Hearings and Business Meetings

SD-366 Energy Committee Hearing Room 10:00 AM

Mr. Paul Simons

Deputy Assistant Secretary for Economic and Business Affairs, U.S. Department of State

 

Statement of Paul Simons

Deputy Assistant Secretary for Economic and Business Affairs

Department of State

Before the Committee on Energy and Natural Resources

U.S. Senate

Tuesday, July 18, 2006

 

Mr. Chairman, distinguished Committee members, I am pleased to be here today, with Department of Energy Deputy Assistant Secretary David Pumphrey to discuss Indian energy issues.   As the world’s largest democracy and an important emerging energy consumer, India surely warrants the extra attention.

 

U.S.-India Partnership

 

During the visit of President Bush to New Delhi last March, he proclaimed that “India in the 21st century is a natural partner of the United States.” It is this natural partnership that has led to our ongoing U.S. India Economic dialogue since 2000 and led to the launching of the U.S.-India Energy dialogue prior to the Prime Minister’s visit in July 2005.

 

The U.S.-India economic relationship has become stronger. We are working with India on a full agenda of economic issues through our Embassy in New Delhi, the many cabinet-level visits to the sub-continent, and the four policy forums of the Economic Dialogue -- the Trade Policy Forum, the Financial and Economic Forum, the Environment Dialogue, and the Commercial Dialogue – as well as two cross-cutting forums focused on biotechnology and information technology.  We also established a CEO Forum last year composed of 10 chief executives from each country. Their input will help the United States and India make progress on key issues that will enhance economic growth and job creation and promote bilateral trade and investment by harnessing the energy and expertise of private sector leaders.

 

India is increasingly becoming a major U.S. trading partner. From just $16 billion in two-way trade in 1998, U.S.-India trade has grown to $26 billion in 2005. U.S. exports (of goods), now at approximately $8 billion, grew almost 30 percent last year and we expect continued strong growth.  In the past year, we have taken steps that are opening many new opportunities for both India and the U.S.  We negotiated a comprehensive open skies agreement that has brought momentum to the aviation sector. Since then Boeing has sold almost $15 billion in new aircraft to India and two U.S. airlines have opened non-stop routes to India. Airport privatization is underway and the air transport market has grown by close to 40 percent in the past year.

 

Economic Challenges

 

There are a number of mutually beneficial strategic reforms that could contribute significantly to India's progress and encourage American business to invest in India's future.  Private enterprise and free markets are key to long-term progress. Effective public-private cooperation will address economic growth and development challenges far more effectively than micro-management by governments. Business activity and people-to-people engagement will be critical to the transformation of US-India relations.  Nevertheless, governments play an important role in setting the ground rules for much business activity. Prime Minister Singh has put economic reform at the top of India's agenda. We recognize that these reforms must be politically viable to survive. There are a number of mutually beneficial strategic reforms that could contribute significantly to India's progress and encourage American business to invest in India's future.

 

The most prominent challenge is world-class infrastructure, which India must provide as a platform for higher sustained growth to enable India to achieve its vision of becoming a world power. Infrastructure is now a national priority, but bringing together federal/state authorities and public/private players is just beginning, and remains a tall order.  Infrastructure challenges are complicated by the fact that India's federal/state fiscal deficits severely restrict necessary finances for development. India must invigorate private sources to finance long-term project development. This means that the regulatory environment and attitudes towards private investment in infrastructure at the federal and state level must change. Opening up sectors of the economy where private investment is now restricted, such as retailing, real estate, food processing, small-scale industry, and telecommunications will improve rural connectivity and help generate the growth and revenue streams necessary to provide positive returns to infrastructure investment. 

 

Investors need greater confidence to undertake infrastructure investments, especially in the power sector, where our U.S.-India Energy Dialogue promotes increased trade and investment, including in civilian nuclear power.  Transparent market structures and commercial practices help to open markets. They enable foreign investors to better understand and negotiate on a level playing field. These are essential for realizing the energy security objectives of India as well as other countries in the South Asian region. Market structures will be critical for nations as they seek to increase access to global energy markets and strive to meet the needs of their growing economies.

 

U.S. - India Civil Nuclear Cooperation Initiative

 

One of the most important aspects of our strategic partnership with India is, of course, the U.S.-India Civil Nuclear Cooperation Initiative. As Secretary Rice said during her Senate hearing, this initiative is an historic strategic achievement that will advance energy security, further environmental protection, foster economic and technological development in both of our countries, bolster international security, and strengthen the global nonproliferation regime.

