Akshay Jaitly on India's Energy Sector Challenges, Reforms, and Future Pathways

SHRUTI RAJAGOPALAN: Welcome to Ideas of India, where we examine the academic ideas that can propel India forward. My name is Shruti Rajagopalan, and I am a senior research fellow at the Mercatus Center at George Mason University. 

Today my guest is Akshay Jaitly, one of the founders of Trilegal, one of India’s leading law firms. He specializes in advising on energy and infrastructure projects. His research interests include power sector reform, the energy transition and public-private contracting.

We talked about the top-down nature of electricity regulation and pricing in India, the dysfunctional DISCOMS, the reforms required for an energy transition towards renewables and nuclear energy, and much more. 

For a full transcript of this conversation, including helpful links of all the references mentioned, click the link in the show notes or visit mercatus.org/podcasts. 

Hi, Akshay. Welcome to the show. It’s so nice to finally speak with you.

AKSHAY JAITLY: Thanks a lot, Shruti. After a long time of being in touch.

Electricity in India

RAJAGOPALAN: Yes. I want to talk to you obviously about all the work that you’ve done on the energy sector in general, electricity in particular. The way we normally think about electricity is we think about the last mile, which is what we experience. It’s usually shortages, outages, load shedding, things like that. If you’re a little bit dorkier and read the newspaper, one step above that [are] issues of pricing and subsidies and how different consumers—industrial, commercial, agriculture—are all treated differently.

To me, as an economist, and to most people, it just seems like a pricing issue. Either we are paying too much or not paying enough, and there just doesn’t seem to be enough electricity to go around. The allocation of electricity, and this is particularly what I’ve learned from reading your work, it’s not just a price allocation issue. There’s a whole bunch of other things going on. 

There are allocative issues between how the union government and state governments split their responsibilities. Then there are generation companies, both public and private sector, then there are DISCOMs, both largely public and some private sector, and then dispatch centers, and then all the procurement and pricing problems just seem to be downstream. Can you walk us through this landscape? I’m scared to say landscape, maybe it’s a minefield, but can you walk us through the minefield? Take as much time as you need, but it’d be good to get a sense of this broader picture.

JAITLY: You’ll get the view of someone who’s studied a bit of economics and has encountered it along the way, but I don’t think like an economist. The way that I’ve come to doing this policy work—and the reason I’m giving you this background is just to place my following thoughts in context—has really been from a practitioner’s perspective. I’m sitting at the shoulder of investors, people who are looking at the sector and saying, “Okay, where can I invest? What are the risks? Who are my counterparties? How can I expect to make money over relatively longer periods of time,” because that’s the nature of these assets and the timeframe over which they reveal their value, if you like.

One of the ways that I just think about this in the whole price and economics context, is to just say, look, it’s like any other commodity. You start from the premise that it’s any other commodity. Like any other commodity, it’s produced, it’s taken to the market. There are wholesalers who might sell it to retailers and then sell it to the final consumer. That’s the way that very often, when I’m trying to explain what I do to people who aren’t familiar with the sector or even economics or the more formal economy, that’s how I do it.

It’s super, super simple, maybe too simple. It’s just nice because it breaks up the different legs of it and allows you to think of where you go to from there. You’re right that it is a minefield in many ways. I think the reason it’s complicated and difficult is because it’s a microcosm of many of the kinds of issues that we face within the economy today. It’s a wonderful example of how you look at the operation of the state vis-a-vis the operation of private players vis-a-vis the operation of what are supposed to be semi-independent bodies doing load risk dispatch and regulation.

Of course, very importantly, it’s the consumer at the other end, the citizen. Because of the history of the sector in the country—and you started off talking about the last mile—the citizen believes that they should turn on the switch and electricity should flow. Of course, they don’t quite expect it because of the history of outages in the country and load shedding, et cetera, but that’s the expectation or the hope. What’s happening behind that, which is extremely complicated and quite difficult, is not on anyone’s mind. There’s this expectation that it’s a public good, and it’ll come free.

I was recently at a very fancy Delhi party, and I was talking about the work I do. Somebody said, “But electricity should be free.” I was just shocked. The kinds of things you’re battling against when you talk about reform in the sector are under that backdrop. That’s where we start off from. When you talk about reform, and when you talk about prices and markets, there’s a really thin sliver of people you’re speaking to.

Even within that thin sliver, there are a whole lot of people who are impacted by the political economy and, therefore, even though they might well understand what the implications are, feel themselves constrained to do something about it that would lead to a more economically rational power sector in the future. That’s how I just set the stage. Maybe we can come back to some of the stuff that you had detailed in your original question.

RAJAGOPALAN: How much of this—let’s start with the top—the regulatory system that’s set up by the union government, how that impacts the states. What are the states doing in terms of generation, distribution, and regulation? Then we can talk about the downstream consequences that you set up after that.

JAITLY: As someone who knows the constitution pretty well, you know that electricity is a concurrent subject. You’ve got both the central government and the state government making law and, therefore, downstream of that policy as well as delegated legislation on electricity— In fact, that is one of the most important themes in the sector, and it continues to be really, really live and hot even today, even as much as last month where there was an important judgment of the Karnataka High Court, which struck down the green open access rules that the central government had purported to pass under a certain provision of the Electricity Act.

I think there’s a very neat historical break in the history of the sector, which is 2003. It’s not much use going too far back, other than the fact we can just take it as read that it was basically a state-owned system almost in its entirety. There had been some private generators, and there were some legacy private generators that had continued in the system. There was even a legacy private distribution company in Kolkata, CESC, which continues to be in existence. Effectively, we are talking about something that is within the state. It is not just owned by the state, but these were electricity boards, they were not corporate entities, et cetera.

What the 2003 act did is it started off by saying, “Okay, we are going to split these things up. We are going to do what was called unbundling.” The regulators had already been created a couple of years earlier. Because of the fact that there are both central and state-level issues, we’ve got the CERC, the Central Electricity Regulatory Commission, which regulates matters of interstate electricity sale and purchase and transmission, et cetera. Then we’ve got the state commissions, which take care of regulatory issues within the states.

That’s the regulatory framework. There isn’t much interaction between the state regulator and the central regulator. Appeals from both of these go to the Appellate Tribunal for Electricity, or APTEL, and then appeals from that go to the Supreme Court. That’s the very basic regulatory framework. 

What 2003 did was that it required the state electricity boards, as they were, to unbundle transmission, distribution, and generation from each other, and to put them into separate corporatized entities, still completely owned by the state. It also had a provision for trading, which is a small part of the system, but which has acquired greater importance. That was more relevant for the central government, although you can have traders within states, but a lot of trading generally takes place across states. 

Actually, even prior to that, Odisha had tried to privatize its distribution company in the mid-’90s, something that I as a very junior associate worked on in some capacity long ago. It was quite well thought of. The World Bank was involved, the ADB was involved, but it was wound back some years later. Three or four years later, it has again been privatized. There’s quite an interesting history, probably some PhD student looking at that history as we speak. 

