment has only increased. The President’s policy recognizes the global nature of the energy markets, and that a nation’s energy security does not end at its national boundaries. Our overarching energy security objective is to promote adequate and reliable supplies of affordable energy, as well as the clean and efficient use of energy resources. As the world’s largest producer and consumer of energy resources, the U.S. must play a leading role in addressing the world’s energy challenges and ensuring a secure energy future. The world’s demand for energy is growing rapidly and the demand growth will be increasingly concentrated in the developing world.

We are working internationally to create expanded energy partnerships with major consuming and producing countries. These partnerships are designed to improve energy security globally through domestic energy resource development, increasing the use of clean fuels, improved legal and regulatory regimes, increasing private investment, diversifying resources to include alternative and renewable energy sources, and helping the developing countries and growing economies to be more efficient producers and consumers of energy.

India -- a nation of over a billion people with an economy growing at approximately 8 percent per year -- has a massive and rapidly growing appetite for energy. Rapid population growth, expanding industrial production, economic development, urbanization, and increased motor vehicle ownership are all driving this energy demand. Between 1980 and 2004, energy demand increased by over 270 percent. In 1980, total primary energy demand was only 4.16 quadrillion BTUs but by 2004 demand had risen to over 15 quadrillion BTUs of commercial energy, thus making it the fifth largest consumer of

energy in the world behind only the United States, China, Russia, and Japan. This growth will continue at a rapid pace with total energy demand projected to be 25.7 quadrillion BTUs by 2020 and 32.5 quadrillion BTUs by 2030.

India is the world’s third largest coal producer behind China and the U.S. Coal consumption was 478 million short tons (mst) in 2004, growing to 775 million mst by 2020. India’s coal has twice the ash content of U.S. coal, resulting in serious environmental and health consequences for its population. Currently, about 53 percent of India’s total energy (and 70 percent of India’s electric power generation) is derived from coal.

Of the remaining sources:

1. • nearly 33 percent is derived from oil;
2. • 8 percent from natural gas;
3. • 5 percent from hydro-electric power;
4. • less than one percent from renewable (solar and wind) sources; and,
5. • the remaining 1 percent comes from nuclear energy.

India’s current civilian nuclear program has an installed capacity of 3,850 megawatts electric (MWe), but, according to the Government of India, it is expected to reach 20,000 MWe by 2020.

India’s demand for oil and natural gas is substantial, and will only increase as its economy grows and industrializes. Indian consumption of natural gas has risen faster than any other fossil fuel in recent years, from 63 trillion cubic feet per year (Tcf) in 1995 to 1.09 Tcf in 2004. Its use is projected to reach 1.5 Tcf by 2010 and 2.2 Tcf by 2020. Oil accounts for 33 percent of India’s total energy consumption. India’s average oil production level was 828,000 barrels per day in 2005. Future oil consumption is expected to grow from 2.6 million barrels per day (mmbd) in 2005 to 3.7 mmbd in 2020 and 4.5mmbd in 2030. In 2005, India imported (net) approximately 1.7 mmbd of oil. Based on conservative estimates, these imports will continue to grow as consumption needs will rapidly outpace growth in production capacity. Looking ahead, in 2020 India’s production capacity will be 1.4 mmbd, leaving an estimated import demand of 2.3 mmbd. Likewise, by 2030 import demand will continue grow to 2.9 mmbd as production will only increase slightly between 2020 and 2030 (1.4 to 1.6 mmbd.)

The U.S. began engaging India on energy more than a decade ago. We realized the enormous growth potential in its economy and recognized the implications for our energy security and for the global environment. My colleague from the Department of State can elaborate on the Civil Nuclear Cooperation Initiative; I would like to discuss more fully the broad range of energy-related activities we have undertaken with India. Today, the Department of Energy leads a wide variety of joint activities with India designed to increase its energy security while building a lasting partnership and friendship between

our two nations. These partnerships include participation from several agencies, the Department of State, the Department of Commerce, the Agency for International Development, the Trade and Development Agency, and the Environmental Protection Agency.

Our efforts in 1994 focused on improving the efficiency of India’s coal- fired power plants, promoting the use of clean fuels such as natural gas, wind and solar energy, helping establish public-private partnerships in industrial energy efficiency, and improving the investment climate for U.S. energy firms.

