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PP RUEHBI RUEHCI
DE RUEHCI #0123/01 1071143
ZNR UUUUU ZZH
P 161143Z APR 08
FM AMCONSUL KOLKATA
TO RUEHC/SECSTATE WASHDC PRIORITY 1962
INFO RUEHNE/AMEMBASSY NEW DELHI PRIORITY 1843
RUEHBI/AMCONSUL MUMBAI PRIORITY 0856
RUEHCG/AMCONSUL CHENNAI PRIORITY 0851
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEHCI/AMCONSUL KOLKATA 2398

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 
 
-------------------------- 
Two 1200 MW Projects - Orissa and Chhattisgarh 
-------------------------- 
¶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. 
 
------------------------ 
CSR activities in Orissa and Chhattisgarh 
------------------------ 
 
¶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 
 
KOLKATA 00000123  002.2 OF 003 
 
 
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. 
 
--------------------------- 
Renewable energy in the Sunderbans 
--------------------------- 
 
¶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. 
 
----------------------------- 
Status of pending court cases 
----------------------------- 
 
¶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, 
 
KOLKATA 00000123  003 OF 003 
 
 
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. 
 
----------------------- 
AES' future plans in India 
----------------------- 
 
¶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