What happened then was that the distribution did not see a lot of private investment and neither did transmission. What the government did was allow for private investment into generation, thinking that that’s a discreet thing. You produce power, usually the tariff is determined typically by competitive bidding. In certain cases, it might be set by a regulator, but even a bid tariff needs to be approved by a regulator. Once the power is generated, it’ll be sold to a distribution company, and it’ll flow through some transmission lines and that’s it. Now, many people believe, and I’m one of them, that we perhaps got the wrong end of the stick. We possibly should havesorted out distribution first and then bothered about transmission and generation.

Where we are today, if we were to just do a quick jump to the present, is that you’ve got a whole bunch of private generation. In fact, probably a majority of private generation now, a vast majority in renewables. You’ve got a largely public-sector-owned transmission, but an increasing amount of private transmission as well. Although a power grid, which is allowed to PGCIL, which is the government transmission company, is allowed to bid in projects and often wins projects, it’s competing as if it were an ordinary market player like anyone else.

Distribution has been privatized to a very limited extent in only a very few places, Delhi and Bombay being the really prominent ones, apart from Odisha, as I just mentioned. There’s now talk about increasing the privatization of distribution. In fact, in the last week, I’ve spoken to three or four different people who’ve told me that it seems like people are finally taking this seriously. Of course, it’s an issue for the states because distribution is entirely owned by the states. Therefore, it’s very much a function of the political economy of the states.

RAJAGOPALAN: Before we get into the nitty gritty of DISCOMs and all the pathologies that they come with, can you walk us through why generation and distribution [are] always treated separately? I know there’s a technical reason for this because just the way electricity functions, which I pretend to understand. There is an issue of storage. There’s an issue of transmission. There’s an issue of transmission losses, and so on. Why do we have this huge separation between grids, which are usually at least set up by the state, if not completely owned and run by the state, individual DISCOMs, and power generation? And how that therefore impacts how they’re regulated?

JAITLY: Generation is a discrete part of the system and can be easily split off, and because generating companies are selling power to distribution companies, they could be private or public, and it wouldn’t make a difference as long as the price, as far as the current government thinking and general thinking within the country’s concerned, as long as the price is “controlled” through a regulatory process. The control would ordinarily come through competitive bidding. As I said, even a competitively bid tariff has to be approved.

Of course, there’s also scope for negotiated tariffs although increasingly the government is signing less of those kinds of purchase agreements. The generation companies can be anywhere in the country. You’re not selling the same electron that you generate to a purchaser. It’s basically a netting exercise where you put in X amount and the other person draws the same amount at their end. The distribution company has to be customer facing and the distribution company is owned by the state because that is the conduit through which subsidies are also paid out.

If you want to get private investment into the power sector, you need to separate generation from distribution because a generator shouldn’t be taking the burden of subsidies. In the UK, of course, you’ve got much more granular separation. You’ve got companies which are retail companies. As here in India, you get a call saying, “Would you like to buy a flat on the Sohna Road?” In England you’ll get a call saying, “Would you like to change your electricity provider?” It’s a function of just switching because the access to the last mile hardware is open. It’s under common carrier principle so anyone can access them.

RAJAGOPALAN: That is the problem that in India we separate this because the last mile pipes are not common carrier, we’ve left it entirely with the states? Is the expectation that if you have private DISCOMs, they will have to build their own pipes? What are they solving for exactly?

JAITLY: No. They’ve acknowledged that what I described in England is possible because that’s what you can do in Bombay as well. They don’t expect pipes to be built again. They don’t expect infrastructure to be built again. That would be really silly. I’m happy to say that that’s not the route we’ve gone down. They’ve acknowledged that that’s possible.

RAJAGOPALAN: It’s just a subsidy pipe. It has nothing to do with the electricity pipe.

JAITLY: You could say that. The physical electricity pipe—because there are two private providers in Bombay, you can switch from one to the other. The infrastructure for all of it is legacy infrastructure that was built by the state, or which was built while the distribution company was state owned. Therefore, you’ve said, okay, you’ve used [the] common carrier principle and said you can switch.

DISCOMs

RAJAGOPALAN: Now let’s go to the DISCOMs. There’s a lot that’s wrong with them. Let’s start with just how they function, the way they function, and what’s wrong with that. Then we can talk about procurement and pricing and all the other nonsense that they come with.

JAITLY: I’d just like to start by saying that I have enormous sympathy for government-owned DISCOMs in India because they are supposed to be corporate entities, and they’re supposed to function according to principles of efficiency, the sorts of things that any company was supposed to do. 

The kinds of pressures that they are under, which are pressures from a variety of different directions: the government itself, the regulator and its own customers, and last but not least, its own people. They employ very large numbers of people. There are ecosystems that have been created over the years within distribution companies. First of all, as I said, I have a lot of sympathy for them. 

The basic logic of how they operate is that they have a bunch of long-term power purchase agreements that they’ve signed on fixed prices with a variety of different providers. They also have to meet peak load power. 100% of what they’re buying is not what they’re actually selling. They have to buy and dispatch power when there is the demand. They are required to dispatch according to what’s called merit order dispatch, so the cheapest power first. They are buying at a variable cost, but people who they’re selling to are not paying at a variable cost. You’re paying X amount per unit.

RAJAGOPALAN: You mean a given customer is not having variable pricing through the day, right?

JAITLY: Yes.

RAJAGOPALAN: You have different groups of consumers who have different pricing.

JAITLY: Correct. You have different consumers who have different pricing. In some cases, some of them might even pay different prices in the day, but it’s not mirrored to the prices that the DISCOMs are buying power at. You’ve got a complete mismatch there, number one. Number two, as I mentioned earlier, subsidies are channeled through the distribution companies. Very often, subsidies are not released by the government to the distribution companies. It’s just as simple as that.

RAJAGOPALAN: Basically, what is it, a line of credit that the DISCOM is giving to the government, its own government? How does this work exactly?

JAITLY: They’re supposed to receive allocations to pay subsidies. They don’t receive the allocations and yet they’re having to provide electricity at subsidized rates, which means that they have to borrow. They have to find ways to make ends meet, which is one of the main reasons why there is so much DISCOM debt.

RAJAGOPALAN: When you say borrow, again, it’s from the same government. Are these just different government departments? What’s going on? For me, the only comparable example is banks, badly run state-owned banks, which now keep getting merged into SBI. How does DISCOM work?

JAITLY: If I were to take the example of Tamil Nadu, which we’ve studied in some detail, they’ve got a whole bunch of loans from a variety of public sector banks and financial institutions. They also have loans from deposit-taking state NBFCs, nonbanking financial companies. As a consequence, what happens as a result of this gap between what they spend and what they get in, [is] they are late in making payments under power purchase agreements to people who generate power.

RAJAGOPALAN: Who are mostly private.

JAITLY: Who are increasingly private, although if you were to speak to NTPC, there’s no love lost between NTPC and the distribution companies at all. In fact, they are probably taken more for granted at times, and it depends on the state, than some private generators might be because private generators may be able to exercise some clout that a public sector generator cannot.