President Bush and Prime Minister Vajpayee bolstered our energy cooperation in November 2001, issuing a Joint Statement establishing energy as one of five pillars of the Indo-U.S. Economic Dialogue, with the other pillars being trade, investment, commerce and the environment. This enabled the implementation of the President’s National Energy Policy Plan’s recommendation that the Department of Energy work with India’s Ministry of Petroleum and Natural Gas to enhance domestic oil and gas supply.

Growing concerns about energy security prompted the U.S. and India to launch a new energy dialogue in 2005 that reflects the transformed strategic relationship between the world’s two largest democracies. The United States and India recognize their mutual interests are best served by working together in a collaborative fashion to ensure stability in global energy markets. Adequate and reliable supplies of clean energy at reasonable cost are essential to fuel India’s rapidly growing economy. Both the U.S. and India are increasingly reliant upon global oil and natural gas markets to satisfy their energy needs. Both nations depend heavily upon domestic supplies of coal for electric power generation and seek to increase their utilization of natural gas, renewable energy and nuclear power, as well as pursue energy efficient practices to ensure a balanced and sustainable energy economy that helps preserve a clean environment.

In addition to our bilateral work, the United States and India joined with Australia, China, Japan, and South Korea to launch the Asia-Pacific Partnership on Clean Development and Climate in January. This results-oriented, pro-growth initiative will help Partner countries to focus on steps that will create new investment opportunities, build local capacity, and remove barriers to the introduction of clean, more efficient technologies. This partnership, pursued in close collaboration with the private sector, will help each member meet the challenges of improving energy security, reducing pollution, and addressing the long-term challenge of climate change. We look forward to India’s active participation in this critical initiative.

President Bush has called for a transformed Indo-U.S. relationship premised upon a new strategic partnership under which energy security and energy cooperation are key factors. This relationship was reflected in the launch of the new U.S.-India Energy Dialogue on

May 31, 2005 chaired by Secretary Bodman and Deputy Chairman of India’s Planning Commission Montek Singh Ahluwalia. It established five Working Groups along with a Steering Committee to provide oversight and direction. The goal of the Dialogue is to identify concrete actions that the two countries can take to help India address its energy challenges. The underlying strategy is to address these challenges through increased trade and investment in cleaner domestic energy production, energy efficiency and diversified imports of energy. Building upon the broad range of existing cooperation, this effort will help mobilize secure, clean, reliable, and affordable sources of energy.

The five Working Groups are: Oil and Gas, Coal, Power and Energy Efficiency, New Technologies and Renewable Energy, and Civil Nuclear. These Working Groups have launched activities designed to increase the development of domestic resources, promote the deployment of clean energy technologies and fuels, support reforms in the power sector, enhance India’s awareness of steps it needs to take to attract foreign investment in the energy sector, and bolster India’s energy security. The Department of Energy co-chairs each of these Working Groups with the appropriate Government of India counterparts and we convene experts from a variety of U.S. Government agencies to participate in the projects.

The Department of Energy, in partnership with several other U.S. Government agencies, has been working with the Government of India on several projects that will increase the use of India’s domestic resources.

The Department of Energy is undertaking a number of steps to support the most efficient development of coal resources. In April 2006, India became a partner in the FutureGen international partnership which will work to create a zero-emissions coal-fired power plant that will produce hydrogen and sequester carbon dioxide underground, enabling greater use of coal in an environmentally sustainable way. Successfully demonstrating and adopting this technology will allow India to reduce the intensity of future greenhouse gas emissions from the burning of their abundant coal resources. India became the first country to join the United States on the FutureGen Government Steering Committee and plans to participate in the FutureGen Industry Alliance. The Government of India will contribute a total of $10 million to the project to join the government steering committee, $2.2 million of which has already been contributed.

The Coal Working Group has recently identified several high priority projects that will be pursued by our two countries over the next 2 years, including pursuing investment opportunities and information exchanges in the areas of coal mining and processing, coal mine safety, coal mine methane, and in situ coal gasification. The U.S. Trade and Development Agency has provided a $360,000 for a feasibility study grant for the Neyveli coal mine expansion project. Technical exchanges and visits are underway between the U.S. and India to examine the potential for pilot projects in India in the areas of underground coal gasification and coal beneficiation/coal washeries.

Finally, a Memorandum of Understanding, or MOU, between the U.S. Minerals Management Service and India’s Oil Industry Safety Directorate is expected to be signed in July 2006 in Washington, D.C. The MOU will deal primarily with operational safety, inspection issues and accident investigations of offshore oil and gas operations related to both drilling and production.

