Indo-U.S.

Cooperation in Energy - Indian Perspective

By

V. Raghuraman
Senior Advisor – Energy
Confederation of Indian Industry, India
Email: v.raghuraman.ciionline.org

&

Sajal Ghosh
Executive officer, Energy Division
Confederation of Indian Industry, India
Email: sajal.ghosh@ciionline.org

Confederation of Indian Industry

Plot No. 249-F, Sector 18
Udyog Vihar, Phase IV
Gurgaon, Haryana 122015
India
March 2003

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 Introduction

The Atlantic Council of the United States is now engaged in a policy project to
help promote clean air in China and India. This is a quadripartite project involving the
Confederation of Indian Industry, the South-North Institute for Sustainable Development
(China) and the Committee for Energy Policy Promotion (Japan).

The objective of this project is to develop a consensus policy paper, which will
include recommendations directed at the public and private sectors of China, India, Japan
and the United States, which will contribute to promoting clean air in China and India.

This paper “Indo-U.S. Cooperation in Energy – Indian Perspectives” by V.

Raghuraman and Sajal Ghosh of the Confederation of Indian Industry, was prepared as
input to the Working Group, which is developing the policy paper noted above.

This paper has been developed to present some areas for enhanced Indo-U.S.
cooperation in the energy sector from an Indian perspective. To lay a sound foundation
for identifying these areas, the paper first presents an energy scenario for India and then a
summary of existing Indo-U.S. cooperation efforts in the pubic and private sectors.

The paper highlights opportunities for foreign investment (including U.S.

investment) in subsectors of the energy sector, ranging from oil and gas to renewables.
The paper then identifies areas for possible enhanced Indo-U.S. energy cooperation in a
range of areas including geophysical exploration, energy efficiency, clean energy sources
and the power sector.

The paper concludes by presenting recommendations for strengthening Indo-U.S.

energy cooperation.

Donald L. Guertin
Director, Program on Economics, Energy and Environment
Atlantic Council of the United States

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 Executive Summary

The energy sector holds the key in accelerating the economic growth of India. The
challenge is especially significant given the Honorable Prime Minister’s cherished goal
of reaching 8% growth rates from the current threshold of around 5 to 6%. However, the
development of the Indian energy sector has been constrained by capital, technology,
environment and security issues arising out of internal and external consequences.

Five different ministries have structurally handled the Indian energy sector and
power is a concurrent subject of both the central government and the states. Although
reforms in the energy sector are underway, the pace of reform is different in the sub
sectors viz, power, coal, oil, gas and renewables. The power sector needs special attention
to foster development aspirations. Despite significant growth in terms of technological
sophistication and capacity addition, the power sector suffers from financial weakness
and supply constraints. Thus, emphasis should be put on a scheduled process to turn
around the sector from “bankruptcy to bankability”.

Indo-U.S. cooperation in the field of energy has been crystallizing over the years
in government, academia and industry. Some collaboration in the coal, gas and electricity
sectors now exist and a number of American enterprises are operating in India but the
magnitude is small relative to the total potential that can be exploited.

Bringing the availability of energy up to the global average will require huge
additions to the energy infrastructure in India. To attract foreign investment in the energy
sector, the Indian Government has provided attractive packages and policy incentives.

Immense Indo-U.S. energy cooperation possibilities exist in the area of energy

efficiency, nuclear energy, the application of biotechnology in biomass gasification,
geophysical exploration, renewables, and other clean energy technologies. The United
States can also play a role in regional energy cooperation and ensuring energy security by
promoting greater cooperation and integration of regional energy markets in electricity
and natural gas, as well as the unhindered cross-border trading of cleaner fuels and
energy resources among South Asian countries.

It would also be possible for Indian organizations to carry out research and
development programs in collaboration with U.S. research entities on emerging
technologies such as integrated gasification humid air turbines, integrated gasification
molten carbonate fuel cells, development of hot gas cleanup systems for Integrated
Gasification Combined Cycle (IGCC), high temperature air pre-heater, new material for
ultra-supercritical boilers, cleaner vehicles, development of super-conducting materials,
hydrogen energy and development of local scale clean technologies. With regards to
clean coal technologies over the next decade in the United States, it may be difficult to
deploy the advanced technologies that emerge from research programs, as most of the
new power plants will be based on non-coal sources. There are excellent opportunities in
India to examine the feasibility of these technologies, which will be a win-win situation
for India and the United States.

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 For a country such as the United States, reforms in the power sector were fast and
are now at a consolidation stage. The reform experiences of the United States would be of
immense importance in deciding the way forward for power sector reform in India
although the solution must be tailor-made to the Indian power sector.

India can follow the US model of rural electrification supported by the U.S.
Government on commercial principles without financial subsidy by making loans
available at the same cost as the cost of borrowing to government, after taking into
account local conditions and culture. The establishment of rural cooperatives to take up
utility services in rural areas should be encouraged in India. The rural electric
cooperatives can use the convergence potential to lower the cost of service to the
consumer. Rural electrification should be handled along with rural roads, telecom and
water supply for synergy and integrated development with the involvement of the rural
community.

While India suffers from many disadvantages such as inadequate infrastructure,

poverty, a low level of productivity, and a higher level of pollution similar to many
developing countries, it has the great advantage of having a cheap and efficient human
resource. This availability of highly qualified cheap manpower along with fast growing
industrialization and significantly higher economic growth potential has undoubtedly
transformed India into one of the largest potential markets in the world. Since India is a
multilingual and multicultural society, properly orchestrated and executed Indo-U.S. joint
ventures could be an example to other developing countries that will definitely open up
the avenues of future collaboration with other developing countries.

Acknowledgement

Sajal Ghosh would like to thank A.V. Naik, Energy Division, CII for
providing valuable inputs on Oil & Gas Sectors.

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 1. Energy Scenario in India

Energy is the prime mover of economic growth and is vital to the sustenance of a
modern economy. Future economic growth crucially depends on the long-term
availability of energy from sources that are affordable, accessible and environmentally
friendly.

India ranks sixth in the world in total energy consumption and needs to accelerate
the development of the sector to meet its growth aspirations. The country, though rich in
coal and abundantly endowed with renewable energy in the form of solar, wind, hydro
and bio-energy has very small hydrocarbon reserves (0.4% of the world’s reserve). India,
like many other developing countries, is a net importer of energy, more than 25 percent
of primary energy needs being met through imports mainly in the form of crude oil and
natural gas. The rising oil import bill has been the focus of serious concerns due to the
pressure it has placed on scarce foreign exchange resources and is also largely
responsible for energy supply shortages. The sub-optimal consumption of commercial
energy adversely affects the productive sectors, which in turn hampers economic growth.

If we look at the pattern of energy production, coal and oil account for 54 percent
and 34 percent respectively with natural gas, hydro and nuclear contributing to the
balance. In the power generation front, nearly 62 percent of power generation is from
coal fired thermal power plants and 70 percent of the coal produced every year in India
has been used for thermal generation.

The distribution of primary commercial energy resources in India is quite skewed.

70 percent of the total hydro potential is located in the Northern and Northeastern
regions, whereas the Eastern region accounts for nearly 70 percent of the total coal
reserves in the country. The Southern region, which has only 6 percent of the total coal
reserves and 10 percent of the total hydro potential, has most of the lignite deposits
occurring in the country.