RAJAGOPALAN: You have voters who want cheaper power. You’ll have people who are fighting elections who will promise cheap to free electricity to certain groups of voters. Unfortunately, they get voted into power. These are typically state government players, so they’re going to call and put pressure on the bureaucrats who run the DISCOMs.

They don’t pay the DISCOMs because the central government is putting pressure on them that there’s a fiscal squeeze, and you can’t randomly, willy-nilly subsidize electricity. Basically, the DISCOM ends up holding the bag. Because they can’t crumble completely, some more calls will be made to some more bureaucrats, and then other state-owned entities like banks and NBFCs will have to loan money into this hole. By some magic, this has all not collapsed yet.

JAITLY: This is day-to-day business as usual. 

RAJAGOPALAN: I’m sorry, I’m laughing. This is just terrible.

JAITLY: We’re painting a broad brush. This isn’t the case for 100% of the DISCOMs in the country.

RAJAGOPALAN: Sure. It’s like 60%, 70% of the DISCOMs. This is like Hemingway, right? Gradually, and then suddenly, they’ll all go bankrupt.

JAITLY: They will, and they won’t. One of the reasons why the Electricity Act came in in 2003 was not because this was the 1991 logic being applied to the electricity sector. It was because of the fact that the power sector in every state was bust. The energy departments in each state were bust. There was a massive bailout. This whole thing was put into place to say, “Okay, let’s corporatize these entities and put them on their own financial feet.”

That objective has spectacularly not been achieved because there have been four subsequent bailouts of increasing amounts of money. They’ve been with various kinds of conditions that the central government has imposed saying that you must do this, you must do that, you must reform, you must raise tariffs, et cetera. That’s the background within which these day-to-day financial issues are resolving themselves or not.

RAJAGOPALAN: Now that we know these DISCOMs are a mess, how does that impact all their counterparties who are typically electricity generators from whom they’re buying power?

JAITLY: Let me put my adviser-to-investors hat on for a second, and let me take you to an investment committee meeting where a large fund is looking to buy a portfolio of renewable energy assets which are scattered across a large number of states in the country. Plus, there are two central schemes of procurement of electricity. Let’s assume that this company is rated, and it has rating agencies that has put certain conditions as to what kinds of assets it can hold, what debt-equity ratio it should have, et cetera, et cetera.

You will find that this fund will divide the assets into three categories: Category 1, which will be SECI, which is the Solar Energy Corporation of India, NVVN, which is a subsidiary of NTPC, and Gujarat. That’s Category 1. There are three or four states in Category 2, which are all right. And then everybody else is in Category 3. They will look at the number of assets that are in each bucket, and they’ll say, “Okay.”

They’ll tell if someone’s selling these assets, they’ll say, “We will either pay you less for those assets” or they’ll say, “Please leave them out of the deal altogether,” because it is a condition that the rating agency has put on them that you can have only X percentage of Category 3 assets within your portfolio. The reason I’m illustrating this in this fashion is because this is what the government or the state or people who believe in the state system don’t see. This is investment walking out of the door. We never see investment that doesn’t happen. We only see investment that happens.

RAJAGOPALAN: Economists see it because your gross fixed capital formation just plummets, and it has plummeted.

JAITLY: Here’s an example of the poor functioning of a distribution company, the poor financial health in the context of a state’s finances, which is causing it to behave badly in the manner in which it honors its contracts, which is causing an investor to look at it in a certain way and either “undervalue it” or choose not to purchase it.

RAJAGOPALAN: Are you talking about investing in the DISCOM or investing in all the generation companies which are left holding the bag because of the DISCOM?

JAITLY: Investing in a set of generation companies because in the generation sector, there are lots and lots of SPVs, or special purpose vehicles, that are set up to hold one or two, or a small group of assets for project financing purposes. There are many, many companies that often are part of these larger transactions. We might have 1,000 megawatts, which comprise 50 companies.

RAJAGOPALAN: What is the risk that they are worried about? Just that there will be a delay for these SPVs or generation companies in getting paid, or that they’ll be underpaid, or that they’ll not be paid at all? What exactly is the nature of the risk?

JAITLY: In some ways, all of the above, although the “never get paid” doesn’t really happen very often, to be fair. Not 20 but maybe 18 years ago, when I was first advising a foreign lender on the risks that existed, one of the things I said is that it’s never happened that a PPA hasn’t been honored in terms of payment. It can be delayed. Three, four, five, six months is all right. If you have a 12-month delay, what it does to your balance sheet and your cash flows is terrible. Very often, most often, it’s delay. There are some egregious examples which have happened in places like Andhra [Pradesh] and Punjab.

RAJAGOPALAN: You have retroactive pricing, like retroactive taxation. Now we have a new category. 

JAITLY: Yes. There’s an article which I wrote which talked about Punjab’s Vodafone moment, which is when they basically said that they passed a law—here’s the interesting thing. This was just before the Punjab elections, the assembly elections, and a law was unanimously passed within the assembly, which was to say that the tariff clause of all power purchase agreements are knocked off, and the regulator will redetermine what the tariff is going to be. You’re not talking about not honoring a contract, you’re talking about not having a tariff at all.

RAJAGOPALAN: Or renegotiating a tariff under the state holding the gun, right?

JAITLY: You can put “renegotiate” in very big air quotes because it’s a regulator who’s going to determine it. The regulator will tell you what the tariff is going to be, and your negotiating ability is not going to be overt at all. It will depend on what influence you can exert.

RAJAGOPALAN: Sorry, just to go back a minute, I thought that’s the way it works even in the original negotiation. There’ll be a bid that’s floated. There’re different generation companies that will make the bid. Hopefully, they will price in this crazy risk of delays in payment and cash-flow issues and things like that when they do choose to bid. Okay, no. How does this work? You walk me through this.

JAITLY: Yes and no. I think that we get wildly different answers from people sometimes on a particular bid where you’ll have people who look and feel like a very similar type of investor who bid very differently. Remember that a lot of investors have portfolios of assets, so they may be looking to balance what their tariff is across the entire portfolio. Somebody might be willing to take a little more of a punt and go on with a lower tariff on a particular bid for certain strategic reasons because it wants to get a bigger foothold in a state, or it might perceive the state that risk [is] in slightly differently for whatever reasons, but that can translate into a significant change in the difference in the tariff. If you were to take Western standards of risk assessment, the tariffs to my mind would be higher than they are at the moment.

RAJAGOPALAN: At what point does the regulator come in and vet whatever is the agreement between the DISCOM and the generation company?

JAITLY: It’s a petition that needs to be filed after the tariff is revealed on an auction. A petition has to be filed and then the regulator will approve that. That’s a few months process. It’s not very long. 

RAJAGOPALAN: How badly captured is this? How badly is the regulator been captured?