 

The significance of this initiative should not be underestimated. India has pledged, for the first time, to submit its entire civil nuclear program to international inspection and to take on significant new nonproliferation commitments in exchange for full civil nuclear cooperation with the international community. With this initiative, the world expects India to be a full partner in nonproliferation, and India expects the world to help it meet its growing energy needs. We will continue to work with India on a range of nonproliferation issues as it implements its Joint Statement commitments and our strategic partnership further unfolds.

 

Implementing this Initiative is a top priority for both the United States and India. We continue to engage our Indian counterparts on a daily basis as we both move forward. In doing so, we look to Congress as a full partner in this endeavor. We are thankful for the support of the Senate Foreign Relations Committee and the House International Relations Committee in favorably reporting legislation on this initiative by overwhelming bipartisan margins.  Your support for this is crucial and we look forward to continuing to work closely with you to ensure that we grasp this important opportunity by passing the enabling legislation by the full bodies of both houses.

 

Energy Challenges

 

Another top priority for India is found in ensuring energy security to maintain its strong economic growth.  India’s growing appetite for energy has been fueled by urbanization, economic development, population growth, expanding industrial production, and increased motor vehicle ownership.  Between 1980 and 2001, demand increased by 208 percent.  By contrast, China, often thought of as the next big energy consumer, saw a 130 percent increase over the same period according to the U.S. EIA (Energy Information Administration).  India ranked fifth in the world in total energy consumption in 2004, only behind the United States, China, Russia, and  Japan.  India’s energy needs are expected to double by 2025.

 

India has experienced very strong growth in energy demand, growth that threatens to outstrip supply and lead to energy shortages around the country.  This is a serious challenge for the country, but we need to keep in mind that this is the result of strong economic growth, which is good news.  We should also understand that India is not the only country facing this challenge.  For oil importing countries, the rise in the cost of oil and refined products has added to trade deficits and in some cases, created balance of payments problems.  Many developing countries, whether in Asia, Africa or Latin America, are also facing challenges meeting growing electricity demands, resulting in brownouts and blackouts.

 

Energy Options Available

 

While these are enormous challenges, I believe that India has more options than many other countries in meeting them.  In order to meet these challenges, it needs to pursue a policy of energy security through diversification of supply and resources.

 

India relies on the following principal sources of energy:

 

Coal is the dominant energy source in India.  Currently, over 50 percent of India’s total energy, and 70 percent of India’s electric power generation, is derived from coal.    India is the world's third largest coal producer (after China and the United States), so domestic supplies satisfy most of the country's coal demand.  One major drawback is that Indian coal is extremely energy inefficient.  It produces about twice as much ash and particulate matter as American coal.  Coal consumption is projected in the International Energy Outlook 2005 to increase to 544 million short tons (Mmst) in 2010, up from 431 million short tons (Mmst) in 2003. 

 

Oil demand in India grew by over 6% annually during the past decade, more than three times the world average, while at the same time oil production rose barely at all.  This has led to a widening of the demand-supply gap and in an increased dependency on imports.  The EIA says that future oil consumption in India is expected to grow rapidly from 2.2 million barrels per day in 2003 to 2.8 million barrels per day in 2010.  At current rates of economic growth this figure is likely to rise to over 5 million barrels per day by the year 2030 according to the IEA (International Energy Agency). Unless India obtains or develops alternative sources of energy, in 15 years it will have to import close to 90 percent of its petroleum needs.  India is trying to limit its dependence on oil imports by expanding domestic oil exploration and production and by diversifying to other energy sources where possible.  Much will depend on India’s ability to locate and use existing domestic oil reserves.

 

Natural gas is an increasingly important fuel as India strives to meet growing energy needs by diversifying its fuel supply, with the recent focus on development of gas-fired electric power plants in coastal areas.  India’s domestic natural gas is unlikely to keep up with demand, and the country will have to import much of its natural gas, either via pipeline or as liquefied natural gas (LNG).  Potential for gas use in India’s growing economy is large and has so far mainly been constrained by insufficient supplies.  India became a gas importer in February 2004 with the arrival of the first LNG tanker at the Dahej terminal.  India needs to almost triple its existing pipeline capacity over the next five years to accommodate LNG imports and growing domestic consumption. Construction of a “National Gas Grid” is one of the major national priorities and plans for the construction of over 7,000 km of pipelines for a cost of about $4.5 billion by 2008 have been announced.  India also currently lacks a coherent natural gas policy and regulatory framework.  The price of natural gas also remains regulated, reducing incentives for energy companies in the Indian market. 