On the consumption front, the industrial sector in India is a major energy user
accounting for about 52 percent of commercial energy consumption. Per capita energy
consumption in India is one of the lowest in the world as shown in Fig. 1. But, energy
intensity, which is energy consumption per unit of GDP, is one of the highest in
comparison to other developed and developing countries. For example, it is 3.7 times that
of Japan, 1.55 times that of the United States, 1.47 times that of Asia and 1.5 times that of
the world average. Thus, there is a huge scope for energy conservation in the country.

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Fig. 1: Per capita energy consumption

Per Capita Energy Consumption

India 290
293
Pakistan
China 597
4017
Germany
4026
Japan
8080
USA

0 2000 4000 6000 8000 10000

Kg. of Oil Equivalent

Source: CMIE

During the pre-reform period, the commercial energy sector was totally regulated
by the government. The economic reform and liberalization, in the post 90s, has
gradually welcomed private sector participation in the coal, oil, gas and electricity sectors
in India. Energy prices in India have been under an administrated regime with subsidies
provided to meet certain socio-economic needs of the public. This has led to distortion
and inefficiency in the use of different sources of energy. The government has taken
serious steps to deregulate the energy price from an Administered Price Mechanism
(APM) regime. The prices of all grades of coal and petroleum products have already been
deregulated. In the electricity sector, most of the State Electricity Boards (SEBs) have
started taking reform measures and regulatory commissions have been set up to
determine tariffs based on economic rational.

2. Existing Indo-US Cooperation in Energy Sector

Indo-Us cooperation in the field of energy has been crystallizing over the years in
government, academia and industry. Some collaboration in the coal, oil, gas and
electricity sector exists and many American enterprises are operating in India, as we will
see in the later section (Section 3). In this section, we will highlight some other examples
of cooperation in the field of energy.

2.1 Projects with Confederation of Indian Industry (CII)

2.1.1 China-India-Japan-United States Cooperation to Promote Clean Air

With the objective of recommending economic and energy policies to promote

clean air and reduce air pollution associated with energy use in China and India, the
Atlantic Council of the United States initiated a quadripartite project on “China-India-
Japan-United States Cooperation to Promote Clean Air” in the year 2001. These
countries have extensive experiences with policies that foster more effective use of

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energy, through appropriate pricing, deregulation, restructuring, investment, trade, and
technology transfer. The government and private sectors of these countries also have
experience in working with each other on energy issues, which would facilitate such an
effort. The first seminar on Clean Air for Asia was organized by CII in association with
the Atlantic Council where over 40 experts from India, China, Japan and USA shared
their perceptions on clean air.

2.1.2 Standards and Labeling Program – Standards and Labeling have been identified
as a key area for energy efficiency improvement. Developed countries, which have
implemented the Standards and Labeling Program through market push and pull, have
been in a position to demonstrate savings of 10,000 MW. In view of the above, the
Standards and Labeling Program is a priority area in the Indian context. The
Collaborative Labeling and Appliance Standards Program (CLASP) – USA, has
undertaken two missions to India and have prepared a road map for implementation of
the Standards and Labeling Program. The CII’s working group on energy efficiency
labeling is already involved in formulating energy labels for energy efficient products in
the country.

2.1.3 CII - USAID Initiatives in Promoting Energy Efficiency and Cleaner

Technologies

The Indian Parliament enacted the Energy Conservation Bill in 2000. The Act
spelled out a roadmap for the country to move up the energy efficiency ladder and
attempted to radically change India’s approach towards energy conservation efforts.

The approval of the bill set the stage for the establishment of institutional and
legal structures and the mobilization of market forces to implement energy efficiency
programs in the country. The establishment of the Bureau of Energy Efficiency (BEE) is
seen as an important step in this direction.

Energy efficiency is increasingly seen in India as a viable option that is cost

competitive, supplemental and environmentally sound in comparison to energy supply
strategies. For a long period CII has been involved with promoting energy efficiency
services in the country in collaboration with USAID.

2.1.3.1 Energy Conservation and Commercialization (ECO) This project is a USAID

assistance instrument that aims to promote widespread commercialization of energy
efficiency technologies and services in India, thereby contributing to the reduction of
greenhouse gas (GHG) emissions. Assistance is provided for the development of a
market oriented policy environment, the commercialization of energy conservation, and
the enhancement of private and financial sector capabilities for deploying market based
mechanisms for energy efficiency investments. This project addresses technical,
economic, financial, regulatory and institutional barriers to implementation of end use
energy efficiency improvements in India.

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2.1.3.2 The CII Green Business Centre This is a joint initiative of the CII and the
government of Andhra Pradesh with technical support from USAID. It is established as a
center of excellence for energy, environment and climate change. It offers green services
including energy efficiency in buildings to Indian industries. The main focuses are on
promoting clean and efficient energy, using recycled products and renewables to develop
a better environment and to lead to sustainable development.

2.1.3.3 CII – USAID Climate Change Project - The climate change issues provide a
new impetus to examine energy efficiency as a low cost means of reducing GHG
emissions. Progress on the proposed flexible mechanisms such as emissions trading and
the Clean Development Mechanism (CDM) creates a strong additional, possibly global,
market drive for investments in energy efficiency. The major objective of this program is
to expand awareness of climate change negotiations especially with the CDM, and its
possible impact on the Indian economy and industry. Such knowledge enables industry to
take up issues with the Indian Government for negotiations in the climate change fora.
The Center also helps to foster partnerships with CDM-related projects that could be role
models for future activity in this area.

2.2 Other USAID Projects in India

2.2.1 Power Sector

2.2.1A Reform & Restructuring

The United States Energy Association (USEA), with funding from the United
States Agency for International Development (USAID) is forging strong relationships in
the Indian Power Sector. USEA has established a system of matching the Indian utilities,
State Electricity Boards (SEB) and State Electricity Regulatory Commissions (SERC)
with various U.S. utilities and regulatory commissions. The primary goal of these
partnerships is to assist Indian utilities, SEBs and SERCs in promoting more efficient,
environmentally sound supply and utilization of energy by introducing commercially
viable, market-oriented approaches. Additionally, these partnerships would help to
enhance joint venture opportunities for U.S. investments and trade in international energy
markets and reduce the climate impact of energy activities.
The USEA has established the following partnerships in India between U.S. and
Indian organizations in the power sector:
1) Bombay Suburban Electric Supply (BSES) with Niagara Mohawk Power Corporation
(NMPC);
2) Calcutta Electric Supply Corporation (CESC) with Gulf Power Company;
3) Andhra Pradesh State Electricity Board (APSEB) with Pennsylvania Power & Light
Company (PP&L);

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4) Karnataka Electricity Board (KEB) and Karnataka Power Corporation Limited
(KPCL) with Duquesne Light Company (DQE);
5) Orissa Electricity Regulatory Commission (OERC) with the Public Service
Commission of the District of Columbia (PSCDC), and the Public Utilities Commission
for the State of Colorado (PUCSC);
6) Tamil Nadu Electricity Board (TNEB) with the Texas Utilities Company (TU);
7) Haryana Electricity Regulatory Commission (HERC) with the Public Utilities
Commission of Ohio (PUCO);
8) Central Electricity Regulatory Commission (CERC) with the Massachusetts
Department of Telecommunication and Energy (MDTE).
Some of the exclusive benefits gained from the partnerships are listed below:

• The CESC, India's second largest private sector utility, has designed a connector
to reduce line losses from oxidation, breakage and inefficient bolted connections
based on information gained from Gulf Power Company. In return, CESC's parent
company RPG has invited Southern Company of Atlanta, Georgia, Gulf Power's
parent company, to participate in a joint venture to build-own-operate a 700 MW
naphtha-fired independent power plant in the Indian State of Rajasthan.