JAITLY: No, not much happens there. Usually, the tariff goes ahead. You do have other kinds of problems that come in in the period from which the tariff is revealed to the signing of a contract, which is, assume the tariff in a certain state is 250 per unit on a solar tender, and in the next state there’s been a tender before the contract has been signed but after [the] tariff has come out which is at 240. State A will go back to the winning bidder and say, “You reduce your tariff.”

RAJAGOPALAN: Why do they do that?

JAITLY: It’s because the perception is that you are within the same general time window. You have gold-plated your tariff, and you probably should have access to lower costs. Now what happens is that different people negotiate different prices with different vendors. They have different costs of capital; they have different costs of debt. It’s really an optics thing that if my neighbor has just got a lower tariff, then I can’t be seen to be signing a PPA with a higher tariff. This has happened systematically over the years.

RAJAGOPALAN: Is this because they’re worried about [the] Central Vigilance Commission and audits and stuff like that, or this is just the attitude that they should get the best deal and squeeze the private generation company the most?

JAITLY: No, this is a political economy optics issue largely. There are a couple of examples where in the past I’ve been told that there is a vigilance issue. As someone who’s a lawyer as well, you might appreciate this little story. 

RAJAGOPALAN: I’m not a lawyer. Don’t include me with your people. This is all crazy to me.

JAITLY: No, no. You studied law, didn’t you?

RAJAGOPALAN: Sure.

JAITLY: Imagine someone wanting to sign a contract under the following circumstances. This is in the days of feed-in tariffs where there was a public hearing process where the public and people would submit costs of inputs that went into, say, a wind farm, which would be cost of the equipment, cost of capital, insurance, labor. The regulation would provide for, say, a 16% return on investment on that, and on the basis of those costs that were submitted and the 16%, the regulator would come out with a tariff.

Say the tariff was 330. Now the previous tariff, and this is Tamil Nadu again, the previous tariff was 290 and the regulator comes out with a tariff 330. It’s a public hearing process, I’m saying this for the third time just to make a point. My client gets a PPA from the DISCOM which says, “Tariff is 330,” footnote: “We have filed an appeal against this tariff. If our appeal were to be successful, the tariff will go back to whatever it is determined to be, and you will refund me the difference.”

Now who will the sign contract on this basis? They told us this was because the state vigilance authorities had told them you have not exhausted every possible legal means to reduce your costs, so you must file an appeal. The appeal is against, for the fourth time, a tariff determined by a public hearing process, transparent for everyone to see. You can criticize the vigilance officer for putting that pressure but also criticize the DISCOM for not having the guts to stand up to that process.

RAJAGOPALAN: Are all of them for not understanding that the supply curve slopes upwards? 

JAITLY: This was in the days of feed-in tariffs. There aren’t too many opportunities for this thing to happen now. But you’d have to speak to my litigation colleagues to figure out all the different types of bad behavior that a DISCOM is capable of. Some of the other highlights are things like not honoring change in law clauses, not taking into account force majeure, taking very narrow definitions of these things when it’s very clear for everyone to see that when GST was brought in, for instance, there were all sorts of denials of claims of change in law.

Those continued for a long time because initially, it was just GST itself, then it was GST on suppliers. There’s been a whole lot of litigation on change in law for GST. It’s really an illustration of the attitude that I will say no in my contract management process. I will say no to anything that requires me to pay out more money, however legitimate it might seem on the face of it. As you said, that’s one of the—you used the word pathology, which I also use a lot—that’s one of the many pathologies within the sector.

RAJAGOPALAN: Normally, in this system, what one would expect is private power generation companies just won’t play ball with the worst actors. They’ll just say, “These guys are a pain in the ass, they never pay out. There’s a loss-making proposition. We should probably just sell to someone else.” Why doesn’t that standard market selection happen in India? Is it because almost all of them are government-owned DISCOMs, and that’s the only way to exist and make any money, or something else is going on?

JAITLY: Oh, I think it does happen. I think that if you look at the number of direct contracts that private generators have with states or state DISCOMs, the reason you have, for example, the Solar Energy Corporation of India and NVVN, they exist in order to be an intermediary between the generator and the state DISCOM. What they do is, they commission a project which is intended for further on sale to a particular state. You sign a power purchase agreement with SECI, SECI signs a power sales agreement with a state DISCOM and is effectively backstopping the risk.

In the very early days when SECI started, they had a provision in the power purchase agreement which said I’ll pay you when I get paid by the state. Then all of us got up and many people got up and said, “What the hell? You’re just another layer in the system. You’re not dealing with my risk in any way.” Then that was removed and they do pay.

RAJAGOPALAN: Now the union government backstopping these DISCOMs is only going to make them behave worse.

JAITLY: I wonder what the contingent liability profile of these guys is. Of course, because it’s all within the state system, they probably bank on the fact that someone will lean on someone else for money to be paid, which, given the reality of the system, they’re performing a very important function. They’re allowing the sector to grow. In terms of having a rational and efficient power procurement system, you’re basically landing contingent liabilities on the face of it, on a public sector entity which is supported by taxpayer money.

RAJAGOPALAN: Now what is the solution? One way to think about it is just privatize the DISCOMs. This problem also gets solved if you have at least one private DISCOM in each state. Is that intuition not quite right?

JAITLY: Well, it could. What’s already happening, Shruti, is that the existing DISCOMs are being emaciated further, not just by the payment of subsidies, but the fact that many of their highest paying customers—

RAJAGOPALAN: Want to leave. 

JAITLY: —have left or are leaving. They leave either through captive power or they leave through what we call in the business third-party contracts or corporate PPAs, where Google is buying from a ReNew Power, for instance. At the moment, they need to apply for what is called open access, which is a regulatory process which is required to be given, and they can migrate out of the system. It’s the highest paying customers. 

RAJAGOPALAN: Just to explain to all the listeners, the commercial and industrial are the highest paying. They pay above market price because they have to cross-subsidize all the others. Then you have households. Then you have agriculture, which is right at the bottom, which barely pays anything. In the midst of all of this, there’s a fair bit of theft, both on the agriculture and the household side. Is that about right?

JAITLY: About right, yes. I think that’s right. I think in some states, agriculture is just free; in other states, there are lower costs. Yes, that’s fair.

RAJAGOPALAN: Basically, when you say the high-paying customers, you’re saying it’s the industrial and commercial who will exit?

JAITLY: Yes.

RAJAGOPALAN: What’s the difference between open access and captive power?

JAITLY: Captive is when you’re generating for yourself and there’s a regulatory regime which requires you to have a certain percentage of shareholding and offtake a certain amount of the power. You can have group captives where you’re selling to other companies within your own group, et cetera. Then open access is a mechanism through which third parties can sell to you.

RAJAGOPALAN: You basically just bypass the DISCOM company altogether.

JAITLY: You bypass the DISCOM. You need connection nodes, et cetera, and you might need that, but you’re basically bypassing them from a commercial perspective.