 

Electricity: India’s installed power generating capacity on 31 January 2005 was 115,545 MW reflecting a 44 percent increase in capacity in the decade between 1993 and 2002.  India currently relies on coal for nearly 70% of its electricity generation and forecasts indicate that coal will remain the backbone of the country's power sector for many decades.  To meet its mounting power demands, the Indian government plans to double its capacity to produce electricity within the next eight years.  The government of India has set an ambitious target of adding 100,000 MW of new capacity by 2012.

 

Nuclear energy currently only comprises approximately two percent of India’s total power generation.  In comparison, the United States, receives over 20 percent of its power from nuclear energy, Japan derives 30 percent, and France roughly 78 percent.  India’s operating civil nuclear power plants currently have approximately 3,310 megawatts of installed capacity.  If given the opportunity under the U.S.-India civilian nuclear initiative, India plans to invest quickly in additional civil nuclear reactors so that, by 2030, its capacity to produce electricity from clean nuclear technology would reach 40,000 megawatts – a twelve-fold increase, according to India’s Atomic Energy Commission.  Under this plan and further long-term objectives, the Indian government has indicated that approximately 20 percent of India’s total power production would eventually be met by nuclear technology, thus significantly decreasing the growth in its reliance on fossil fuels.

 

India’s power generation resources are unevenly distributed and far away from major load centers.  Two-thirds of India’s population lacks access to electricity, and those who are connected to the power grid have to live with frequent power disruptions.  State Electricity Boards (SEBs) are responsible for the production and distribution of electricity in all but 3 of India’s 28 states.  Old equipment, subsidized electricity rates, and bloated payrolls mean that reform of the Indian power sector is necessary to maximize economic growth.

 

Renewable Energy: India has a modest renewable-energy program, and the plans for its expansion are ambitious. According to the government’s Policy Statement on Renewable Energy, India hopes to obtain as much as 10 percent of its new power capacity from renewable sources—wind, biomass, hydroelectric, and solar—by 2012. If the country even hopes to approximate this goal, however, it will require both external funding and technological expertise. US companies, which have considerable expertise in the development of alternative and renewable energy sources, could play a vital role in energizing the Indian market.

 

External Energy Policy

 

India has increased its energy diplomacy with states in the South Asia region as well as states in Central Asia, Russia, the Middle East, Latin America and Africa. The Indian state-owned Oil and Natural Gas Company (ONGC) has invested $3.5 billion in overseas exploration since 2000. It has invested in gas fields in Vietnam, as well as energy projects in Algeria, Kazakhstan, Indonesia, Venezuela, Libya and Syria. Indian private sector firms have pursued projects in the Middle East and in Africa.

 

Gas Pipelines involving Iran, Turkmenistan, Burma and Bangladesh have also been considered in recent years.  Each of these proposals has serious geopolitical problems and the outlook for pipeline supplies will depend on resolving key regional geopolitical rivalries and constraints. The Iran-Pakistan-India pipeline has been in discussion since the early 1990’s.  A meeting earlier this year reached no consensus on gas price and project framework.  The U.S. government continues to make clear our concerns about the pipeline, based on long-standing U.S. policy and law.  We encourage India to look to non-Iranian sources for their gas supplies.  The proposed Burma-Bangladesh-India has also seen little progress due to opposition in Bangladesh.  Instead, a longer and more costly route directly from Burma through India’s northeast is being considered.  In 2006, India agreed to join the Turkmenistan-Afghanistan-Pakistan (TAP) pipeline project. 

 

US-India Energy Cooperation on Indian Energy Challenges

 

Diversifying India’s energy sector will help to alleviate the competition among India, the United States, and other rapidly expanding economies for scarce carbon-based energy resources, thereby lessening pressure on global energy prices.  At the same time, increased energy efficiency can have significant environmental gains.  An India that can meet its energy needs efficiently and rationally ultimately strengthens global and U.S. energy security.

 

Our cooperation with India in its energy sector goes back to the 1960’s through a variety of initiatives.  More recently, we have continued this cooperation through the U.S.-India Energy Dialogue.  The U.S. and India are cooperating on energy initiatives through five working groups: The Civil Nuclear Working Group, the Coal Working Group, the Power and Energy Efficiency Working Group, the Oil and Gas Working Group, and the New Technology and Renewable Energy Working Group.  These DOE-led groups have been actively meeting since the formation of the U.S.-India Energy Dialogue in May 2005, and plan a full range of activities in the near term. 