• The APSEB has improved the generation efficiency of its coal-fired power plants
in consultation with PP&L. The direct result of this will be a decrease in CO2
emissions for the APSEB's plants. The benefits of restructuring using PP&L’s
literature have also enlightened APSEB.

• The OERC has recently established a Regulatory Information Management

System (RIMS), a consumer complaint handling system, and a website with
assistance from the Colorado Public Utility Commission and the District of
Columbia Public Utility Commission. Using USEA and USAID's guidance,
results have already proven to be useful to the OERC.

• The BSES and Plum Street Enterprises, the international subsidiary of Niagara
Mohawk Power Corps (NMPC), have signed a joint venture agreement to market
solid state electric meters made under a Niagara Mohawk patent in India to
replace unreliable mechanical meters used in most utilities. The BSES in turn has
developed a Supervisory Control and Data Acquisition system to reduce
distribution system losses based on NMPC's model.

• KPCL has proposed the implementation of multi-crafting, the training of

employees to do multiple tasks in order to qualify for higher compensation, which
it learned from the DQE of Pittsburgh. This could significantly increase the
efficiency of its workforce.

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New Partnerships
In the state of Haryana, USAID identified and developed projects worth $40
million for the World Bank to improve low-tension electricity distribution. The USAID’s
technical assistance in the states of Punjab, Haryana, and West Bengal is helping to
establish State Electricity Regulatory Commissions to help power sector restructuring.
USEA recently started three new partnerships with Tamil Nadu Electricity
Regulatory Commission (TNERC), Haryana Electricity Commission (HERC), and
CERC. USEA is actively seeking U.S. partners for the Maharashtra State Electricity
Board (MSEB) and the Power Finance Corporation (PFC).
2.2.1B Collaboration with NTPC
The National Thermal Power Corporation (NTPC), the world's sixth largest
thermal power generating company, has gone from installing 200 MW units to 17,735
MW since 1982 and plans to add another 16,000 MW by 2007.
Over the years, the performance of NTPC's power stations has been the
benchmark for the Indian power sector. Six the 10 best-rated coal based stations in the
country belong to NTPC. The corporation, with less than one fifth of the country's
capacity, has been generating more than one fourth of the country's total electricity.
In an effort to benefit the entire Indian power sector, the NTPC in association
with USAID and the U.S. Department of Energy, has set up the Center for Power
Efficiency and Environmental Protection (CENPEEP) to ensure sustainable and eco-
friendly power development. The center aims at acquiring, assimilating and dissimulating
new technologies to improve the efficiency of power generation and reduce greenhouse
gas emissions.
2.2.2 Renewables
USAID's support for renewable energy technologies has resulted in the
installation of nearly 200 MW of sugar cogeneration plants, using sugarcane waste for
power that will offset approximately one million tons of carbon dioxide annually. USAID
credit assistance to the Indian Solar Electric Light Company helped establish a multi-
million credit line for the company to bring power for pumping water, lighting and
communication to 2500 rural homes. Zero-emission electric vehicles, to replace the
heavily polluting three-wheelers, are being introduced to India through an Indo-U.S. joint
venture brokered by the USAID.
2.2.3 Clean Technology Initiatives (CTI)
Working with the Confederation of Indian Industry (CII) and the Steel Authority
of India Limited (SAIL), CTI is actively promoting the adoption of the Internal Standards
Organization (ISO) 14001 standards through demonstration pilot projects. CTI is also
working closely with the cement, agro-pulp and paper industries to pilot a new rating
system that measures each facility's performance against the best of the district. This

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collaboration is anticipated to facilitate capacity building and demonstrate improved
environmental and economic performance.
The CTI is also involved in the new Environmental Information Center (EIC)
established at the Federation of the Indian Chamber of Commerce and Industry (FICCI).
The EIC will serve as a foundation of information regarding the adoption of
environmentally friendly techniques for both the private and public sectors. The United
States-Asia Environmental Partnership (US-AEP) is also working with the CTI by
conducting lectures, workshops, and tours to promote business exchanges. The CTI
currently focuses on the following areas:
• Awareness raising and information outreach: stimulating interest and participation
of Indian industries in improved environmental management.
• Private sector environmental incentives: strengthening and publicizing market-
based incentives for corporate environmental responsibility.
• Indian industry capacity development: strengthening the organizational learning
process within Indian firms related to environmental management.
• Commercially-oriented technology cooperation: catalyzing information, technical
assistance, and funding.
The USAID's Clean Technologies Initiative implemented by TetraTech provides
assistance to Indian industries in adopting certified environmental management systems
and enhancing the capacity of industry to incorporate the best technologies and practices
for increasing productivity and profitability. Energy intensive sectors like cement,
thermal power and steel are targeted for assistance. Nine firms will achieve ISO 14000
certification under a pilot phase.
2.3 Marketing Alliance with Indian Institute of Petroleum (IIP)
• The Stone and Webster Engineering Corporation and the IIP signed an agreement
on June 6, 1999 for the setting of visbreaking plants in Latin American and
Ukrainian refineries.
• Exxon-Mobil and the IIP entered into an agreement on June 17, 1998 to market
Mobil’s latest lubes de-waxing technologies.
• The IIP along with the Indian Oil Corporation Limited (IOCL) and Gas Authority
of India Limited (GAIL) signed a joint collaborative agreement with BP-Amoco
for preparing Techno-Economic Feasibility Report (TEFR) production,
transportation and marketing of dimethyl ether for the Indian market.
• The IIP entered into an agreement with Unitel Technologies, and Valvardi, USA
for establishing mini-refineries in India.

2.4 Marketing Alliance with National Chemical Laboratory (NCL)

The National Chemical Laboratory (NCL) of India has collaborative research
agreements with a number of U.S. based multinational corporations including DuPont,
Dow, Eastman, General Electric, Cargil, Schenectady Chemicals and UOP. The major

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projects on which the NCL works with these companies include development of eco-
friendly chemical processes and products. These collaborative arrangements give the
MNC access to Indian human capital as well as to emerging scientific knowledge.
Laboratories like the NCL gain complimentary strengths in product development,
financial and marketing inputs to scientific and technological cooperation.

The NCL’s research alliance with General Electric Co. has a long-term
perspective on research and development programs. The success of this alliance has led
GE to establish a corporate research and development lab in Bangalore.

2.5 Partnerships with U.S. Academia

The Indian Institute of Chemical Technology, Hyderabad has established

academic linkages with many American universities through post-doctoral assignments.
Some of these universities are: the University of Texas Medical Center, Dallas; the John
Hopkins Institute; the University of California at La Jolla; the University of California at
Los Angeles; the University of Wisconsin, Madison; Rutgers University, New Jersey;
and Cripps Research Institute, San Diego, California.

2.6 SAREC – South Asia Regional Energy Coalition

South Asian countries need capital and energy to propel economic growth and
improve the quality of life in an environmentally responsible manner. The region is
endowed with untapped energy resources but their development, efficient distribution and
utilization require cooperation and trade among the countries in this region.

Although limited exchange of electricity already occurs between Nepal, Bhutan

and India, multilateral cooperation to develop and exchange energy resources will have
far-reaching economic and security benefits. India can benefit from electricity and gas
imports from neighboring countries to foster its development aspirations. Bangladesh,
Nepal, Bhutan and Myanmar can also realize significant economic benefits from the
development and export of hydroelectric power and natural gas. Lastly, Pakistan’s
economy could benefit from electricity export from independent power producers.