RAJAGOPALAN: Now, if I understand this correctly, many of the states—and of course, the worse the DISCOM, the worst this problem. They start putting in new rules to make it harder and harder to have captive power plants because it’s basically an adverse selection market for lemons problem. The best ones leave; the worst ones remain in the system. Now, you want to prevent the best ones from leaving, but instead of reforming the system, they’re making it harder to have captive power plants, which means you actually have overall squeezed supply. None of it makes sense anymore. Is this about right again?

JAITLY: Yes.

RAJAGOPALAN: I keep checking because all of this sounds so outrageous to me. It doesn’t seem believable.

JAITLY: No, it is outrageous, which is why, for me, I would just see this deal to deal. I would see this procurement to procurement. I didn’t necessarily build a framework around this until Ajay Shah and I started working together three years ago. He asked me to go and think about how I would think of the energy transition—that was as broad as his question was. That’s when I started saying, “Okay, let me try and develop some framework for my own thoughts.” [I] started off by saying “privatize DISCOMs” because what you said is true, that you could have a private DISCOM but then the private DISCOM would take all the other customers away from the publicly owned DISCOM. These DISCOMs have people, they have assets, they have this whole ecosystem around them—which is why I mentioned them in the beginning—which it’s not easy to unravel. 

RAJAGOPALAN: Bankruptcy, the way we think of it in the regular marketplace, [is] not an ideal thing even for a state DISCOM to go through.

JAITLY: No, it’s not because they are valuable assets sitting there. You should be pumping up the value of those assets for sale as opposed to grinding them into the dust. Which in certain cases, I have heard said, that that’s what some people in government feel should happen, and that’s what they’re wanting to have happen, but it’s really the wrong way to go. Very, very simply—and this is a question that we ask often—nobody is saying that the state doesn’t have a right to subsidize whoever it wants to subsidize. Just don’t do it through the DISCOM.

RAJAGOPALAN: Yes, just write them a check.

JAITLY: Put the money in people’s pockets to buy the power or have X amount of free units, which is built into the regulatory framework. If someone is bidding for a project, they know they’ve got Y number of customers within that landscape which are going to have the benefit of the free power, and therefore, they’ll take them into account. But we don’t do that. There’s, of course, been talk about DBTs in the sector and stuff, and we’ve tried to think about it in certain ways as well, but it’s not really happened yet at scale.

Open Access

RAJAGOPALAN: Now, all of this is a mess. When it comes to contracts for open access, how does that part work? Does that function relatively smoothly because now the DISCOMs are cut out or is that a whole other different kind of procurement and pricing problem?

JAITLY: No, it’s not a contract. There’s some very interesting things that are happening in the whole area of private-to-private contracts. As one would imagine, when people have the flexibility to transact, even though within the framework of a reasonably conservative regulatory model, there’s still quite a lot of innovation happening. What’s required is a regulatory process to secure open access for a transaction to happen. You need to apply for open access, provided other than in under very limited circumstances, which is effectively that the grid would come down, engineering, technical safety, security concerns is required to be given.

If you do a search for open access at APTEL, the Appellate Tribunal for Electricity, you’ll find a huge number of cases. I think in the vast majority of cases, I’m right in saying that the state loses because this is basically delay tactics. One step, to go back a little bit, is that the litigation that someone is willing to do against a DISCOM is not as much as it would ordinarily be because remember that these are people with whom you have a long-term relationship. You’re reliant on them for a whole number of things.

RAJAGOPALAN: Your money is stuck.

JAITLY: Your money is stuck.

RAJAGOPALAN: The state has endless deep pockets to keep going and appealing and the kinds of things that private players don’t do. They have zero interest or incentive to settle. Even a few hundred core contracts will go all the way to the supreme court. They’ll keep fighting. None of that quite makes sense. I don’t even know why anyone would do business with the state, let alone sue them.

JAITLY: Which is why in some other work I’m involved with, looking at government behavior in regulatory disputes and disputes more generally—but it’s a very broad field that many people are looking at—we’re looking at regulation in particular. The framework or the parameters of a regulatory dispute are narrower than those of a general litigation against the state.

It would be a relatively easier job to bring in principles of cost-benefit analysis for regulatory litigation where someone could do a checkbox exercise and then relieve themselves of the fear of being prosecuted by vigilance authorities because they’ve taken the right kind of decision. Because, as you said, there is absolutely no skin off anybody’s nose going and appealing something. Because they know that it’s not coming out of their pocket and that they’re not going to be evaluated on the basis of whether that was the right decision or whether then, the appeal succeeds or not.

Expanding Capacity

RAJAGOPALAN: Now, the first stage problem is all of this is messed up, which means the way we currently allocate power—it doesn’t go to the highest-valued use. When the highest-valued use tries to exit the system and get better pricing and so on, they get stopped through bad regulation for captives or something else that the regulator’s trying to do. 

Now, how does all of this impact expansion, which is a slightly different problem? The way you set up the original regulatory framework was generation is private and distribution is mainly controlled by the public sector. When I think of expansion, it’s new players coming in with relatively new technology supplying energy resources. Most of this now is renewable. 

How does this entire pricing and incentive problem impact that, not the existing amount of power? Do we actually increase and grow the power generation capacity in India year on year? How much? How badly off are we? Are we on the appropriate growth trajectory to serve the needs of so many people and whatever our energy crisis is? What’s a good way to think about expansion?

JAITLY: No, we’re expanding capacity fairly significantly. Again, couple of points of comparison. I don’t have the latest numbers, but the last time I looked at [it] was a couple of years ago. We increased renewables in a particular year from 6 to 12 gigawatts, and China went from 86 to 120 or something like that. When we talk about trajectories, you could say that we doubled, but look at where we were starting from. It’s going up every year, but we just don’t know how much better we could do. 

Because the numbers are still, in percentage terms, spectacular, we can say, “Look at what we’ve done.” But we know of investors who don’t come to India. We know of investors who are in India and don’t expand their portfolios as much as they could. We look at portfolios, they don’t necessarily get as much value as they could have, et cetera, et cetera. There are a whole other bunch of metrics which don’t come to light, which indicate how much worse we are doing than we could.

Renewable Energy

RAJAGOPALAN: When it comes to renewables, are we doing better in renewables than in the fossil fuel sector because that would be the intuition that that sector is regulated differently and marginally better than the old school coal power generation system?

JAITLY: Frankly, there’s been very little fossil fuel addition in the last five years or so. Anything that happens is going to be on the margin. If you look at where the money is coming from, the fossil fuel addition will come largely from the PSUs, from people like NTPC because they have government-owned capital- 

RAJAGOPALAN: Yes. Legacy assets basically. There isn’t much room for them to wiggle.

JAITLY: No. Also, even if there’s a new plant, they will find the financing for a new plant through equity that comes from government and debt that might come from public sector banks. If you are a regular private sector market participant without necessarily having close connections with Indian banks who might be wanting to do you a favor, you are not going to get Indian debt. You are not going to get Indian equity, you’re not going to get foreign debt, and you’re not going to get foreign equity for thermal power generation. It’ll be on the margin. All the World Bank institutions have moratoriums on this. All the DFIs have moratoriums.