In the area of coal-based power generation, a proposed strategic partnership has been established between India’s National Thermal Power Corporation and the U.S. Department of Energy’s National Energy Technology Laboratory to collaborate on advanced research and development of clean and efficient power generation. A workshop is planned in India for September 2006 to discuss the results of a study on the feasibility of Integrated Gas Combined Cycle power plants in India.

The promotion and development of clean coal technologies and carbon sequestration efforts associated with power generation remain a focus of current U.S. initiatives with India.

The Department of Energy has been working with India to help them develop their domestic natural gas resources that can offer near-term alternatives. India has discovered a significant reserve of natural gas off its east coast but lacks an adequate infrastructure to move this gas to major national markets. We recently held a joint conference on natural gas that included representatives from government and the private sector to review the potential for natural gas development and to assist the Government of India in shaping the regulatory environment necessary to attract the investment needed to move this gas to market.

Another important area for future domestic natural gas production is from coal bed methane (CBM). India is believed to have significant resources of CBM that could make important contributions to meeting future energy needs. This is an opportunity for the U.S. private sector, which has extensive experience in the area of CBM development, to engage in this key energy source. The Ministry of Coal and Ministry of Petroleum and Natural Gas with the U.S. Trade and Development Agency (USTDA) and the U.S. Environmental Protection Agency are working together to establish a CBM Clearinghouse Information Center, an initiative under the Methane to Markets Partnership. This Center would promote the development of CBM projects and CBM resources by collecting data, conducting training, facilitating technology transfer, and providing consulting services. USTDA plans to support a kickoff event such as a workshop or conference showcasing U.S. technologies, and the Environmental Protection Agency plans to provide financial assistance, technical training, and other support to the organization. In addition USTDA is providing a $506,000 grant to Reliance Industries Limited to partially fund the cost of technical assistance to develop CBM resources at Reliance's Sohagpur field.

In order to meet India’s growing demand for energy, significant new investment is needed and the necessary legal and regulatory framework must be in place to attract the needed capital. Recently, the two governments conducted a workshop on natural gas regulation held at the Ministry of Petroleum and Natural Gas. India has recently enacted a Petroleum and Natural Gas Regulatory Board Act which seeks to promote competition, open access and greater transparency in gas pipeline transportation. The meeting addressed a number of regulatory issues and processes that India will have to address to develop a regulatory scheme that will be attractive to potential investors. The meeting was attended by various U.S. Government officials (from the U.S. Department of Energy, U.S. Department of Commerce, U.S. Trade and Development Agency, and U.S. Embassy in India); and a senior official of New York State’s regulatory body for natural gas who is an expert on both U.S. federal and state regulation. The Indian representatives at this meeting included the Ministry of Petroleum and Natural Gas, and its Petroleum Planning Analysis Cell, as well as the Gas Authority of India (GAIL). The effort to establish an appropriate regulatory regime is also being supported by a USTDA grant to the Government of India for a limited feasibility study of a national pipeline grid and to explore the possibility of providing further technical assistance in the area of gas sector regulation.

A key element of a fully functioning energy market is the availability of timely and accurate information. To help support India’s efforts to develop much better data and information, the U.S. Energy Information Administration and India’s Ministry of Petroleum and Natural Gas have initiated activities to help develop Indian data systems. The initial work has focused on techniques for collecting hydrocarbon data in India and the United States and methods to improve data collection in India.

One of the most important areas of cooperation between the U.S. Government and the Government of India is improving energy efficiency. Energy efficiency investments could make a major contribution to shaping the future demand for energy in India. Much of the recent cooperation between DOE and India has focused on facilitating the development and deployment of energy efficient technologies and practices, including those directed at the industrial, residential, and transportation sector. Building on much of the work of the U.S. Agency for International Development mission in India, the Power and Energy Efficiency working group has engaged in several projects designed to decrease energy demand and improve power generation infrastructure in India.

A U.S.-India Energy Efficiency Technology Cooperation Conference, jointly organized by DOE and India’s Ministry of Power, was held on May 2^{nd and 3rd, 2006 in New Delhi with technical support from USAID and sponsorship by several Indian and U.S. industry groups. The focus of the conference was on industrial and building energy efficiency. Among the key recommendations that came from the event was the establishment of five regional centers of excellence in energy efficiency in India as well as a collaborative program of assistance in developing macro-economic energy efficiency indicators. Following the conference, USAID in technical partnership with the State Government of Karnataka and the Ministry of Power, announced the establishment of a center of excellence for efficient lighting technologies and products, to be called the "Lights Museum and Energy Centre" in Bangalore. Cooperation is also continuing on energy efficient buildings and on the development of building codes, and a U.S. team conducted training in India in May 2006.}

Major strides have been made towards rural electrification as well. USAID recently launched a public-private partnership with the General Electric Company to increase access to clean and affordable energy services in rural communities in India. The partnership will span a two-year period and provide up to four communities in India with access to clean energy. The Distribution Reform Upgrades and Management program under USAID has also completed detailed project reports on four model projects on efficient power distribution in the states of Karnataka, Maharashtra, Gujarat and Delhi.