The South Asia Regional Energy Coalition (SAREC), which is a non-

governmental effort established under the aegis of the U.S. Chamber of Commerce,
focuses on and promotes the concept of an integrated South Asian energy market by
establishing a network of mechanisms through which public and private sector
stakeholders can influence regional energy policy, consumption pattern and sectoral
reform throughout South Asia. The Confederation of Indian Industry is a member of
SAREC and is also represented on its technical committee.

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 3. Investment Opportunities in the Indian Energy Sector

3.1 Oil & Natural Gas

India is currently the fourth largest oil consumer in the Asian-Pacific region after
Japan, China and South Korea. The total demand of oil is expected to reach about 368
million metric tons (MMT) by the year 2025, assuming the base case with GDP projected
to grow at 6.5 percent per annum until 2025. Further in line with international trends, it is
estimated that the share of middle distillates would increase from a current level of 59-60
percent to about 65 percent by 2025. Therefore the estimated refining capacity and crude
requirement by the year 2025 shall have to be in the range of 355-360 MMT.

The present refining capacity in India is at a level around 114.7 MMT per annum.
There are plans for expansions of existing refineries and implementation of grassroot
refinery projects by different oil companies. In the deregulated scenario of the petroleum
sector, the implementation of additional refining capacity will depend on the growth of
the economy and growth in the consumption of petroleum products. It is expected that the
country may have a refining capacity of about 184 MMT at the end of 10th Five Year
Plan (2002-2007) considering various capacity augmentation programs pursued by oil
companies. The production of domestic crude oil is only about 33 MMTPA, leaving a
substantial gap for imports to meet the refining capacity. Hence, the gap will have to be
met through increased domestic crude production by enhanced exploration and
production activities as well as imports. The import of crude oil is estimated to go up
from present level of about 85 MMTPA to 151 MMTPA during the 10th plan period. The
oil import bill is estimated to increase from US$17-18 billion* at present to US$31.3
billion in 2006-07, which is an enormous burden on India’s balance of payment
condition. In view of highly volatile oil prices in the international market, the task
becomes all the more difficult when controlling the burden of a huge oil import bill.
Thus, oil security has become the most important key issue for the country.

3.1.1 The Opportunities The gas industry seeks to play an important role in the growth
of the energy sector in India. Hydrocarbon Vision projects a natural gas demand of 313
million cubic meters (MCM) and 391 MCM by the year 2011 and 2024-25, respectively
from the existing demand and supply of 115 MCM and 65 MCM respectively.

Exploration and Development

The government has until recently allotted exploration blocks through the system
of bidding rounds. In 1997, the government announced the New Exploration Licensing
Policy (NELP) in an effort to promote investment in the exploration and production of
domestic oil and gas. Under the NELP, foreign investors are granted the same treatment
as domestic companies and it is no longer binding on them to partner with state oil
companies; no blocks are reserved for national oil companies. The New Exploration
Licensing Policy has been operationalized through NELP-I and II production sharing
contracts and NELP-III is under bidding.

*
U.S.$1 = Rs48

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Speculative Surveys

To upgrade the quality and volume of seismic data, the government also
announced bidding rounds for speculative surveys. After the seismic work is completed,
the blocks are to be offered for exploration. The data acquired by the seismic companies
can be sold in India and abroad.

Refining

The government has opened the domestic refining sector for private investment
from Indian/foreign private companies.

The challenges for the refining sector are threefold:

1. To construct adequate refining capacity through expansions, replacements/

modifications and new refineries with flexibility of imports.
2. To upgrade and implement emerging technologies to meet the predominant
demand for middle distillates.
3. To improve the quality of India's petroleum products to make them environmently
friendly and globally competitive.

India is adopting more environmentally benign measures with regard to usage and
quality of fuels. Lead phasing-out and benzene reduction in gasoline, sulfur reduction and
cetane improvements of diesel are among the prominent measures that are under
implementation and consideration. Such quality upgradation of fuels will call for
adopting the latest, state-of-the-art technology requiring huge investments by way of
providing reformulated gasoline producing units, hydrocrackers, hydro-treaters and
hydro-desulfurisers.

Lubricant Oil

The Indian lubes market is the second largest in Asia and the seventh largest in
the world. With the automobile sector growing at a healthy pace, the demand for lube oils
is expected to grow at 4 percent a year, one of the fastest rates in the world.

A number of global lubricant oil majors have already established operations in

India. Foreign companies have also been permitted to own retail outlets for the
distribution of petrol, petroleum products and lube oils.

Distribution & Marketing

With India being a vast country, there is a need for transportation of petroleum
products to demand centers from ports and refinery locations. Movements of petroleum
products are undertaken with the help of railways, pipelines, coastal tankers and road
transport. In most cases, petroleum products are ultimately delivered to the consumer by
road transport. Ample opportunities exist for the development of port facilities and
pipeline transportation infrastructure facilities, the improvement of railway and road

14
transportation, and the modernization of existing transportation facilities available in the
petroleum sector.

The requirement of LPG over and above the indigenous availability is met by
imports. The LPG import capacity at two ports in the country, viz. Visakha and Mumbai,
is 700 trillion Metric Tons per annum (TMTPA). New LPG import facilities at Kandla
and Mangalore are being constructed with the capacity at Visakha is being augmented.
However, to fill in the gap, the private sector and joint venture companies are planning to
set up LPG import facilities at different locations. Foreign companies including Exxon,
Shell, Caltex, Mobil, and Vitol SHV have shown interest in setting up LPG import
facilities. Huge investment is required for the development of these facilities.

3.1.2 Policy – New initiatives

♦ The Indian petroleum sector has opened up to the private sector, both domestically
and foreign, for investments through joint ventures and strategic alliances.
♦ In exploration and production, Indian oil and natural gas fields have opened up to the
private sector as well as to foreign participation under production sharing contracts.
♦ The refining sector has opened up to the joint sector (public-private partnerships) as
well as to the private sector for new refineries.
♦ Foreign investment is to be permitted as indicated:

100% FDI in exploration

26% FDI in refining in a Joint Sector
100% FDI in refining in the case of private Indian companies
51% FDI in petroleum products and pipeline sector
100% FDI in production, import, marketing and setting up import terminals for
LNG and pipelines for natural gas
74% FDI in marketing infrastructure
100% FDI for market study and formulation of investment/financing plans

♦ India is moving towards market-based gas pricing and gas use to replace the regime
of allocations and administered prices.
♦ The importation of natural gas and LNG is under the Open General License.
♦ For gas fields developed in the private sector, promoters are free to market the gas at
market related prices.
♦ There is a proposal to set up a Petroleum Regulatory Board.
♦ In the petroleum product pipeline sector, pipelines will be developed through joint
ventures.

3.1.3 Supports and incentives

♦ There is a seven-year tax holiday after the commencement of commercial production

for blocks in Northeast India.

15
♦ Specific equipment imported for oil and gas exploration or exploitation has been
exempted from customs duty.
♦ A new Petroleum Tax Code has been developed to promote private investment in the
sector.
♦ The model Production Sharing Contract for exploration provides that capital
expenditures incurred in respect of exploration and drilling operations are fully tax-
deductible.
♦ Various incentives are announced under the New Exploration Licensing Policy
(NELP).
♦ Attractive terms have been offered to investors for the construction of liquefied
natural gas import terminals.
♦ Some major U.S. companies involved in the marketing sector in India are
Caltex, Esso Petroleum, Exxon – Mobil Gas, Mobil Peeves Co. Ltd., Mosbacher
and Unocal.

