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print versionA very expensive proposition
by MV Ramana and Suvrat Raju
February 12, 2013
During his visit to India this week, French President Francois Hollande is likely to urge the government to conclude a questionable deal to purchase six nuclear European Pressurised Reactors (EPRs) from the French company Areva for Jaitapur (Maharashtra). Though marketed as "the most advanced"
reactor, the EPR is commercially immature; not a single reactor has been commissioned anywhere in the world. Moreover at the construction sites at Olkiluoto (Finland) and Flamanville (France) costs and time have escalated dramatically from the initial projected figures, suggesting that each reactor will cost about Rs. 60,000 crore. So six could cost in excess of Rs. 3.5 lakh crore.
To put this figure in perspective, each of the two reactors that Areva is hoping to sell in the next five years is larger than Maharashtra’s annual plan for 2012 (Rs 45,000 crore). Shockingly, the government agreed to purchase the reactors from Areva without a nominal competitive bidding process. The procurement rules in any branch of the government, including the Department of Atomic Energy (DAE), mandate public tenders for any purchase above Rs. 10 lakh.
Cables revealed by Wikileaks suggest that this peremptory decision was made in 2007. The government’s rationale was laid out by former DAE secretary Anil Kakodkar. In an article in 2011, Kakodkar wrote: "We also have to keep in mind the commercial interests of foreign countries and of the companies there… America, Russia and France were the countries we made mediators in these efforts to lift sanctions, and hence, for the nurturing of their business interests, we made deals with them for nuclear projects." Indian officials are aware that this attitude is costly. In another cable, the general manager of the Nuclear Power Corporation (NPCIL) admitted that India had "paid a ’high’ price for French reactors from Areva".
Unsurprisingly, the government has been reticent about discussing the modalities of the contract it is negotiating with Areva. It has failed to support its assertions that "the cost per unit of electricity from the Jaitapur plant will be competitive to the other power plants" with any substantive data on costs. When asked, it demurred, even in Parliament, with the excuse that "the detailed project proposals … are under finalisation."
To check the veracity of the government’s claims, we recently used the best available public data on fuel prices and capital costs, assumed a substantial markdown to account for lower costs of labour in India and estimated the expected tariff from the EPR reactors. This calculation involves some rather detailed accounting, but the basic procedure for setting the electricity tariff from nuclear plants was laid out by NPCIL in 2008.
By adapting this procedure to the EPR - and using the most recent guidelines of the Central Electricity Regulatory Commission - we estimated that if NPCIL were to follow the regulations faithfully, the first-year tariff from the EPR would be about R14 per unit. This assumes that reactor construction starts next year and is completed on the same pattern as the Kudankulam I and II reactors, which, given the untested nature of the EPRs, is generous. The calculated tariff is a far cry from current or expected future tariffs from other base-load power projects.
Since it cannot pass on such a high tariff on to consumers, the government may absorb the loss and sell electricity at a lower price. However, every rupee of under-recovery will cost the exchequer about Rs. 1,000 crore per year. Just to halve the tariff from the first two reactors down to Rs. 7, the government may need to spend Rs. 14,000 crore per year.
This is in addition to indirect subsidies in the existing revenue model. For example, NPCIL plans to put in its equity early, and then let it lie idle with no return for the period of construction that may easily extend beyond a decade. The government may increase these handouts in various ways - for example, by putting pressure on public sector banks to provide cheap credit for the project. The issue here is not Maharashtra’s need for electricity. Rather it is why the government has chosen this particular company, and its overpriced technology, to meet this need.
MV Ramana and Suvrat Raju are physicists associated with the Coalition for Nuclear Disarmament and Peace. Ramana is the author of The power of promise: Examining nuclear energy in India
The views expressed by the authors are personal
