AES EXPANSION PLANS INDICATE POWER SECTOR SUCCESS STORY IN

UNCLAS SECTION 01 OF 03 KOLKATA 000123

SIPDIS

SENSITIVE
SIPDIS

DEPT OF ENERGY (PI) FOR A/A/S FREDRIKSEN, GBISCONTI, TCUTLER
DEPT OF ENERGY (FE) FOR DAS JSWIFT, RLUHAR, CZAMUDA

E.O. 12958: N/A
TAGS: ENRG EMIN EINV BEXP PGOV IN SENV
SUBJECT: AES EXPANSION PLANS INDICATE POWER SECTOR SUCCESS STORY IN
INDIA'S SMALLER MARKETS

REF: A) 07 NEW DELHI 2078; B) 07 NEW DELHI 5003


1. (SBU) SUMMARY: AES India, the wholly-owned Indian subsidiary
of the US energy major AES Corporation, will invest around USD
1.2 billion each in two 1,200MW capacity coal-based power plants
in Orissa and Chhattisgarh over the next few years.
Collectively, the USD 2.4 billion investment will be the largest
by any multinational company in the Indian power sector. The
company is today the largest US investor in the Indian power
sector, and is now formulating a long term strategy in India,
evaluating bidding and acquisition opportunities and focusing on
developing a portfolio of renewable projects in the country. The
road to success was not without significant hurdles, but AES'
experience demonstrates that perseverance in key sectors can pay
off. END SUMMARY

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Two 1200 MW Projects - Orissa and Chhattisgarh
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2. (U) AES Corporation picked up a 49 per cent stake in Orissa
Power Generation Corporation (OPGC) in 1994, making it the first
foreign company operating in India's power sector. Currently,
OPGC runs two 210 MW plants in Ib Valley in Orissa's Jharsuguda
district. AES plans to augment its generation capacity by 1200
MW by adding two 600 MW thermal power plants at an investment of
USD 1.2 billion. According to AES sources, considerable
pre-project work has been accomplished. Land for the power plant
plus adequate water supply as well as clearance from the Civil
Aviation Ministry (for chimney height) are in place. Coal will
be sourced from the Manoharpur blocks in Ib Valley that have
been allocated to OPGC. The coal reserve there is estimated at
531 million tons.


3. (U) OPGC will finalize its engineering consultations for the
project by the end of April 2008, and the tendering process for
appointing engineering, procurement and construction (EPC)
contractors should start in August (the project is targeted for
completion within 42-48 months from the issuance of `notice to
proceed' to the EPC contractor). Environment clearances are
expected by October 2008, and the company hopes to reach
financial closure on the deal by the second quarter of 2009.


4. (U) In addition to it's Orissa plans, AES Corporation,
through its subsidiary AES India Private Limited, signed a
Memorandum of Understanding with the Government of Chhattisgarh
in March 2006 to set up a 1200 MW thermal power project with
integrated captive coal mine in that state. The expected
investment in this project is reported to be USD 1.2 billion.
AES received the necessary clearance from the GOI in November
2006 for bringing in foreign investment for this project. AES
India has formed a special purpose vehicle called AES
Chhattisgarh Energy Private Limited (ACE) to set up and
implement the project.


5. (U) AES applied to the federal Ministry of Coal (MoC) for
the allocation of a captive coal block in January 2007. In
November 2007 the MoC allocated the Sayang Coal Block in
Mand-Raigarh Coalfields in Chhattisgarh for the project. The
coal block is 20 kilometers from the power plant site. AES still
needs to obtain clearances from various government departments
including the federal environmental and forestry department
before commencing exploration activities, and mine development
is expected to take three to five years. The company has made
significant progress in terms of project site identification,
application for land acquisition, power evacuation studies and
water allocation. AES estimates that it will take a year to
obtain the required permits and expects to achieve financial
closure by March 2009. The new plant is expected to commence
power generation by September 2012.

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CSR activities in Orissa and Chhattisgarh
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6. (U) Orissa and Chhattisgarh are two of India's poorest
states both with considerable tribal populations. These are also
states in which Maoist insurgencies, fueled by a lack of
economic development and poverty, continue to pose serious
threats to India's internal security. Corporate Social
Responsibility (CSR) activities can be useful in garnering local
support for projects. In Orissa, OPGC has started a drinking
water project to supply water to villages around its power
plant. The first phase of the project is complete and water is
now being supplied to six villages. The second phase starts this
year. OPGC is organizing medical camps in villages around the

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OPGC plant and near allocated mines to provide free medical
services to villagers. OPGC also runs a 20-bed hospital, which
supports the needs of villages near its plant. OPGC is also
extending financial support to local schools in the surrounding
villages by building classrooms, school boundary walls, and
community halls. In Chhattisgarh, AES is in the initial stages
of community engagement and plans to carry out CSR activities in
the areas of education, medical, sanitation, and water supply.


7. (SBU) AES wrote a letter of appreciation to U.S. Embassy New
Delhi, thanking Post's Commercial and Economic Sections,
Consulate Kolkata, and Consulate Mumbai for their strong and
persistent advocacy over two years with the state governments,
the Ministry of Coal and the Ministry of Power on behalf of AES'
Orissa and Chhattisgarh power projects, including a crucial coal
block allocation approval in November 2007 (ref a). USG efforts
included letters from Ambassador Mulford and representations to
the ministries during USDOC Assistant Secretary Bohigian's
meetings on April 19, 2007 (ref b). ConGen Kolkata has also
advocated for AES interests with the Orissa Government.
Embassy New Delhi had underscored to the GOI that many U.S.
power companies and investors were watching the AES project as a
test case of whether they should consider re-entering India's
power sector, including for the proposed Ultra-Mega Power
Projects.