3.2 Coal

Coal meets approximately 63 percent of the country’s total energy requirements.

According to current estimates, the reserves are sufficient to meet India’s needs for at
least another 100 years. India now ranks 3rd amongst the coal producing countries in the
world.

During the IX plan, coal demand increased from around 300 million tons in 1996-
97 to 353 million tons during 2001-02, implying a cumulative growth rate of 3.3 percent
per annum. This is significantly lower that the IX plan target growth rate of 6.85 percent.
The reasons for this slow growth are the failure of new coal-based power plants to
materialize, a slump in the steel, lower demand in the cement sector and overall
sluggishness in the economy. Against the projected demand of 453 million tons, the
anticipated availability is projected to be 405 million tons in the terminal year of X plan.

3.2.1 The Opportunities

Production

India has a huge untapped potential for underground mining. Currently, the
predominant method used in the country is open cast mining to exploit the 64 billion tons
of proven reserves situated within a depth of 300 meters.

Coal beneficiation

The use of beneficiated coal has gained acceptance in steel plants and power
plants located at a distance from the pithead. Currently, India has 21 large coal washeries
but only two are devoted to power requirements. There is enormous scope for private
investment in this area, with the government now permitting build-own-operate (BOO)
washery projects by coal companies.

16
3.2.2 Foreign Investment Policies

The private Indian companies establishing or operating power projects as well as

coal or lignite mines for captive consumption in such projects may be allowed foreign
equity up to 100 percent provided that the coal or lignite produced by them is meant
entirely for captive consumption in power generation.

One hundred percent foreign investment in the equity of an Indian subsidiary of a

foreign company or in the equity of an Indian company for setting up of coal processing
plants in India is permitted subject to the conditions that such an Indian subsidiary or the
Indian company (a) shall not do coal mining and (b) shall not sell the washed coal or
sized coal from their coal processing plants on the open market and shall supply the
washed coal or sized coal from their coal processing plants to the respective parties
sending raw coal to such coal processing plants for washing or sizing.

Other private Indian companies engaged in exploration or mining of coal and

lignite for captive consumption for production of iron, steel or cement are permitted
foreign equity up to 74 percent. Automatic approval of the Reserve Bank of India for
foreign direct investment in the equity of Indian companies up to 50 percent in all the
above cases is permitted.

Automatic approval from the Reserve Bank of India for foreign direct investment
in equity of an Indian subsidiary of a foreign company or in the equity of an Indian
company for setting up coal processing plants in India may be allowed subject to the
conditions that such an Indian subsidiary or the Indian company (a) shall not do coal
mining and (b) shall not sell the washed coal or sized coal from their Coal Processing
Plants on the open market and shall supply the washed or sized coal from their Coal
processing Plants to the respective parties sending raw coal to such Coal processing
Plants for washing or sizing.

However, foreign direct investment beyond 50 percent in the equities of private

Indian companies engaged in activities of the nature indicated above should require
approval of the FIPB.

Some policy initiatives to attract foreign investment –

• Grading and pricing of non-coking coal on Upper Heating Value (UHV) basis
being replaced by Gross Calorific Value (GCV) basis in line with international
practices.
• Independent regulatory body being set up to arbitrate price disputes between
producers and consumers.
• Bill for setting up an independent body to allocate coal and lignite blocks to
private companies for exploration and mining is on the anvil.

17
US-based Spectrum Technologies has established the ST-BSES Coal Washery
Company, a joint venture with power producer BSES Ltd. to set up a 2.5 million ton
washery.

3.3 Power Sector

Over the next 10 years, the minimum capacity addition needed is estimated to be
over 83,000 MW. At an average cost of US$1 million per MW, the investment calls for
US$83 billion. If the investment required in transmission and distribution is taken into
account, the total figure rises to US$143 billion. A majority of this amount will have to
be funded by the private sector, both domestic and foreign.

3.3.1 Power Sector – Recent Policy Initiatives

100% FDI is permitted in generation, transmission and distribution.

Long-term power purchase and fuel supply agreements
Mandatory International Competitive Bidding (ICB)
Detailed guidelines have been formulated for private sector participation in
Renovation & Modernization (R&M).
All R&M schemes costing up to Rs.500 crores* are not required to be submitted for
the concurrence of the Central Electricity Authority (CEA).
A new Hydel Policy announced an objective of making investment in hydro projects
more attractive.

The CEA study on “Preliminary Ranking Study of Hydro Electric Schemes” is

complete, identifying potential hydroelectric sites at various river basins, which
are prioritized in the order of their attractiveness for implementation. The ranking
studies will serve as guide to the potential developers on which hydro schemes to
choose for implementation.
A transparent methodology for the selection of developers for surveying,
investigation and project execution will encourage private sector investment.
Tariff dispensation and innovative financing mechanisms will minimize the risks
associated with hydro projects.

Revised norms for Environmental Clearance

Reforms and Restructuring of State Electricity Boards
Emphasis on distribution reform followed by generation
The Electricity Bill 2000 is being finalized for introduction in the Parliament.

A number of prominent foreign corporations already doing business in India’s

power sector are as listed below:

Power Equipment: General Electric, Donaldson (India) Filter System, Woodward, Foster
Wheeler India Pvt. Ltd.

*
One crore = 10 million

18
Engineering Consultancy: Bechtel, Fluor Daniel, Sargent & Lundy and Raytheon
International.

Management Consultants: Arthur Andersen, Boston Consulting, Ernst & Young, KPMG
Peat Marwick, Price Waterhouse and McKinsey & Company.

3.4 Renewables

India is planning to add about 12,000 MW of power generating capacity from

renewables by the end of the 11th. Plan. Almost half of it will come from wind, 3500
MW from biomass and 2000 MW from small hydro.

3.4.1 Policy Initiatives in Renewables

A host of fiscal incentives and facilities are available to both manufacturers and
users of renewable energy systems, which include:
• 100 percent accelerated depreciation for tax purposes in the first year of
the installation of projects/systems.

• No excise duty on the manufacturing of most finished products.

• Low import tariffs for capital equipment and most of the materials and
components.

• Soft loans to manufacturers and users for commercial and near

commercial technologies.

• Five-year tax holiday for power generation projects.

• Remunerative pricing under the alternate power purchase policy by state

government for the power generated through renewable energy systems,
fed to the grid by private sector.

• Facility for the banking and wheeling of power.

• Facility for the third party sale of renewable energy power.

• Financial Incentives/Subsidies for devices with high initial cost.

• Involvement of women not only as beneficiaries but also as active

contributors in the implementation of renewable energy programs.

• Encouragement to non-governmental organizations (NGOs) and small

entrepreneurs.

19
 • Special thrust for renewable energy in Northeastern region of the country.
10 percent of plan funds earmarked for the Northeast towards enhanced
and special subsidies.

• Allotment of land on a long-term basis at token lease rent and supply of

garbage free of cost at project site by state governments, with respect to
projects on energy recovery from municipal waste.
3.4.2 Foreign Investment Policy

• Foreign Investors can enter into a joint venture with an Indian partner for
financial and/or technical collaboration and also to set up a renewable
energy based Power Generation Projects.

• Approval for a liberalized foreign investment regime to facilitate foreign

investment and technology transfer through joint ventures.

• The proposals for up to 74 percent foreign equity participation in a joint

venture qualify for automatic approval.

• 100 percent foreign investment as equity is permissible with the approval

of the Foreign Investment Promotion Board (FIPB).