Maybe the US will be willing to finance thermal power in India now, although they’re not willing to do things overseas. But if they do anything, it might well be thermal power today. US EXIM had stopped doing that. The availability of capital for thermal is very, very low. It’s a problem. We do need to increase base load at this point in time, and we’ve got some coal assets that we could use, but it’s not an easy thing to do from a financing perspective. For that reason, we are definitely doing better in renewables, but renewables are constrained by a couple of obvious things. One is transmission capacity. The kinds of transmission grid you need to have for renewables has to be far more robust than you have for conventional power because of the variability.

Of course, the second thing is you can’t store it. And while you can have a constantly running thermal power plant, you can’t depend on solar or wind. Although we are at the beginning, I think. And all of these technologies seem to have a fairly hockey stick or a reverse hockey stick in terms of price and a hockey stick in terms of growth. Prices of storage are coming down dramatically. The last storage plus renewables bid that we had came out at 3.92 rupees, which is cheaper than new-build coal. Of course, it’s not catering to the same market because it’s much smaller, et cetera, but it’s showing us the tip of what is definitely a very substantial iceberg. Of course, there’s the other issue which is alongside this, which is what we may or may not do in nuclear.

Technology Diffusion

RAJAGOPALAN: Yes. Before we get to nuclear, just on wind and solar, can you walk me through what that world looks like because to me, from the outside, the way it looks is technology diffuses really fast. Whatever is the latest in another part of the world, there will be some smart entrepreneur in India who will figure out how to pull together that kind of solar panel at a cheaper cost. 

Contracts diffuse but not as fast as technology. Largely, lawyers will start mimicking the way contracts are designed in other parts of the world, but the regulation is the slowest to diffuse. What is happening in renewables? Is it just that we don’t regulate that sector too much yet, so we’re relatively okay and that’s why it’s growing so fast or is there something else going on altogether? Or is it subsidies?

JAITLY: Each one of the three things that you talked about is important and more complicated than might meet the eye. Let’s start with the first point you made, which was on technology. Technology doesn’t diffuse that quickly. Technology doesn’t diffuse that quickly despite high tariffs on Chinese panels, despite production-linked incentives, and despite a list of approved models of panels that can be sold within India. Despite this, we don’t have the level of production that we would like to have in India. 

Even the panels that are being produced under these favorable circumstances, many of them are being exported because the US for instance, they’re cheaper in the US because Chinese panels are also not being imported to the US. Technology is not diffusing that quickly, and it’s also not necessarily fulfilling its other objectives like job creation, et cetera. It’s only really the mobile phone PLIs that has been successful and not too many others. That’s one. 

If you give people the freedom to contract, contracts are diffusing reasonably quickly. There are some regulatory impediments to the kinds of contracts you have, but there has been some movement on regulation in relation to those contracts. Take, for example, any contract that might look like a derivative—a contract for differences. Contracts for differences, because they become a future, they are regulated. They would technically be regulated by SEBI and have to be traded on an exchange. That has been resolved.

RAJAGOPALAN: Hang on a second. They treat contract for differences as a future in India?

JAITLY: Whether it’s treated as a future or not, it’s something that is required to be traded on exchange. They are private contracts.

RAJAGOPALAN: Yes. What exchange is this going to bring down or what domino effect is the regulator like SEBI worried about? Which consumer is it protecting in a two-party contract?

Sorry. Can you just start with explaining to regular people what a contract for differences is, and then walk us through how SEBI regulates it? Maybe this is too dorky for a normal person.

JAITLY: Sure. I’ll give you a very specific example. Again, let’s take the Google and ReNew Power example. Google, for various reasons, including doing good things for the environment and climate change, tells ReNew Power, “Please build a 100-megawatt plant of renewables and release that into the grid. If the price that you get for it is 3 rupees, we are all square. If you get 2.90 rupees, I’ll make up the difference. If you get 3.10, maybe I’ll take 20 paisa and you keep 80 paisa.” You’re basically saying I will guarantee you a certain price, but you sell it in the market.

RAJAGOPALAN: The reason for this kind of a contract is because during the day, the price fluctuates a fair bit especially for renewables because they can’t be stored.

JAITLY: Correct. These sorts of contracts are now, thanks to a judgment of the Bombay high court, which was essentially adjudicating a dispute between two regulators, said, “Okay, this is going to now be regulated by the CERC, by the Central Electricity Regulatory Commission.” Those kinds of contracts are allowed. 

Therefore, in a private-to-private contract—for the sake of a different example—between a Macquarie-owned platform and InBev you may have a provision which says that, “Here is the price of this contract, but if the price in the exchange changes or if bid prices drop, then our price will get readjusted in the following fashion.” Contracting flexibility will come in as soon as you allow people to or account contractual diffusion will happen as soon as flexibility is permitted.

We’ve talked about some of the regulatory changes that are required. The trouble though with the whole regulatory framework as a whole is that it may well respond positively. It may even respond positively within a reasonable period of time, but it has to do that for every different type of business model. Every business model has to pass a stress test to make sure that is fitting the fairly tight regulatory framework.

Let me give you an example. Various states have passed regulations now for peer-to-peer electricity trading. They’ve passed guidelines under their rulemaking power under the Electricity Act. If you were to ask me, they’re all illegal. All those rules are illegal because you can’t buy and sell electricity without a license. You can generate it, but you can’t buy electricity without it. So if I’ve got a rooftop and I want to sell it to you as my neighbor, I can’t. If that business model becomes viable from a commercial perspective—

RAJAGOPALAN: Then the contracts will diffuse.

JAITLY: —you will need a whole set of rules written to allow it to happen, which currently are not permitted by the act itself. There’s only so much that you can do through regulation-making and rulemaking, which is why the approach that Ajay and I have taken in the work that we’ve done is that you really have to go back to the drawing board. If you really want to see efficient growth reasonably quickly and say, “Okay, what are the market failures that we are correcting for through regulation?” that has to be the lens that we look at it from.

I’m perfectly willing to say that we’ll take 10, 15 years to get there, but a question that I ask sometimes is to say, “What is the vision that anyone has of a deregulated, net zero electricity sector in India even for 2070?” What do people envisage? Do they envisage a completely free market, or do they envisage something else? Whatever it is that you envisage should dictate the steps that you should be taking in order to get there.

I think that there seems to be an understanding now or a gently growing view that DISCOM privatization is an essential part of this because the pressures that are placed on a DISCOM, as long as they exist, are going to prevent it from doing what it should be doing.

RAJAGOPALAN: Wait, sorry to be stuck on this. How did SEBI get involved in this? Why did SEBI get involved in this, rather?

JAITLY: I am forgetting the details of this but, through the Securities Contract Regulation Act.

RAJAGOPALAN: Again, maybe economists are just too simpleminded, because the way I think about it is, if you have a situation where you have renewable electricity, where there’s a lot of variability, the best thing to have is futures contracts. We have fantastic weather pattern recognition and forecasting right now. The entire market for futures contracts and oranges to everything else is based off of it.

