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Is Nuclear Power The Answer To India's Clean Energy Targets?

  • Jan 31, 2022
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Source: 
Mondaq Business Briefing

Based on official figures published by the Ministry of Power ("MoP"), Government of India, the installed nuclear power capacity in India as of December, 2021 is 6,780 MW (1.7% of India's total energy mix).

In addition, ten reactors (including 500 MW prototype fast breeder reactor being implemented by Bharatiya Nabhikiya Vidyut Nigam Limited ("BHAVINI"), a Government of India enterprise) aggregating to 8,000 MW are under various stages of construction. Further, the Government of India has accorded administrative approval and financial sanction for the construction of ten indigenous pressurized heavy water reactors ("PHWRs"), each with a capacity of 700 MW, to be set up in fleet mode. This is a first of its kind project for India's nuclear power sector, as these reactors would be completely made in India.

On progressive completion of the projects approved and under construction, it is expected that the installed nuclear capacity in India would be 22,480 MW by 2031.

With an aim to promote the growth of nuclear power and ensure long term energy security, India is pursuing an indigenous three-stage nuclear power programme. The first two stages being the PHWR and fast breeder reactors followed by the third stage of thermal breeder reactors i.e., advanced heavy water reactors. Separately, light water reactors based on foreign cooperation are also proposed to be set up. Furthermore, in December, 2021 the Department of Atomic Energy, a department under the direct control of the Prime Minister of India ("DAE") announced that a large expansion programme of nuclear power is being undertaken to provide the country with clean electricity.

The legal regime for atomic energy in India mandates the Central Government or any authority or corporation established by it or a Government company who has been granted a license pursuant to the Atomic Energy Act, 1962 to own and operate nuclear power plants in India. Further, the Atomic Energy Act, 1962 was amended in 2015 to allow public-sector companies to form joint ventures to build nuclear power plants. Relevantly, currently in India nuclear power plants are owned by either Nuclear Power Corporation of India Limited ("NPCIL") or BHAVINI, both Government of India enterprises.

While the installed capacity of nuclear power in India has grown by 40% in the last 7 years, in absolute terms, India has only added 2,000 MW of installed capacity between 2014 and 2021. And, the current installed capacity of 6,780 MW is far lower than what was originally envisaged by the DAE in its report of the working group published in September, 2011, which proposed that the installed nuclear power capacity in India would be 20 GW by the year 2020.

The Government of India has taken significant initiatives to push the development of nuclear energy in India, especially in terms of indigenization of technology for the design, construction and operation of nuclear reactors (as briefly discussed above) and increased capital investment by NPCIL in the last 5 years. The details of which investment are as follows (i) 2016-17: INR 6,560.48 crore, (ii) 2017-18: INR 7,880.64 crore, (iii) 2018-19: INR 11,813 crore, (iv) 2019-20: INR 10,041.19 crore, and (v) 2020- 21: INR 10,052.02 crore1 . Based on disclosures made by the DAE, the expenditure in 2019-20 and 2020-21 were lower on account of restrictions relating to COVID-192 .

However, the growth of nuclear energy in India does look stunted; more so in view of how promising and lucrative this sector seemed post the signing of the India-United States Civil Nuclear Agreement (commonly known as the 123 Agreement) in 2008 and the execution of other landmark agreements with France, United Kingdom and Japan, amongst others for development/collaboration of/in peaceful uses of nuclear energy.

One reason why nuclear power has not grown according to the estimated levels thus far is the reluctance of foreign suppliers to participate in this sector. While the foreign suppliers have been interested in the Indian nuclear market for the last decade or so, their participation has unfortunately not fructified (with the exception of Kudankulam nuclear power plant; which is mainly on Government to Government route). It seems that the main reason behind this reluctance is the discomfort of the foreign suppliers with the liability regime for nuclear accidents.