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Renewable energy in the Sunderbans
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8. (U) AES' renewable energy project in the ecologically
fragile Sunderbans region of West Bengal is a 2 megawatt
off-grid distributed generation project using primarily biomass
as a fuel. This project is expected to supply electricity to
about 20,000 village households on the island of Gosaba, one of
about a fifty inhabited islands in the Sunderbans. The West
Bengal Renewable Energy Development Agency (WBREDA),a State
Government promotional agency for renewable energy, originally
conceived of the project. The islands do not come under the
jurisdiction of the West Bengal State Electricity Board,
therefore WBREDA has in principle agreed to purchase power from
the project and sell it to the local population.


9. (U) AES India and Amrit Bio-Energy & Industries Limited, a
private company, have established a joint-venture company (AES
Amrit Power Projects Pvt. Ltd.) to develop the Sundarbans
project and hold all project rights, permits and contracts. AES
India and Amrit will jointly fund the development expenses in
proportion to their equity holdings in the new company. Amrit
will implement the project and control day to day management.
Additionally renewable energy ventures AES is considering
include development of hydro and wind projects. AES is also
evaluating its potential participation in carbon offset
activities designated as "Clean Development Mechanism" projects
under the Kyoto framework.

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Status of pending court cases
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10. (U) AES has two disputes concerning its power sector
investments in the state of Orissa, which it is contesting
through multiple court cases. (Note: In a meeting with ConGen
in late 2007, Orissa Chief Minister Naveen Patnaik declared that
the legal issues surrounding generation and distribution of
power were "resolved" and that the state was moving forward.
End note.) In 1998, AES purchased a 49 percent equity share in
the Orissa Power Generation Corporation (OPGC),which owns and
runs two 210 MW thermal units, from the Government of Orissa
(GOO) in an international competitive bid at a price of USD 143
million. In its second investment in 1999 AES paid
approximately USD 10 million for a 51 percent stake in the
Central Electricity Supply Company (CESCO).


11. (U) In an international arbitration proceeding GRIDCO (a
GOO owned transmission company) had claimed recovery of losses
from AES towards its 51 percent stake in the distribution
business of CESCO in the state. Hearings concluded in August

2005. In June 2007 arbitrators dismissed both GRIDCO's claims
and AES's counter claims, and closed the arbitration process.
GRIDCO has challenged the arbitration order in a local court.


12. (U) In a separate petition initiated by GRIDCO before the
Supreme Court, in conjunction with its claims in the CESCO case,

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GRIDCO sought to enjoin AES from drawing dividends from OPGC and
from the sale of its shares in OPGC. While the Supreme Court
allowed AES to continue drawing dividends, it reserved judgment
on the sale of OPGC shares pending the outcome of the
arbitration proceedings. With the arbitration order going in
AES' favor, the Supreme Court ruled for AES.


13. (U) OPGC had also sought relief in the Supreme Court
against a case filed by GRIDCO with the State Regulator that
would have reopened the Power Purchase Agreement (PPA). The
Court stayed further proceedings of the State Regulator, pending
further hearing. In the interim, OPGC has initiated a
settlement process with the Orissa government and GRIDCO. The
Government of Orissa (GOO) constituted a Task Force to look into
the OPGC-GRIDCO dispute relating to the existing Power Purchase
Agreement (PPA). The Task Force has concluded its meetings and
has placed its recommendations before the government, pending
final approval. AES expects that with the GOO taking an active
interest in resolving pending disputes, OPGC will go ahead with
its 1200 MW capacity expansion proposal. (Note: The GOO has
already demonstrated its support for AES by recommending
allocation of captive coal mines for OPGC for the expansion
project. In response, the federal Ministry of Coal, has
allocated two coal blocks to OPGC in Jharsuguda district in
Orissa. End Note.)


14. (U) In another case initiated by AES before the Company Law
Board (CLB),citing oppression of minority share holder (AES) by
the majority share holder (GOO),the CLB issued an order in
favor of AES. The order has been challenged by the GOO in the
local courts, and is pending a hearing.

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AES' future plans in India
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15. (U) AES is among the eleven bidders that has cleared the
first stage of competitive bidding for the 4000 MW Tilaiya Ultra
Mega Power Project (UMPP). The company is evaluating the
details and will be working out a strategy to participate in the
next phase of the bidding process. AES considers India as one
of their key markets for growth in its core business of power
generation as well as for renewable energy. While AES continues
to focus on the development of the 1200 MW OPGC expansion
project and 1200 MW Chhattisgarh greenfield project, they
continue to evaluate bidding and acquisition opportunities
elsewhere in the country and are focusing on developing a
portfolio of renewable projects.


16. (U) COMMENT: In spite of initial hurdles, AES is
continuing to build on its presence in India. The fact remains
that India is still eager to meet its seemingly insatiable
appetite for energy. There are lessons to be learned from AES'
experience - unlike some foreign energy companies that made much
publicized entries into India (example Enron, Unocal, Cogentrix
among others) only to make an exit within a few of years, AES'
made a long term commitment to stay, which has borne profits
and a growing presence in the important Indian market. AES has
also been willing to operate in eastern India. Although it is a
region with high poverty, weak development, and is often shunned
by investment, the eastern region still contains most of the
critical mineral resources needed for India's power and
industry. While litigation has been a source of frustration for
AES, it is important to note that AES continually has been
making a profit from its operations in Orissa, even while the
court cases were ongoing. Although the initial years of entry
in the power sector might involve managing complex regulatory
schemes and other difficulties, AES's experience shows that it
does pay to stay for the long haul.
JARDINE