U.S.-India energy cooperation has also focused on the fostering of reliable sources of fuels, including development, deployment, and commercialization of technologies for sustainable, renewable fuels. This work includes creating public-private sector partnerships, as well as the promotion of investment, trade, and technology cooperation in the development of renewable resources such as solar, wind, hydro, and biomass. The Minister of Non-Conventional Energy Sources recently met with experts at DOE’s National Renewable Energy Lab to discuss potential areas of collaboration in hydrogen and biofuels research.

Nuclear energy will also be an important part of India’s energy future. To that end, the Department of Energy held a joint technical workshop earlier this year in Mumbai to advance dialogue and cooperation on technical issues associated with civilian nuclear energy use. Initial preparations are underway for a second workshop to take place this fall in the United States. However, any meaningful collaboration in this area is contingent on modification of our legal framework as proposed under the U.S. - India Civil Nuclear Cooperation Initiative.

Looking longer term, the U.S. and its ITER partners, the European Union, Russia, Japan, Republic of Korea and China, have invited India to participate as a full partner in the international research project which aims to demonstrate the feasibility of fusion power. U.S. support was instrumental in ensuring this final agreement. The partnership represents the first tangible and concrete step towards greater cooperation between the U.S. and India in the area of civil nuclear energy.

Private sector investment in all parts of the energy supply chain is critical to fostering energy security. We have made it a priority to include the participation of U.S. business in aspects of all of the working groups under the U.S.-India Energy Dialogue, which we have encouraged on the Indian side as well, and we have consistently made an effort to encourage the Government of India to take the necessary steps to improve the investment climate and attract U.S. companies.

This past March, the Department of Energy, with the Department of Commerce and USTDA, organized a CEO-roundtable event for the Ministry of Petroleum and Natural Gas in Houston. This event was held in conjunction with the roadshow for the sixth round of New Exploration Licensing Program and third Coal Bed Methane bid round. The meeting was designed to be a forum for U.S. companies to discuss their potential investment and voice any concerns they may have about the oil and gas sector in India.

In addition, the Department of Energy and the U.S.-India Business Council jointly organized a meeting in January of this year with the purpose of soliciting industry views on key commercial issues and building private sector participation in the Energy Dialogue and to promote increased U.S. trade and investment in India’s energy sector.

The Coal Working group is also establishing a Coal Business Council consisting of representatives from business, industry, academia and other non-governmental organizations to serve as a resource to the Working Group.

The Department of Energy has been working closely with India for some time to help develop its emergency response capability and its strategic stocks. India is developing a 5 million ton (approximately 36.5 million barrels) strategic crude oil reserve, with several locations near Mangalore on the east coast being considered. The Department of Energy

has hosted study tours for Indian officials to visit U.S. Strategic Petroleum Reserve sites and speak with U.S. experts in these areas. Indian officials have also participated in international oil stockpile conferences we have held in the U.S. We have also invited Indian representatives to visit with the International Energy Agency (IEA) to better understand how the IEA members plan for and respond to a severe supply disruption.

As such, the Department of Energy has been actively improving relations with senior Indian officials in energy policy-making. In order to ensure a coordinated response in an emergency or crisis situation, we must continue to develop close relations at the highest levels of government. In recent months we have had several high level meetings and exchanges between senior Department of Energy and Indian government officials.

Mr. Chairman and members of the Committee let me conclude by emphasizing that the economic growth that India is experiencing today will lift many people out of poverty and it is in our mutual interest to see that growth continue. Therefore, it is in our mutual interest to help India meet its energy needs and become a more efficient user of energy, both that which is available domestically and that which it imports.

The U.S. is leading by example and making needed investments in technologies that will fundamentally transform how we produce and consume energy in the future. We have embarked on an ambitious agenda through the President’s Advanced Energy Initiative. We can share these bold ideas and our experiences with India. We are convinced that bilateral and multilateral energy cooperation maximizes everyone’s energy security. Thank you, Mr. Chairman, for the opportunity to address the Committee on this important subject and I am happy to take any questions you or the Members may have.