 

National Gas Grid: These groups are allowing us to work with India on key areas of concern in the energy sector.  A key example is our support of a national gas grid. Through the support of the USTDA (U.S. Trade and Development Agency), the Indian Ministry of Petroleum and Natural Gas, is exploring the feasibility of a national gas grid for reaching all major energy consuming areas in India.   Expanded access to, and utilization of, natural gas is expected to facilitate economic growth and maintain sufficient energy supplies to avoid potential shortages as India's energy demand grows.  This represents an example of the U.S.-Indian private and public sector cooperative efforts underway as a part of the U.S. – India Energy Dialogue.

 

Power Sector: There are many other challenges that we both our countries face in the energy sector.  As the IEA noted in a report several years ago, reform of India’s electricity supply sector is important in order to maintain its level of economic growth.  The demand-supply gap will grow unless more market mechanisms are introduced while taking into account goals of electricity access, environmental protection and economic growth.  State Electricity Boards are heavily dependent on government subsidies, which have reached the point where their impact on state and national fiscal operations could threaten India’s overarching development objectives. Power utilities lose almost $7 billion per year, and this figure is growing at 15 to 20 percent each year.

 

The US government has worked closely with the Indian government to promote best practices in the power sector, expand electrification to rural areas, and to enhance billing and tariff collection systems through USAID's new Distribution Reform, Upgrades, and Management (or "DRUM") activity.  In April of this year, USAID launched a public private partnership with General Electric Company in association with Winrock International India to bring energy to rural areas in India that currently lack access to electricity by establishing several pilot projects. Such partnerships with the private sector help to introduce new technologies and management expertise and provide access to financing.

 

Electricity Imports:  In addition to reforming the power sector, another option is exporting electricity from Central Asia to South Asia.  The World Bank has done some work in this area, and the U.S. hosted a conference in Istanbul in June to bring together officials from the region to look at this.  Transporting power across borders offers a number of advantages that simply cannot be achieved otherwise:  In addition to providing supplies to South Asia, it can provide new markets for countries like Tajikistan and Kyrgyzstan.  The U.S. believes that regional cooperation and integration are key elements of long-term energy security in this region. We support regional integration because we are confident that it will benefit the economy and security of all South Asian countries. It will create stronger partners and bring member countries closer together.  Through USAID’s South Asia Regional Initiative for Energy (SARI/Energy), we have focused on regional approaches to meet South Asia's energy security needs through increased trade, investment and access to clean energy.  Energy linkages between South Asia and Central Asia can strengthen the energy security of both regions.

 

Clean Coal: India’s dependence on its domestically-produced coal raises many other environmental concerns.  Power plants are also the main source of Indian emissions of carbon dioxide, the most important greenhouse gas.  These high emissions, along with emissions from other sources, have made all four of India's largest cities – New Delhi, Mumbai, Chennai and Kolkata – among the most polluted in the world leading to serious health consequences for inhabitants.  The Coal Working Group has been meeting since July 2005 with several key goals: increased collaboration on clean fossil energy technologies; creating an attractive investment climate for domestic and foreign investment in the energy sector; and developing an efficient and environmentally sound energy infrastructure.  

 

India’s agreement to take part in the FutureGen Project is important since the project will create the technology to produce a near-zero emissions coal-fired power plant that will produce hydrogen and sequester carbon dioxide underground, enabling greater use of coal in an environmentally sustainable way when the technology is eventually used in other coal-fired power plants. We strongly support the IEA’s Clean Coal Center and their work with India.  In May 2006, the IEA and the World Coal Institute co-hosted a workshop, “Coal for Sustainable Energy: Clean Development and Climate Change” in New Delhi, India.  To the extent that India expands its use of cleaner energy technology, the result will be reduced air pollution locally, regionally, and globally.  We have also encouraged by the IEA’s efforts to work with India on developing a strategic petroleum reserve. 

 

During Indian Prime Minister Singh’s visit last year, President Bush stated that “the United States and India have built a relationship of great potential as we face this century's challenges.”  Among those challenges is that of ensuring energy security.  The U.S. and India are working together to address this crucial challenge. 

 

Thank you for the opportunity to testify today.