Further, the legal framework for foreign direct investment ("FDI") in India does not permit foreign investment in atomic energy. The FDI legal framework is governed by the Foreign Exchange Management Act, 1999 ("FEMA") and the rules/regulations issued thereunder; read with the FDI Policy issued by the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, Government of India ("DPIIT")3 as updated pursuant to press notes and directions and circulars issued by the Reserve Bank of India from time to time. However, as per Government of India, DAE press information release dated 10 August, 2016, "foreign companies can however, invest in the supply chain for nuclear power projects". Pertinent to mention that in this regard, no formal Government notification/regulation has been issued permitting FDI in the supply chain for nuclear power projects. Relevantly, in January, 2020, there was news that the Central Government was mulling over the decision to allow FDI in the nuclear power industry. However, the DAE in February, 2020 clarified that the Central Government is not considering allowing FDI in the nuclear power sector.

Civil nuclear liability regime

To address the liability issue, the Indian government enacted the Civil Liability for Nuclear Damage Act, 2010 ("CLND Act")4 . The CLND Act inter alia provides for civil liability for nuclear damage and prompt compensation to the victims of a nuclear incident through a no-fault liability regime channeling liability to the operator5 of the nuclear installation. The CLND Act came into force on 11 November, 2011. Subsequently, in exercise of the power conferred by Section 48 of the CLND Act, the Government of India framed the Civil Liability for Nuclear Damage Rules, 2011 ("CLND Rules") which came into force on 11 November, 2011. Pertinent to mention here that, the constitutionality of the CLND Act and the CLND Rules has been challenged in the Indian courts and the matter is currently sub-judice; and the Supreme Court of India has not yet interpreted the provisions of the CLND Act and the CLND Rules.

In this regard, India signed the Convention on Supplementary Compensation for Nuclear Damage ("CSC") in 2010 and subsequently ratified it on 4 February, 2016 pursuant to an instrument of ratification submitted to the Director General of the International Atomic Energy Agency, declaring compliance of its national law with the Annex of the CSC.

Further, to clarify certain ambiguities related to the CLND Act, the Ministry of External Affairs under the Government of India issued and published the 'Frequently Asked Questions and Answers on Civil Liability for Nuclear Damage Act 2010 and related issues' ("FAQs")6 . These FAQs were supplemented by another round of frequently asked questions issued by the DAE sometime in August 2020 ("FAQs 2.0")7 . Relevant to mention that FAQs are not legally binding, though they may provide guidance to the courts while interpreting the provisions of the CLND Act.

The ratification of CSC by India also did not allay the concerns of the suppliers regarding the liability regime. Broadly, it seems that the suppliers concerns are three fold and pertain to:

  1. the operator's right of recourse against the supplier under Section 17 of the CLND Act read with Rule 24 of the CLND Rules;
  2. claims under other laws pursuant to Section 46 of the CLND Act; and
  3. insurance coverage under the Indian Nuclear Insurance Pool ("INIP").

We, briefly, discuss below each of these concerns along with some arguments/mitigants to address such concerns.

Operator's right of recourse

The operators' liability is capped under the CLND Act. In respect of nuclear reactors having thermal power equal to or above 10 MW, the liability of the operator is capped at INR 1,500 crore (approximately USD 201.56 million). Once the operator has paid the prescribed liability for a nuclear damage, it has a right of recourse against the supplier as provided in Section 17 of the CLND Act. The operator has a right of recourse against the supplier in the following instances:

  1. if this right is provided in a contract (Section 17(a));
  2. if nuclear incident has resulted as a consequence of an act of supplier or his employee, which includes supply of equipment or material with patent or latent defects or sub-standard services (Section 17(b));
  3. the nuclear incident has resulted from the act of commission or omission of an individual done with the intent to cause nuclear damage (Section 17(c)).

Suppliers have raised concerns that Section 17(b) provides for an additional right of recourse that is not envisaged under the CSC. As per Article 10 of the Annex to the CSC, the national law of a contracting party may provide for a right of recourse only in the following scenarios:

  1. where it is expressly provided for by a contract in writing; or
  2. if the nuclear incident results from an act or omission done with intent to cause damage, against the individual who has acted or omitted to act with such intent.

Relevantly, the operator's right of recourse under Section 17(a) and (b) has to be read along with the conditions mentioned in Rule 24 of the CLND Rules. Rule 24 of the CLND Rules inter alia provides for the quantum of right of recourse and duration thereof. Rule 24(1) provides that the right of recourse provided for "in the contract referred to under Section 17(a)" should not be for a value less than the extent of operator's liability or the value of the contract itself, whichever is less. Rule 24(2) provides that the duration of the right of recourse would be for a duration of initial license under the Atomic Energy (Radiation Protection) Rules, 2004 (which is currently 5-year period) or the product liability period, whichever is longer.