The India Nuclear Deal: Implications for Global Climate Change

Testimony before the U.S. Senate Committee on Energy and Natural Resources

July 18, 2006

David G. Victor

Director, Program on Energy and Sustainable Development

Stanford University

David G. Victor is the Director of the Program on Energy and Sustainable Development (PESD) at Stanford University (http://pesd.stanford.edu).  He is also adjunct Senior Fellow and Director of the Energy Task Force at the Council on Foreign Relations.  PESD’s research focuses on international energy markets and the economic and environmental consequences of energy consumption.  Its studies examine the development of global natural gas markets, reform of electric power markets, international climate policy, and how the availability of modern energy services, such as electricity, can affect the process of economic growth in the world’s poorest regions.  The Program, established in 2001, is funded mainly with gifts from the Electric Power Research Institute (EPRI) and BP, plc.  Dr. Victor holds a Bachelor’s degree from Harvard University and a Ph.D. in political science from MIT. 

Email: david.victor@stanford.edu.

Introduction

The debate over the India nuclear deal has been too one-dimensional.  Nearly all commentary has focused on whether this proposal would undermine efforts to contain the proliferation of nuclear weapons.  Dissent along these lines has been based on a series of largely overblown claims.  And the singular focus on proliferation has allowed the debate to lose sight of other ways that this deal is in the interests of the United States and India alike. 

                Chief among those other reasons is environmental.  The fuller use of commercial nuclear power, if done to exacting standards of safety and protection against proliferation, can play an important role as part of a larger strategy to slow the growth in emissions of the gases that cause global warming.  That’s because nuclear power emits essentially no carbon dioxide (CO₂), the most prevalent of these so-called “greenhouse gases.”  While this benefit is hardly the chief reason for initiating this deal, with time it will become one of the main benefits from the arrangement.  The nuclear deal probably will lead India to emit substantially less CO₂ than it would if the country were not able to build such a large commercial nuclear fleet.  The annual reductions by the year 2020 alone will be on the scale of all of the European Union’s efforts to meet its Kyoto Protocol commitments.  In addition, if this arrangement is successful it will offer a model framework for a more effective way to engage developing countries in the global effort to manage the problem of climate change.  No arrangement to manage climate change can be adequately successful without these countries’ participation; to date the existing schemes for encouraging these countries to make an effort have failed; a better approach is urgently needed. 

Economic Growth, Electric Power and the Options for Supply

Evaluating the environmental benefits of this deal requires, first, understanding the basic factors that affect investment in the Indian electric power market.  From the 1970s through much of the 1990s India’s economy was famous for its low rate of growth; with low growth came low demand for electricity.  A series of economic reforms, initially introduced in the wake of a financial crisis in 1991 but strengthened over the many years since, has changed that situation dramatically.  India’s economy enjoyed an average annual growth rate of around 7% from 1994-2004.  Most analysts expect growth to be sustained at 8% over the next few years if not longer.  India’s population is young; and an important fraction is well-educated and increasingly engaged with the world economy.  To be sure, the Indian economy has many deep flaws.  India has made no progress in solving the development problem in the rural areas where most Indians live, and India’s democracy is notorious for its political gridlock.  All that said, there is palpable evidence that India’s economic reforms have finally taken hold. 

                Higher growth has led directly to higher demand for electricity.  While the exact future needs for power remain uncertain, there is considerable evidence that electric demand will grow at roughly the same rate as the economy.  Some factors will tend to dampen the growth in demand for power.  For example, economic growth is expected to cause a shift in the Indian economy away from energy-intensive manufacturing and also engender investments that make the economy more efficient in its use of energy.  But other factors will cause demand for electricity to accelerate.  Among them is an improvement in power quality that is likely to accompany the extensive efforts to reform India’s electric power system that have been under way for 15 years.  While reformers have found it difficult to make progress, these reforms are beginning to take effect in some parts of the country.  Those effects are evident not only in the improved performance of some of the country’s power utilities, but also in the rising role for privately owned (and generally more reliable) power plants.  In industry, for example, reliable power is essential; many companies are taking matters into their own hands and building their own plants.  And where electricity is more reliable, Indians will consume more of it.