• Various Chambers of Commerce and Industry Associations in India can be

approached for providing guidance to the investors in finding appropriate
partners.

• Foreign Investors can also set up a liaison office in India.

• The Indian Government is also encouraging foreign investors to set up

renewable energy based power generation projects on a build, own and
operate basis.

4. Future Possibilities in Indo-U.S. Energy Cooperation

It is thus evident from Section 3 that immense possibilities exist in Indo-U.S.

energy cooperation both at the upstream and downstream of coal, oil, gas, renewables and
the power sector. Cooperation already exists in some pockets but the magnitude is small
relative to the total potential that could be exploited.

In this section, we will focus on some other areas of possible cooperation between
India and the United States.

4.1 Geophysical Exploration

It has been observed worldwide that Mesozoic sediments are responsible for more
than one half of the world’s oil and gas. Both in India and the United States (Colorado
flood basalt), a thick basalt cover overlays these rocks. Normally applied seismic

20
methods are not capable of exploring the Mesozoic sediments. The National Geophysical
Research Institute (NGRI) of India has developed techniques to delineate these sediments
below the basalt where drilling has proven them. India could provide technical know-how
to America in solving similar kinds of problems.

4.2 Improving Energy Efficiency

Indian industry has not paid much attention to energy savings. The high-energy
consumption in the Indian industries is due to three main reasons:

♦ Most of the manufacturing units still depend on old machinery

♦ The relatively high cost of capital as compared to European/U.S. standards.
♦ Uncertainty about the long-term growth of the particular industrial sector.

A recent World Bank report shows that Indian industry has the potential to save
20 to 30 percent of total energy consumption. Energy conservation and efficiency
improvement in the Indian power sector requires special attention since the sector has
been suffering from a chronic supply shortage, lack of capital investment for new
capacity addition and environmental problems associated with coal-based power plants.
High auxiliary consumption and transmission and distribution loss further aggravate the
problem.

It has been estimated that nearly 30,000 MW could be saved through the
implementation of energy conservation programs. Studies and experience have indicated
that most of India's megawatt potential can be captured at substantially lower costs
compared to the cost of capacity additions, which currently stands at over US$1 million
per MW. However, in spite of good returns and short payback periods for energy
efficiency investments, most of India's end-use energy efficiency potential remains
largely untapped.

Macroeconomic policies sometimes discourage the undertaking of energy

efficiency measures. Environmentally harmful subsidies reduce the private costs of
producers and consumers resulting in over-utilization of natural resources. Energy
subsidies in India, for example, lead to energy intensive economic structures and
technologies, and wasteful management practices. It has been estimated that the
elimination of energy subsidy worldwide would reduce global carbon emission by 9.5
percent. A study by the International Energy Agency of the OECD in 1999 on the under
pricing of electricity in China, India, Indonesia, Iran, Kazakhstan, Russia, South Africa
and Venezuela, found that reducing price subsidies in India would reduce primary energy
consumption by 13 percent, increase GDP through higher economic efficiency by 1
percent, lower CO2 emissions by 16 percent, and produce domestic environmental
benefits including lower local air pollution.

The United States has considerable experience in improving the energy efficiency
in various sectors of the economy. They have used an integrated and coordinated
approach of technological improvements, policy measures and institutional development

21
for achieving quantum jumps in energy efficiency. India can benefit from U.S.
experiences on how to manage subsidies that exists in the Indian sector so that it does not
create a market distortion but develops a market for improved energy efficiency in
appliances.

The government of India has already passed the Energy Conservation Bill in the
Parliament whose salient features are mandatory energy audits in energy intensive
industries, labeling and standardization of the appliances and energy conservation in
buildings. India can endogenize the methods and procedures followed by the United
States for testing and certification of appliances.

4.3 Clean Energy

The future choice of technology for power generation crucially depends on

current and future trends of environmental regulations, availability of low-cost fuel on a
long-term basis, plant efficiency and costs of the technology. Seventy one percent of
India’s power generation comes from coal and it is expected that coal will continue to
dominate in the future of power generation. However, the burning of coal creates a host
of serious environmental problems requiring emissions control and waste disposal.

Since India cannot live without coal, one of the solutions is to adopt clean coal
technologies for power generation, which would not only reduce pollution, but also
achieve higher thermodynamic efficiencies. Technologies for coal gasification, IGCC,
CO2 capture and sequestrations along with coal water slurry fuel are strong candidates for
Indo-U.S. research and development.

It would also be possible for Indian organizations to carry out research and
development in collaboration with U.S. research entities on clean and new technologies
like integrated gasification humid air turbine, integrated gasification molten carbonate
fuel cell, development of hot gas cleanup system for IGCC, high temperature air pre-
heater, new material for ultra-supercritical boiler and development of local scale clean
technologies. Indo-U.S. synergy in this area would be most welcome.

Over the next decade in the United States, it may be difficult to deploy the
advanced coal technologies that emerge from research, as most of the new power plants
will be based on non-coal sources. There are excellent opportunities in India to examine
the feasibility of these technologies, which would be a win-win situation for India and the
United States.

Being a tropical country, India is abundantly endowed with renewable energy

sources. In the area of power generation about 3000 MW (about 3 percent of total
installed capacity) power-generating capacity based on renewable energy has already
been installed in the country. For India, biomass gasification and cogeneration holds great
promise as an eco-friendly source of power, especially for decentralized applications.
Though India has developed world-class technologies in this area, it needs more
development with the help of biotechnology, another lucrative area for future Indo-U.S.

22
cooperation. The Confederation of Indian Industry and The U.S.-India Business Council
along with the U.S.-based Biotechnology Industry Organization and Pharmaceutical
Research and Manufacturers of America have launched the U.S.-India Biotech Alliance.
It is believed that collaborative research in biotechnology would ensure that power from
biomass would be more attractive.

The Indian Government attaches much importance to the development and

deployment of renewable energy. With a strong industrial base and successful
commercialization of technologies in wind, solar photovoltaics, solar thermal, small
hydro and bio-energy, India today is in the forefront of international effort to harness
renewable energy resources. Recently, wind energy equipment major Suzlon Energy
Limited of India has obtained a $22 million order to set up 24 MW wind energy turbines
in the state of Minnesota in the United States. This is the first wind energy project export
by an Indian company to the United States. The power generated from this project will be
linked to a grid connected commercial power project.

Gas Hydrate

Gas Hydrates containing mostly methane are considered a clean source of energy
for the future. This ice-like crystalline substance is stable at high pressures and low
temperatures, prevailing in the sediments of the deep sea and also in permafrost areas. As
a present estimate, the potentials are 6,156 trillion cubic meters of gas hydrates and 600
million tons of oil shale. The National Gas Hydrate Mission of India has focused on
laboratory studies and scientific research on physical, chemical, geological, geophysical
and thermo-dynamical aspects of sea floor stability, along with the environmental
impacts of a possible methane release to the ocean and atmosphere. Additionally, the
mission has researched technology development for exploration of methane potential
using improved seismic techniques in addition to specific geophysical and geological
studies including cores specimens to identify the quality, quantity and nature of the
hydrate. Lastly, the mission has looked at technology development for the safe extraction
of hydrates. While the scientific research and laboratory studies continue at the same
time, a pilot scale project could be planned for technology demonstrations relating to
exploration and exploitation. Cooperation between the research and development
laboratories and industries in the United States and India might be an excellent idea.