It would be the most direct and obvious thing to do that for wind and solar pricing. The fact that we would make this illegal or then regulated under some whole other bizarre thing—none of it makes sense. If there are large-scale buyers or futures, that would be different, but the kind of contract you describe between Google and whoever is supplying them power, that doesn’t quite seem to be the same thing. Anyway, we’ll do this later.

JAITLY: Those contracts are now permitted as a consequence.

RAJAGOPALAN: Oh, they are permitted? Okay. There’s some happy news at the end of this crazy story.

The other renewable story I want to talk about is nuclear. This has suddenly become very important.

Nuclear Power

JAITLY: No, I’m smiling because lots of people in many parts of the world would jump out of their chairs when you said renewables and nuclear in the same breath. They do not allow nuclear to be defined as renewable. I’m completely with you. I do, but that’s why I’m smiling.

RAJAGOPALAN: Yes, but if I reacted to every time someone jumped out of their chair when I said something, I would not really be an economist. I’ve just started ignoring that crap now. Nuclear energy seems about as close to renewable as I can imagine. 

Nuclear seems a little bit different from wind and solar. Mainly it’s the externality, right? There are a few different externalities associated with nuclear. One is just the fact that there could be a crazy accident, like a standard negative externality. There could be something that leaks like [the] Bhopal gas tragedy or Chernobyl or something like that, which is the horror scenario. A second externality is the dumping of waste. Even if nothing leaks and nothing goes wrong, you have to deal with the nuclear waste in some way. How do we deal with that? That’s going to cause a particular kind of externality, whether it’s landfill or something else.

A third kind of externality is that it’s fundamentally the same kind of substances that are used to make very dangerous weapons. It’s not exactly like a leak externality, but it is if you start allowing trading platforms for all of this enriched uranium stuff, then you’re going to have some other downstream consequences. 

First up, are there any other externalities or this is mainly the reason why nuclear seems to be quite different from wind and solar and hydro in people’s imagination?

JAITLY: No, that’s pretty much it.

RAJAGOPALAN: Anytime you have this kind of externality, all of these three things should have very clear ways—I mean, ex ante, you can have insurance markets. Ex post, you can have really good liability rules. Why don’t we end up seeing that in nuclear? Is it just Chernobyl was just too big, and HBO made a very nice series? What’s the roadblock here?

JAITLY: No, as far as India is concerned, I don’t think the roadblock is Chernobyl or the Chernobyl type of issue. Incidentally, you probably know this, but the issue goes way back. It goes back to Three Mile Island.

RAJAGOPALAN: Which has now restarted, by the way.

JAITLY: Yes, but the interesting thing about Three Mile Island is nobody died, but a movie came out at the same time called The China Syndrome in which many people died in a nuclear accident, and it was conflated in people’s minds. It was one of those classic behavioral science issues, and then Malcolm Gladwell, that type of story. Of course, there is a very committed and well-meaning group of nuclear campaigners in India, safety campaigners, and I have a lot of respect for where they come from on this, but that’s not the main concern.

Well, let’s first just acknowledge that in India, at the moment, no private investment is allowed in the nuclear sector. What we are looking at is private involvement, which could happen in a variety of different ways within the nuclear sector. The reason that we are thinking about these issues, the three types of issues that you identified now, is because we are looking at, one, greater supplies of nuclear, which haven’t been happening. That’s because of liability issues.

The other two relate to what we might want to do with private investment in the sector, including foreign investment, because the regimes that we will then need for—and I call them safety on the one hand and security on the other—the bomb issue is the security issue, and the waste issue is the safety issue. Those two issues will require regulatory protocols to be developed, which are significantly different from what they are today because everything is done within the state sector. Now, as far as these protocols are concerned, you need a completely different level of regulatory oversight in a situation where there is private involvement in the running of a nuclear plant.

When it’s state to state, the International Energy Agency will allow you much more leeway. When it’s a privately owned plant, they will come and inspect and do all of that sort of thing. What we need to do is we haven’t sorted out the liability issue yet, but from what’s been said in the economic survey and the budget as far as nuclear is concerned, is that changes to the Civil Nuclear Liability Act are coming, which are absolutely essential for people to take us seriously as far as nuclear is concerned.

RAJAGOPALAN: What would that liability regime look like, let’s say, for private generation? Let’s assume India decides to go the French way and have a number of relatively small nuclear plants largely run by private players but not exclusively by private players. What does that world look like in terms of liability?

JAITLY: The liability side of things isn’t going to be particularly different irrespective of whether there’s private investment or not. The guiding principle for civil nuclear liability worldwide is that liability must be channeled to the operator. In order to have robust markets, not have multiplicity of litigation against various different parties, the international regime basically says, channel liability to the operator and suppliers, and operators can take care of issues between themselves through either contracts or through insurance or whatever else. All of these things actually happen.

The problem with our law is that there is the infamous section 17(b) of the Civil Nuclear Liability Act, which says that nuclear recourse to a supplier might be permitted in a situation where there’re defective supplies or substantive services from a supplier. It’s the suppliers, the manufacturers of the equipment who are saying, “Look, I’m not going to supply a project in India because my liability is open and my whole insurance and liability risk management regime is based on liability being channeled to the operator.”

We agree with this. We agree with this in principle because the government has on two separate occasions over the last 10 years, issued frequently asked questions, FAQs. Effectively, they say that this is not what we mean, but no sensible person in the world would be willing to risk doing business in India in the nuclear sector on the basis of the government’s views on what a law means, which is what these FAQs are. The government’s views on what law means is overturned on a daily basis in all the courts of the country.

RAJAGOPALAN: Yes, the law only is overturned and retroactively enforced. What are we talking about FAQs and MOUs?

JAITLY: There’s specific cases on FAQs where the courts have said, “Forget it. We are not taking these into account. That’s the government’s opinion. It’s entitled to its opinion. Thank you.” There’s historical reasons why this provision came in. It was almost a necessity of the time in order to get the nuclear deal with the US done because the BJP was in the opposition then. There was an insistence that the same regime as was being proposed and as we find in other parts of the world shouldn’t be what we accept. We must have a slightly Indian version of it. That has led to these problems for the last 10 years. It seems to me that the government is looking to introduce a bill to change that. So that’s the supply side. There is also the side of the investment. If we allow private investment into the sector, then we have to completely reform our safety and security regimes for the reasons that we’ve been talking about.

RAJAGOPALAN: Before we go to the safety and security part, here, it seems ridiculous because what the law has effectively done is prevent an Indian homegrown nuclear equipment supply chain from forming. Because no one is going to invest this in India if the supplier is on the hook. Presumably, they put in this stupid provision to punish whatever Scandinavian supplier they had in mind.

JAITLY: You’re right. I hadn’t thought of it like that, but we aren’t necessarily going to get the primary suppliers, but certainly sub-suppliers.