                There are many projections for total demand for electricity.  In Figure 1, I show the International Energy Agency’s projections, which envision a doubling of power demand from the present to 2020. Barring an economic catastrophe, I would be surprised if demand for electric power were dramatically lower than these projections.  And it is possible that demand could be higher if India discovered, as China has in recent years, that demand for electricity rises even faster than economic output.  For now, let’s use these projections to illustrate the stakes. 

Figure 1: India’s Installed Capacity (2002 – 2030)

                At present, the total size of India’s electric power system is 124 GW.  Of that, coal comprises 55%, hydroelectric 26%, natural gas 10%, renewables 5%, and nuclear makes up only 3% of total installed capacity.  Looking to the future, India has five main options for providing the bulk of its electric needs:

Hydroelectric.  Official Indian plans call for much greater use of hydro, but in practice, India has found this option increasingly difficult to deploy due to local opposition to dams.  This pattern is evident in all large democracies and there is no evidence that it will become significantly easier to site domestic hydro facilities in the future.  While there are possibilities of hydro imports from Bhutan and Nepal, such international projects are invariably fraught with political uncertainty.  Overall, hydro will probably play a declining role in the future Indian system; projections that claim otherwise are probably wishful thinking and unlikely to be realized.

Renewables.  India makes extensive use of biomass digesters in rural areas and wind and solar energy in a few states.  Given India’s aggressive and expanding renewable energy program, particularly in wind power, the projection shown in Figure 1 (about 6 GW of installed renewable electricity generation capacity by 2020) is certainly too low.  However, even assuming India were to continue its aggressive push on renewable energy, renewables are not likely to represent more than 10% of installed capacity by 2020.  More importantly, renewable power generators, notably wind turbines, are intermittent.  They are available less frequently than conventional power plants, contributing to the unlikelihood that renewables will supply more than 5% of India's total electricity by 2020 even given optimistic assumptions.

Natural gas.  Until recently, most analyses of the Indian power sector envisioned that gas would play a much larger role in the future.  Gas is attractive because it is the cleanest of the fossil fuels and because the capital cost of gas plants is much lower than for all the other main rivals such as nuclear, coal, and hydro.  Thus, gas plants have been especially attractive to private investors who are wary of sinking large amounts of capital into projects where regulatory rules are in flux.  Indeed, nearly all foreign-owned private power plants in India are fired with gas. (In other developing countries, most privately-owned power plants are gas fired).  However, the price of gas has risen sharply in the last four years.  For two decades gas prices were regulated at approximately $3/mmbtu and supplies were controlled by the state transmission and marketing monopoly.  Over the last decade a private gas market has emerged, with prices much higher than those in the historic government-managed market.  India has built three terminals to import LNG as a supplement to its own domestic gas supplies, and has plans to build several others.  The workings of that gas market are the best indicator of the real price of gas in India.  The most recent large transaction, in which India purchased a spot cargo of LNG from Algeria’s Sonatrach, put delivered prices at above $10/mmbtu.  Our group at Stanford is heavily involved in analyzing this gas market, and we expect delivered gas prices will remain high—perhaps not as high as $10, but probably in the range of $7-$8/mmbtu.[1]

Nuclear.  Until now, nuclear power has been controlled by the central government, mainly for non-energy purposes (namely weapons), and has not been exposed to commercial accountability.  In addition, India’s domestic uranium reserves are quite meager – the Atomic Energy Commission estimates that domestic resources could support only 10 GW of installed nuclear capacity.[2]  Thus, not surprisingly, nuclear energy has played only a small role in the power sector.  Whether and how that could change is at stake in this deal.

The India nuclear deal would provide for “full” civil nuclear cooperation between the U.S. and India.  By enabling India to import modern nuclear energy technology, as well as uranium, a properly regulated deal would in effect alleviate the historical restrictions placed on civilian Indian nuclear power. 

Coal.  In the past and in the foreseeable future coal is expected to provide most of India’s electricity.  In fact, coal has not met its full market potential in the last decade because coal supplies are unreliable (partly because the railroad network is badly in need of investment) and of notoriously low quality.   Both those impediments to coal sector growth are being alleviated.  India has begun to encourage private investment into coal mines and pithead power plants that will send the coal “by wire” to the national electric grid rather than via railcars.  In addition, the country has adopted favorable rules to encourage investment in the inter-state power grid, enabling the grid to move much larger quantities of electricity.[3]  At the same time, changes in import tariffs are making it easier to import high quality coal from other countries; those imports, in turn, are inducing India’s domestic coal industry to perform better.  These reforms are set to have a huge impact on growth in coal-fired capacity.  India is soliciting bids for five new 4 GW coal-fired power projects (known as the “ultra mega power projects”) – two of which will produce electricity at coal pitheads in the interior of the country and three coastal plants that will import foreign coal supplies.