The Indian government has aimed to address this concern through the frequently asked questions. The FAQs and FAQs 2.0 state that Section 17(b) is ostensibly in addition to situations identified for the right of recourse provided in Article 10 of the Annex to the CSC. However, the situations identified in Section 17(b) relate to actions and matters such as product liability stipulations/conditions or service contracts. And, which are ordinarily part of a contract between the operator and the supplier and not a novel situation.

Additionally, some mitigants a supplier may consider to address this concern is to:

  • ensure that the contracts with NPCIL and the entire contractual framework for the nuclear project is structured and drafted carefully to ensure the liability of suppliers (along with sub-contractors) is limited within the overall caps provided by India law; and
  • obtain the insurance policies for the right of recourse under the INIP (in addition to any other insurance it would obtain for its obligations under the supply contract).

Claims under other laws

Section 46 of the CLND Act allows for third party claims being raised against the operator under laws other than the CLND Act (hereinafter collectively referred to as "Other Laws"). Ever since the CLND Act was enacted, there has been ambiguity if this provision on third party claims applies to suppliers or not.

The ambiguity is mainly due to the fact that while the second part of Section 46 ("nothing contained herein... against such operator") clearly states that the CLND Act would not bar proceedings under Other Laws against the "operator", concerns have been raised that the first part of Section 46 of the CLND Act may potentially be construed as preserving any claims or remedies that a person may wish to pursue against suppliers outside the ambit of the CLND Act (for instance, claims under tort law). And, it may expose suppliers to risk of third-party claims in relation to nuclear damage arising from a nuclear incident under Other Laws. Another argument to extend the applicability of Section 46 of the CLND Act to the supplier is that no provision under the CLND Act expressly restricts the rights/ remedies that a third party may have against the supplier for nuclear damage. In addition, the CLND Act does not state expressly that it has an overriding effect vis-ŕ-vis Other Laws.

Relevant to mention that there is one school of thought that prescribes the view that as the CLND Act was enacted in public interest, it would be grave injustice to the victims of nuclear damage if they are restricted in seeking any remedy against the suppliers outside the CLND Act (especially when the nuclear damage was caused due to the faulty equipment/ materials supplied).

On the other hand, the arguments that support the view that Section 46 of the CLND Act may apply only to the operator and not the supplier are as follows:

  1. Overall scheme of the CLND Act - The CLND Act seeks to channel all the liability for any nuclear damage arising out of a nuclear incident towards the operator of nuclear installation. In addition, the provisions of Section 17 (operator's right of recourse) read in the context of the CLND Act support the argument that third party claims under the CLND Act are to be brought against the operator.
  2. FAQs - The FAQs clarify that Section 46 does not extend to suppliers. In support of this interpretation, the Government has relied upon the parliamentary debates preceding the passage of the CLND Act, wherein specific amendments to include supplier under this section in the bill were negated. While, FAQs are not legally binding, they may be seen as reflecting the intent of the Government and may be relied upon by the courts to interpret the provisions of the statute.

    Further, FAQs 2.0 clarify that Section 46 is a general provision to preserve the application of other laws, if any, in respect of the operator. The FAQs 2.0 further go on to clarify that there is no other law on civil nuclear liability in India.
  3. CSC Ratification - The instrument of ratification for CSC submitted by India declared that "its national law complies with the provisions of the Annex to the Convention". Thus, interpreting Section 46 of the CLND Act in a manner supporting third party claims for nuclear damage against the supplier may be in contravention of this.

    However, as courts have not yet interpreted the provisions of the CLND Act and the constitutionality of the CLND Act and the CLND Rules has been challenged in the courts in India, the risk of the courts interpreting Section 46 in a manner supporting third party claims for nuclear damage against suppliers under general laws (including claims under tort law) cannot be completely disregarded/ negated.

As regards this issue, ensuring adequate indemnity provisions are included in favour of the supplier from the operator under the supply contracts could be a potential mitigant.