RAJAGOPALAN: Right. This would be open-ended. Anything that is faulty, anyone could be sued in the supply chain, is the way I interpreted the crazy provision.

JAITLY: Even if you couldn’t be sued by the end suer, you could be sued by your supplier—would sue you down the chain. Certainly, smaller manufacturers would have a problem. If we talk about SMRs, small modular reactors, that’s an area in which you could see Indian manufacturers coming in, joint ventures, et cetera because the technological hurdles are lower there.

RAJAGOPALAN: Yes. They’re also safer overall. All the downstream problems, whether it’s leaks, whether it’s waste, all of it ends up getting contained at a much smaller level by making them these small modular reactors.

JAITLY: Yes.

RAJAGOPALAN: Now come to the safety and the security part. What does our regime look like there? Do we have one?

JAITLY: No, we don’t have one. We haven’t felt the need to do any reforms for the moment because we haven’t allowed the private participation yet.

RAJAGOPALAN: Shouldn’t they do it before they allow the private participation?

JAITLY: We should, there’s absolutely no reason why we shouldn’t. That’s also in the budget, and it’s also being talked about at the moment. The changes to the Atomic Energy Act and the entire regulatory regime downstream of that are envisaged, I hope, in the next few months. From what I hear, it’s quite serious. People are taking this quite seriously. I feel that whether it’s a small modular reactor or a large plant, the principles of regulation should be exactly the same.

I fear that there will be separate regimes put in for different types of technology as opposed to regulating by principle, which is to say, liability—very clear, channel it to the operator. Whether it’s a small plant or a large plant, make sure that there’s enough insurance. As far as safety is concerned, you have conditions for disposal of waste, which should apply irrespective of the size of the plant.

Of course, technically you’ll have specifications which will vary, but it shouldn’t be linked to the size of the plant necessarily. You have security issues, which is ensuring the integrity of the fuel supply chain as it enters the plant, within the plant, and then going out of the plant. I thought of this very simple model where you have CISF doing security at airports, the Central Industrial Security Force, you’ve got a government security force sitting within a privately owned establishment providing security. You can have a very simple, conceptually a similar kind of framework.

RAJAGOPALAN: First, India has to actually formulate the rules. But just more simply in terms of liability, how much of this will be insurance versus liability? Will anyone insure this kind of risk? Does our insurance regulator permit insuring this kind of risk and so on?

JAITLY: [For] the larger plants, there are the systems of insurance, which are based on calculations of SDRs and whatnot, special drawing rights, et cetera. I’m not sure how this will play out on the insurance front. To be honest, I’ve not applied my mind to that side of the picture at all.

RAJAGOPALAN: What is the best way to figure out how the nuclear part of it expands in India? There are two ways to think about it. If we go back to an example of something like telecom, in one sense, India did liberalize its telecom sector. We went from one fixed line per 100 people for, I don’t know, God knows how many decades, to about 10. Then we just plateaued at 10 per 100 because the mobile phone revolution just took off. That was just so much cheaper that the remaining 80 or 85 per 100 came in from the mobile sector.

Can you imagine something similar happening in India, that if we actually liberalized nuclear energy, it’s going to be so much cheaper, it’s going to be so much cleaner? The resource constraints are just vastly simpler as are storage and transmission issues. It’s a little bit closer to thermal than it is to wind or hydro or solar. Can we just bypass this existing problem that we have and just leapfrog into some completely different system if we just get the nuclear piece of the puzzle right?

JAITLY: I don’t know because I don’t know what’s going to happen in a variety of other technologies—what’s going to happen in storage, not just battery storage but with various other types of storage. The reason I’m saying this is also to illustrate that we shouldn’t be betting on any one technology. We don’t need to. What we should do in this case is liberalize the rules for people to come and set up. Make sure that all these concerns of liability and security and safety are taken into account and then allow for contracting frameworks that are realistic.

One, nuclear is very expensive, and I think one of the things you said was that it’d be cheaper. It might be cheaper in an SMR when you’re replacing a commercial and industrial tariff. It won’t be cheap if you’re providing base load power from a large plant. It’s also going to take 10 years to come into existence. The way I think of this is, the government should think of this a bit like it’s thought of one of the models for offshore wind. One of the models for offshore wind is to say, “We will identify these areas where you can put up your mast and bid for a project. You find your own buyer. We will provide you interconnection. We will charge for this, that, and the other, but basically, you are on your own, buddy.” I think that’s what we should do for large scale.

RAJAGOPALAN: That sounds quite nice actually, given how much they’ve screwed up everything else. It doesn’t sound terrible to me. 

JAITLY: The renewable sector isn’t as necessarily as bad as that. Still, I think the reasons for why they’ve adopted that approach is because there’s a huge capital cost. It’s quite risky. It’s not been tried before, and the electricity is going to be expensive. These things are all common with nuclear. The same approach where you basically let the business make its decision as to whether it wants to do this or not is at least one model that they should try. One option of setting up nuclear plants could be under this regime.

If the government wants to set up its own plants or whatever, that’s fair enough. For SMRs, you again say the same. You want an SMR,here are the safety guidelines, here are the security guidelines, here is the liability regime and whatever the tech specs you want to have for it to do that. And then let people set up SMRs as captive for whatever large industrial facilities it’s feasible for.

RAJAGOPALAN: Last question is how will all of this change for nuclear fusion plants? Those are so much smaller. I’m not doing the sci-fi version of this, but it sounds a little bit more like the solar panels on your roof, relatively speaking.

JAITLY: Washing machine is the way that I’ve heard it.

RAJAGOPALAN: Washing machine is even better. I know a couple of people who are actually building out nuclear fusion, things in labs and so on, and it seems really very cool and also frightening at the same time that this is a possibility. That seems a lot safer. It seems like it doesn’t have this massive capex involved and 10 years in setting up a plant and then having all those foreign bodies coming and inspecting them every six months. Will that change everything, and do we have anything in place to allow for nuclear fusion, or have we just clamped down on it? Or we are nowhere, we’ve done nothing?

JAITLY: No. I think even nuclear fusion itself is still just coming out of the speculative stage into something that might be possible. The answer to what you said is we’ve not thought about it yet. My fear is that, because the word nuclear exists, we will impose the same regime on it as we do for everything else. I hope that that’s not the case. I hope that we can identify the major substantive differences in a situation where you’re using a radioactive fuel, which can be used for bombs versus fusion. I think that it shouldn’t be too hard to do, but I don’t think anyone is thinking about it yet.

RAJAGOPALAN: Broadly, I think the previous point you made, which is just set the principles out and don’t get in the way and be very clear for the kind of externality or safety or security issues that you’re concerned with. And then everything else should take care of itself downstream. I think that that should largely work no matter what we’re talking about.

JAITLY: It works for the rest of the economy in many, many areas.

RAJAGOPALAN: It’s the nicest thing anyone has said so far on this podcast. Thank you so much for doing this. Akshay, this was such a pleasure.

JAITLY: Not at all. My pleasure entirely.