Coal Bed Methane (CBM)

India has 400 billion cubic meters (M3) of CBM with a heat value of 8500-9000
KCal/M3. CBM, a clean fuel for power generation, is currently being wasted during coal
mining. This release not only creates safety hazards in coalmines but also causes global
warming when released in the atmosphere. There is a need to explore this wasted
potential. India and the United States can work together on the development of
techniques for exploiting CBM.

23
4.4 Power Sector Reforms

The State Electricity Boards (SEB) in India, which have enjoyed monopolistic
power to generate and distribute electricity in their respective states, are caught in a
vicious cycle of resource shortages and poor operational and financial performances. The
financial weaknesses for most of the SEB are mainly due to the irrational tariff structure
along with high transmission and distribution (T&D) losses. In 2000-01, the total
commercial losses reached an alarming figure of 24,000 Crs*. In addition, the outstanding
amount due the Central Public Sector Undertakings has now reached Rs. 26,000 Crs,
which is threatening their viability.

Over the past decade, the government has taken several steps aimed at
reconstruction and corporatization of the SEBs in order to make them independent profit
centers, delivering reliable electricity at affordable prices. The efforts of power sector
reform have included:

• Unbundling generation, transmission and distribution sectors and allowing private

sector participation in generation transmission and distribution
• Setting up of the Central and State Electricity Regulatory Commission (CERC/SERC)
• Securing outstanding debts of the SEBs

The Ministry of Power is encouraging and extending support to the states to

undertake reforms by choosing a model from the options available that suit them best.
Power sector reforms have started with Orissa. As of now almost all the states have taken
up reform processes.

Unfortunately, the reform process in some states faces a setback mainly due to
inexperience in realizing ground realities and a lack of proper groundwork before
unbundling and corporatization of SEB. In Orissa, for example, investors have found
significant variations in the actual and on-paper performance of the SEB including crucial
areas like segment-wise demand, losses and physical condition of the distribution assets.
Most of the data provided for 1998-99 and future projections have been proven wrong
and the deviation in many cases is in the range of 25 to 50 percent. Based on the data
pertaining to distribution loss and consumer profile, etc, tariff fixation by the commission
has suffered severely. There needs to be a well-established institutional framework
consisting of regulatory agencies, emphasizing the rules and regulations of the sector and
policy guidelines. The regulatory agency should have international experience,
independence from political pressures, accountability, autonomy, and expertise on
technology, economics, law and accounting.

Interest in restructuring and reform of the power sector is a worldwide

phenomenon being pursued in different forms in different countries, depending on the
structure and condition of the economy and political institutions. The entire process of
reforms in most countries was initiated in the mid-1980s and early 1990s. For a country
like the United States, reforms were fast and are now at consolidation stage. The reform
*
1 Crs = 10 million Rupees

24
experiences of the United States would be of immense importance in deciding the way
forward for the power sector reform in India, although the solution should be tailor-made
to the Indian power sector. As we have seen earlier, USAID has already started several
projects in this area, however a more comprehensive Indo-U.S. cooperation is expected.

It is believed that the Electricity Bill to be tabled soon in the Parliament will give
a major boost to the process of power sector reforms throughout the country. The bill
aims at creating an enabling framework for a competitive and efficient power sector,
which can contribute significantly to the requirements of all sectors of the economy and
population.

The tariff structures in India for bulk power were determined in a simplistic way.
In generation, for all practical purposes, there was a single tariff. In transmission, costs
were averaged on a regional basis for tariff determination. Other types of tariff setting
methodologies, which have been prevailing in India, are Performance based Tariffs and
Competitive Bidding for mega-power projects. US experiences show that “time of day
metering” and “duel tariff system” could be attempted for HT industrial consumers of
India.

Quality of power supply requires special attention in India. In the United States,
losses due to poor quality energy supply are estimated at $150 million. The damages that
are being caused in eastern and southern regions due to high frequency excursions though
not quantified until now appeared to be substantial.

4.5 Nuclear Power

Development of nuclear power is essential in the context of India’s energy

security and environmental perspective. Nuclear power plants would be a good option for
future base load power generation. Although the present share of nuclear power is less
than 3 percent of the total installed capacity, the Vision 2020 of the Department of
Atomic Energy envisages a cumulative installed capacity of 20,000 MWe.

Nuclear power generation in India commenced in 1969 with the commissioning

of the Tarapur Atomic Power Station built on a turnkey basis by the International General
Electric of the United States based on boiling water reactor technology using imported
enriched uranium.

Despite imposition of a ban by the United States and several other developed
countries after nuclear tests followed by technological, commercial, organizational,
political and financial challenges, today India is one of the few countries which is entirely
self reliant in the peaceful application of nuclear energy.

25
 The United States has the world’s largest share of nuclear power, yet instead of
constructing new plants, the United States has emphasized extending the life of existing
plants. Some states in the U.S. are also examining the role of nuclear power in their
energy mix in order to comply with the Kyoto Protocol.

The sharing of experience and information would be a win-win situation for both
India and the United States on the nuclear power generation front particularly in the areas
of research and development, design standardization, management competence, training,
safety, environment and regulatory practices. The Indo-U.S. joint research and
development program in “cold fusion” could be another thrust area.

4.6 Rural Electrification

Rural electrification in India has suffered badly over the last decades mainly
because of the poor operational and financial health of SEBs. Although 86 percent of the
total villages have been electrified over the years, nearly 80,000 villages are yet to be
electrified. Moreover, the use of electricity in rural areas for households and other
productive purposes such as small industries are rather limited. Rural people are often not
in a position to afford the cost of electricity and they meet their basic energy needs
through the use of energy sources like firewood, cow dung, agricultural residue and
kerosene. However, inefficient exploitation of these resources has led to environmental
degradation. An action plan on 100 percent village electrification within the next 6 years
has been prepared in which rural electrification would be treated as a basic minimum
service under the Prime Minister Gramodya Yojana. Other elements of the action plan
include; setting up credit support from Rural Electrification Corporation to SEBs for
speedy electrification in the backward areas, improving the quality of power supply in
villages by strengthening the distribution network, earmarking a sum of at least Rs. 750
Crores out of the Rural Infrastructure Development Fund for rural electrification works
and augmenting the resources of REC by allowing it to float capital gains tax exemption
bonds.

Renewables can play a major role in rural electrification. In India, 18,000 villages
mostly in remote far-flung areas can only be electrified by using renewable resources
since they are not economically viable to connect through conventional grid systems. The
features of rural electricity viz, low and dispersed loads, high T & D costs and seasonality
of the load favors decentralized (small hydro and biomass based) power plants for
meeting rural electricity needs in a sustainable manner. Local institutions like Panchyats
might play an important role in the implementation, operation and maintenance of such
power plants. This will not only minimize transaction costs but also minimize
transmission and distribution costs.

The United States has a successful rural electrification program, which has been
supported by the government on commercial principles without financial subsidy by
making loans available on the same cost as cost of borrowing to government. The only
subsidy was in the form of office overhead expenses. However, it ensured that
cooperatives borrowing under this program collected appropriate tariff for meeting this

26
cost and enabling the repayment of the interest and principal. Effectively, the consumer
was asked to pay the full cost for the power they were receiving.

The US model of rural electrification could well be adopted in India after taking
into account the local conditions and culture. Establishment of rural cooperatives to take
up utility services in rural areas should be encouraged. The rural electric cooperatives can
use the convergence potential to lower the cost of service to the consumer. Rural
electrification could be handled along with rural roads, telecom and water supply. In this
regard, standardization of equipment/materials used for rural electrification and the
erection methodology should be attempted. In the United States, installation cost has been
reduced substantially due to these initiatives. India could consider studying the US rural
model and deal with the electricity in rural areas in a differentiated manner.