Insurance coverage under the INIP

The INIP was launched on 12 June, 2015 with corpus of INR 1,500 crore (by General Insurance Corporation of India along with several other Indian insurance companies. It was formed as a risk transfer mechanism to cover/transfer the risks of operators' and suppliers' liability under the CLND Act (Section 6(2) and Section 17, respectively) to INIP.

The main suppliers' policy under INIP is 'Nuclear Supplier's Insurance Policy (Right to Recourse only under the CLND Act)' ("NSIP") and it provides coverage for the supplier's liability under Section 17(a) and/or (b) under the CLND Act. While the terms of NSIP are not available in public domain, based on some publicly available information the main concern of suppliers inter alia relate to the fact that a supplier can avail a policy under NSIP only once the operator has availed a policy for the nuclear power plant under the operator's policy i.e., Nuclear Operator's Liability (CLND Act) Insurance Policy ("NOLIP"). Importantly, NOLIP needs to remain in full force and effect for the entire term of NSIP for a supplier to be able to make a claim under the NSIP. Further, NSIP is issued as only a right of recourse policy, offering to hold the supplier harmless should the operator exercise its rights against the supplier under Section 17(a) and/or Section 17(b) of the CLND Act. And, thus, NSIP would not indemnify a supplier against any liability under Other Laws or any other laws of any other country (or under Section 17(c) of the CLND Act).

Way forward

To address the concerns of the foreign suppliers and to enable their participation in the Indian nuclear power sector, the Government of India has taken several steps, such as, issuance of the FAQs and FAQs 2.0, and the establishment of the INIP.

With respect to indigenous technology, NPCIL has also included language in its tender documents clarifying that it would assume the role of the supplier being the system designer and technology owner and would be responsible for safety design of the installations. This is with an aim to give comfort to the smaller suppliers that they would not be responsible for liabilities under Section 17(a) and (b) of the CLND Act read along with Rule 24 of the CLND Rules. However, enforceability of such provisions are certainly debatable and open to challenge.

Now, it is time for the Government of India to recognize the role nuclear power could play in assisting the country in meeting its net-zero emission targets, and its importance in helping with grid stability by balancing the effect of the intermittent nature of renewable energy on the grid. And, to take more concrete steps to (a) continue the growth of indigenous nuclear power plants; and (b) encourage development of nuclear power plants with the support of the foreign suppliers (inter alia including suppliers based out of France and United States of America), to be able to achieve the envisaged growth of the nuclear power in the Indian energy mix.

While the heart of the Government on nuclear power growth seems to be in the right place, it would need to be seen if they can progress things at the ground level to stimulate the much needed domestic private and foreign investment in the Indian nuclear sector.

Footnotes

1 DAE's response dated 15 December, 2021 to a question raised in the Parliament of India in relation to investment in nuclear energy sector.

2 Ibid.

3 The latest consolidated FDI Policy was issued by DPIIT on 15 October, 2020.

4 The constitutionality of the CLND Act and the CLND Rules has been challenged in the Indian courts and the matter is currently sub-judice before the Supreme Court of India.

5 'Operator' in relation to a nuclear installation, means the Central Government or any authority or corporation established by it or a Government company who has been granted a licence pursuant to the Atomic Energy Act, 1962 for the operation of that installation.

6 Frequently Asked Questions and Answers on Civil Liability for Nuclear Damage Act 2010 and related issues, accessed on 23 January, 2022 Available at: https://www.mea.gov.in/press-releases.htm?dtl/24766/Frequently_Asked_Questions_and_Answers_on_Civil_Liability_for_Nuclear_Damage_Act_2010_a nd_related_issues

7 FAQs Version 2.0 on CLND Act 2010, accessed on 23 January, 2022 Available at: https://www.mea.gov.in/Images/amb1/FAQ_FOR_WEBSITE.pdf

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Mr Hitesh Kalwani

L&L Partners

9th Floor &103, Ashoka Estate

Barakhamba Road

New Delhi

INDIA

Tel: 1141215100

Fax: 1123723909

E-mail: Competitionlaw@luthra.com

URL: www.luthra.com

 

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