As one of the world’s most active regions for nuclear development, India is pinning a lot of hope on nuclear power. How can the supply chain mitigate project risks within India’s legal framework?
India is one of the top energy-consuming countries in the world and is expected to surpass the European Union by 2030. To meet its growing energy demand, India plans on growing its nuclear sector at pace over the next decade. The subcontinent currently has 22 reactors in operation with a total net capacity of around 6780 MW and is hoping to increase this almost threefold to a total capacity of 22,480 MW by 2031. It is not only considering expanding its large nuclear power plants (NPPs) fleet, but also developing small modular reactors (SMRs). With such ambitious plans, what learnings should India take from previous trends in nuclear energy?
Development of India’s nuclear energy sector
In the 1960s, India made its first foray into the nuclear sector by building two small General Electric boiling water reactors. However, international collaboration quickly stopped when India carried out its first nuclear weapon test in May 1974 while refusing to sign the Treaty on the Non-Proliferation of Nuclear Weapons. Various international sanctions were imposed, which excluded India from nuclear trade.
Over consequent decades, India relied mainly on Russia. But since the 2005 the Civil Nuclear Cooperation Initiative between India and the USA, India has been reinstated in the international nuclear community. At present, India has signed Agreements on Co-operation and Peaceful uses of Nuclear Energy with 13 countries.
As per India’s 2006 Integrated Energy Policy, the country aims to achieve energy security for all of its citizens irrespective of their ability to pay for it. For this policy to be a reality, India needs to reduce its dependence on the import of fossil fuels. Yet, based on its current policies, India’s combined import bill for fossil fuels is projected to triple over the next two decades, with oil the largest component by far.
In meeting its growing demand for energy, India’s policymakers are keen to adopt “safe, clean and convenient forms of energy” at the lowest cost and in a technically efficient, economically viable, and environmentally sustainable manner. Currently, the nation devotes nearly 3% of its GDP to energy investment, and an increasing share of this investment is going into clean energy. Looking beyond 2050, policymakers view nuclear energy as the most potent means to attaining long-term energy security and energy-independent status.
Today, India is second in the world, after China, in terms of the number of reactors being constructed. One of India’s primary goals for 2031 is to ensure the energy needed to sustain a growth rate of 8-9% becomes available. This opens opportunities for large-scale investment in the nuclear energy sector.
Despite this momentum, steps towards increasing India’s nuclear energy capacity will continue to meet delays arising from several factors. First, the civil liability for nuclear damage law has been a source of concern to foreign suppliers. Second, there are inherent challenges in developing and building NPPs on budget and on time. Third, several nuclear power projects have met with protests from the local population owing to the nature of nuclear energy. Fourth and finally, there may be delays due to Russia-related sanctions, as Russia is currently the only foreign partner active in the Indian nuclear sector.
Taking these considerations into account, it is important that all parties; whether local or foreign, are well-informed about the legal pitfalls they may face while working their way along the delicate path needed for the growth of nuclear energy in India.
Mitigating legal risks: learnings from India and abroad
NPP projects have a long history of disputes. The Olkiluoto 3 power plant in Finland, being designed and constructed by the French-German supplier consortium of Areva-Siemens for the owner Teollisuuden Voima Oyj (TVO), was due to have been completed in 2009 but has still not achieved Takeover. This had led to ICC arbitrations running for a decade. More recently, EDF made a EUR1.5bn claim from Areva in 2021 for Flamanville 3’s operating losses.
The stringent process unique to the nuclear industry can lead to delays in the issuance of licensing approvals, which can then delay the planned construction schedule. Moreover, if the applicable regulations change during the construction period, the contractor may have to adapt its work to the new standards. For example, after the 9/11 terrorist attacks, regulators required design changes to consider the possibility of a plane crashing into an NPP. Likewise, after the Fukushima Daiichi nuclear accident in 2011, regulators required design changes to address similar NPP vulnerabilities.
India is no different, and delays have already occurred in the construction of some NPPs such as the Kundankulam plant.
Disputes in the nuclear sector can be mitigated if there is proper understanding and management of the associated risks from an early stage.
First, risks can be managed during the procurement and contract drafting stage. The construction contract must specify and define the objectives in the order of their priority, such as scope of work and performance requirements, price, and time of completion, as well as the circumstances giving rise to extension of time and additional costs.
Second, the stage of contract management is important for risk management. The parties should have clear and rigorous project management procedures in place that would help identify and mitigate risks arising from misunderstanding between the parties.
Third, risk management can be addressed at the stage of handling disagreements and disputes between the parties. When a claim arises in the project, it should be fairly and efficiently addressed in the manner provided in the dispute resolution clause in the contract. Claims should not be allowed to accumulate, and a proper system must be in place for presenting and responding to claims by the parties.
Disputes are likely to arise due to the expected rate of involvement and investment by foreign entities, related to the construction of NPPs or otherwise.
Given the international nature of these projects, and the risk of potential delays in resolving these disputes in the domestic courts in India, international dispute resolution (such as mediation or international arbitration) is likely to be a preferred choice. International construction contracts typically include an arbitration clause for resolution of disputes that arise during the project. The regulations in force in different jurisdictions associated with the construction of NPPs to guarantee certain standards are of utmost importance here.