4.7 Education & Fundamental Research

We strongly believe that availability of the world’s third largest scientific and
technical manpower and well established R&D infrastructure in the form of national
laboratories and universities will motivate many more American companies to invest in
setting up research and development centers in India. This has already happened in the
software sector.

The first decade of the 21st century should see many flourishing business
partnerships emanating from the cooperation in science and technology.

4.8 Clean Development Mechanism & Opportunities

India is among the top 10 contributors to GHG emissions, despite its per capita
emissions being only one-sixth of the world average. Since India’s major energy comes
from coal, which has the highest CO2 emission coefficient, India needs to adopt clean and
energy efficient technologies to reduce its GHG emissions. However, there is a problem
in obtaining finances for these technologies. The CDM, included in the Kyoto Protocol
could be very helpful in overcoming the situation.
With regard to the Kyoto Protocol, India has already signed the Indo-U.S. Joint
Statement on Cooperation in Energy and Related Environmental Aspects in 1999. India
declared hereby the intention to achieve a 10 percent share for renewable energy in
electricity capacity by 2012 and a 15 percent improvement in energy efficiency by 2008.

This bilateral agreement also includes the passages of technology transfer via the
CDM route. The Indian Government has set up within the Ministry of Environment and
Forests a “Working Group on the Framework Convention or Climate Change.”
The Credit Rating Information Services of India Limited (CRISIL) conducted a
study to examine the range of possibilities and investment potential for CDM in India.
The top-down analysis shows that the CDM could account for between 397-503 MMTC
of emissions reduction required of Annex B countries in 2010. The corresponding CDM

27
flows could be between $5.2-17.4 billion and India could collect between 7-12 percent of
the total global market for CDM-led investment.
To initiate a process of learning by doing, India has hosted several Activities
Implemented Jointly (AIJ) projects, which were supported by several foreign
governments, especially by the United States, Norway, Japan and the Netherlands. This
shows the United States’ interest in exploring the sub-continent’s great CDM potential.
The United States has announced a $45 million program for clean energy and global
climate change in India despite Washington’s unwillingness to ratify the Kyoto Protocol.
The framework of the Clean Development Mechanism enshrined in the Kyoto
Protocol gives Indian industry the opportunity to achieve reduction in greenhouse gas
emissions, taking advantage of the markets for trading reductions in such emissions.
Globally, a variety of mechanisms for trading carbon emissions have emerged. A number
of trading systems are active in North America and Europe. Though the United States has
opted to stay out of Kyoto commitments, opportunities for trading emissions with U.S.
companies is a possibility even now.

5. List of Recommendations for

Strengthening Indo-US Energy Cooperation

• Although reforms in the Indian energy sector are underway, the pace of reform is
different in the sub-sectors viz. power, coal, oil, gas and renewables. Accelerating
reform and restructuring the Indian energy sector after taking into consideration
the structure and condition of the economy is the need of the hour. A number of
major barriers and prejudices need to be overcome, which require firm
commitments and bold decisions from the government. In this regard, it is also
important to explore the possibilities of whether or not a single regulatory
framework to determine optimal fuel mix and tariffs can coordinate all these sub-
sectors.

• Establishment of market determined prices for energy is critical for India if

financing is to be made available to maintain facilities, establish new capacity in
the energy sector and to support effective transport mechanisms to move energy
to users.

• The recent gas discoveries in the Krishna-Godavari Basin will definitely

restructure the future energy mix and provide the energy starved Southern Region
of India a much-needed solace. This also makes the point that opening of sectors
to the private sector does give results and needs to be pursued with greater vigor.
However, issues such as the provisions to regulate the import of LNG, gas
pricing, provisions for open access to gas pipelines, and the role of regulator need
to be resolved.

28
• Anti-theft legislation with stringent provisions and support of government in
tackling law and order problems for curbing the widespread theft of electricity
would be helpful in India.

• Formation of a robust national grid at the earliest possible time will improve
reliability, quality and economics of power supply in India. Open access to
surplus capacity of the transmission system, including inter-regional HVDC links,
should be allowed on a commercial basis.

• Many of India’s best talents have been serving in America for decades. Their
services have frequently been utilized to great mutual advantage, under the
TOKTEN (Transfer of Knowledge through Expatriate Nationals) Scheme of the
Indian government. The scope of TOKTEN Scheme needs to be upgraded to
TOKTEE (Transfer of Knowledge through Exchange of Experts), which would
include both Indian and American experts.

• Promotion of Indian industries is a significant source of outreach for US

industries, particularly in view of India’s technological competence and lower
cost. Cost effectiveness of Indian technology has been demonstrated in a few
areas, such as in space hardware, electronics, auto parts, software, etc, where the
United States has tried to outsource from India. With a liberal and proactive
policy, greater use of Indian enterprise and industrial capability could be achieved
that would be beneficial for both countries. Such collaboration could also lead to a
greater presence of the United States in Asian and African countries.

• In order to create an enabling environment for future Indo-US cooperation, it is

desirable that the United States lift the bans that were imposed after the Pokhran
nuclear test in India.

• The possibilities of exchanging energy services in the upcoming General

Agreement on Trade and Services (GATS) regime should be explored.

• The United States can play a major role in regional energy cooperation and
energy security. This work is intended to promote greater cooperation and
integration of regional energy markets in electricity and natural gas, as well as the
unhindered cross-border trading of cleaner fuels and energy resources among the
South Asian countries.

• While India suffers from many disadvantages such as inadequate infrastructure,

poverty, poor agricultural productivity, large-scale and a higher level of pollution
similar to many developing countries, it has the great advantage of possessing
cheap and efficient human resources. India can offer minimum intellectual capital
per dollar. According to the demographic projection by 2025, more than 50
percent of India (about 600 million) will be less than 20 years old. This ready
availability of highly qualified cheap man-power along with fast growing
industrialization and significantly higher economic growth potential have

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 undoubtedly transformed India into one of the largest potential markets in the
world. Since India is a multilingual and multicultural society, properly
orchestrated and executed Indo-US joint ventures could be an example for other
developing countries and this will definitely open up the avenues of future
collaboration with other developing countries.

SOURCES

Websites of:

a) Ministry of Environment & Forest (http://envfor.nic.in)

b) Ministry of Power (http://powerin.nic.in)
c) Ministry of Coal (http://coal.nic.in)
d) Ministry of Non-conventional Energy Sources (http://mnes.nic.in)
e) Ministry of Petroleum & Natural Gas (http://petroleum.nic.in)
f) Central Pollution Control Board (http://envfor.nic.in/cpcb)
g) Indo-US Science & Technology Forum (http://www.ind-usstf.org)
h) Tata Energy Research Institute (www.teriin.org)
i) Confederation of Indian Industry (www.ciionline.org)
j) USAID (www.usaid.gov/in)
k) The South Asia Regional Initiative for Energy Cooperation and Development
(http://www.sari-energy.org)
l) National Chemical Laboratory (http://www.ncl-india.org)
m) International Energy Agency (http://www.iea.org)
n) South Asia Regional Energy Coalition (http://www.energysouthasia.com)
o) The Atlantic Council of the United States (www.acus.org)
p) Centre for Monitoring Indian Economy (CMIE) Pvt. Ltd. (www.cmie.com)
q) Nuclear Power Corporation of India Limited (http://www.npcil.org)

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