                In this context, the question for the India’s energy future centers on the rivals to coal.  Where alternative fuels can be successful, the share left to coal will decline.  All the rivals have problems.  For hydro and renewables those problems are severe, and the United States, in any case, has no ability to influence them.  For gas the severity of the problems created by high gas prices are not yet known.  On the one hand, high prices have discouraged (but not stopped) investment in plants that use gas.  Indeed, some investors who would have built gas-fired power plants are now looking closely at coal.  On the other hand, barely a month passes without the announcement of new gas discoveries in India (in particular the large resources discovered off the country’s east cost).  These new gas supplies may eventually help to lower the price of gas, which in turn will allow for a much larger gas-fired generation capacity. 

                For nuclear, the future is really wide open.  So long as India’s nuclear industry remains isolated, it is hard to see that India will build more than the occasional reactor as the cost basis for nuclear equipment will be too high and fuel needed for such reactors will not be available.  Some critics have claimed that allowing exports of fuel for use in Indian commercial reactors will free up domestic fuel supplies for use in the nuclear weapons program.  The more likely outcome is that India simply will not expand its commercial reactor fleet so that the military program can obtain the fuel it needs.

                It is hard to predict with certainty how the costs of the different options will unfold.  In Table 1, I focus on the main contenders:  nuclear, coal, and natural gas.  I show estimates for nuclear power drawn from a study by a group at MIT evaluating nuclear power in developed countries (“high” and “medium cost” estimates) and also from a study that focuses on nuclear power options in the Indian context (“low cost”) but used a notably low capital cost estimate.  The coal numbers provide an approximation for costs of a new pulverized coal plant—technology widely available in India—for a plant that meets U.S. environmental standards, as well as a conventional plant in India.  The estimates for gas are based on the Indian experience and levelized costs are shown at different prices—from the low price for public gas (which is essentially unavailable for new power plants) to various feasible private gas prices. 

Table 1: Carbon Implications of India Nuclear Deal

                Three things are clear from Table 1.  First, at the high gas prices typical of today’s market, gas-fired electricity is extremely expensive.  Second, while there are many uncertainties—especially for nuclear power—the cost of coal and nuclear are comparable.  Third, the costs noted in Table 1 may exaggerate the cost advantage of coal because coal-fired electricity has larger environmental consequences.  (The “U.S. Context” number is for a plant capable of meeting current U.S. environmental standards; the “Indian Context” number includes some particulate control but only monitoring of other pollutants).  If these are taken into account, nuclear power would be even more competitive with coal.

CO₂ and Global Climate Change

                While there remains some divergence in opinion in the United States about the causes of global changes in climate and the severity of the global climate problem, the risk of unacceptable changes in climate will undoubtedly rise with increasing atmospheric concentrations of CO₂ and other greenhouse gases.  It is impossible to predict the outcomes from climate change with complete certainty.  (Indeed, the most worrisome possible changes are the least certain, such as possible catastrophic rise in sea level, a change in ocean currents, or the destruction of vast ecosystems like the Amazonian rainforest).  Looking at the totality of the evidence, however, it is hard to escape the conclusion that a prudent and risk-averse policy strategy toward the threat of global climate change must include a substantial effort to control emissions.  And because those emissions emanate globally, such a strategy must be pursued globally.

Figure 2: Carbon Implications of India Nuclear Deal

The CO₂ savings implications of replacing coal with a range of installed nuclear capacities are provided in Figure 2 above.  Because there is considerable uncertainty as to the exact amount of new nuclear capacity likely to arise from the deal, Figure 2 shows a line rather than any particular point.  India’s track record of installing power plants, combined with the difficulties that are likely to arise in a shift to a truly commercial nuclear power program, suggest to me that new nuclear capacity could be in the range of 10-20GW by 2020.  The State Department has proposed that 20GW of new nuclear capacity could be built by 2020— this represents a middle-of-the-road estimate provided by Secretary of State Condoleezza Rice in her April 5^th remarks to the Senate Foreign Relations Committee.  Under this scenario, by displacing 20GW of capacity that would otherwise be coal-fired, the new nuclear capacity would save 145 million tonnes of CO₂ per year.[4]  Indian Prime Minister Manmohan Singh has recently suggested that the India nuclear deal could have even larger implications, arguing that it might lead India to install up to 40GW of new nuclear capacity by 2015. 

