TAMIL NADU EXPERIENCES POWER SHORTAGES, INEVITABLE

UNCLAS SECTION 01 OF 03 CHENNAI 000263

SENSITIVE

SIPDIS

STATE FOR EEB/ESC DHENGEL, PHAYMOND, DHENRY
STATE FOR EEB/HST STEVE MANN
DEPT OF ENERGY FOR U/S BUD ALBRIGHT, DSCHWARTZ
DEPT OF ENERGY IP FOR A/A/S KFREDRIKSEN, RCOOPER, GBISCONTI
DEPT OF ENERGY IP FOR TCUTLER, CGILLESPIE
DEPT OF ENERGY FE FOR DAS JSWIFT, RLUHAR

E.O. 12958: N/A
TAGS: ENRG TRGY KNNP ECON EINV PGOV EFIN IN RS
SUBJECT: TAMIL NADU EXPERIENCES POWER SHORTAGES, INEVITABLE
CONSEQUENCE OF UNDER-INVESTMENT

REF: A) 07 CHENNAI 289, B) MOSCOW 2119


1. (SBU) Summary: Decades of under-investment in power generation
have finally caught up with the South India state of Tamil Nadu,
which is currently experiencing unprecedented disruptions of
electricity supply. This under-investment, combined with strong
economic growth and accompanying demand for power, stalled
production projects, and the dearth of nuclear fuel supplies for
India's nuclear power plants, have forced the state to implement
electricity rationing. Recent rains may boost hydropower output and
promises from New Delhi to supply more power from the national grid
may ease the pain, but a state that once prided itself on having one
of the most dependable power supplies in India is in a difficult
situation. End Summary.

Tamil Nadu announces power cuts
--------------


2. (U) Tamil Nadu's Minister of Electricity, Arcot Veeraswami, told
a hastily gathered group of the state's leading companies on July 18
that his ministry would enforce "power holidays" starting on July

21. Noting that the state suffered from a power shortage of some
1000 megawatts (MW) of capacity, he explained that the supply in
Chennai would be disrupted for one hour every day (through a series
of rolling blackouts spread across eight zones) and for two hours in
the state's other cities, and for three hours in rural areas.
Farmers, he said, will get six hours of power during daylight hours
five days per week and four hours the other two days, along with
eight hours every night. He also told companies that his ministry
would re-institute a system of "zonal holidays" for businesses,
forcing them to operate without electricity from the grid one
weekday per week.


3. (U) The current situation is not unexpected. Veeraswami first
gave warning at a press conference in November 2007 that the state
expected to experience an electricity shortfall in the summer of
2008 of up to 1300 megawatts (MW). Blaming rapid industrial
expansion for the expected deficit, the minister said that the state
would manage the situation through a combination of planned outages
to businesses and continued attempts to secure additional power from
India's national grid. He emphasized at that time that power to
individual consumers would not be subjected to rolling blackouts.
The state instituted a similar "zonal holiday" scheme for many
businesses this spring, but ended it in May after unseasonable rains
replenished sources of hydroelectric power.

Who's to blame?
--------------


4. (SBU) Privately, a senior Tamil Nadu official told us earlier
this year that two key factors are contributing to the shortfall.
One is the neighboring state of Kerala's decision to sell some of
its hydro power to other states. Previously, Tamil Nadu had
absorbed most of Kerala's spare capacity. The other reason,
according to the official, is that Tamil Nadu is receiving far less
power than projected from nuclear energy, largely because the
construction of a new facility at Koodankulam (500 km south of
Chennai) is behind schedule.


5. (SBU) Even the state's functioning nuclear plants are operating
well below capacity, however. Tamil Nadu's Energy Minister told us
in March that the state's nuclear power plants in Kalpakkam (30 km
south of Chennai, at the Indhira Gandhi Center for Atomic Research,
or IGCAR) are functioning at only 50 percent capacity because of a
shortage of Russian-supplied uranium fuel. Recent press reports
suggest that this fuel-shortage problem plagues many of India's
nuclear power plants, noting that about half of them are operating
near or below 50 percent capacity. Prime Minister Singh even noted
the shortage of uranium fuel in his July 22 address to parliament as
he spoke in support of the need for the civil nuclear agreement.


6. (SBU) The failure of successive governments to plan for increased
demand is also to blame. The chairman of the Tamil Nadu Electricity
Board (TNEB) told us that Tamil Nadu's impressive economic growth
has led to an increase in electricity demand of some 500 MW per year
in capacity over the past several years, while the state has added a
mere 100 MW per year in reliable generation capacity. He also told
us that the state's wind-power generation is often hampered by poor
winds, noting that at any given time the state's wind farms produce
far below (less than 10 percent of) their rated potential.

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(Comment: He told us this in January, a time when the state
generally experiences little wind. The state's wide seasonal
variability in wind, however, creates challenges consistently. The
state's installed wind-power capacity is reported as 3600 MW, the
most of any state in India, although the low plant load factor for
wind means that actual capacity is less than one-third of this
amount, at best. End comment.)