Another avenue that can be adopted by investors for dispute resolution is to initiate investment treaty arbitrations under the Bilateral Investment Treaty (BIT) in force between the country of the investor and the home State of the owner. Even disputes arising out of delays and cost overruns in the construction of an NPP can potentially be the subject of an investment arbitration in certain circumstances.
The nuclear energy sector has also proven to be a fertile ground for commercial disputes, giving rise to some of the most high-profile arbitration cases worldwide in recent years. In 2013, US-utility company Southern California Edison (SCE) initiated an ICC arbitration against Japan’s Mitsubishi, alleging that Mitsubishi delivered faulty steam generators for Edison’s San Onofre NPP in San Diego, USA. While in 2014, German energy group E.ON and its subsidiary PreussenElektra commenced an ICC arbitration against Belgian-based Electrabel over nuclear power tax payments arising from reciprocal electricity supply agreements entered into by the parties in 2009.
Disputes arising from a commercial relationship between different entities can range from non-supply of nuclear fuel, or supply of faulty plant equipment, to protection of intellectual property rights. Given the size of the nuclear supply chain related to the construction of all of the large NPPs and SMRs India wishes to build in the coming years, numerous commercial disputes are likely to arise in the future.
Legal framework governing the sector
The Atomic Energy Act (1962) of India is the foundational legislation that governs all regulations on the civil use of nuclear energy. But the 2010 Civil Liability for Nuclear Damage Act has had considerable implications for the development of the nuclear energy programme in India.
The 2010 Act aims “to provide a civil liability for nuclear damage and prompt compensation to victims of a nuclear incident through a no-fault liability to the operator.”[1] The legislation allows the operator to have a right of recourse against the supplier for the compensation paid for a nuclear accident, if the accident results from the supplier’s action.
This approach is partly a consequence of the 1984 chemical accident that occurred in Bhopal, the capital of the Indian state Madhya Pradesh. It was the worst industrial accident to date. The release of a toxic gas from a factory during the night caused, over several years, the death of 15,000 to 20,000 persons, and injured between 150,000 and 800,000 persons. An important legal battle to compensate the victims ensued, and in October 2022, the Indian Government was still considering pursuing further action before the Supreme Court.
The 2010 Act is controversial because under the international nuclear liability conventions, the operator is strictly and solely liable and the operator would have a right of recourse against a supplier “only if this is expressly provided by a contract in writing”.[2]
India’s provision has been met with criticism from the nuclear industry, both domestic and international. The agreements already in place between India and foreign countries assumed that India would “create a civil nuclear liability regime based upon established international principles”, which is not considered to be the case by the foreign suppliers.
The Indian government took some steps to address these concerns, with no success, such as: the adoption of the Civil Liability for Nuclear Damage Rules (2011), FAQs on the Act, and the establishment of the Indian Nuclear Insurance Pool, which provides nuclear liability insurance policies for the nuclear operators and suppliers respectively.
However, the Nuclear Supplier’s Insurance Policy (NSIP) has also given rise to a number of concerns. Firstly, the NSIP will only be effective as long as the one provided to the operator of the NPP, for which the suppliers have taken insurance, remains in full force and effect. Secondly, the NSIP only addresses the operator’s right of recourse under Section 17(a) and Section 17(b) of the 2010 Act, and no other liability a supplier may incur for nuclear damage under any other laws, in India or abroad, is covered.
In addition, at the time of writing, two public interest litigation petitions are currently pending before the Supreme Court. These petitions challenge the validity of the Act.
Given India’s present advancement in the nuclear energy sector and its increasing needs for energy, as well as its need to engage foreign suppliers and investors, it is important for the government, operators, and suppliers to find a way forward that will overcome these concerns.
Future nuclear development in India
NPPs in India often attract protests, as well as resistance from the local population and civil rights groups. The Supreme Court’s current role in balancing the general public’s concerns with the government’s vision to develop the nuclear energy sector in India appears to be a step in the right direction.
The nuclear power sector has immense potential to serve global targets for decarbonised energy. The situation in India is consistent with this, as India aims to increase the share of nuclear in its energy mix to meet its already known and anticipated energy needs and strategic security goals.
It is, however, conceivable that disputes may arise at an increasing rate in India and around the world, with the increased focus on nuclear energy. Should any such dispute arise in relation to an international project in the nuclear energy sector in India, international arbitration is likely to be the preferred choice of dispute resolution due to the involvement of foreign players and the requirement of particular expertise in the field.
Indeed, examples from around the world indicate that there is a wide range of disputes in connection with the construction of NPPs and the commercial relationship between parties all through the supply chain that may end up as disputes in construction, investment, or commercial arbitration. In this regard, it is important for the concerned parties to focus on early risk management, which must be followed diligently throughout the life of the project or contract. Often, parties can avoid or at least mitigate such disputes by adopting a proactive and well-informed approach from the start.
While India appears to be taking steps in the right direction in this regard, it does not mean that projects in the nuclear sector can be dealt with in an easy manner. A great deal of care and planning by all relevant players is essential for projects and contracts in a sector regulated like no other.