In Figure 3, I put the CO₂ savings from a 20 GW buildout of nuclear power into perspective by comparing it with other relevant emission estimates. The annual savings from the Indian deal could be nearly as large as the entire commitment of the 25 EU nations to reducing emissions under the Kyoto Protocol.  This single arrangement in India would exceed the total carbon savings from the 100 largest developing country projects under the Kyoto Protocol’s Clean Development Mechanism (CDM).  At present, the CDM is the only mechanism for engaging developing countries in the effort to control greenhouse gas emissions.

 Figure 3: India Nuclear Deal Carbon Savings in Perspective

Beyond India: Engaging Developing Countries

                Until now, developing countries have adamantly refused to limit their emissions of greenhouse gases.  These countries are wary that the possible high costs of climate change mitigation will jeopardize their development goals.  The result of that opposition is the CDM—a system that compensates developing countries for the full extra cost of any policies to control emissions.  The CDM was a good idea in principle, but in practice it is not working well.  The scheme has become mired in red tape as countries and investors try to establish their baseline levels of emissions and the reduction in emissions from each project.  (The difference between the baseline and the reduced level is the key to the CDM concept—that difference becomes a credit that can be used to offset emission obligations elsewhere in the world, such as in Europe’s emission trading system).  The problems have encouraged gaming and they have caused CDM investors to focus on activities that are easy to quantify and which are marginal in nature.  Indeed, energy projects account for just 17% of the CDM pipeline.  Almost none of the energy projects are of the type that will lead to fundamental changes in countries’ energy systems.[5]

If the India nuclear deal is successful, it will frame a new approach to engaging developing countries in a climate strategy.  This approach would focus on finding game-changing policies that align with reluctant countries’ interests.[6]  Rather than involving hundreds of small and marginal projects, this style of engagement would focus on just a handful of large pivotal actions involving just a few critical countries.  This concept is incidentally at the core of the Asia-Pacific Partnership on Clean Development and Climate, whose six members, including India and the U.S., account for half the world’s greenhouse gas emissions.  That Partnership has promise, but it remains young.  Success with this nuclear deal could offer a credible example of practical actions that the Partnership could encourage.

Proliferation, Indian Politics and the Fuel Cycle

                My brief in this testimony is to focus on the possible environmental benefits of the India nuclear deal.  I close, though, with a brief word on proliferation.[7] 

                My sense is that the claims about proliferation risks stemming from this deal have been overblown for three reasons.  One is that many observers are reluctant to treat India differently from other states that have acquired nuclear weapons.  Yet that argument is not sustainable.  India—in contrast with Pakistan, among others—has not been the locus for proliferation of weapons technologies to other states and possibly terrorists.  Nor has India taken the kind of aggressive stance with its nuclear weapons program that has been evident in Iran or North Korea. 

                A second reason for these hyperbolic claims about proliferation is critics have imagined the world as they would like it—a world before India’s nuclear test and when the NPT was intact and functioning—rather than the world as it really is.  Both these reasons have been covered extensively and I will say no more on them.

                The third reason is that critics have imagined that the U.S. somehow got hoodwinked by India—for example, the list of facilities that are exempt from external scrutiny is longer than most U.S. analysts would like.  This is a valid concern, but I think it misses the point because it imagines the India nuclear deal as a construct entirely of U.S. interests when, in fact, it is the product of a nascent cooperation between two democracies that must pay attention to how the deal plays locally.  It is striking how much hostility the deal has engendered in the Indian press, as Indian nationalists portray this as an erosion of India’s sovereign prerogative to sustain a nuclear weapons program.  In such settings I think it is imperative that we give extensive deference to those who were able to negotiate a deal that (probably) has navigated these contours of Indian domestic politics while also delivering what is most essential for the U.S. to gain from the arrangement. 

                The world is in the early stages of recrafting the fuel cycle.  Among the proposals is the Administration’s Global Nuclear Energy Partnership (GNEP).  The IAEA has a proposal.  A tailored proposal is emerging as the logical solution to the troubles with Iran’s nuclear program—with off-site fuel production and storage.  Similarly, success with the India nuclear deal can establish a practical framework for a new fuel cycle for India.  Many in the anti-proliferation community have been uneasy about this shift in fuel cycles, but such a shift strikes me as inevitable.  And a practical demonstration with a responsible country could go a long way to making these visions a practical reality with adequate protections against proliferation.