Delays in Koodankulam plant, painful and mysterious
-------------- --------------


7. (SBU) The chairman of the Tamil Nadu Electricity Board (TNEB)
told us this spring that the delays in the Koodankulam project were
"the key issue" for the state's power woes, noting that the facility
should be providing the state with an additional 900 MW of
generating capacity by now. The history of this facility stretches
back to 1988, when the Soviet Union's General Secretary Mikhail
Gorbachev signed an agreement with Prime Minister Rajiv Gandhi to
sell two 1000 MW reactors to India. The Soviet Union fell apart
before a final contract was negotiated, however, and the deal went
nowhere through most of the 1990s. The Russian and Indian
governments resuscitated the deal in 1998 (six weeks after India's
controversial nuclear weapons tests),and the Russians maintain
officially that the facility remains outside the purview of the 1992
Nuclear Suppliers Group (NSG) agreement, emphasizing that the
original deal was signed in 1988 (ref B).


8. (SBU) The TNEB chair, when asked why there were delays in the
Koodankulam project, told us "that's the million-dollar question --
nobody knows!" He said that the facility was originally slated to
begin operating in December 2006, but the target date has now
slipped to March 2009.


9. (SBU) The chairman of India's Atomic Energy Commission (AEC),
Anil Kakodkar, told the press in late January that Russia had
delayed work on the Koodankulam facility because of Russia's
commitment to the NSG, an explanation consistent with ref B. The
science editor of a major Indian daily explained to us that the
Russians want to add additional reactors and expand the plant's
capacity to at least 4000 MW, which they believe requires NSG
approval. The Russians are therefore dragging their feet on
construction, he said, until the NSG approves an agreement with
India.


10. (SBU) We asked in early March a Russian diplomat who claimed to
be involved in the project for his interpretation of the reasons for
the delay in the Koodankulam facility. He denied that there was any
delay and said that things were progressing normally.

Quick fixes unlikely
--------------


11. (SBU) Some state officials -- particularly elected officials and
those who serve at their pleasure -- suggest that the state's power
problems will be resolved fairly quickly, emphasizing that new
generation capacity, in the form of thermal plants, will come online
later this year. Other officials are less sanguine. The TNEB chair
told Chennai's American Chamber of Commerce in March, however, that
shortages in the state may persist for two to three years. A
detailed local press report quoted an unnamed TNEB official stating
that the state's energy deficit would increase in the coming years,
reaching nearly 1900 MW in capacity by 2010 or 2011.


12. (SBU) The Minister of Electricity announced in April that the
state planned to sanction 15 privately owned power plants capable of
generating more than 14,000 MW, but other officials have noted that
these planned units are still several years away from operating.
The TNEB chair told us that the state will encourage conservation
(by subsidizing the use of compact fluorescent bulbs, for example,
which TNEB estimates could reduce energy usage in the state by
300-400 MW) and add additional thermal-, wind-, and solar-generation
capacity.

Businesses develop strategies to cope
--------------


13. (SBU) Local companies are making plans to deal with the
situation and keep their operations running. Most major companies
have back-up generators, usually run on expensive diesel, which
allow them to keep their core components functioning, even if power

CHENNAI 00000263 003 OF 003


from the grid is unavailable. These generators operate a high cost
per kilowatt-hour of output, however. Anecdotes from our local
contacts suggest that operating on back-up power can raise energy
costs from 30 to 100 percent. They appear to be taking it in
stride, however, and all have told us that they will continue to
operate, although several warned that if diesel supplies were
disrupted (as happened in June and July),the result could be
catastrophic.


14. (SBU) U.S. companies like automaker Ford and auto parts supplier
Visteon have special arrangements with the Tamil Nadu government
that should allow them to operate unimpeded (neither has enough
back-up generation capacity to operate fully should the grid go
down). Executives from both companies told us that they were
confident that TNEB would supply them with the power they need to
operate. They admitted, however, that some of their suppliers may
face problems.


15. (SBU) Several of our contacts have complained, however, about
the quality of electricity supply in recent months, noting that
frequencies have varied widely and that there have been an unusually
high number of power spikes. Chennai's emergence as a center for
the production of electronic equipment has made this especially
problematic, as many of the instruments used in the production and
testing of this equipment are delicate. Consulate Chennai staff
have also noticed an unusually high number of power outages in
recent weeks.

Comment
--------------


16. (SBU) Unusual rains in late July may help soften the power
crunch by replenishing reservoirs used for hydropower, but there is
no question that the electricity situation in Tamil Nadu is
problematic. Tamil Nadu has long enjoyed a power surplus and a
reputation for being one of India's most competently administered
states, a combination that has helped it maintain an attractive
climate for foreign investors, who continue to pile in, particularly
in the more energy-intensive manufacturing and information
technology sectors. If the state fails to keep the lights on,
however, potential investors may begin to wonder if Tamil Nadu is
the right place for their ventures.

KAPLAN